Q4 2023 Varonis Systems Inc Earnings Call

Operator: Greetings and welcome to the Varonis Systems Inc. fourth quarter 2023 earnings conference call. At this time, all participants are in a listen only mode.

Greetings and welcome to the Verona Systems, Inc. Fourth quarter 2023 earnings Conference call. At this time, all participants are in a listen only mode.

Operator: A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Tim Perz of Investor Relations. Thank you, Mr. Perz.

A brief question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.

As a reminder, this conference is being recorded.

Now my pleasure to introduce your host Kim <unk> of Investor Relations.

Kim: Thank you Mr. <unk> you may begin.

Tim Perz: You may begin. Thank you, operator. Good afternoon.

Kim: Operator, good afternoon. Thank you for joining us today to review for honest its fourth quarter and full year 2023 financially.

Tim Perz: Thank you for joining us today to review Varonis's fourth quarter and full year 2023 financial results. With me on the call today are Yaki Faitelson, Chief Executive Officer, and Guy Melamed, 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 under federal securities laws, including projections of future operating results for our first quarter and full year ending December 31st, 2021. Due to a number of factors, actual results may differ materially from those set forth in such forward-looking statements. These factors are set forth in the earnings press release that we issued today under the section captioned "forward-looking statements."

Kim: With me on the call today are Yoki vital Sun, Chief Executive Officer, Guy Melamed, Chief Financial Officer, and Chief operating officer of Corona. After preliminary remarks, well 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.

Kim: Statements under federal Securities laws, including projections of future operating results for our first quarter and full year ending December 31 2024.

Kim: For a number of factors actual results may differ materially from those set forth in such statements.

Kim: 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.

Tim Perz: 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. The following statements reflect our views only as of today and should not be relied upon as representing our views as of any subsequent meeting. Varonis expressly disclaims any obligation or under any circumstances to release publicly any updates or revisions to any forward-looking statements made herein. Additionally, non-GAAP financial measures will be discussed on this conference call.

Kim: Encourage all investors to read our SEC filings.

Kim: And to reflect our views only as of today and should not be relied upon as representing our views as of any subsequent date Verona expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward looking statements made herein. Additionally, non-GAAP.

Kim: Financial measures will be discussed on this conference call a reconciliation to the most directly comparable GAAP financial measures is also available in our fourth quarter 2023 earnings press release, and Investor presentation, which can be found at www Dot dot.

Tim Perz: A reconciliation for the most directly comparable GAAP financial measures, Varonis, is also available in our fourth quarter 2023 earnings press release and investor presentation, which can be found at www.varonis.com in the investor relations section of our website. Lastly, please note that a webcast of today's call is available on our website in the Investor Relations section. With that, I'd like to turn the call over to our Chief Executive Officer, Yaki Fa Thanks, team, and good afternoon, everyone.

Kim: Dot com in the Investor Relations section.

Speaker Change: Lastly, please note that a webcast of today's call is available on our website in the Investor Relations section with that I'd like to turn the call over to our Chief Executive Officer Yoki vital yockey.

Speaker Change: Thanks, Kim and good afternoon, everyone.

Yaki Faitelson: Thank you for joining us to discuss our fourth quarter and full year 2023 performance. Today, I would like to review our fast transition progress. We will discuss key drivers for business in 2024 and how we are positioned to capitalize on them. One year ago, we discussed our initial excitement for Varonis Soft.

Speaker Change: Thank you for joining us to discuss our fourth quarter and full year 2023 performance to date and you'd like to view first then we can progress and discuss key drivers.

Speaker Change: Business in 'twenty 'twenty four.

Speaker Change: So well positioned to capitalize on them.

Speaker Change: One year ago.

Speaker Change: Discuss putting Michelle excitement.

Yaki Faitelson: At the time, we talked about how we had invested heavily for years to build a world-class cloud-native SaaS offering, which allowed our customers to secure their data automatically and simplify our packaging to include automation that we knew our customers needed. We had confidence in our product, our team, and our plan. But it was early, and we had a lot of food.

Speaker Change: Yourself.

Speaker Change: The other thing we talked about how we had invested heavily for you to be a world class cloud native SaaS offering which allows our customers to secure their data automatically.

Speaker Change: If I don't packaging to include automation that we know our customer need.

Speaker Change: We had confidence no product team and our plan, but it was early and we have a lot of good.

Yaki Faitelson: Despite ongoing macro challenges, Sase Arar grew from several million dollars in 2022 to approximately $125 million at the end of 2023. We are proud of the momentum we have achieved so far and how that sets us up for 2024 and beyond. Our fourth quarter results reflect the sustained momentum of our SaaS platforms, and I'm happy to announce that SaaS ARR represents approximately 23% of total company ARR at U.N. Progress gives us the confidence to accelerate our transition timeline, which we now expect to complete by the end of 2020, a year earlier than our initial... Fourth quarter SAS mix came at 66% and for guidance of 60%, ARR grew 17% year-over-year to $5 The macroenvironment remained stable during Q4, and we continued to see a high level of deal scrutiny with multiple levels of approval.

Speaker Change: Despite ongoing macro challenges.

Yeah, I'll go from $700 million in 2022 to approximately 125 million.

Speaker Change: At the end of 2025th we are a part of the momentum we have achieved so far and how does set us up for 2024 and beyond our fourth quarter results.

Speaker Change: Reflect the sustained momentum of our SUS platforms, and I'm happy to announce that fussy at all.

Speaker Change: Approximately 23% of total company Yeah, it's healing.

Speaker Change: Good gave us the confidence to accelerate our transition timeline.

Speaker Change: We now expect to complete.

Slide 26, you earlier, you know in Asia.

Speaker Change: Fourth quarter was seismic scheme, it's 66% for the full guidance of six people, saying, hey, uncles seven people send people over to you.

Speaker Change: $543 million and.

Speaker Change: And we generated $54 3 million.

Speaker Change: Free cash flow in 2020.

Speaker Change: From a cost $10 million last year.

Speaker Change: Macro environment remained stable during Q4, and we continue to see a high level it's been scrutiny.

Speaker Change: Multiple level of to pull them, Okay all right.

Yaki Faitelson: Overall, we are excited by the progress of our SAS transition against these headwinds. Guy will review our Q4 results and our 2024 guidance in more detail. We are still in the early innings with our transition to the SaaS delivery model, and the benefits we expect to realize are just getting started. But Q4 2023 overall marked a strong step in the right direction, and I'm very grateful to the entire Varonis team for how they have executed so far. Turning now to our strategic priorities for 2024.

Speaker Change: Cited the progress of both.

Speaker Change: Sucked in Houston against these headwinds that we really view, our Q4 results and all of 'twenty 'twenty four guidance in more detail.

Speaker Change: Still in the early evening news I'll transition to discuss the legal the modem and the benefits we expect to realize.

Speaker Change: Oh, just getting started but Q4 and 2020 C O the horn mountain.

Speaker Change: That.

Speaker Change: Action and I'm very grateful to the entire belongs team.

Speaker Change: How you have executed so far.

Speaker Change: Turning now to our strategic priorities for 'twenty plentiful.

Yaki Faitelson: Continuing our transition to SACS will be a primary focus. And to briefly remind you, there are three key benefits that such a platform provides to all. Customers can achieve automated outcomes, which means we can ensure that data is protected with very little effort. TAS is quicker to deploy and operationalize because of significantly lower infrastructure and personnel.

Carlos continue all countries into stocks will be a primary focus in.

To briefly remind you.

Speaker Change: There are three key benefits such as that.

Speaker Change: Provide to our customers.

Speaker Change: Customers can achieve automated outcomes, which means you can ensure that data is protected with very little effort.

Speaker Change: Seems quicker to deploy and operationalize because of significantly lower infrastructure until sometime this month and fast easier to maintain an object.

Yaki Faitelson: And SAS is easier to maintain and upgrade. Additionally, there are three key benefits that we realize. They are shorter cell cycles, larger initial length, and margin benefits over time.

Speaker Change: Kelly.

Speaker Change: I think you'd benefit that we realized they are shorter sales cycles now that your insulin and margin benefits over time.

Yaki Faitelson: We started to see evidence of these benefits in 2023 and expect them to continue in 2024, in addition to executing on a fast transition. The dangerous threat environment is creating increased awareness for data security against that backdrop. We see three additional drivers for our new managed data detection and response service, which we call MDDR.

We started to see that'd be gains of these benefits in 2023 and expect them to continue in 'twenty 'twenty four.

Speaker Change: In addition to executing on a soft transition.

Speaker Change: Dangerous fighting violence is creating increased awareness or data security.

Speaker Change: One thing that backstop, we see additional drivers.

Speaker Change: When you manage data detection and response service, which we called M. D D R.

Yaki Faitelson: The adoption of enterprise-generated AI, like CorePilot and Einstein, and increasing compliance requirements, such as the new SEC disclosure rule around cyber, is that to next tackle the overall environment, each of these divers in more. Foundation for Innovation. It's been simple, follow the data, and we start. We have been able to innovate much faster.

Speaker Change: The adoption of enterprise general like quote pilots and Einstein and then treating compliance requirements such as the U S. You see disclosure who alongside with them.

Speaker Change: Is that because that's stuck in.

Speaker Change: The oil environment and each of these drivers in more detail.

Speaker Change: A foundation for innovation.

Speaker Change: It's been since then.

Speaker Change: To follow the data and automate.

We sauce.

We have been able to innovate much faster.

Yaki Faitelson: We have gone wider, offering more coverage of enterprise data stores, and we have gone deeper, adding more automation, so that our customers can achieve their business outcomes with very little effort. But this is just the beginning. One year ago, we introduced proactive incident response, which provides our SAS customers with assistance from our world-class incident response team. Today, we are introducing the next evolution of this offering with the world's first managed data detection and response service. The discount is an SLA and $24.07.

Speaker Change: We have gone way down.

Speaker Change: He's more coverage enterprise data stores.

We have got people eating more automation, so that our customers can achieve their business outcomes very little export.

Speaker Change: But this is just the beginning.

Speaker Change: On a year ago.

Speaker Change: We introduced four octave incident response, which provides.

Speaker Change: Customers with assistance from our World Class incident response team today, we are introducing the next evolution of this offering we do all first manage data detection and response service, which come even escalate and 24 by seven coverage.

Speaker Change: The only M. D D out you get paid Saturdays it takes responsibility of managing the only.

Yaki Faitelson: Varonis MDDR is a paid service that takes the responsibility of managing Varonis out of our customers' hands and places it with us. Customers will no longer have to monitor the Varonis alert. Instead, our teams will leverage behavioral analysis, machine learning automation, and our unique metadata telemetry to protect. We introduced this service because you know security teams are such things, and MDDR builds upon the automation enabled by our SaaS platform and maximizes the return on investment. Another driver for us in the year ahead will be the impact of generative AI in large language models. We spent some time last quarter discussing what Sterling means for Varonis.

Speaker Change: All of our customers' hands in places eat with us customers no longer have to monitor all of them, but one instead.

Speaker Change: Instead, our teams leverage behavioral analysis machine learning automation that we need to make the data telemetry to protect them.

Speaker Change: We introduced the salaries because no security gains.

M D D O builds upon the automation enabled by our search platform and maximizing the return on investment.

Speaker Change: The loss in the year it will be the impact of Genuity knowledge language models.

Speaker Change: Spent some time last quarter when discussing why they stay with me for voice, but to briefly review generally I represent bulk of the Trinity and at least for companies the Gulf Sophie I see the potential to generate significantly more data and also.

Yaki Faitelson: But to briefly review, generative AI represents both opportunity and risk for companies. The growth of AI has the potential to generate significantly more data and also significantly more, which in turn increases the need for automated data security. Without a robust data security strategy, AI will reveal sensitive data to the wrong machines and people.

Speaker Change: Significantly movies.

Speaker Change: Switching turn.

Speaker Change: The need for automated data security without Abbotts data security strategy.

Speaker Change: Zinc sensitive data to their own machines and people.

Yaki Faitelson: Most generative AI tools utilize existing access controls, which leaves organizations overexposed. Companies will also need to ensure that sensitive data is not being used when training LLM or Hacker. We leverage these tools... check malware or even search for data once inside an organization.

Speaker Change: Generally these AI tools utilized existing access control, which leaves organizations.

Speaker Change: Exposed to.

Speaker Change: To be Frank.

Speaker Change: Companies will also need to ensure that sensitive data is not being used when thing element.

Speaker Change: And how can we leverage these tools.

Cost beta phishing email.

Speaker Change: My live well, even search for data once inside an organization simply put.

Yaki Faitelson: Simply put, generative AI is forcing organizations to take a hard look at the data, and they are realizing that access control must be correct to ensure sensitive data cannot be exposed. These are core use cases for Varonis. In support of this, two weeks ago, we announced a strategic partnership with Microsoft to help companies safely harness the power of Microsoft Copilot. This integration helps customers improve their Microsoft 365 data security posture before, during, and after deploying corporate data. As a result of increasing risks and regulations, we are seeing data security become more of a priority. Varonis is in a unique position to capitalize on this as we help organizations protect their data like a bank watches its money. Banks spot financial crimes by analyzing financial transactions.

Speaker Change: You spoke to new organizations to take a hard look at the data.

Speaker Change: And they are realizing that access control must be correct to ensure central these data can be exposed.

Speaker Change: Oh cool use cases full volumes.

Speaker Change: The bulk of these two weeks ago, we announced a strategic partnership with Microsoft to help companies safely harness the power of Microsoft scope items.

Speaker Change: This integration customers include the Microsoft 365 data security posture before during and after the plant co pilot.

Speaker Change: These are increasingly.

Speaker Change: Keeping these kind of regulation, we are seeing data security become multiple Iot.

Speaker Change: You're in a unique position to capitalize on these as we help organizations protect their data.

Speaker Change: I like to think what's your it's not nice.

Speaker Change: Sports financial crime analyzing financial transaction.

Yaki Faitelson: Varonis Spots Cybercrime by Analyzing Data Transactions. Our customers have Varonis watching the data and the infrastructure close to it, which limits the likelihood of damage. In addition to watching data usage, we locate sensitive data, visualize access to it, and automatically lock it. This allows companies to realize more value from their data, leverage it safely, and keep it protected. The world has never been more reliant on data than it is today, and if you dissect every major breach... the one common threat is that nobody was watching the data. Take, for example, what happened at a large ride-sharing company with a very sophisticated security stack but no data security platform. A group of teenagers was able to bypass the multi-factor authentication, access file shares, and steal critical data.

Speaker Change: Sports type of games.

Speaker Change: Analyzing data transaction costs.

Speaker Change: Customer pay voice watching the data on the <unk>.

Speaker Change: Infrastructure close to eat.

Speaker Change: Which limit.

Likelihood of damage. In addition to watching data usage, we locate sensitive data BG like access to the.

Speaker Change: Mattingly Lucky there.

Speaker Change: This allows companies to realize more value from their data literally drive safely and keep it protected.

The World has never been more reliance on data and it needs to be in.

Speaker Change: If you dissect every major bleach.

Speaker Change: The common thread is that nobody was watching the data lake.

Speaker Change: Wasn't exactly what's happened is allowed.

Speaker Change: Trailing company is a very sophisticated security stack, but no data security platform.

Speaker Change: Teenagers.

To bypass a multifactor authentication access five shows.

Speaker Change: Clinical data it wasn't thinking yeah, I can posted messages and slack the new dual bleach.

Yaki Faitelson: It wasn't until the hacker posted messages in Slack that they knew they were breached. The biggest threats can come from insiders. Think about Wikileaks, Snowden, and the Pentagon breach. These breaches highlight the damage that can happen when insiders have access to far too much data. When the perimeter fails and you have a rogue insider, we are in the best position to catch them.

Speaker Change: The biggest threat from come from inside or thinking about Wikileaks Snow then.

Speaker Change: Pentagon bridge.

Speaker Change: Which is.

Speaker Change: I like the damage that can happen when insider access to far too much data.

Speaker Change: It does say is and you have cited we are best positioned to catch it.

Yaki Faitelson: Data breaches and the danger of ransomware used to be something we had to explain. And today, every organization knows that they are... The increasingly dangerous threat environment has led governments to enact regulation. For example, the Security and Exchange Commission rule, which took effect in December, requires public companies to disclose cybersecurity breaches in a Form 8K within four business days after determining that it has a material impact on the business.

Speaker Change: Data breaches and the danger of flying somewhere it used to be something we had to explain.

Speaker Change: And today.

Speaker Change: Every organization know that they are at risk.

Speaker Change: Increasingly dangerous affecting violently cause led governments to enact regulation for example, the six.

Speaker Change: No we didn't exchange commission to which to.

Speaker Change: Effective December require public companies to disclose cyber security breaches in the form 8-K within four business days after the government and he pays immaterial impact on the business. It's also puts more structure into how they disclose their cybersecurity.

Yaki Faitelson: It also puts more structure into how they disclose their cybersecurity risk management strategy and governance while also detailing management and the board roles and expertise in handling these risks. This increased scrutiny on U.S.-listed public companies has raised awareness about cybersecurity. And we believe Varonis is well positioned to help companies comply with these regulations. With that, I would like to briefly discuss a couple of key customers. Thank you. A real estate company with 5,000 employees became a new customer this quarter.

Speaker Change: Management strategy and governance, but also the tailing management and the board the walls and expertise in handling these risks.

Speaker Change: This increased scrutiny on U S listed public company.

Speaker Change: Awareness for cyber security and we believe the only well positioned companies comply with regulations is that we'd like to briefly discuss capital key customer wins.

Speaker Change: From Q4.

Speaker Change: Real estate company with 5000 employees became a new customer this quarter.

Yaki Faitelson: Its organization had an executive mandate to find sensitive data across its hybrid environment. During the risk assessment, our team discovered over 250,000 records containing PII and thousands of employment contracts and mortgage documents that would be open to everyone in the organization. Incident Response even stopped multiple data breaches. This customer evaluated Varonis and two other vendors. But ultimately, Varonis was the only one who could automatically ensure their data was protected.

These Asian head.

Speaker Change: Jackie please mandate coupon sensitive data because its hybrid environment doing the risk assessment our team in Chicago.

Speaker Change: 250000 vehicles containing VII and thousands of employment contracts and mortgage documents that were open to everyone in the organization.

Speaker Change: Our incident response team even stopped multiple data breaches attempts.

Speaker Change: This customer.

Speaker Change: Uhm Barneys and two other vendors, but ultimately the only what was the only one.

Speaker Change: Tamara Green shoot their data is protected.

Yaki Faitelson: As a result, they purchased Varonis SaaS package for Windows, Microsoft 365, Edge, AWS, and SAP. We continue to see strong interest from customers wishing to convert to voluntary. One example is a large municipal government that became a Varonis on-prem subscription customer in 2018. They were leveraging our software to find and protect sensitive data and monitor abnormal user behavior on a single device. The success this organization had protecting their on-prem environment enabled our team to meet the mandate for the broader municipal organization.

Speaker Change: So they purchase the only such package for Windows, Microsoft 65 age AWS in a sleep.

Speaker Change: We continued to see strong interest from customers wishing to convert to go alongside one example is allowed to municipal government.

Speaker Change: Jamie the only on Prem subscription customer in 2018.

Speaker Change: But you know software to find and protect sensitive data and to monitor abnormal behavior.

Speaker Change: Yeah.

Speaker Change: The success of this organization had protecting.

Speaker Change: Turning violent enabled our team to the mandate for the daughter of municipal organization. This quarter. They converted to go on as fast and expanded from just 500 users to 25000 children sauce.

Yaki Faitelson: This quarter, they converted to Varonis SaaS, spending from just 500 users to 25,000 users. It was an ideal fit for them because of automated remediation, improved scalability, and infrastructure savings.

Speaker Change: Peaceful them, because it's all automated remediation.

Speaker Change: Scalability infrastructure savings.

Yaki Faitelson: They purchased an SAS package for Windows, Microsoft 365, Active Directory, and Exchange Online, which will allow them to protect their data without Steininger Securities, Inc. Finally, about a month ago, we had ourselves a kickoff event here in New York, with the amount of changes and magnitude of innovation we have in 2023, which was important for us to bring our team together. And I cannot speak enough about the level of energy and enthusiasm during this. I would like to thank our team for their tireless effort, as none of this would be possible without them.

Speaker Change: They purchased stock package for Windows, Microsoft 365, active directory and it changed online, which will allow them to take the data is out.

Speaker Change: Staining the securities.

Speaker Change: Finally.

They bought it in months ago since.

Speaker Change: Sales kick off event here in New York.

Speaker Change: The amount of changes and magnitude of innovation.

Speaker Change: We had in 2023.

Speaker Change: It was important.

Speaker Change: For us to bring our team.

Speaker Change: And to get them in it.

Speaker Change: Cannot speak enough about the level of energy and enthusiasm you wouldn't be than I.

Speaker Change: And we'd like to thank our team for their tireless effort. There's none of this would be possible without we are excited about the reception of our SaaS platform and the momentum for these.

Yaki Faitelson: We are excited about the reception of our SaaS platform and the momentum of our business. Let me be optimistic; not only to 2024 but also beyond, we will approach a $1 billion ARS. With that, let me turn the call over to Guy. Thanks, Yaki. Good afternoon, everyone.

Speaker Change: This leaves me optimistic is that going to hit.

Speaker Change: Not only to 2020 fall because of the young.

Speaker Change: Coach 1 billion going out.

Guy Melamed: With that let me turn the call over to Guy Guy. Thanks, Yoki. Good afternoon, everyone. Thank you for joining US today, we are pleased with our fourth quarter results, which reflect the strong adoption trends of rone assessed against the challenging but stable macro backdrop.

Guy Melamed: Thank you for joining us today. We are pleased with our fourth quarter results, which reflect the strong adoption trend of Varonis S against a challenging but stable macro-backup. Our fast transition continues to gain momentum, and after just one year in the transition, SAS now represents approximately 23% of our total company ARR.

Guy: Our SaaS transition continues to gain momentum and after just one year in the transition SaaS now represents approximately 23% of our total company a L. R.

Guy Melamed: As a result of this momentum, we now expect to complete our SaaS transition in 2026, which is one year earlier than previously outlined. As a reminder, our transition will be considered complete when 70% to 90% of total companies' ARR is coming from 70%. In the past, we've described the transition as occurring in two phases.

Guy: As a result of this momentum we now expect to complete our SaaS transition in 2026, which is one year earlier than previously outlined.

Guy: There are transition will be considered complete with 70% to 90% of total company's AOR is coming from Seth.

Guy: In the past we've described the transition is occurring in two phases phase one began when we introduce the product and this is the phase where we focus on selling faster on new customers.

Guy Melamed: Phase one began when we introduced the product and is the phase where we focus on selling faster on you. Phase 2 of the transition, which is converting our installed base of on-premises subscription customers to our SaaS platform, is planned to begin in earnest during the second half of this year. We expect that the ramp-up of this phase will not be linear and anticipate growing momentum in each quarter of 2024 and further acceleration in 2025 and 2026. We ended the year with ARR of $543 million, which increased 17% year over year, and we generated $54.3 million of free cash flow in 2023, up from half a million dollars last. These metrics illustrate our ability to drive top-line growth, margin leverage, and cash flow generation even in the first year of transition.

Guy: As two of the transition, which is converting our installed base of on Prem subscription customers to our SaaS platform is planned to begin in earnest during the second half of this year.

Guy: We expect that the ramp up of this space will not be linear and anticipate growing momentum in each quarter of 'twenty 'twenty four and further accelerating in 2025 and 2026.

Guy: We ended the year with a $543 million, which increased 17% year over year, and we generated $54 $3 billion of free cash flow in 2023 up from half a billion dollars last year.

Guy: These metrics illustrate our ability to drive top line growth margin leverage and cash flow generation, even in the first year of transition.

Guy Melamed: Our fourth quarter SAFNICS represents 66% of new business and net new upsell ARR versus our guidance of 60% of new business, which led to a full year SAS mix of 57% versus our guidance of 55%. We again saw more of our existing customers converting to our SaaS. In the fourth quarter, we had approximately $15 million in conversions of existing customers, impacting our Q4 revenue.

Guy: Our fourth quarter fast makes represents 66% of new business and net you upsell AOR versus our guidance of 60%, which led to a full year stats makes a 57% versus our guidance of 55%. We again saw one of our existing customers converting to our SaaS offering.

Guy: In the fourth quarter, we had approximately $15 million in conversions of existing customers impacting our Q4 revenue.

Guy Melamed: To be clear, this $15 million represents the renewal amount that was previously booked as on-premise subscription but which converted to SAS during the quarter. Because SAS revenues are recognized randomly, when these $15 million worth of customer renewals convert from on-premise subscription to SAS, it causes a headwind to our reported revenue and operating margins. The $15 million revenue impact from this quarter does not include the uplift that we realize from these conversions, which is accretive to ARR and free cash flow.

Guy: We clear this 15 million represents the renewing though that was previously booked as on Prem subscription.

Guy: But which converted to center during the quarter.

Guy: Because science revenues are recognized rapidly with these $15 billion worth of customer renewals convert from on premise subscription. This that it causes a headwind to our reported revenue and operating margin.

Guy: The $15 million revenue impact from this quarter does not include the uplift that we realize for these conversions, which is accretive to aon on free cash flow.

Guy Melamed: We ended the year with approximately 4,950 subscription customers, which was up 14% year-over-year. Our dollar-based net retention rate for subscription customers was 107% at the end of 2023, adjusting for FDI. Turning now to our fourth-quarter results in more detail. As a reminder, ARR, Free Cash Flow, and ARR Contribution Margin are the leading indicators for this trend. A shift from on-premises subscription licenses, where approximately 80% of the deal's value is recognized up front, to a science delivery model with fully ratable revenue rec- will call the initial headwinds on the Traditional Income Statement. As we said previously, the faster we progress through the transition, the more headwinds we will experience on our traditional income statement metrics. We view these headwinds in a positive light. In the fourth quarter, we continue to see deal scrutiny with multiple levels of approval, which is still impacting our... But if I had to describe the environment in one word, I would use the same word I used last quarter, which is stabilization.

Guy: We ended the year with approximately 4950 subscription customers, which was up 14% year over year.

Guy: Our dollar based net retention rate for subscription customers was 107% at the end of 'twenty two 'twenty three adjusting traffic.

Turning now to our fourth quarter results in more detail.

Guy: Sure Hey, our free cash flow and contribution margin are the leading indicators for this transition.

Guy: A shift from on Prem subscription licenses, where approximately 80% of the deals value is recognized upfront to a SaaS delivery model with fully ratable revenue recognition will cause initial headwind for.

Hey: Oh, the traditional income statement metrics.

Hey: As we said previously the faster we progressed through the transition the more headwinds we will experience started traditional income statement metrics. We view these headwinds in a positive light.

Hey: In the fourth quarter, we continued to see deals could be with multiple levels of approval, which are still impacting our result.

Hey: If I had to describe the environment in one word I would use the same words I used last quarter, which is stabilization.

Guy Melamed: For Total Revenue, we were $154.1 million, up 8% year-over-year. During the quarter, as compared to the same quarter last year, we had approximately a 16% headwind to our year-over-year revenue growth rate as a result of having increased SAS sales in our book, which are recognized randomly versus the upfront recognition of our on-prem subscription. Subscription revenues were $129.2 billion, and maintenance and services revenues were $24.9 billion, as our renewal rates were again over $19 billion. Moving down the income statement, I'll be discussing non-GAAP results going forward. Gross profit for the fourth quarter was $136.4 million, representing a gross margin of 88.5% compared to 89.9% in the fourth quarter of 2022, despite significant revenue headwinds, which were largely offset by the SAS platform. Operating expenses in the fourth quarter totaled $109.2 million.

Q4, total revenues were $154.1 billion.

8% year over year.

During the quarter as compared to the same quarter last year, we had approximately 60% headwind to our year over year revenue growth rate as a result of the holiday.

Increased SaaS sales.

Hey: Okay.

Hey: Which are recognized ratably versus the upfront recognition of our on Prem subscription product subscription revenues were $129 $2 billion in maintenance and services revenues were $24.9 billion as our renewal rates were again over 90%.

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

Hey: <unk> profit for the fourth quarter was $136 4 million, representing a gross margin of 88, 5% compared to 89, 9% in the fourth quarter of 2022 despite significant revenue headwinds, which were largely offset by science platform efficiency.

Hey: Operating expenses in the fourth quarter totaled $192 million as a result fourth quarter operating income was $27 $2 million or an operating margin of 17, 7%. This compares to operating income of $26 million or an operating margin of 18, 2%.

Guy Melamed: As a result, fourth-quarter operating income was $27.2 million, or an operating margin of $17.7 million. This compares with operating income of $26 million, or an operating margin of 18.2%, in the same period last year. During the quarter, as compared to the same quarter last year, we had approximately a 10% headwind to our operating margin as a result of having increased share sales in our bookings, which are recognized, and fully routable versus the upfront recognition of our on-prem subscription products. Fourth quarter ARR contribution margin was 13.4%, up from 4.5 percent last year. A significant leverage improvement, even during the early stages of the transition, reflects our ability to drive strong incremental margins while growing ARR and transitioning to SAM. During the quarter, we had financial income of approximately $8.1 million, driven primarily by interest income on our cash, deposits, and investments in marketable securities.

Hey: In the same period last year.

Hey: During the quarter as compared to the same quarter last year, we had approximately a 10% headwind to our operating margin as a result of having increased sales in our bookings mix, which I recognize fully ratable versus upfront recognition of our on Prem subscription product.

Hey: Fourth quarter contribution margin was 13, 4% up from four 5% last year.

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

Hey: During the quarter, we had financial income of approximately $8 $1 million driven primarily by interest income on our cash deposits and investments in marketable securities.

Guy Melamed: Net income for the fourth quarter of 2023 was $34.3 million, or $0.27 per diluted share, compared to net income of $26.1 million, or $0.21 per diluted share, for the fourth quarter of 2022. This is based on 126.1 million and 126 million diluted shares outstanding. Q4 2023 and Q4 2022 respectively. As of December 31, 2023, we had $744.8 million in cash, cash equivalents, short-term deposits, and marketable security. For the 12 months ended December 31st, 2023, we generated $59.4 million of cash from operations, compared to $11.9 million generated in the same period last year. CAPEX was $5.1 million, compared to $11.4 million last year.

Hey: Net income for the fourth quarter of 2023 with $34 $3 million or 27 cents per diluted share compared to net income of $26 $1 billion or net income of 21 cents per diluted share for the fourth quarter of 2022. This is based on $126 1 million.

Hey: At 126 million diluted shares outstanding for Q4, 2023 in Q4, 2022 respectively.

As of December 31st 2023, we had $744 $8 million in cash cash equivalents short term deposits and marketable securities.

Hey: For the 12 months ended December 31st 2023, we generated $59 $4 million of cash from operations compared to $11 $9 million generated in the same period last year.

Hey: Opex was $5 $1 million compared to 11 $4 million last year.

Guy Melamed: I will now briefly recap our full year 2023 results. Total revenues grew 5% to $499.2 million. In 2023, as compared to 2022, we had approximately a 12% headwind to our year-over-year revenue growth rate as a result of having increased SAS sales in our booking mix, which are recognized ratably versus the upfront recognition of our on-prem... Our full year operating margin was 5.8% compared to 6.2% for 2022. Additionally, in 2023, as compared to 2022, we had approximately a 10% headwind Turning now to our 2024 guide. We continue to take a responsible approach to our guidance philosophy, which includes factoring in the continuation of long deal cycles and multiple layers of deal scrutiny throughout 2024. Our commitment to balancing top-line growth, margin leverage, and cash flow generation has not changed.

Speaker Change: I will now briefly recap our full year 2023 result.

Speaker Change: Total revenues grew 5% to $499 $2 million.

Speaker Change: In 2023 as compared to 2022 we had approximately a 12% headwind.

Speaker Change: Our year over year revenue growth rate as a result of having increased sales in our bookings mix, which are recognized ratably versus the upfront recognition of our on Prem subscription part of our full year operating margin was five 8% compared to $6 two per cent for 2022 and.

Speaker Change: 2023, as compared to 2022 we had approximately a 10% headwind to our operating margin as a result of having increased sales in our bookings mix, which I'll recognize fully ratable versus upfront recognition of our on Prem subscription product.

Speaker Change: Turning now to our 'twenty 'twenty four guidance.

Speaker Change: We continue to take a responsible approach to our guidance philosophy, which includes factoring in the continuation of long deal cycles and multiple layers of steel scrutiny throughout 2024.

Our commitment to balancing top line growth margin leverage and cash flow generation has not changed while at the same time, we also see an opportunity to invest in order to capture the longer term opportunity that we see and capitalize on the secular tailwind that you can discuss.

Guy Melamed: At the same time, we also see an opportunity to invest in order to capture the longer-term opportunity that we see and capitalize on the secular tailwinds that Yaki discussed. These investments are already baked into our guidance, which shows our ability to invest in the business while generating improvements in our North Star mission. When we launched this transition, we committed to being transparent and also to providing metrics that accurately measure the health of the business.

Speaker Change: These investments are already baked into our guidance, which shows our ability to invest in the business, while generating improvements in our north star metric.

Speaker Change: When we launched this transition we committed to being transparent and also to providing metrics that accurately measure the health of the business as.

Guy Melamed: As we turn our attention towards the final phase of this transition, our main focus is now completing this transition, which means SAS is 70 to 90 percent of total AR. In an effort to provide metrics that help you monitor our progress throughout the next phase, we will be providing revenue and also revenue as a percentage of total ARR on a quarterly basis. At the same time, this will be the final time that we provide... That metric measures the progress of phase one of the. Going forward, we expect the vast majority of new customers... For the first quarter of 2024, we expect. Total revenues of $111 million to $115 million, representing growth of 3% to 7%. Non-Gap Operating Loss of negative $15 million to negative $13 billion, and non-gap net loss for basic and diluted share in the range of negative 10 cents to negative 90.

As we turn our attention towards the final phase of this transition. Our main focus is now completing this transition which means that 70% to 90% of total error.

Speaker Change: In an effort to provide metrics that help you monitor our progress throughout the next phase we will be providing SaaS revenue. It also serves as a percentage of total ALR on a quarterly basis at the same time. This will be the final time, we provide SaaS mix is that metric measure the progress of phase one of that transition.

Speaker Change: Going forward, we expect the vast majority of new customers to purchase our SaaS offering.

Speaker Change: In the first quarter 'twenty 'twenty four we expect.

Speaker Change: Total revenues of 111 million to 115 billion representing growth of 3% to 7%.

Speaker Change: non-GAAP operating loss of negative 15 million to negative $13 million and non-GAAP net loss per basic and diluted share in the range of negative 10 cents did they get it right.

Guy Melamed: This assumes 110.1 million basic and diluted shares are... For the full year 2024, we expect ARR of $617 billion to $625 billion, representing growth of 40% to 50%, and free cash flow of $17 million to $75 million. Total revenues, $536 million to $546 million, representing growth of 7% to 9%, non-GAAP operating income of $7.5 billion to $12.5 billion, and non-GAAP net income per diluted share in the range of 11, the third. This assumes 127.7 million diluted shares outstanding.

Speaker Change: This assumes a 110.1 million basic and diluted shares outstanding.

Speaker Change: For the full year 'twenty 'twenty four we expect a.

Speaker Change: R R of $617 billion to $625 million.

Speaker Change: The growth of 14% to 15%.

Speaker Change: Free cash flow of 17 million to $75 million.

Total revenues of $536 million with $546 million representing growth of 7% 10, 9%.

Speaker Change: non-GAAP operating income was $7 5 billion to 12 5 million.

Speaker Change: non-GAAP net income per diluted share in the range of 11.

Speaker Change: The 13th since.

Speaker Change: This assumes 127 7 million diluted shares outstanding in.

Guy Melamed: In summary, we are excited by the progress of our SAS transition, which is benefiting our three North Star members: ARR, Free Cash Flow, and ARR Contributions. The momentum of our transition, coupled with the tailwinds of NDDR, the adoption of generative AI, and increased data-centric regulation, gives us confidence as we finish the initial stage of the transition and look to grow new customers and convert existing ones to our SaaS platform in 2024 and beyond. With that, we'll be happy to take. Operator.

Speaker Change: In summary, we are excited by the progress of our SaaS transition, which is benefiting our three northstar metrics.

Speaker Change: Our free cash flow and they are our contribution margin the momentum of our transition coupled with a tailwind of N D D or the adoption of generative AI and increased data centric regulation.

Gives us confidence as we finished the initial stage of the transition.

Speaker Change: Look the grow new customers and convert existing ones to our SaaS blackboard at 'twenty 'twenty four and beyond.

Speaker Change: With that he would be happy to take questions.

Later.

Speaker Change: Yeah.

Operator: Thank you. We will now be conducting a question and answer session. If you'd like to ask a question, please press star one on your telephone keypad. Confirmation film will indicate that your line is in the question queue, and you may press start if you would like to remove your question from the queue.

Speaker Change: Thank you we will now be conducting a question and answer session. She would like to ask a question. Please press star one on your telephone keypad confirmation from wanting to keep the airline is another question can you.

Speaker Change: And you May press Star two if he would like to move your question from the queue.

Operator: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. In the interest of time, we ask that you please limit your question to one. One moment, please. Thank you. Our first question comes from the line of Matt Hedberg with RBC. Please proceed with your question. Greg, I think you're taking my questions. First off, congratulations on the results.

Speaker Change: Participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

Speaker Change: In the interest of time, we ask that you please limit to one question.

Speaker Change: One moment please.

Speaker Change: Thank you. Our first question comes from the line of Matt Hedberg with RBC. Please proceed with your question.

Matt Hedberg: Great guys. Thanks for taking my questions first off congrats on the results <unk>. The SaaS momentum is impressive but equally interesting is to be free cash flow and that's great to see both of those.

Matt Hedberg: The SaaS momentum is impressive, but equally interesting is the free cash flow, and it's great to see both of those. I guess for one question, you know, Yaki. Can you talk a bit more about the specifics of the Microsoft partnership? I know there were some news releases this past quarter, maybe a little bit more about the go-to-market functions in the channel. Is there any way to think about sort of the momentum, maybe the pipeline generation that Microsoft is generating? Thanks.

Matt Hedberg: I guess for one question.

Matt Hedberg: You know Yoki can you talk a bit more about the specifics Microsoft partnership I know there was some news releases this past quarter, it maybe a little bit more about the go to market functions.

Matt Hedberg: The channel, but any way to think about sort of the momentum maybe the pipeline generation that Microsoft is generating.

Yaki Faitelson: It's still early innings, but essentially, co-pilot for Microsoft is a tremendous productivity opportunity for organizations, but it comes with a lot of risk. So what's happening is that co-pilot for business is going to digest any data that it can get, and the data that it can get is access control, which is related to access control. This is the security model that they are using, and without a product like us, 90% of the data, on average, that a user can access is not relevant to them. So think what will happen. They will create a staggering rate. High Value Information products are completely out of policy, not labeled, so you don't know where they are.

Matt Hedberg: Great.

Matt Hedberg: Early innings by essentially.

Co pilots for Microsoft is a tremendous productivity opportunity for organizations with categories a lot of risk. So what happened is that.

The copilots full business, he's going to digest any data, but he can get it in the data that they can get these auctions control is related to access controls. This is the security model most of the day.

Matt Hedberg: Using.

Matt Hedberg: Our great product like US 90% of the data on average that you usually can access is not relevant for them. So I think what will happen they will create the staggering right.

High value information product completely auto policy not play that you don't know where they are and this is a this is massive risk. So they recognized that in order to close the blast radius automatically when he does and the other thing if a tool like that do you think the hands of the Doctor, it's even speak to massive damage.

Yaki Faitelson: And this is a massive risk. So they recognize that in order to close the blast radius automatically, you need us. And the other thing, if a tool like that is in the hands of a bad actor, it's going to inflict massive damage on organizations. So we are teaming with them; we are teaming with those sellers in order to make sure that we will be the foundation of getting good control over the data before you unleash this, and also the risks that come with it. But we really need to make sure that they are ahead of the risk, and we are well, well positioned to do very well. We are very excited about the opportunity. Thanks, Yaki.

Oh no organizations. So we are teaming with them. We are assuming we sell is in order to make sure that we will be the foundation of.

Matt Hedberg: These are getting.

Matt Hedberg: Getting a good control over the data before youre going to unleash it.

Matt Hedberg: To unleash these tools, it's important to understand that it's still early innings, but they are still not been mass distribution, we'd be losing.

Matt Hedberg: We use these product it's coming up in every conversation, but we think that they're going to really see an organization, who really understand the power of these can also be reached with Congress.

Matt Hedberg: But do you really need to make sure the Delhi head of the risk and we are well positioned to do really well and we're really excited about the opportunity.

Yaki Faitelson: Thank you. Our next question comes from the line of Saket Kalia with Barclays. Please proceed with your question. Okay, great.

Speaker Change: Thanks Jackie.

Thank you. Our next question comes from the line of socket Cleo with Barclays. Please proceed with your question.

Saket Kalia: Hey guys, thanks for taking my question here and an echo to congrats on the quarter. Yaki, maybe for you, a little bit of a higher level question. You know, SAS transitions into other areas of software that have often expanded the total addressable market, and understanding that it's still early here in Varonis's transition.

Socket Cleo: Okay, Great Hey, guys. Thanks for taking my question here and Echo the congrats on the quarter.

Yeah, maybe for you a little bit of a higher level question.

Cleo: SaaS transitions in and other areas of software.

Socket Cleo: Often expanded the total addressable market.

Socket Cleo: And understanding that it's still early here in Verona says transition.

Yaki Faitelson: What are some of the anecdotes that you can see out there where you think your SaaS products are expanding a customer's spending on data protection? I think you mentioned a couple of customer examples, but I know you spend a lot of time with customers. Do you see some of that TAM expansion starting here with the move to SaaS? Of course, and it's very tangible.

What are some of the anecdotes that you can see out there where you think your SaaS products are expanding our customer spending on data protection. I think you mentioned a couple a couple of customer examples, but I know you spent a lot of time with customers do you see some of that Tam expansion, starting here with the move to SaaS.

Socket Cleo: Of course, it's very tangible so the way did you see any stemming from the value proposition first you just tremendous amount of automation.

Yaki Faitelson: So the way that you see it is stemming from the value proposition. First, it's just a tremendous amount of automation. And with ease, we can cover many more data repositories.

And we easily can cover many more with data repositories, but also with the <unk>.

Yaki Faitelson: But also, with MDDR, the automation, the threat detection response, the classification, and data protection, we can do so much more for customers. So if they buy our product now, we can really take all the, not all, but a lot of the operational load off us and make sure that they have a world-class security team that is completely oriented to data and the expansion of the term in terms of innovation, and you will also see that with what we are going to release in the future. But you see, they're very aggressive; if you will, release cycles. And you see now, you know, Snowflake and more coverage.

M D D out automation to the detection response to classification data protection, we can do so much more for customers. So they.

Socket Cleo: Buying a product now we can really take all the not all but a lot of the operational load on us and make sure that hey, the World World Class Security team.

Socket Cleo: Is completely oriented to data and the extension of the time in terms of innovation and you know.

You will also see it with the with what we're going to release in the future, but you see there's very aggressive if you will release cycles and you see now you know snowflake and more in more coverage is organization going to have more critical data repositories and they they will hit the Kitty.

Yaki Faitelson: Is the organization going to have more critical data repositories, and they will hit the critical mass in the marketplace? We are going to, and we are going to protect it. Just in terms of the value today, if you have Varonis, most probably, you will not have a data breach and you will not have a data breach automatically without any effort. You just need to buy the platform.

Socket Cleo: Masks in the marketplace.

Socket Cleo: We are going to we are going to protect it. So that's in terms of the value today. If you have any most probably you would not take the data breach and you will not have a data breach automatically without without any effort you just need to buy the platform. So it's from everywhere from the value from the way that you can expand on the the data repositories coverage automate.

Yaki Faitelson: So it's everywhere, from the value, from the way that you can expand from data repositories, coverage, or automation. It's just increasing our time drastically. And also in terms of innovation, it's much easier for us to take a thought and make it a commercial reality and really distribute it to the marketplace. We are very excited about the ability to innovate and the data situation. You see things like Copilot, you know. It's Copilot.

Socket Cleo: And he just increasing our Tam drastic they drastically.

Socket Cleo: Drastically and also in terms of innovation, it's much easier for us to take a thought and to make it a commercial reality and really distributed to the marketplace. We are very excited about the ability to innovate and the situation that they're related to data you see things like co pilot.

Yaki Faitelson: You have more connectors and stuff like that, so it's definitely expanding the need. Makes sense. Thanks, guys. Thank you. Our next question comes from the line of Hamza Fodderwala with Morgan Stanley. Please proceed with your question. Thank you for taking my question. Yaki, um..., for you.

Socket Cleo: He's copilot, you left more connectors and stuff like that.

Socket Cleo: Oh, it's definitely expanding many.

Speaker Change: Makes sense thanks, guys.

Speaker Change: Thank you our next.

Speaker Change: Next question comes from the line of Hans I put them all with Morgan Stanley. Please proceed with your question.

Great. Thanks for taking my question Yoki.

Hans: Jockey question for you.

Hamza Fodderwala: We're obviously seeing a lot of focus on getting their data prepped for these generative AI. A big focus on data, and governance around that.

We're obviously seeing a lot of focus on.

Hans: With companies getting their data prep for these generative AI deployments.

Hans: A big focus on data security and governance around that I'm just curious.

Yaki Faitelson: I'm just curious as you have more customers and prospective customers. You know, how often is that coming up for Varonis and how do you expect that conversation to ramp up throughout the year and ultimately drive Thanks for the question. So it's really coming up with every single conversation.

Hans: Having more conversations with your customers and prospective customers.

Hans: You know, how often is that coming up for bonus and how do you expect that conversation to ramp throughout the year and ultimately drive more sales for our business. Thank you.

Speaker Change: Thanks for the question, so, it's really coming coming up with.

Speaker Change: Every single conversation and I think that if you take almost every system not them. You know what is your main objective. They will tell you that the launch of the objectives is to avoid a data breach and the other parties to make sure that the infrastructure, obviously, how the IDE application you have uptime everything can't really deliver a service and for us with all the facts.

Yaki Faitelson: And I think that if you take almost every system and ask them, you know, what your main objective is, they will tell you that the line share of the objective is to avoid a data breach. And the other part is to make sure that the infrastructure, obviously, you know, the application, you have uptime, and everything can really deliver a service. And for us, with all the SAS, we really can make sure that you will most probably not have a data breach, but when you do have a data breach, the potential damage will be very small, and we'll get to the root cause super fast.

Speaker Change: We really can make sure that you will most probably you will not take the data breach, but we do have a data breach the potential damage would be very small and we will get to the root cause super fast does your attitude today an organization. They they affect everybody choose you guys understand extremely well, it's almost always about the data he's organization has a very strong.

Yaki Faitelson: The reality today in organizations, they dissect every breach, which you guys understand extremely well. It's almost always about the data. The organization has a very sophisticated, modern security stack, a lot of very smart people that manage security, but they breach the perimeter, and they don't see anything.

Speaker Change: It did modern security stock it was a very smart people that manage security, but the bypass the perimeter and they don't see anything it's all about the data they need to bringing our company. They pay them. Sometimes you know sometimes it's millions of dollars and they can say what damage harping on the data. Later this is a world that is upside down and people understand that it's been.

Yaki Faitelson: It's all about the data, then they need to bring in an IR company, they pay them sometimes, you know, sometimes it's millions of dollars, and they can't say what damage happened at the data layer. This is a world that is upside down, and people understand it. They've constantly been spending more on security, and they have more data breaches. And the way that you can, you know, and the way that a credit card issuer can't give you for detection without seeing the transaction, or you will never do business with a bank that can provide the ledger and can tell you if you have other identities or devices on your account. It's the same with data.

Speaker Change: Of course, I need to spend more on security and they have no data breaches and the way that you can you know and.

Speaker Change: The way that the kidneys called Israel.

Speaker Change: They give you for detection without seeing the transaction well you will never do a business with the bank, but can provide the ledger and can tell you. If you have other identities devices.

Speaker Change: You know, it's it's the same with data so we definitely see that.

Yaki Faitelson: So we definitely see that organizations understand it, and definitely things like co-pilot accelerate it, because it's really, it's like ransomware, it's exposing the problem. You know, ransomware, if one out of thousands organizations gets into 100 organizations, I think that everybody will get co-pilot. So co-pilot is going to really expose the blast radius.

Speaker Change: Organizations understand it indefinitely things like copilot accelerating because they it's really it's a constant wave it's exposing the it's exposing the problem and you don't want somebody one on auto.

Speaker Change: This organization will get you to handle the organizations I think everybody will get co pilot copilot, he's going to really expose the blast radius. So we feel that did you say.

Yaki Faitelson: So we feel that it's, can be, over time, a very good opportunity for us. And we're also excited that we are joining forces with Microsoft. Thank you.

It can be over the kind of very good opportunity for us and we're also excited.

Speaker Change: But we are joining forces with Microsoft.

Speaker Change: Yeah.

Speaker Change: Thank you.

Speaker Change: Okay.

Speaker Change: Thank you. Our next question comes from the line of Brian Essex with J P. Morgan. Please proceed with your question.

Brian Essex: Our next question comes from the line of Brian Essex with JP Morgan. Please proceed with your question. Good afternoon, and thank you for taking the question. I guess, maybe for Guy, would you mind unpacking your net dollar retention rate a little bit? And what might we think about that?

Brian Essex: Hi, good afternoon, and thank you for taking the question I guess.

Brian Essex: Maybe if a guy would you mind unpacking your net dollar retention rate, a little bit and how might we think about that and and.

Guy Melamed: And the, I guess, factors that go into calculating that, whether it's customer growth, cross-sell, up-sell, and how might we expect that to drive kind of a, you know, better traction as we look into fiscal 2020. Absolutely, when you look at kind of NRR in 2023, there were basically two factors that had an impact. The first one was the friction related to the transition.

Brian Essex: I guess factors that go into calculating that whether it's customer growth cross sell up sell.

Brian Essex: And how might we expect that.

Brian Essex: Back to drive kind of a better better traction as we look into fiscal 'twenty four.

Brian Essex: Yeah.

Speaker Change: Absolutely when you look at them kind of in our or in 2023, there were basically two factors that had an.

Speaker Change: And in fact, the first one was the friction related to the transition in the first six months of the year. If you remember we started the year with sitting here today at 23% and SaaS mix out of total a R. R.

Guy Melamed: In the first six months of the year, if you remember, we started the year, and we're sitting here today, at 23% SAAS mixed out of total ARR, and that only happened in one year. But, you know, we had to go through a lot. And the first six months definitely had an impact in terms of the friction there. And the second factor was the macro environment, which we talked a lot about in terms of longer sales cycles and deal scrutiny. And that's definitely kind of the second factor that impacted NRR. I think as we look at the kind of opportunity, both with the customer lifetime value that we're generating with our existing customers, converting them to SAAS, that generates a tremendous opportunity for us to continue to sell to them and make them better protected on additional platforms. We're very excited about that. It's happened; the whole conversion in 2023 happened in a natural way.

Speaker Change: And in one year.

Speaker Change: But you know we had to go through a lot and in the first six months.

Speaker Change: We had an impact in terms of the friction there and the second the second factor was the macro environment, which we've talked a lot about in terms of longer sales cycles and deal scrutiny and that's definitely the kind of the the second factor that impacted N. R. R. I think as we look at kind of the opportunity both with our customer life.

Speaker Change: Time value that we're generating with our existing customers converting them to SaaS.

Speaker Change: That generates a tremendous opportunity for us to continue to sell to them and make them better protected on on additional platforms.

We're very excited about that.

Speaker Change: It's happened kind of the whole conversion.

In 2023 happened in a natural way and it's been very extremely encouraging for us and we believe with that can accelerate in 'twenty 'twenty four but even in terms of new customers and you look at the land, they're there they're larger land them with the SaaS offering and as with the simplicity of the product.

Guy Melamed: And it's been very, extremely encouraging for us, and we believe that can accelerate in 2024. But even in terms of new customers, you look at the land, they're, they're, they're larger land, with the SAAS offering and the simplicity of the product, and the fact that we are now offering the MDDR, which is really a game changer for us in terms of the offering to our customers in terms of having them better protected in a much easier way. All of those are an opportunity for us to grow our NRR into a larger That makes sense. Congratulations on the progress. Thanks very much.

Speaker Change: The fact that we are now offering the M D D R.

Speaker Change: Which is really a game changer for us in terms of the offering to our customers in terms of.

Speaker Change: Having them better protected than in in a much easier way all of those are an opportunity for us to grow our NR or enter into larger and higher level.

Speaker Change: That makes sense and congrats on the progress.

Joel P. Fishbein: Thank you. Our next question comes from the line of Joel Fishbein with Tourist Security. Please proceed with your question. Thanks for taking the question. And again, good, strong execution.

Speaker Change: Thanks very much.

Speaker Change: Thank you. Our next question comes from the line of Joel Fishbein with Jewish Securities. Please proceed with your question.

Joel P. Fishbein: Thanks for taking the question again.

Joel P. Fishbein: Strong execution it was a good segue the previous question of mine.

Guy Melamed: It was a good segue into my previous question of mine. I wanted to, Guy, ask about the MDDR offering. Can you just give us a little color on how that will be priced? And then, you know, what do you think the adoption curve looks like in terms of time to revenue? It's a very good question.

Joel P. Fishbein: I wanted to ask Guy I want to ask about the M. D. M. D D are offering.

Joel P. Fishbein: Can you just give us a little color on how that will be priced and then you know what do you think the adoption curve looks like in terms of time.

Joel P. Fishbein: Time to revenue.

Guy: It's a very good question when you look at kind of our offering to date. We've we've offered the proactive incident response teams for quite some time now and the reception the way customers have received it has been extremely positive. So all we're doing right now is charging for the service that we've provided for it.

Guy Melamed: When you look at our offering to date, we've offered the proactive incident response team for quite some time now, and the reception, the way customers have received it, has been extremely positive. So all we're doing right now is charging for the service that we've provided for quite some time. And I think there is, as you look at the kind of MDDR, we expect it to generate a healthy uplift in terms of the ASD and what we can generate from our customers. So we don't, and we don't expect to become a service company. We believe that over time, we can generate MDDR that is in the licensed software margins. We feel that not only is it extremely beneficial for our customers, but it can also help with increased and improved renewal rates over time. It can help with the opportunity to upsell additional platforms that a customer would see the value in and would want to be protected on multiple platforms.

Guy: Quite some time.

Guy: And I think there as you look at kind of the M. D. D are we expect it to generate a healthy uplift in terms of the a S D and what we can generate from our customers.

Guy: So we don't we don't expect us to become a service company. We we believe that overtime, we can generate M. D D or that is in our license software margins, we feel that not only is it extremely beneficial for our customers, but it can also help with <unk>.

Kris and improved renewal rates overtime. It can help with the opportunity to upsell additional platforms that a customer would see the value and would wanna be protected on on multiple platforms and at the at the same time, it's so.

Guy Melamed: And at the same time, it's so appealing to customers that it can actually help with closing rates. So I think the MDDR has an option on all of those fronts. The way we've structured the comp plan in 2024 makes it a no-brainer for our reps to introduce it to our customers.

Appealing and and for our customers that it can actually help with closing rates. So I think the M. D. D. R has an option on all of those fronts. The way we've structured the compound in 'twenty 'twenty through 'twenty 'twenty four it makes it a no brainer for our reps to introduce it to our customers. So I expect the adoption to be extremely healthy there.

Guy Melamed: So I expect adoption to be extremely healthy this year. And I think it's a benefit for our customers but also a significant benefit for us as an organization. Thank you very much.

Guy: Here.

Guy: And I think it's a benefit for our customers, but also a significant benefit for us as an organization.

Speaker Change: Thank you very much.

Andrew James Nowinski: Thank you. Our next question comes from the line of Andrew Nowinski with Wells Fargo. Please proceed with your question. Great, thank you for taking the question. And congratulations on a nice quarter.

Speaker Change: Thank you. Our next question comes from the line of Andrew Nowinski with Wells Fargo. Please proceed with your question.

Andrew James Nowinski: Great. Thank you for taking the question and congrats on a nice quarter. So I wanted to ask about total air or guidance you guys have outlined so many different positive growth drivers Tonight, you know the mix of your SaaS revenue was 23% I think it's the fastest pace we've seen over the last four.

Guy Melamed: So I wanted to ask about total ARR guidance. You guys have outlined so many different positive growth drivers tonight. You know, the mix of your SAS revenue is 23%. I think it's the fastest pace we've seen over the last four quarters. You're getting that 25 to 30% price uplift on SAS, you're getting larger territories, as you mentioned, you got the new integration, of course, with Microsoft and the MDDR service, but your outlook for ARR implies a fairly steep deceleration. I'm just, you know, given those growth drivers, why would we expect a deceleration in your ARR growth this year? So when you look at kind of the math, and I think that the numbers that you look at, I completely understand the math that you're doing, and it makes sense. I think when you look at the prepared remarks, we had an extremely bullish tone, and I do want to reconcile that with the guidance that we've provided. So, you know, as you look at us sitting here today, we've never had so many things working in our favor.

Speaker Change: Quarters, Youre getting that 25% to 30% price uplift on SaaS, you, you're getting larger lands as you mentioned, you've got the new integration of course, with Microsoft and the M. D C or a service, but your outlook for air or implies a fairly steep deceleration I'm. Just you know given those growth drivers why would we expect a deceleration in your ear our growth this year.

Speaker Change: So when you look at kind of the math and I think that the numbers that you look at I completely understand the math that you're doing in it and it makes sense I think when you look at the prepared remarks, we we had extremely bullish tone.

And I do when I reconcile that with the guidance that we've provided so you know when when as you look at US sitting here today, we've never had so many things working in our favor you know apart from the everyday increasing breaches that we've seen happen for years, there's additional drivers Intel wins that we've really never seen.

Guy Melamed: You know, apart from the everyday increasing breaches that we've seen happen for years, there are additional drivers and tailwinds that we've really never seen before. Yaki talked about the copilot, there's the cybersecurity SEC regulation, and also what we believe is a game changer for us, which is the MDDR, which we just introduced. But you have to remember, our sales cycles are three months on the shorter end and up to 12 months on the larger deals. So when you look at us sitting here right now and looking at the philosophy that we've guided for in the past for many, many years, it's not something that we have done in the past to bake in positive assumptions into our guidance without seeing the data that supports it. So, you know, it's really a starting point for the year. We're sitting here in February, and there's a long year ahead of us.

Speaker Change: Before I could you talked about the co pilot Theres, the cyber security SEC regulation and also what we believe is a game changer for US which is the M. D. D. R, which we just introduced them, but you have to remember our sales cycles are three months on the shorter end and up to 12 months on the on the larger deals. So when when you look at kind of.

A sitting here right now and I'm looking at the philosophy that we've guided for in the past for many many years its not something that we have done in the past to bake in positive assumptions into our guidance without seeing the data that supports it so you know.

Speaker Change: It's really a starting point for the year, we're sitting here in February and there's a long year ahead of us.

Guy Melamed: We believe that we will see those trends that I've talked about kind of work in our favor over the year, and, as we have done in the past, we'll be happy to update our guidance as the year progresses. But, as I mentioned, there are a lot of things that are working in our favor that we haven't seen in the past. Yeah, it certainly seems like that. All right. Thank you very much.

Speaker Change: We believe that we will see those trends that I've talked about kind of work in our favor over the year end and as we have done in the past, we'll be happy to update our guidance as the year progresses, but as I mentioned, there's a lot of things that are working in our favor that we we haven't seen in the past.

Speaker Change: Yeah. It certainly seems like that alright, thank you very much.

Fatima Boolani: Thank you. Thank you. Our next question comes from the line of Fatima Boolani with Citi. Please proceed with your question. Thank you. Good afternoon. Thank you for taking my questions. Guy, this one's for you.

Speaker Change: Thank you.

Speaker Change: Thank you. Our next question comes from the line of Tina Romani with Citi. Please proceed with your question.

Tina Romani: Thank you good afternoon, and thank you for taking my questions Guy. This one's for you I was hoping you could help unpack for us how much of the expected operating margin degradation that you're anticipating this year.

Guy Melamed: I was hoping you could help unpack for us how much of the expected operating margin degradation that you're anticipating this year is more due to the fact that the transition is actually accelerating, because you did pull forward that timeline. So certainly, we appreciate the mechanical P&L impact of that. But just how much of that degradation on a year-of-year basis is tied to this sort of mechanical artifact versus some of your comments in the prepared remarks pertaining to a desire to reinvest in certain parts of the business? I believe you said some organic reinvestment. So just some directional help on that front would be great. Thank you. That's a very good question.

Tina Romani: Is it more do you need that the stocks that the transition is actually accelerating could you, but hopefully what that timeline. So you know certainly we appreciate the yeah, the mechanical piano P&L impact of that.

Guy: So much of that degradation on a year over year basis, it's tied to bolster mechanical artist shop versus some of your comments in my prepared remarks pertaining to a desire to reinvest in certain parts of the business I believe you said some organic green Bachman.

Speaker Change: Just some directional help on that front would be great. Thank you.

Speaker Change: That's a that's a very good question and I think it's a combination of some of the accounting in terms of the.

Guy Melamed: And I think it's a combination of some of the accounting in terms of the cloud costs and the way they're recognized in terms of the expense in a ratable way, versus kind of the ARR where you recognize it on the day of the sale. But there's also this understanding that there's a tremendous opportunity ahead of us, and we want to take advantage of it. So when you look at kind of our philosophy over the last couple of years, we've been very focused on top-line growth and wanted to make sure that we showed margin leverage and free cash flow generation. I think as we sit here today, we feel extremely confident about the guidance that we provided during the investor day in March of 2023, about a 20% ARR contribution margin by 2027. So kind of when you look at the progression, in terms of free cash flow, we've shown improvement from 22 to 23. And even in the guidance of 2024, there's a significant improvement there as well. The ARR contribution margin moved significantly from 2022 levels to 2023 levels, and the 2024 guidance as an improvement as well.

Speaker Change: Cloud costs and the way they're recognized in terms of the expense in a ratable way.

Speaker Change: Versus kind of the E. R. R where you recognize it up on the day of the sale, but Theres also I'm just understanding that there's a tremendous opportunity ahead of us and we want to take advantage of it. So when you look at kind of our philosophy over the last couple of years, we've been very focused on the top line growth and wanted to make sure that we show margin lever.

Speaker Change: Bridge and free cash flow generation I think as we sit here today, we feel extremely confident about kind of the guidance that we provided during the investor day in March of 2023 of about 20% are our contribution margin by 2027, so kind of when you look at the progression in terms of free.

Speaker Change: Cash flow, we've shown improvement from 'twenty, two to 'twenty, three and even in the guidance of 'twenty 'twenty four there is a significant improvement there as well.

Speaker Change: Our contribution margin moved up significantly from 'twenty to 'twenty two levels to 2023 levels in the 'twenty 'twenty four guidance hasn't it and improvement as well. So I think some of the investments that we're making today are ahead of what we want to see is a return to the E. R. Our topline growth.

Guy Melamed: So I think some of the investments that we're making today are ahead of what we want to see as a return to the ARR top line growth of kind of that 20 plus percent. So I think we're definitely making the investments to take advantage of a larger opportunity. And we believe that with the tailwinds that we've talked about, there's a tremendous opportunity for us to take advantage of. Thank you.

The kind of the 20 plus percent. So I think we're definitely making the investments to take advantage of a larger opportunity.

Speaker Change: And we believe that with the tail wins that we've talked about there's a tremendous opportunity for us to take advantage of them.

Speaker Change: Thank you.

Speaker Change: Thank you. Our next question comes from the line of watch endpoint with UBS. Please proceed with your question.

Roger Boyd: Our next question comes from the line of Roger Boyd with UBS. Please proceed with your question. Great. Thank you for taking the question and congratulations on the quarter. Guys, I want to go back to the conversion math.

UBS: Great. Thank you for taking the question congrats on the quarter Guy I want to go back to the conversion math you converted a little over 30 million from term license SaaS. This year with really without any sort of formal go to market behind it apologies. If I missed this I think you noted that you're expecting that to accelerate but any any rough cut assumptions on what you expect.

Guy Melamed: You converted a little over $30 million from term licenses to SAS this year really without any sort of formal go-to-market behind it. Apologies if I missed this. I think you noted that you're expecting that to accelerate, but any rough assumptions on what you're expecting in terms of conversions in 2024? And, alternatively, kind of the puts and takes here around renewal timing, and the sales ramp-up, which you noted will be kind of skewed towards the back half of the year. Thanks.

Speaker Change: In terms of conversions in 2020 for and Alternatively kind of the puts and takes here around renewal timing the sales ramp up but she noted won't be kind of skew towards the back half of the year.

Speaker Change: Absolutely we finished 2023 with 23%.

Speaker Change: On the SaaS out of total a or so at $125 million in and our assumptions for 'twenty 'twenty. Four is that we will finish at 46% SaaS percentage out of total a or that basically means $285 million of SAP.

Guy Melamed: Absolutely. We finished 2023 with 23% SAS out of total ARR, so at $125 million. And our assumptions for 2024 are that we will finish at 46% of total ARR. That basically means $285 million of revenue from SAS by the end of 2024. So a significant increase basically means $160 million of SAS ARR in 2024, a significant increase versus the $120 million of SAS that we generated in 2023. So obviously, our assumptions are that there will be some significant increase in the conversions themselves, but also that the percentage of SAS sold to new customers would be pretty significant as well. I think the overall understanding and the feedback that we're getting from our customers is that they prefer the SAS offering because it's a better product.

Speaker Change: <unk> by the end of 'twenty 'twenty four so a significant increase.

Basically means a 160 million SaaS. They are are in 'twenty 'twenty four a significant increase versus the 120 $120 million of SaaS that we are we have generated in in 'twenty 'twenty. Three so obviously our assumptions are that there will be some significant increase in in the conversions themself.

Speaker Change: <unk>, but also that the percentage of sand sold to new customers.

Speaker Change: It would be pretty significant as well I think the overall understanding and and the feedback that we're getting from our customers is that they prefer the SaaS offering because its a better product and in terms of from a commission perspective, all reps retire quota on anything on top of it.

Speaker Change: That renewal so on on that on the uplift that they get from an existing customer in that conversion that goes towards that quota retirement. So it's actually a win win it's a win win for it's a win for our customers and it's a win for our sales team and that's the best way to kind of incentivize them and that's why.

Guy Melamed: And in terms of commission, our reps retire quota on anything on top of that renewal. So the uplift that they get from an existing customer in that conversion, that goes towards their quota retirement. So it's actually a win-win.

Guy Melamed: It's a win-win for us, it's a win for our customers, and it's a win for our sales team. And that's the best way to kind of incentivize. And that's why 2023 has been a great surprise in the level of conversions that we saw. And our expectation is for an acceleration in 2024, which would bring us to that $285 million of SAAS by the end of this year. Very helpful.

Speaker Change: On the 20th 23 has been a great surprise and in the level of conversions that we saw and our expectation is for an acceleration in 2024, which would bring us to that $285 million of that.

At the end of this year.

Speaker Change: Very helpful. Thank you.

Speaker Change: Yeah.

Speaker Change: Thank you.

Speaker Change: Thank you. Our next question comes from the line of Chad Bennett with Craig Hallum. Please proceed with your question.

Guy Melamed: Thank you. Thank you. Our next question comes from the line of Chad Bennett with Craig Hallam. Please proceed with your question. Great, thanks for taking my questions. Guy, maybe just a prior question, when you talked about the MDDR opportunity and the ASP difference, is there any way to kind of quantify how material that uplift is or just the deal size difference you see in MDDR versus, you know, a traditional SAS deal? So it's very early still, but I can tell you that even as we sit here today, and we just spoke to our sales teams about it during the SKO that we had a couple of weeks ago, we've already seen that they've adopted it in a very healthy and positive way. We've actually seen some of the quotes where they go back and get an uplist. I don't want to put a number quite yet, just because it's so early.

Chad Bennett: Great. Thanks for taking my questions Guy maybe just a prior question when you when you talked about the M. D D. Our opportunity and in the S. P. Difference is is there any way to kind of quantify kind of how how material that uplift is there or just the deal size difference you see in EM.

Chad Bennett: D D R versus a traditional SaaS deal.

Guy: So it's very early still but I can tell you that even as we sit here today and we just.

Speaker Change: Spoke to our sales teams about it during the S. K O that we had a couple of weeks ago, we've already seen that they've adopted it and are in a very healthy and positive way, we've actually seen some of the quotes are.

Speaker Change: Where they go back and get an uplift I don't want to put a number quite yet just because it's so early.

Guy Melamed: But the MDDR does allow us to generate pretty significant and nice uplift but, at the same time, provide customers with value with less of a need for people to actually be protected. And at the end of the day, that's the best thing, the win-win with our customers. The win-win is that there are many customers that are using managed security service providers and at times get little value in terms of data breaches, and they can be completely protected with us.

Speaker Change: But the M. D D. R. It does allow us to generate a pretty significant nice uplift, but at the same time provide customers the value with with a less of a need of people to actually be protected.

And at the end of the day, that's the best thing the win win with our customers do win win is that are there is you know many customer that's using managed security service providers and at times get little value in terms of data breaches and they can be completely protected with us. So there are budgets for wheat.

Yaki Faitelson: So there are budgets for it. And the other thing is, in order to get the most from MDDR, you need a good footprint for the platform. As much as you have more licenses with us, if you want, more bundles, you get, you get more value. And regarding our AI capabilities, we invested tremendous effort in Athena AI, not just for our customers but also for our analysts. We are selling software. So we build robots and interfaces to make sure that our people that provide incident response and professional services can be much, much, much more productive. And we learn very fast; you know, the system learns what they are doing repeatedly. And really build the robots, the robots behind it.

Speaker Change: And the I don't see you know to get the most from the M. D. D. All you need a good footprint of the of the platform as much as you have more.

Speaker Change: Licenses with us if you will more bundled.

Speaker Change: You'll get you'll get more value and regarding our AI capabilities.

Speaker Change: Invested tremendous their food, we see NII not just for customers, but also for analyst we're selling software. So we believed all boats and interfaces to make sure that our the people that provide incident response and professional services can be much much much more productive and we learned a very.

Speaker Change: First you know the system around what they are doing repeatedly and really build the orbits.

Speaker Change: Or what's behind it so we think that this offering is.

Yaki Faitelson: So we think that this offering has tremendous opportunity and tremendous attachment to budget. It's a driver to buy more bundles. It's just the beginning, but we think that it's something that is very unique and the first match detection response that is data-oriented.

Speaker Change: Tremendous opportunity tremendous attachment to budgets, it's a driver to buy more bundle. It's just the beginning but we seem to let it sit.

Speaker Change: Something that is very unique in the first the managed detection and response that these data oriented.

Yaki Faitelson: And obviously, as we go through the year and we... And just to touch on that, as we go through the year and the sample size becomes much more meaningful, we'll be happy to provide more color about what we see in terms of the MDDR and the uplift that we see. And then maybe just one quick follow-up just now that we've kind of been through a full year of the SAS transition, and we have a decent amount of critical mass in Maybe for Yaki, just in terms of the 25 to 30% uplift on deals on conversion, but just as importantly, are you seeing any quantification of new data repositories or, or, or new use cases now that you are, you have seen a pretty good volume of SaaS deals that, you know, maybe outside of the Microsoft ecosystem, you know, you're realizing more of these opportunities from a data repository use case standpoint? Is there, are there two or three that, you know, are significant?

Speaker Change: Another guy that goes through the year and we.

Speaker Change: And just to just to touch on that as we go through the year and kind of the the sample size becomes much more meaningful we'll be happy to provide more color about what we see in terms of the M. D. M D D R&D and the uplift that we see.

Speaker Change: And then maybe just one quick follow up just now that we've.

Speaker Change: <unk> been through a full year.

Speaker Change: Of the SaaS transition and we have a decent amount of critical mass in that business in deal flow and whatnot.

Speaker Change: Maybe for Yoki just in terms of I know, the 25% to 30% uplift on deals on conversion, but just is it are you seeing you know is there any quantification of new data repositories or or or or new use cases now that you are you know do you you have seen.

Speaker Change: Gave a pretty good volume of SaaS deals that you know maybe outside of the Microsoft ecosystem. You know you you're realizing more of these opportunities are from a data repository. A use case standpoint is there is there are two or three that you know are significant.

Yaki Faitelson: Yeah, the three things that we are doing extremely well. He's making sure that only the right people can access the right data, that robotic remediation of access control without breaking any business processes, which is the holy grail of data protection. Thread detection and response that is data-oriented.

Speaker Change: But the three things that we are doing extreme.

Speaker Change: Extremely well, he's making sure that only the right people can access their data that ore body remediation of Fox is control without breaking any b any business supposed to says which is the Holy Grail of data protection.

Speaker Change: Third detection and response that these data oriented.

Yaki Faitelson: And then, obviously, a very accurate classification of data and to give it context, and then we are doing it on every repository. We have this amazing product for Salesforce, for Box, and Google. But now we are going into the iOS world, and with AWS, all the databases, all the RDS, and S3, and in Azure, the Azure Blob.

Speaker Change: And then obviously, a very accurate classification of data and to give you context and then we are doing it on every positive you know we have this amazing product for sales folks at Salesforce, Inbox and Google, but we are going now into the August eight.

Speaker Change: AWS all the databases all reality, yes.

Speaker Change: And you know as three and you know and in Oslo as your brother and we're just moving very very very fast really to you know to do everything we have done with on Prem data storage and the biggest NAS devices of the world in the unstructured and then went to school application in the same stock Joe then email and he starts application.

Yaki Faitelson: And we're just moving very, very, very fast, really doing everything we have done with on-premise data, with storage, and the biggest NAS devices in the world, and the unstructured data, and then went to applications, and same structure, then email, and this SaaS application. And now this data repository is in AWS and Azure, and we will move very fast. And everywhere we go, we bring these three use cases. But the other thing is also, as you have more data, you have more enrichment. Because if you look at most of the breaches, almost all of them always go from one day; they come in, they try to get credentials, they become a user.

Speaker Change: D. C is data repositories in AWS and Azure and we will move very fast in everywhere. We go we bring these are these three use cases, but the other thing is also as you have more data you have more enrichment.

Speaker Change: Cause if you look at most of the breaches almost all of them always go from one day become a game to try to get credential that'll be coming to US and then they are moving from one data repository.

Speaker Change: Data repository to the other and we all.

Speaker Change: It really did in.

Speaker Change: In the best position to make sure that the organization don't give data breach and we are doing it with <unk> and now even in the places that they need to put some airports. We are taking it on a self suggest need to help us set it up and someone needs to answer the phone. This is the level of automation, we are getting to in any repository that will go on.

Yaki Faitelson: And then they are moving from one data repository to the next. And we are really in the best position to make sure that organizations don't have data breaches. And we are doing it automatically. And now, even in the places that they need to make some effort, we are taking it on ourselves. They just need to help us set it up, and someone needs to answer the phone.

Speaker Change: To protect this is the level of protection you would guess.

Speaker Change: Got it thank you much.

Speaker Change: Thank you.

Speaker Change: As a reminder, in the interest of time, we ask that you. Please limit to one question. Our next question comes from the line of Jason Ader with William Blair. Please proceed with your question.

Yaki Faitelson: This is the level of automation we are getting to. And any repository that we are going to protect, this is the level of protection we will get. Got it.

Jason Ader: Yeah. Thank you.

Jason Ader: Afternoon, guys.

Jason Ader: Just wanted to ask.

Jason Ader: In terms of the conversion process.

Chad Bennett: Thank you very much. Thank you. As a reminder, in the interest of time, we ask that you please limit yourself to one question. Our next question comes from the line of Jason Adder with William Blair.

Jason Ader: In practice, how does it work.

Jason Ader: Existing customers do you wait.

Jason Ader: For the term.

Jason Ader: Exploration.

Jason Ader: What kind of a little bit ahead of that and try to convince people to switch over to the SaaS.

Jason Adder: Please proceed with your question. Thank you. Good afternoon, guys. In terms of the conversion process, you know, in practice, how does it work with your existing customers? Do you wait?

Jason Ader: Version, how much incentives do you provide for them and I know you have a 25% to 30% price uplift that doesn't seem like much of incentives to me if I'm a customer so what what what are some specific things that youre doing.

Yaki Faitelson: For the term, Exploration, you know, kind of a little bit ahead of that to try to convince people to switch over to the SaaS version. How much incentives do you provide for them? I know you have a 25% to 30% price uplift. That doesn't seem like much of an incentive to me if I'm a customer. What are some specific things that you are doing as you think about 2024, especially the second half, when you talked about accelerating and increasing your activity? So Jason, I'd start by saying that that 25-30% uplift is actually a significant incentive for our customers to convert because the total cost of ownership saves them money. So yeah, they pay more on our price list.

Jason Ader: As you think about 2024, especially second half where you talked about accelerating the.

Jason Ader: Some of the activity with the existing customer base.

Jason Ader: Yeah.

Speaker Change: So Jason I'd start by saying that that 25% to 30% uplift is actually a significant incentive for our customers to convert because the total cost of ownership and saves them money. So yeah. They they pay more.

On our price list, but at the end of the day, they save on the hardware and they save on the people and they're getting a much much better product.

Speaker Change: And especially with the M D D R. It could save them, even more in terms of the of the offering. So so it's it's definitely an incentive as we look at our offering and when we look at kind of the renewals.

Speaker Change: We really take the cue from our customers some customers want to wait until the renewal period and then they would talk about the conversions, sometimes they went out they don't want to wait because they have a renewal. That's ahead of time, but they want SaaS and they want it now we work with our customers to make sure that.

Yaki Faitelson: But at the end of the day, they save on the hardware, and they save on the people, and they get a much, much better product. And especially with the MDDR, it could save them even more in terms of the offering. So it's definitely an incentive. As we look at our offering, and when we look at kind of renewals, if we really take the cue from our customers, some customers want to wait until the renewal period, and then they will talk about conversions. Sometimes they want to they don't want to wait; they have a renewal that's ahead of time.

Speaker Change: They would be protected in the way that they feel most comfortable I can tell you that.

Speaker Change: Getting a renewal on on the on Prem subscription side is a pretty automatic profit you know you could ask whether in all you get the Po and theres not too much conversation going on.

Speaker Change: Obviously, you you want to position in terms of the upsell, but just getting a pure renewal is pretty straightforward gear.

Speaker Change: Getting a conversion requires understanding what types of offering would make the most sense to them I'm kind of talking about the price uplift, but how it saves them money over.

Yaki Faitelson: But they want SAS, and they want it now. We work with our customers to make sure that they are protected in the way that they feel most comfortable. I can tell you that getting a renewal on the on-prem subscription side is a pretty automatic process. You know, you ask for the renewal, you get the PO, there's not too much conversation going on. Obviously, you want a position in terms of the upsell, but just getting a pure renewal is pretty straightforward; getting a conversion requires understanding what types of offering would make the most sense to them, kind of talking about the price uplift but how it saves money over the TCO in general. So there's more of an effort there. It's not happening automatically, but it's a much better product.

Speaker Change: Over the the the T C O N in general so so there's there's more of an effort there it's not happening automatically but it's a much better product. It is providing better protection to our to our customers and the fact that we can convert them sets them up for additional upsell opportunity because they'd be protected on.

Speaker Change: Additional platforms and they see the value and that they would want to purchase more so it's a win win and it's time very well spent from our perspective and that's why we're so focused on that obviously as you look at kind of the seasonality we have historically way more renewals happening in the second part of the year, that's why we talked about.

Speaker Change: The phase two and the conversions happening accelerating towards the second part of the year for for obvious reasons, but we also see the conversions accelerating within the year. So every single year, we expect to have more and more conversions in dollar terms is this picks up.

Yaki Faitelson: It's providing better protection to our customers, and the fact that we can convert them sets them up for additional upsell opportunities because they'd be protected on additional platforms, they'd see the value, and they would want to purchase more. So it's a win-win, and it's time very well spent from our perspective. And that's why we're so focused on that. Obviously, as you look at kind of seasonality, we have historically way more renewals happening in the second part of the year.

But I think as we sit here today and with our expectation of getting to $285 million of SaaS by the end of this year we're expecting.

Speaker Change: Customers to convert at a higher pace than we saw in 2023.

Yaki Faitelson: That's why we talked about phase two and the conversions happening, accelerating towards the second part of the year for obvious reasons. But we also see the conversions accelerating within the year. So every single year, we expect to have more and more conversions in dollar terms as this picks up. But I think as we sit here today and with our expectation of getting to two hundred and eighty five million dollars of SAAS by the end of this year, we're expecting customers to convert at a higher pace than we saw in twenty twenty three. Great, thank you.

Speaker Change: Great. Thank you.

Speaker Change: Thank you.

Yeah.

Thank you our.

Speaker Change: Next question comes from the line of Joe Carlo with Jefferies. Please proceed with your question.

Joe Carlo: Hey, guys. Thanks for the question you guys have launched many new products recently Snowflake protection, you've upgraded protection for sales force as you bolstered cloud can you just talk qualitatively about the traction you're.

Joe Carlo: You are seeing in D. A cloud and then quantitatively you know any metrics or size or growth profile and then just how do we should think about the mix as a percentage of IRR over time from D. A cloud thanks.

Joe Gallo: Thank you. Thank you. Our next question comes from the line of Joe Gallo with Jeffries.

Joe Carlo: But Joe if you remember.

For quite some time now where we're looking at our SaaS offering as a whole and we're definitely seeing that in terms of the conversations with customers, where they not only by the SaaS offering on the platforms that we used to have on Prem, but theyre also talking about additional platforms that we have.

Guy Melamed: Please proceed with your question. Hey guys, thanks for the question. You guys have launched many new products recently, such as Snowflake Protection, and you've upgraded Protection for Salesforce as you bolster DA Cloud.

Guy Melamed: Can you just talk qualitatively about the traction you're seeing in DA Cloud and then quantitatively, you know, any metrics or size or growth profile and then just, you know, how we should think about the mix as a percentage of ARR over time from DA Cloud? Joe, if you remember, we've been looking at our SaaS offering as a whole for quite some time now. And we're definitely seeing that in terms of the conversations with customers where they not only buy the SaaS offering on the platforms that we used to have on prem, but they're also talking about additional platforms that we have through the polarized acquisition and the offering there. So I think overall, the adoption, as we saw it in Q4, was healthy. It's definitely helping in terms of the conversations, but obviously, we think we can do much better.

Joe Carlo: Through the polarize acquisition in the offering there so I think overall the adoption as we saw it in Q4 it was healthy.

Joe Carlo: Its definitely helping in terms of the conversations obviously, we think we can do much better.

Joe Carlo: And and and we've talked about the fact that it takes time to introduce new new products until they kind of take off as we saw with the office 365 in the automation engine, but.

Joe Carlo: We're very happy with the progress so far and we believe that we can we can increase it in 2020 for our reps are very much in line with this they understand the benefits there our customers are asking about it and talking to us about it so overall.

Guy Melamed: And we've talked about the fact that it takes time to introduce new products until they kind of take off, as we saw with Office 365 and the automation engine. But, we're very happy with the progress so far, and we believe that we can increase it in 2024. Our reps are very much in line with this.

Joe Carlo: We're happy with the progress so far.

Thanks.

Thank you.

Shrink Qatari: Question comes from the line of shrink Qatari with Baird. Please proceed with your question.

Shrink Qatari: Oh, yeah. Thanks for taking my question congrats on the great execution. So.

Shrink Qatari: So yoki you talked about the sales kick off event Orlando call and the level of energy trying to rent. So just one follow up to the previous question about the second half ramp far for phase two are regarding the salesforce in Santos peso. Luckily of course, so far are they are uplift from from size.

Guy Melamed: They understand the benefits. Our customers are asking about it and talking to us about it. So overall, we're happy with the progress so far. Thanks. Thank you. Our next question comes from the line of Shrenik Kothari with Baird.

Shrink Qatari: And actually positive momentum due to higher commissions.

Shrink Qatari: And as of yet you have not implemented any any additional monitoring Santos off we're selling sauce. So can you elaborate on on the conversion kind of go to market motion around adjusting the sales force incentive dynamics are related Tomlinson also how does these incentives are kind of drive incremental opex, which was.

Shrenik Kothari: Please proceed with your question. Thanks for taking my question; congrats on the great execution. So Yaki, you talked about the sales kick-off event earlier in the call and the level of energy during the event. So just one follow-up to the previous question about the second half ramp for Phase 2, regarding the sales force incentives specifically: of course, so far, the AR uplift from SaaS kind of naturally was momentum due to higher commissions, and as of yet, you had not implemented any additional monitoring incentives for selling SaaS. So can you elaborate on the conversion, go-to-market motion around adjusting this sales force incentive dynamics, related timelines, and also how these incentives kind of drive incremental OPEX, which you're tying into your margin guidance framework and assumptions for the first half and second half?

You're tying into your margin guidance.

Shrink Qatari: I am working assumptions for first half and second half. Thanks.

Shrink Qatari: Yeah.

So I'll take this question in terms of the incentives for 2024.

Speaker Change: Definitely seen some very positive momentum on the conversions in 2023, and we talked a lot about it throughout the year on the fact that it's happening in a natural way.

Speaker Change: We had discussions internally of whether it makes sense to incentivize the conversions in 2024 and I can tell you that with the momentum and the fact that it's happening in a natural way we didn't see any reason to at this current stage to put additional dollars to work from a commission perspective, because what the.

Guy Melamed: In terms of the incentives for 2024, we've definitely seen some very positive momentum for the conversions in 2023, and we talked a lot about it throughout the year about the fact that it's happening in a natural way. We had discussions internally of whether it makes sense to incentivize the conversions in 2024. And I can tell you that with the momentum and the fact that it's happening in a natural way, we didn't see any reason, at this current stage, to put additional dollars to work from a commission perspective because what the reps are actually benefiting from is the uplift on the conversion. So anything on top of that renewal amount goes towards their quota retirement. And we've definitely seen some healthy uplift.

Speaker Change: Our reps are actually benefiting from is the uplift on the conversion so anything on top of that renewal amount goes towards their quota retirement and and we've definitely seen some healthy uplift. There's a 25, 30% uplift, but if that conversion requires additional users additional licenses.

Speaker Change: Additional platforms than those increases are actually higher than that 25, 30% and that's very beneficial for for all rents. So we didn't start with any incentives.

Speaker Change: In 2024 related to that obviously, if we see a need to accelerate on that and and put money to work. There we will but I currently don't see any need to do that because the way. The structure is happening is benefiting our customers and it's benefiting ourselves force them with those uplifts.

Guy Melamed: There is a 25-30% uplift. But if that conversion requires additional users, additional licenses, or additional platforms, then those increases are actually higher than that 25-30%. And that's very beneficial for our reps. So we didn't start with any incentives in 2024 related to that. Obviously, if we see a need to accelerate that and put money to work there, we will. But I currently don't see any need to do that.

Speaker Change: As we increase those uplift.

Speaker Change: The the magnitude in dollar terms throughout 2024, and I talked about kind of phase two accelerating within the year and also as we see that phase two accelerating within the years themselves, where every single year actually has more of conversions versus the previous year I think it puts us in a very good position.

Guy Melamed: Because the way the structure is happening is benefiting our customers, and it's benefiting our sales force with those uplifts. I think as we increase those uplifts, the magnitude in dollar terms throughout 2024, and I talked about kind of phase two accelerating within the year. And also, as we see that phase two accelerating within the years themselves, where every single year actually has more conversions versus the previous year, I think it puts us in a very good position to upsell to those customers and provide them with a product that is much better because the SaaS offering is And with the MDDR offering, I think that's an actual game changer for us, because it provides value where customers don't necessarily need to have the same teams in place; they can have less people and be better protected. And we can benefit from that and provide the protection to our customers that we have provided in the past. So I think all of those are positive things that we want to take advantage of. Very helpful. Thanks a lot, Guy.

Speaker Change: The upsell to those customers.

Speaker Change: <unk> provide them a product that is much better because the SaaS offering is a better product than the on prem subscription offering and with the M. D. D. Our offering I think that's an actual game changer for us because it provides value where customers.

Speaker Change: Customers don't necessarily need to have the same.

Speaker Change: Teams in place they can have less people and be better protected and we can benefit from that and provide the protection to our customers that we provide in the past. So I think all of those are positive that we want to take advantage of.

Speaker Change: Very helpful. Thanks, a lot guys.

Thank you.

Speaker Change: Thank you. Our next question comes from the line of Eric Percher with JMP Securities. Please proceed with your question.

Eric Percher: Yeah. Thanks, Thanks for taking the question on.

Eric Percher: On the M. D. D. R. A service did you say that you would or you would not need to add additional people is that just going to be used.

Eric Percher: Using the IR team that you have.

Eric Percher: And if you look longer term what type of penetration do you think you can get with that.

Eric Percher: Cross across your customer base.

Eric Percher: And in terms of the penetration we've communicated this thing is moving forward.

Erik Suppiger: Thank you. Our next question comes from the line of Erik Suppiger with JMP Securities. Please proceed with your question. Yeah, thanks.

Eric Percher: But the.

Eric Percher: In terms of people, obviously, when we have decided we will need more people, but the productivity profile and I have a team using our AI and from the cloud.

Guy Melamed: Thanks for taking the question. On the MDDR service, did you say that you would or you would not need to add additional people? Is that just going to be using the IR team that you have? And if you look longer term, what type of penetration do you think you can get with that across your customer base? It's a little early in terms of penetration.

Eric Percher: Significantly better you know you're talking about it can be.

Eric Percher: Five X smoke more five X more productive. So this is the key for US with your philosophy is to make sure that we are using the software.

Eric Percher: To provide too many customers at.

Yaki Faitelson: We will communicate as this thing is moving forward. But in terms of people, obviously, when we have the service, we'll need more people. But the productivity profile of an IR team using our AI from the cloud is just significantly better. You know, you're talking about it can be 5X more productive.

Eric Percher: Premium salaries. We then that's L. A it was a very strict SLA and they will have.

Eric Percher: They will have all of them at World class analyst really partially analysts it will be a lot of it will be over but so this is the way that it smokes.

Eric Percher: For many people to be much much more productive.

Yaki Faitelson: So this is the key for us. The key for us is to make sure that we are using the software to provide many customers with a premium service with an SLA, with a very strict SLA, and they will have for them a world-class analyst, partially an analyst, a lot of it will be a robot. So this is the way that it works.

Eric Percher: I wanted to give some additional color on on kind of the expense side as we look at this obviously our expectation in terms of the investments already baked into our guidance.

Eric Percher: We definitely built in some additional investment in our customer success I are but we have provided the practice of incident response team and for a couple of years now and now we're just charging for it. So we can actually benefit from it in terms of margins. So as I mentioned before we still have some.

Guy Melamed: The software is enabling people to be much, much more productive. And I want to give some additional color on kind of the expense side as we look at this. Obviously, our expectations in terms of the investments are already baked into our guidance.

We're a company we don't see us.

Guy Melamed: So we definitely built in some additional investment in customer success IR, but we have provided the proactive incident response team for a couple of years now. Now we're just charging for it.

Eric Percher: Changing that and we expect that <unk> over time will have software like margins.

Eric Percher: Yeah.

Speaker Change: Okay very good thank you.

Speaker Change: Okay.

Speaker Change: Yeah.

Speaker Change: Thank you. Our next question comes from the line of Brian Colley with Stephens. Please proceed with your question.

Guy Melamed: So we can actually benefit from it in terms of margins. As I mentioned before, we're still a software company. We don't see ourselves changing that.

Brian Colley: Hey, guys. Thanks for taking my question here. So I'm curious if you've seen any uptick in the pipeline that's directly related to customers that are looking to enhance their data security before deploying an AI. So you know I realize it's still early but just trying to.

Guy Melamed: And we expect that MDDR, over time, will have software-like margins. Okay, very good. Thank you. Thank you. Our next question comes from the line of Brian Colley with Stevens.

Brian Colley: Please proceed with my question. Hey guys, thanks for taking my question here. So I'm curious if you've seen any uptick in the pipeline that's directly related to customers that are looking to enhance their data security before deploying Gen-AI. So, you know, I realize it's still early, but just trying to see what you all think in terms of how Gemma AI could impact the growth rate.

Brian Colley: Try to see what you all think in terms of how Gen AI code.

Brian Colley: The growth rate, but what we can say there is a lot of confidence is there a lot of confidence that comes up.

Brian Colley: Almost in every conversation people understand that it's a big opportunity with a lot of risks and they need to be ahead of it.

We need to do you know you never know, but the way that we think that it's going to move forward and when we use these tools will be in the hands of many end users would just be you know people will realize it.

Yaki Faitelson: What we can say with a lot of confidence, with a lot of confidence that it comes up almost in every conversation, people understand that it's a big opportunity with a lot of risks, and they need to be ahead of it. If we need to do, you know, you never know, but the way that we think that it's going to move forward and these tools will be in the hands of many end users will just be, you know, people will just realize it on a daily basis and, God forbid if it's going to bad actors, but it's definitely coming up in every conversation. This is, you know, AI comes with security risks, security risks for data risks.

Brian Colley: Daily basis, and you know God forbid if it's going to be doctors, but it's definitely coming up.

Brian Colley: Every country every conversation. He says you know AI comes with security risk security risk. So data is the number one is this overexposed data in terms of excessive.

Brian Colley: Excessive access control and we are uniquely positioned to solve these problems.

Yeah.

Speaker Change: Got it thank you.

Reilly Passenger: Thank you. Our next question comes from the line of really passenger with D. A Davidson. Please proceed with your question.

Reilly Passenger: Hey, Thanks for squeezing me in a guy I know, you're not giving exact color, but it's $15 million and convert it to.

Yaki Faitelson: The number one issue is this overexposed data in terms of excessive access control, and we are uniquely positioned to solve this problem. Thank you. Thank you. Our next question comes from the line of Rudy Kessinger with D.A. Davidson.

Really Passenger: Good kind of starting point for Q1, and then with your sales reps you know given your given them quota relief on the uplift to Mount on renewals does that impact you know.

Really Passenger: Their ability to focus on net new customer.

Rudy Grayson Kessinger: Please proceed with your question. Hey, thanks for squeezing me in. Guy, I know you're not given an exact color, but it's 15 million in converted ARR, a good kind of starting point for Q1. And then with your sales reps, you know, given you're giving them quota relief on the uplift amount on renewals. Does that impact, you know, their ability to focus on net new customers and new deals, and how are you factoring that into your guide? I'll start with the second part of your question.

Really Passenger: Customers in new deals and how are you factoring that into your guidance.

Speaker Change: So I'll start with the second part of your question I think we've been extremely focused on on acquiring new customers. The SaaS offering allows us to tap into markets and verticals and customers that we've never had the opportunity to sell to I can tell you that the way that.

Speaker Change: 'twenty 'twenty four comp plan is set up is that our account managers will not be able to make significant money.

Guy Melamed: I think we've been extremely focused on acquiring new customers; the SaaS offering allows us to tap into markets and verticals and customers that we've never had the opportunity to sell to. I can tell you that the way that the 2024 comp plan is set up is that account managers will not be able to make significant money if they don't sell to new customers. So that's been at the forefront of our philosophy over the last couple of years, and I can tell you that in 2024, we've actually doubled down on the importance of new customer acquisitions. In terms of the conversion, we want to convert our customers as well because there's a lot of leverage with the SaaS offering for us from a financial perspective. And the SaaS offering is a much better product and provides the opportunity to update that product in a much more seamless way. So there's a benefit for us.

Speaker Change: If they don't sell to new customers. So that's been at the forefront of our philosophy over the last couple of a couple of years and I can tell you that in 2024, we've actually doubled down on the importance of the new customer acquisitions.

Speaker Change: In terms of the conversions, we want to convert our customers as well because there is there is a lot of leverage.

Speaker Change: And with the SaaS offering for us from a financial perspective.

Speaker Change: And the SaaS offering is a much better product and provides the opportunity to update those that product in a in a much more seamless way. So there's a benefit for us and it's a much better product for our customers. So I am not sure that $15 million is the right. Starting point you have to remember that there is a seasonality within our.

Speaker Change: Business, where Q4 is the largest quarter of the year and then in dollar terms Q1.

Speaker Change: <unk> historically has been the lowest in terms of the in dollar terms. So it starts with that.

Guy Melamed: And it's a much better product for our customers. So I'm not sure that $15 million is the right starting point. You have to remember that there is seasonality within our business where Q4 is the largest quarter of the year. And then, in dollar terms, Q1 historically has been the lowest in terms of dollar terms.

Speaker Change: Small dollar turn a quarter in Q1, and then it picks up throughout the year, so that needs to be baked into.

Speaker Change: The consideration, but I think a good starting point.

Speaker Change: Should expect kind of the same progression of Q1, Q2, Q3, and Q4 that we saw in 2023.

Guy Melamed: So it starts with a small dollar term quarter in Q1 and then it picks up throughout the year, so that needs to be baked into consideration, but I think a good starting point should expect kind of the same progression of Q1, Q2, Q3, and Q4 that we saw in 2023 as a starting point for 2024 as well. Just in dollar terms, the actual dollar terms that we expect to get to with our SaaS offering by the end of this year are expected to be significantly higher than the 125 we finished with. We want to get the guidance assumes $285 million at the end of this year. Subs by www.zeoranger.co.uk. Thank you. Our next question comes from the line of Rob Owens with Piper Sandler.

Speaker Change: As a starting point for 2024 as well just in dollar terms. The actual dollar terms that we expect to get to with our SaaS offering by the end of this year is expected to be significantly higher than the 125. We finished with a we want to get to that that the guidance assumes 285.

Speaker Change: Millions of dollars at the end of this year.

Speaker Change: Yeah.

Speaker Change: Yes.

Speaker Change: Thank you. Our next question comes from the line of Rob Owens with Piper Sandler. Please proceed with your question.

Robbie David Owens: Great. Thanks for taking my question I want to drill down a little bit on some of your comments there noting bets.

Robbie David Owens: The net new subscription numbers ticked down year over year, and frankly, it's ticked down for the last four years. So to that end was it the way the sales force was incentivized with quota retirement is a churn because I know in some of your comments earlier you did talk about friction with regard to the SaaS change or is this just more sales cycle.

Robbie David Owens: Please proceed with my question. Great, thanks for taking my question. I want to drill down a little bit on some of your comments there, noting that the net new subscription numbers ticked down year over year and, frankly, have ticked down for the last four years. So to that end, was it the way the sales force was incentivized with quota retirement? Is that churn?

And timing around the shift to SaaS, just curious for color I guess in terms of new customer acquisition throughout the year.

Robbie David Owens: I think no matter, how you look at the business there are strong underlying trends and I think our philosophy in terms of new versus existing has been very very much.

Yaki Faitelson: Because I know in some of your comments earlier, Guy, you talked about friction with regard to the SaaS change. Or is this just more sales cycle and timing around the shift to SaaS? Just curious for color, I guess, in terms of new customer acquisition throughout the year. I think that no matter how you look at the business, there are strong underlying trends, and I think that our philosophy in terms of new versus existing customers has been very, very much a mix of both. With our existing customers, there's definitely kind of an increased customer lifetime value that we're seeing with the SaaS offering, but as I mentioned before, the new business opportunity has never been greater for us, and that's why, in 2024, we've kind of structured our comp plan where account managers will not be able to make significant money if they don't sell to new customers.

Robbie David Owens: A mix of both.

With our existing customers, there's definitely kind of an increased customer lifetime value that we're seeing with the SaaS offering, but as I mentioned before the new business opportunity has never been greater for us and that's why in 2024, we've kind of structured our compound where account managers.

Robbie David Owens: We will not be able to make significant money if they don't sell to new customers I think it's important to note that it's not a simple excel, where we've put in the 25, 30% uplift and you plug it in and you get and you get the P O.

Robbie David Owens: Renewals happen in an automatic way.

Robbie David Owens: When you get that on Prem subscription renewal, but when you try and convert a customer you have to talk to them about the benefits you have to talk to them about the cost. It's it's an exercise that requires time. It is a different contact in terms of the you know a different security review.

Yaki Faitelson: I think it's important to note that it's not a simple Excel where you know we put in a 25-30% uplift, and you plug it in, and you get the PO. Renewals happen in an automatic way when you get that on-prem subscription renewal, but when you try and convert a customer, you have to talk to them about the benefits, you have to talk to them about the cost. It's it's an exercise that requires time. It is a different contract in terms of the, you know, different security review. To make this transition, there are just so many moving parts, I will tell you that, but in terms of the value proposition, it's completely different. I think that you know the common ground is the logo.

Did this transition that all just the <unk>.

Robbie David Owens: So many moving parts. So we say to you that that in terms of the value proposition. It's completely different I think that the common ground is the logo.

Steve.

Robbie David Owens: Magnitude in terms of the automation the way it works. The overall platform is a fraction of the support ticket they sell posted.

Robbie David Owens: This is the sauce and sitting here today I would tell you that it's you so.

Robbie David Owens: So far are moving much faster than we anticipated, but it's you.

Robbie David Owens: You need to do it with great great attention to detail that he just so many things to do in order to make sure.

Robbie David Owens: It will work that you will cater to the customer just it's it's you need to daily.

Yaki Faitelson: It's just the order of magnitude in terms of the automation. The way it works, the overall platform is a fraction of the support ticket they self-hosted versus the SaaS, and sitting here today, I will tell you that it is moving much faster than we anticipated, but you need to do it with great, great attention to detail. There are just so many things to do in order to make sure that it will work right and that you will cater to the customers. It's just you need to focus on it daily, just to have laser focus on the way you're doing it.

Robbie David Owens: Daily focus on it just to have laser focus on the way the way Youre doing and just to touch on on kind of the new customer adds.

Robbie David Owens: I think it's still early but SaaS does open up kind of opportunity for us to new markets and new customers that we haven't been able to sell to before as you look at kind of the a S. B theyre higher when we sell to are the new customers through SaaS offering which is a very healthy and I think that as you look at kind of the year.

Yaki Faitelson: And just to touch on kind of the new customer ads, I think it's still early, but SAS does open up a kind of opportunity for us to new markets and new customers that we haven't been able to sell to before. As you look at the ASB, they're higher when we sell to our new customers through the SAS offering, which is very healthy. And I think that as we look at the years ahead, the SAS offering allows us, will allow us to continue to take advantage of and generate additional fuel that will support the growth of this business in the years ahead. All right, thanks for the color. Thank you. Thank you. Our final question comes from Josh Tilton with Wolf Research. Please proceed with your question. Hey guys, this is Patrick on for Josh. Just a quick clarification question for me.

Or is ahead of the SaaS offering allows us will allow us to continue to take advantage and generate additional fuel it will support the growth of this business in the years ahead.

Speaker Change: Alright, thanks for the color.

Speaker Change: Thank you.

Speaker Change: Thank you. Our final question comes from the line of Josh Tilton with Wolfe Research. Please proceed with your question.

Speaker Change: Hey, guys. This is Patrick on for Josh just a quick clarification, one from me with the transition timeline being moved up a year does that change the way we should think about the path to the 2027 long term targets provided at the analyst day.

And are you all now targeting rule of 40 exiting the transition now in 2026, and what should the composition of that look like thanks.

Speaker Change: When we laid out kind of the plan in March of 2023, we talked about the transition last thing five years, we're bringing that one year shorter and we're very happy about that we're not actually not changing that $1 billion target and that's still at 2027, but I think.

Tim Perz: With the transition timeline being moved up a year, does that change the way we should think about the path to the 2027 long-term targets provided at analyst day? And are you all now targeting rule 40, exiting the transition now in 2026? And what should the composition of that look like?

Speaker Change: We're extremely excited to reduce this the whole transition period by it and cut it by one year.

Guy Melamed: Thanks. When we laid out kind of the plan in March of 2023, we talked about the transition lasting five years; we're bringing that one year shorter. And we're very happy about that. We're not actually changing that $1 billion target. And that's still at 2027, but I think we're extremely excited to reduce the whole transition period and cut it by one year to four years. So the rest is kind of staying intact.

Speaker Change: For years, so the rest is kind of staying intact.

Speaker Change: Yeah.

Yeah.

Speaker Change: Great. Thanks.

Speaker Change: Thank you.

There are no further questions at this time and I would like to turn the floor back over to Paris for closing comments.

Paris: So the interest in Verona as we look forward to meeting with all of you at the conferences this quarter.

Goodbye.

Speaker Change: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

Operator: Great, thanks. Thank you. There are no further questions at this time, and I would like to turn the floor back over to Tim Perz for closing comments. Thank you for your interest in Varonis.

Speaker Change: Hum.

Speaker Change: [music].

Tim Perz: We look forward to meeting with all of you at the conferences this quarter. Goodbye. This concludes today's teleconference. You may disconnect your lines at this time.

Operator: Thank you for your participation. The Bulletproof Executive 2013, The Ultimate Parody Site! BF-WATCH TV 2021, The Bulletproof Executive 2013, Speaker 1 – Tell us about your acquaintance, Morgan. BF-WATCH TV 2021, The Bulletproof Executive 2013, The Ultimate Parody Site!

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