Q2 2024 Varonis Systems Inc Earnings Call
Greetings and welcome to the Varonis Systems Inc second quarter 2024 earnings conference call. At this time, all participants are in a listen only mode.
Operator: At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Tim Perz, Director of Investor Relations. Thank you, sir.
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, Investor Relations. Thank you, sir. You may begin.
Tim Perz: You may begin. Thank you, operator. Good afternoon.
Tim Perz: Thank you for joining us today to review Varonis's second quarter financial results. With me on the call today are Yakov Faitelson, Chief Executive Officer, and Guy Melamed, Chief Financial Officer and Chief Operating Officer, of Varonis. After preliminary remarks, we will open the call to questions and answers. During this call, we may make statements related to our business that would be considered forward-looking statements under federal securities laws, including projections of future operating results for our third quarter and full year ending December 31st, 2021. Due to a number of factors, actual results may differ materially from those set forth in such statements.
Guy Melamed: Thank you, Operator. Good afternoon. Thank you for joining us today to review Varonis' second quarter financial results. With me on the call today are Yaki Faitelson, Chief Executive Officer, and Guy Melamed, Chief Financial Officer and Chief Operating Officer of Varonis.
Speaker Change: After preliminary remarks, we will open the call to a question and answer session.
Tim Perz: These factors are set forth in the earnings press release that we issued today under the section captioned forward-looking statement. And these and other important risk factors are described more fully in our reports filed with the Securities and Exchange Commission. We encourage all investors to read our SEC filings. These statements reflect our views only as of today and should not be relied upon as representing our views as of any subsequent date.
Speaker Change: During this call, we may make statements related to our business that would be considered forward-looking statements under federal securities laws, including projections of future operating results for our third quarter and full year ending December 31, 2024.
Speaker Change: Due to a number of factors, actual results may differ materially from those set forth in such statements.
Speaker Change: These factors are set forth in the earnings press release that we issued today, under the section captioned, Forward-Looking Statements, and these and other important risk factors are described more fully in our reports filed with the Securities and Exchange Commission.
Speaker Change: We encourage all investors to read our SEC filings.
Speaker Change: These statements reflect our views only as of today and should not be relied upon as representing our views as of any subsequent date.
Tim Perz: Varonis expressly disclaims any application or undertaking to release publicly any updates or revisions to any forward-looking statements made here. Additionally, non-GAAP financial measures will be discussed at this conference. The Reconciliation for the Most Directly Comparable Gap Financial Measures is also available in our second quarter 2024 earnings press release and investor presentation, which can be found at www.varonis.com in the investor relations section. Lastly, please note that a webcast of today's call is available on our website in the investor relations section. With that, I'd like to turn the call over to our Chief Executive Officer, Yaki Faitelson. Thanks, Tim. And good afternoon, everyone.
Speaker Change: Varonis expressly disclaims any application or undertaking to release publicly any updates or revisions to any forward-looking statements made herein. Additionally, non-GAAP financial measures will be discussed on this conference call.
Speaker Change: A Reconciliation for the Most Directly Comparable GAAP financial Measures is also available in our second quarter 2024 earnings press release and investor presentation which can be found at www.varonis.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.
Speaker Change: With that, I'd like to turn the call over to our Chief Executive Officer, Daki Faitelson.
Yakov Faitelson: Thank you for joining us today to discuss our second quarter results, the SAS transition progress, and the tailwinds impacting our business. First, I would like to remind you why Varonis exists and how we help our customers. Today, the purpose of almost any cyber attack is to steal data.
Yakov Faitelson: Thank you.
Yakov Faitelson: Thanks Tim and good afternoon everyone. Thank you for joining us today to discuss our second quarter results, our SaaS transition progress, and the tailwinds impacting our business. First, I would like to remind you why Varonis exists and how we help our customers.
Yakov Faitelson: But the purpose of the security solutions most organizations deploy is to protect their endpoints and their perimeters. These technologies are very important, but they aren't enough to protect data. To protect data, you must have a data-first solution and a data-first approach. Varonis' data-first approach helps companies locate their sensitive data, visualize who has access to it, automatically lock it down, and then detect and respond to threats on it. To use a simple example, credit card companies keep making it harder for bad actors to get your credit card number, but they know credit card numbers will still be stolen.
Yakov Faitelson: So they also watch the credit card transactions and compare them to what they know normal usage looks like to detect and stop fraudulent transactions. Varonis uses the same approach to protect data, making it harder for the wrong people to access it, and monitor the data transactions to spot and stop anything abnormal, like ransomware, insider threats, or AI abuse.
Speaker Change: Today, the purpose of almost any cyber attack
Speaker Change: is to steal data, but the purpose...
Speaker Change: All of the security solutions most organizations deploy are to protect their endpoints and their perimeters. These technologies are very important, but they aren't enough to protect data. To protect data, you must have a data-first solution and a data-first approach.
Varonis: Varonis' data-first approach helps companies locate their sensitive data, visualize who has access to it, automatically lock it down, and then detect and respond to threats from it.
Varonis: To use a simple example, a charitable company...
Varonis: Keep making it harder for bad actors.
Speaker Change: to get your credit card number.
Speaker Change: But they know credit card numbers will still sometimes be stolen, so they also watch the credit card transactions and compare them to what they know normal usage looks like to detect and stop fraudulent transactions.
Polonis: Varonis uses the same approach.
Speaker Change: For protecting data, make it harder for the wrong people to access it, and monitor the data transactions to spot and stop anything abnormal, like ransomware, insider threats, or AI abuse.
Yakov Faitelson: With our SaaS platform and recently released MDDR offering, we have a sophisticated and automated solution that enables customers to protect their data with very little time and effort. This allows companies to collaborate safely while also managing Innovation has always been at the core of Varonis, and in late June, we achieved the FedRAMP in-process designation, which represents an important step towards enabling us to provide the benefit of our SaaS platform to our federal government customers. I would like to take a moment to thank everyone involved in the process.
Speaker Change: With our SaaS platform and recently released MDDR offering, we have a sophisticated and automated solution that enables customers to protect their data with very little time and effort. This allows companies to collaborate safely while also managing risks.
Speaker Change: Innovation has always been at the core of Varonis.
Speaker Change: And in late June , we achieved the FedRAMP in-process designation.
Speaker Change: which represents an important step towards enabling us to provide the benefit of our SaaS platform to our federal government customers. I would like to take a moment to thank everyone involved in the process.
Yakov Faitelson: Now, I would like to turn to our second quarter results, which reflect the growing momentum of our SaaS platform in the recently introduced MDDR offering. These offerings are driving strong new customer addition and healthy convergence activity from existing customers. ARR Group, 18%
Speaker Change: Now, I would like to turn to our second quarter results, which reflect the growing momentum of our SaaS platform in the recently introduced MDDR offering.
Speaker Change: These offerings are driving strong new customer addition and healthy convergence activity from existing customers.
Yakov Faitelson: $584.2 million, and year-to-date generated $67.3 million of free cash flow versus $40 million generated last year. TAS ARR now represents approximately 36% of total ARR. We are going to review our Q2 results and our updated guidance. In more detail, this was another quarter of strong execution by our team that has risen to the challenge of a stable but challenging environment filled with elevated levels of build scrutiny. The transition to the fast delivery model is progressing quickly because of the many benefits that our customers realize.
Speaker Change: ARR group, 18%.
Speaker Change: Thank you.
Speaker Change: TAS ARR now represents approximately 36% of total ARR. We are in the review of Q2 results and our updated guidance.
Speaker Change: More details shortly.
Speaker Change: This was another quarter of strong execution by our team that has risen to the challenge of a stable but a challenging environment still with elevated levels of build scrutiny.
Speaker Change: The transition to SaaS delivery model is progressing quickly because of the many benefits that our customers realize.
Yakov Faitelson: Customers can achieve automated outcomes, which means they can ensure the data is protected with very little effort. SAS is quicker to deploy and operationalize because of significantly lower infrastructure and personal investment, and it is easier to maintain and upgrade.
Speaker Change: Customers can achieve automated outcomes, which means they can ensure the data is protected with very little effort.
Speaker Change: TAS is quicker to deploy.
Speaker Change: and operationalized because of significantly lower infrastructure and personal investment.
Yakov Faitelson: Additionally, there are three key benefits that we realize. They are a shorter sale cycle, a larger initial length, and margin benefits over time. I would now like to turn to a couple of tailwinds that we believe will drive momentum in our business. The first is our managed data detection and response offering, which we call MDDR.
Speaker Change: and SAS is easier to maintain and upgrade. Additionally, there are three key benefits that we realize. They are shorter sell cycle, larger initial length, and margin benefits over time.
Speaker Change: I would now like to turn to a couple of tailwinds that we believe will drive momentum in our business.
Speaker Change: The first is our Managed Data Detection and Response offering.
Yakov Faitelson: This is the first managed service for monitoring and protecting critical data and is only available for our SAS customers because of the visibility and automation that is built into our SAS platform. MDDR was only introduced in Q1 and is already becoming a key driver of new business growth and existing customers' conversions to SAS. And we believe that we are just scratching the surface with this opportunity. However, we continue to see that CISOs don't have the resources to monitor and investigate alerts fast enough.
Speaker Change: This is the first managed service for monitoring and protecting critical data, and is only available for our SAS customers because of the visibility and automation that is built into our SAS platform.
Speaker Change: NBDR was only introduced in Q1 and is already becoming a key driver of new business swings and existing customers' conversions to SaaS. And we believe that we are just scratching the surface with this opportunity.
Speaker Change: We continue to see that CISOs don't have the resources to monitor and investigate alerts fast enough.
Yakov Faitelson: With MDDR, we handle this for them. If we see a threat, we can stop it and simply notify the customer after the threat has been neutralized. We pioneered the use of machine learning to perform user behavior analysis and build highly accurate threat models.
Speaker Change: With MVDR, we handle this for them. If we see a threat, we can stop it and simply notify the customer after the threat has been neutralized.
Speaker Change: We pioneered the use of machine learning to perform user behavior analysis and build highly accurate threat models.
Yakov Faitelson: Our team leverages this significant automation plus our unique telemetry to efficiently detect if data is under attack and to catch threats missed by others. Bottom line, the early proof points that we are seeing leave us excited about what the future holds for MDDR. The second tailwind is generative AI.
Speaker Change: Our team leverages this significant automation plus our unique telemetry to efficiently detect if data is under attack and to catch threats missed by others.
Speaker Change: Bottom line, the early proof points that we are seeing leaves us excited about what the future holds for MDDR.
Yakov Faitelson: This technology is top of mind for many organizations, and is a key theme in nearly all conversations with prospects and customers. The productivity benefits that Gen-AI brings are widely understood, but Gen-AI also worsens the data access risks companies already face. Take, for example, a bank that was piloting a GenAI tool with users on their trading floor. They wanted to make trading more productive, and it earned the bank more money. The traders started to use it for research.
Speaker Change: The second tailwind, we see generative AI. This technology is top of mind for many organizations and is a key theme in nearly all conversations with prospects and customers.
Speaker Change: The productivity benefits that Gen AI brings are widely understood, but Gen AI also warrants the data access risks companies already face.
Speaker Change: Take for example a bank that was piloting a Gen AI tool with users on their trading floor. They wanted to make trade more productive.
Speaker Change: And earn the bank more money. The traders started to use it for research. They started searching for answers on questions like what stocks do our employees invest in?
Yakov Faitelson: They started searching for answers to questions like, "What stocks do our employees invest in?" The problem is the tool started showing names, social security numbers, 401k positions, and account numbers. The security team immediately turned it off because they were going to face major fines and punishments.
Speaker Change: The problem is the tool started showing names, social security numbers, 401k positions, and account numbers. The security team immediately turned it off because they were going to face major fines and sanctions.
Yakov Faitelson: And it wasn't because those traders were acting maliciously. They were just trying to use the tool and ended up finding extremely sensitive data that was mistakenly open to everybody in the company. We believe that GNI adoption within enterprises will serve as a catalyst that exposes their underlying data security risks, and this is the very problem that Varonis was built to solve. As a result, we expect that if companies adopt Gen-AI, they will be forced to make addressing those risks a top priority. Without Varonis, Rightsizing access controls is extremely challenging.
Speaker Change: And it wasn't because those traders were acting maliciously, they were just trying to use the tool and ended up finding extremely sensitive data that was mistakenly open to everybody in the company.
Speaker Change: We believe that GNI adoption within enterprises will serve as a catalyst that exposes their underlying data security risks. And this is the very problem that Varonis was built to solve. As a result, we expect...
Speaker Change: That is, companies adopt Gen AI, they will be forced to make...
Speaker Change: Addressing those risks is a top priority. Without Varonis...
Yakov Faitelson: We mitigate these risks by automatically ensuring only the right people can access the data necessary for their job functions. Companies are thoughtfully considering these risks before expanding from piloting to broad rollout. The feedback we are hearing from customers continues to strengthen the conviction we have in our ability to benefit from enormous secular tailwinds, and we are seeing a healthy pipeline build with respect to this opportunity. With that in mind, I would like to briefly discuss a couple of key customer wins from Q2. A large Midwest hospital system became a Varonis customer this quarter. This organization was concerned about where its sensitive data was located, who had access to it, and how they would respond to a ransomware attack.
Speaker Change: Rightsizing access controls is extremely challenging. We mitigate these risks by automatically ensuring only the right people can access the data necessary for their job function.
Speaker Change: Companies are thoughtfully considering these risks before expanding from pilots into broad rollouts.
Speaker Change: The feedback...
Speaker Change: We are hearing from customers, continue to strengthen the conviction.
Speaker Change: We have, in our ability to benefit from enormous secular tailwinds,
Speaker Change: And we are seeing a healthy pipeline build with respect to this opportunity. With that, I would like to briefly discuss a couple key customer wins from Q2.
Speaker Change: A large Midwest hospital system became a Varonis customer this quarter. This organization was concerned about where its sensitive data was located, who had access to it, and how they would respond to a ransomware attack.
Yakov Faitelson: During the risk assessment, we detected attacks already in progress, including an attack on their CEO account coming from outside the organization. The company was able to prevent it and ensure that the account was secured. The second attack that occurred was a business email compromise that began when an employee clicked on a phishing link that came from a malicious email, and the account started accessing files from an unusual geolocation.
Speaker Change: During the risk assessment, we detected attacks already in progress, including an attack on their CEO account coming from outside the organization.
Speaker Change: The company was able to prevent it and ensure that account was secured.
Speaker Change: The second attack that occurred was a business email.
Speaker Change: Compromise that began when an employee clicked on a phishing link that came from a malicious email and the account started
Yakov Faitelson: Luckily, our team was able to confirm it would detect and stop this compromise before any sensitive data was accessed because we have a conclusive record of the data transaction and prevent any damage from being done. They purchased Varonis SAS for their hybrid environment with MDDR protection and were able to avoid material breaches that could require them to publicly file any data breach disclosure. We continue to see healthy demand from existing customers, converting from our self-hosted platforms to Varonis SaaS.
Speaker Change: accessing files from an unusual geolocation. Luckily, our team was able to confirm it would detect and stop this compromise before any sensitive data was accessed.
Speaker Change: Because we have a conclusive record,
Speaker Change: of the data transaction.
Speaker Change: and prevent any damage from being done, they purchased Varonis SAS for their hybrid environment with MDDR protection and were able to avoid material breach that could require them to publicly file any data breach disclosures.
Speaker Change: We continue to see healthy demand from existing customers, converting from our self-hosted platforms to Varonis SaaS.
Yakov Faitelson: One example of this is a multinational commercial real estate firm that has been a Varonis customer since 2014. They wanted to decrease their infrastructure spend and reduce the time spent maintaining and upgrading their services; moving to Varonis SaaS allowed them to immediately cut their server footprint and reduce their ongoing maintenance requirements.
Speaker Change: One example of this is a multinational commercial real estate firm.
Speaker Change: that has been a Varonis customer since 2014. They wanted to decrease their infrastructure spend and reduce the time spent maintaining and upgrading their software.
Speaker Change: Moving to Varonis SaaS allows them to immediately cut their server footprint and reduce their ongoing maintenance requirements.
Yakov Faitelson: In addition to this operational savings, they will automatically remediate overexposure in Microsoft 365. They also purchased the Varonis SaaS hybrid package through the Azure Marketplace, which simplified their procurement process. In summary, the adoption of our SaaS platforms and MDDR offerings is driving positive business momentum, and we are just scratching the surface of our long-term opportunity. We are excited to enter the second half of 2024 from a strong position to capitalize on the tailwind of MDDR GenAI in increasing data-centric compliance regulations. With that, I will turn it over to Guy.
Speaker Change: In addition to these operational savings, they will automatically remediate overexposure in Microsoft 365. They also purchased the Varonis SaaS hybrid package through the Azure Marketplace, which simplified their procurement process.
Speaker Change: In summary, the adoption of our SaaS platforms and MDDR offerings are driving positive business momentum.
Speaker Change: And we are just scratching the surface.
Speaker Change: For a long-term opportunity.
Speaker Change: We are excited to enter the second half of 2024.
Speaker Change: from a strong position to capitalize on the tailwind of MDDR Gen AI in increasing data-centric compliance regulation. With that, let me turn it over to Guy.
Guy Melamed: Thanks, Yaki. Good afternoon, everyone. Thank you for joining us today. Our second quarter performance gives us increased confidence in our full year trajectory, driven by our SAS platform and MDDR offerings. At the end of Q2, SAS ARR increased to approximately $210 million, or 36% of our total company ARR, driven by strong contribution from new logos and existing customer conversion. This momentum, coupled with the tailwinds Yaki mentioned, allows us to raise our full year ARR and free cash flow guidance, and also to increase our SAS ARR expectations.
Guy Melamed: Thanks, Yaki. Good afternoon, everyone. Thank you for joining us today.
Guy Melamed: Our second quarter performance gives us increased confidence in our full year trajectory driven by our SAS platform and MDDR offerings.
Guy Melamed: At the end of Q2, SAS ARR increased to approximately $210 million, or 36% of our total company ARR, driven by strong contribution from new logos and existing customer conversions.
Guy Melamed: This momentum, coupled with the tailwinds Yaki mentioned, allows us to raise our full year ARR and free cast load guidance, and also to increase our SAS ARR expectations.
Guy Melamed: The key drivers of our business this quarter were SAS and MDDR. With each passing quarter, our story becomes more strategic and simpler for customers. That eliminates the two biggest prospects of not wanting hardware or having the headcount to manage the platform. That obviously requires less hardware and meaningfully simplifies maintenance and upgrades.
Speaker Change: The key drivers of our business this quarter were SAS and MDDR. With each passing quarter, our story becomes more strategic and simpler for customers.
Speaker Change: That eliminates the two biggest prospects of not wanting hardware or having the headcount to manage the platform.
Yaki: SAS obviously requires less hardware and meaningfully simplifies maintenance and upgrades, and MDDR removes the need for people to review alerts since we do it all for them.
Guy Melamed: And MDDR removes the need for people to review alerts since we do it all for them. We're seeing that the value proposition of our platform, together with the simplicity of our story, is shortening deal cycles when compared to on-premises subscription deals. Generative AI remains a theme in nearly every customer conversation we have and reinforces our view that this will become a secular tailwind. Our pipeline continues to be healthy as a result.
Yaki: We're seeing that the value proposition of our platform, together with the simplicity of our story, is shortening deal cycles when compared to on-prem subscription deals.
Speaker Change: Generative AI remains a theme in nearly every customer conversation we are having, and reinforces our view that this will become a secular tailwind. Our pipeline continues to be healthy as a result, and as we discussed in the past, we are still not seeing material contribution to our reported metrics derived from it.
Guy Melamed: And, as we discussed in the past, we are still not seeing material contribution to our reported metrics derived from it. Consistent with our prior comments, we have not included the impact of material gen AI adoption in our guidance.
Speaker Change: Consistent with our prior comments, we have not included the impact of material Gen AI adoption in our guidance.
Guy Melamed: As we enter the second half of the year, we look forward to converting more of the installed base of on-prem subscription customers to our SaaS platform. Pricing continues to be in line with our price list increase of 25 to 30%, and in some cases, we see deal sizes increase in excess of that as customers consume more of the platform upon conversion to our SaaS platform. We expect that the ramp-up of this phase will not be linear, and momentum should grow in each quarter with further acceleration in dollar terms in 2025 and 2026.
Speaker Change: As we enter the second half of the year, we look forward to converting more of the installed base of on-prem subscription customers to our SaaS platform.
Speaker Change: Pricing continues to be in line with our price list increase of 25-30% and in some cases we see deal sizes increase in excess of that as customers consume more of the platform upon conversion to our SaaS platform.
Speaker Change: We expect that the ramp up of this phase will not be linear and momentum should grow in each quarter with further acceleration in dollar terms in 2025 and 2026.
Guy Melamed: In the second quarter, ARR grew 18% year-over-year to $584.2 million, and year-to-date, we generated $67.3 million of free cash flow, which was up from $40 million generated over the same period last year. These metrics demonstrate our commitment to balancing top-line growth with improving cash flow generation during the transition. Turning now to our second quarter results in more detail. As a reminder, the leading indicators of our transitions are ARR, pre-cash flow, and ARR contribution margins.
Speaker Change: In the second quarter, ARR grew 18% year-over-year to $584.2 million, and year-to-date we generated $67.3 million of free cash flow, which was up from $40 million generated over the same period last year.
Speaker Change: These metrics demonstrate our commitment to balancing top-line growth with improving cash flow generation during the transition.
Speaker Change: Turning now to our second quarter results in more detail. As a reminder, the leading indicators of our transitions are ARR, free cash flow, and ARR contribution margin.
Guy Melamed: As we have said many times, the faster we progress through the transition, the more headwinds we will experience on our traditional income statement metrics, but we view this in a positive light. As compared to three months ago, we feel increasingly confident in the trajectory of the business following our second quarter results. While the macro environment remains challenging, it is also stable, and SAS and NDDR are responding well in this market to drive positive business momentum. Q2 total revenues were $130.3 million, up 13% year-over-year.
Speaker Change: As we have said many times, the faster we progress through the transition, the more headwinds we will experience to our traditional income statement metrics, but we view this in a positive light.
Speaker Change: As compared to three months ago, we feel increasingly confident in the trajectory of the business following our second quarter results. While the macro environment remains challenging, it is also stable, and SAS and NDDR are resonating well in this market to drive positive business momentum.
Speaker Change: Q2 total revenues were $130.3 million, up 13% year-over-year.
Guy Melamed: During the quarter, as compared to the same quarter last year, we had approximately a 6% headwind to our year-over-year revenue growth rate as a result of having increased sales in our booking mix, which are recognized rapidly, versus the upfront recognition of our on-prem subscription products. In the second quarter, SAS revenues were $44.8 million. Term license subscription revenues were $62.7 million, and maintenance and services revenues were $22.8 million, as our renewal rate was again over 90%.
Speaker Change: During the quarter, as compared to the same quarter last year, we had approximately a 6% headwind to our year-over-year revenue growth rate as a result of having increased sales in our booking mix.
Speaker Change: which are recognized rapidly versus the upfront recognition of our on-prem subscription products.
Speaker Change: In the second quarter, SAS revenues were $44.8 million.
Speaker Change: Term License Subscription Revenues were $62.7 million and Maintenance and Services Revenues were $22.8 million as our renewal rate were again over 90%.
Guy Melamed: Moving down the income statement, I'll be discussing non-GAAP results going forward. Gross profit for the second quarter was $109.6 million, representing a gross margin of 84.1%, compared to 87.1% in the second quarter of 2023. Gross margin continues to be strong, and the year-over-year change is due to the revenue headwind associated with a higher mix of SaaS sales, increased headcount to support the transition, and increased hosting costs. Operating expenses in the second quarter totaled $107.5 million.
Speaker Change: Moving down the income statement, I'll be discussing non-GAAP results going forward. Gross profit for the second quarter was $109.6 million, representing a gross margin of 84.1%, compared to 87.1% in the second quarter of 2023.
Speaker Change: Gross margin continues to be strong, and the year-over-year change is due to the revenue headwind associated with a higher mix of SaaS sales, increased headcount to support the transition, and increased hosting costs.
Speaker Change: Operating expenses in the second quarter totaled $107.5 million.
Guy Melamed: As a result, second quarter operating income was $2.1 million, or an operating margin of 1.6%. This compares with operating income of $0.9 million, or an operating margin of 0.8%, in the same period last year. During the second quarter, as compared to the same quarter last year, we had approximately a 5% headwind to our operating margin as a result of having increased SaaS sales in our booking mix, which are recognized ratably versus the upfront recognition of our on-prem subscription business.
Speaker Change: As a result, second quarter operating income was $2.1 million or an operating margin of 1.6%. This compares to operating income of $0.9 million or an operating margin of 0.8% in the same period last year.
Speaker Change: During the second quarter, as compared to the same quarter last year, we had approximately a 5% headwind to our operating margin as a result of having increased SaaS sales in our booking mix, which are recognized readily versus the upfront recognition of our on-prem subscription products.
Guy Melamed: Second quarter ARR contribution margin was 14.9%, up from 8.2% 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 SAS. During the quarter, we had a financial income of approximately $8.1 million, driven primarily by interest income on our cash deposit and investments in marketable securities.
Speaker Change: Second quarter ARR contribution margin was 14.9% up from 8.2% last year.
Speaker Change: 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 SAS.
Speaker Change: During the quarter, we had a financial income of approximately $8.1 million, driven primarily by interest income on our cash, deposit, and investments in marketable securities.
Guy Melamed: Net income for the second quarter of 2024 was $6.8 million, or $0.05 per diluted share, compared to net income of $1.1 million, or $0.01 per diluted share, for the second quarter of 2023. This is based on $128 million and $127.3 million diluted shares outstanding for Q2 2024 and Q2 2023, respectively. As of June 30, 2024, we had $790.3 million in cash, cash equivalents, short-term deposits, and marketable securities.
Speaker Change: Net income for the second quarter of 2024 was $6.8 million or $0.05 per diluted share compared to net income of $1.1 million or net income of $0.01 per diluted share for the second quarter of 2023.
Speaker Change: This is based on $128 million and $127.3 million diluted shares outstanding for Q2 2024 and Q2 2023, respectively.
Speaker Change: As of June 30, 2024, we had $790.3 million in cash, cash equivalent, short-term deposits, and marketable securities.
Guy Melamed: For the six months ended June 30, 2024, we generated $68.4 million of cash from operations compared to $42.6 million generated in the same period last year, and CapEx was $1.1 million compared to $2.6 million last year. Turning now to our updated 2024 guidance in more detail. It is important to note that our guidance now assumes 48% of total company ARR will come from our SAS platform by year end. As it relates to our quarterly revenue guidance, there are more conversions embedded in our Q4 guidance versus our Q3 guidance because we have more renewals in Q4 from a seasonal perspective, and the third quarter is Fed's largest quarter, and we still expect to sell on-prem subscriptions in that vertical.
Speaker Change: If the six months ended June 30, 2024, we generated $68.4 million of cash from operations compared to $42.6 million generated in the same period last year, and CapEx was $1.1 million compared to $2.6 million last year.
Speaker Change: Turning now to our updated 2024 guidance in more detail. It is important to note that our guidance now assumes 48% of total company ARR will come from our SAS platform by year-end.
Speaker Change: As it relates to our quarterly revenue guidance...
Speaker Change: There are more conversions embedded.
Speaker Change: In our Q4 guidance versus our Q3 guidance, because we have more renewals in Q4 from a seasonal perspective. And the third quarter is Federal's largest quarter, and we still expect to sell on-prem subscription in that vertical.
Guy Melamed: For the third quarter of 2024, we expect total revenues of $140 million to $143 million, representing growth of 14% to 17%, non-GAAP operating income of $7 million to $8 million, and non-GAAP net income per diluted share in the range of 7 cents to 8 cents. This assumes 128.2 million diluted shares outstanding.
Speaker Change: For the third quarter of 2024, we expect...
Speaker Change: Total revenues of $140 million to $143 million, representing growth of 14% to 17%.
Speaker Change: non-GAAP operating income of $7 million to $8 million and non-GAAP net income per diluted share in the range of $0.07 to $0.08. This assumes 128.2 million diluted shares outstanding.
Guy Melamed: For the full year 2024, we now expect ARR of $629 million to $635 million, representing growth of 16 to 17%. Free cash flow of $80 million to $85 million. Total revenues of $544 million to $552 million, representing growth of 9% to 11%. Non-GAAP operating income of $18 million to $21 million. Non-GAAP net income per diluted share in the range of $0.22 to $0.24.
Speaker Change: For the full year 2024, we now expect ARR of $629 million to $635 million, representing growth of 16 to 17%.
Guy Melamed: This assumes 128.1 million diluted shares outstanding. In summary, our second quarter performance, coupled with the many tailwinds in our business, gives us confidence to raise our full year ARR and free cash flow guidance and also to increase our SAS ARR expectations. We look forward to driving continued momentum as we move through the second phase of our SaaS transition and unlocking meaningful value for our customers, our company, and our shareholders. With that, we would be happy to take questions. Operator?
Speaker Change: Free cash flow of $80 million to $85 million.
Speaker Change: Total revenues of $544 million to $552 million, representing growth of 9% to 11%, non-GAAP operating income of $18 million to $21 million,
Speaker Change: non-GAAP net income per diluted share in the range of $0.22 to $0.24. This assumes $128.1 million diluted shares outstanding.
Speaker Change: In summary, our second quarter performance, coupled with the many tailwinds in our business, gives us confidence to raise our full year ARR and free cash flow guidance, and also to increase our SAS ARR expectations.
Speaker Change: We look forward to driving continued momentum as we move through the second phase of our fast transition and unlocking meaningful value for our customers, our company, and our shareholders. With that, we would be happy to take questions. Operator?
Operator: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press... Star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star 2 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. If you would like to ask a question, please press
Speaker Change: Star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. We ask that you limit yourself to one question so that others may have an opportunity to ask questions.
Operator: We ask that you limit yourself to one question so that others may have an opportunity to ask questions. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the start button. One moment, please, while we poll for questions. Our first question comes from Saket Kalia with Barclays. Please proceed with your question. Okay, great.
Speaker Change: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key.
Speaker Change: One moment please while we poll for questions.
Speaker Change: Our first question comes from Saket Kalia with Barclays. Please proceed with your question.
Saket Kalia: Hey, guys, thanks for taking my question here and nicely done this quarter. Thank you. So I'll keep it to one here.
Saket Kalia: Okay, great. Hey guys, thanks for taking my question here and nicely done this quarter.
Yakov Faitelson: Yaki, can you maybe just talk about the success that you're having in converting your on-premise customers to SaaS? And Guy, maybe as part of that discussion, I mean, you talked about, I think, I think, sort of an inline uplift that, as you talked about in the past, that sounds like maybe it's doing a little bit better. Maybe you could just talk us through anecdotally how the economics are looking on some of those conversions. Thanks. Hi Saket.
Speaker Change: Thank you. Thank you.
Saket Kalia: So I'll keep it to one here. Yaki, can you maybe just talk about the success that you're having?
Speaker Change: In converting your on-prem customers to SaaS,
Speaker Change: And, Guy, maybe as part of that discussion, I mean, you talked about, I think, sort of an inline uplift that, as you talked about in the past, but it sounds like maybe it's doing a little bit better. Maybe you could just talk us through, just anecdotally, how the economics are looking on some of those conversions. Thanks.
Yakov Faitelson: The task conversions are working very well because of the offering. We're talking about completely automated outcomes. You know, if you have us, you will probably not have a data breach and a data loss. And we are taking a lot of operations on us. This is on top of just the regular, you know, SAS benefits. Literally 10% of the effort for the customer and 10 times more value. This works extremely well.
Speaker Change: [inaudible]
Speaker Change: Automated outcomes, you know, if you have us, most probably you will not have a data breach and a data loss, and we are taking a lot of the operations.
Guy Melamed: And it's very easy for us to demonstrate the immediate value and the ongoing value. And from a pricing perspective, there's a 25-30% price list uplift on a like for like basis. So when you assume kind of the same features and functionality, but when we look at the data, the discount rates of health firms, so we really are recognizing pricing in line with that. And what's very interesting to see is that when we kind of built the packaging for SAS, our desire really was to have customers consuming more of the platform. And what we're seeing is that they're actually doing that.
Speaker Change: This is on top of just the regular, you know, SAT benefits. Literally,
Speaker Change: 20% of the effort for the customer and 10 times more value in this box.
Speaker Change: Thank you very much.
Speaker Change: [inaudible]
Speaker Change: And from a pricing perspective, there's a 25-30% price list uplift on a like-for-like basis. So when you assume kind of the same features and functionality.
Speaker Change: So when we look at the data, the discount rates of health firms, so we really are recognizing pricing in line with that uplift.
Speaker Change: And what's very interesting to see is that when we kind of built the packaging for SAS,
Speaker Change: Our desire really was to have customers consuming more of the platform, and what we're seeing is that they're actually doing that. We're seeing deal sizes increase.
Guy Melamed: We're seeing deal sizes increase in excess of that uplift, so that's working really well for us. When you look at the conversions in Q2, that really helped us get to approximately 36% of total ARR coming from SAS, or really $210 million. And what we actually saw was an increase in those conversions.
Speaker Change: In excess of that uplift. So that's that's working really well for us.
Speaker Change: When you look at the conversions in Q2, that really helped us get to approximately 36% of total ARR coming from SAS, or really $210 million.
Guy Melamed: A lot of them came from perpetual admission customers, which was really a positive sign for us. So when we look at kind of the pace of the transition, the focus is on SAS ARR is kind of the leading metric to measure the progress, and we're really happy with the progress we've made so far. Our next question comes from Hamza Fodderwala.
Speaker Change: And what we actually saw is an increase in the conversions.
Speaker Change: A lot of them came from perpetual maintenance customers, which was really a positive sign for us. So when we look at kind of the pace of the transition, the focus is on SAS ARR, it's kind of the leading metric to measure the progress, and we're really happy with the progress we've done so far.
Hamza Fodderwala: Please proceed with your question. Great, thank you for taking my question and congratulations on the continued SAS momentum. Yaki, I want to ask you a question about what you talked about with generative AI, not expecting much contribution this year, which I think is, I just wanted to get a sense of your timing as to when you think these Gen-AI deployments will be more mainstream at the enterprises that you serve, and when do you think Varonis could start to benefit from some of these deployments, right?
Speaker Change: Our next question comes from Hamza Fodderwala.
Unknown Attendee: Great, thank you for taking my question and congrats on the continued SAS momentum. Yaki, I wanted to ask this question to you on what you talked about with generative AI. Not expecting contribution this year, which I think is prudent.
Unknown Attendee: I just wanted to get a sense of your timing as to when you think these Gen AI deployments will be more mainstream at the enterprises that you serve, and when do you think Varonis could start to
Hamza Fodderwala: You're already talking about seeing more interest in pipelines, so I was wondering if you could maybe flesh out the timing of this opportunity. Thanks for the question. Before I talk about the timing of the opportunity, I will tell you what I see from customers that feel seeing this tool, this co-pilot, the headlamp, that immediately is exposing the problem of accessing the permissions and intent. So you use it, and it just...
Speaker Change: Benefit from some of these deployments, right? You're already talking about seeing more interest in pipeline. So I was wondering if you could maybe flesh out the timing of this opportunity for us.
Speaker Change: Thanks for the question. Before the timing of the opportunity, I'll tell you what I see from customers that POC.
Speaker Change: [inaudible]
Yakov Faitelson: It's like a Pac-Man from hell that goes and mines all the available data, and by that, if you don't let the platform do hours of work, you get to a lot of data that you don't need to get. And once you get to it, you just keep digging, and people are starting to do a lot of things that can harm organizations badly. And even before that, it was in the wrong hands. You know, God forbid you have an attack over something like that.
Speaker Change: [inaudible]
Speaker Change: He's just been digging, and people are starting to do a lot of things that can harm organizations badly. And even before, it was in the wrong hands. You know, God forbid you have an attack.
Yakov Faitelson: I think that eventually it's inevitable that it will be in the hands of every business user. I don't know how to predict, but I believe that eventually it will be something like Word or Excel, you know. It will be in the hands of every end user. And if you don't solve the data protection problem and you understand the behavior, you're going to have a lot of risk. And we definitely have seen that in a major way, organizations are starting to use it. But we have also started to see a slow material impact on the pipeline.
Speaker Change: over something like that.
Speaker Change: I think that eventually it's inevitable that it will be in the hands of every business user. I don't know how to predict, but I believe that eventually it will be something like Word or Excel, you know, that it will be in the hands of every end user, and if you do not solve the data protection problem and you understand the behavior, you're going to have a lot of risk.
Speaker Change: And we definitely start to see that in a major way organizations are starting to use it.
Speaker Change: But we're also starting to...
Speaker Change: Please see this material slowly.
Yakov Faitelson: I think that people are saying that it's inevitable to use this tool because of the productivity gains, and you can't do it. But if you do it as is, without technical permissions, an understanding of normal behavior, and the ability to classify your data, it's a losing proposition for the organization. So we believe that over time, we will benefit from it. And we believe that, slowly but surely, this is something that will be in our hands in one way or the other. We believe that it will be in the hands of every knowledge worker.
Speaker Change: and material impact on...
Speaker Change: on the pipeline. I think that people are saying that this is inevitable to use this tool because of the productivity gains and you can't do it like if you will do it as is without
Speaker Change: Thank you very much.
Speaker Change: We would benefit from it, and we believe that slowly but surely this is something that will be in the hands, in one way or the other, we believe it will be in the hands of every known advocate.
Guy Melamed: And Hamza, just to add from a numbers perspective and to add to what Yakov just said, when you kind of look at the results of the quarter, they were really strong, and that's without CoPilot being a material contributor yet. So, you know, when we look at kind of the guidance and the assumptions there, we don't bake in any optimistic assumptions in our guidance before we see enough data to support the trend.
Hanzo: And Hamza, just to add from a numbers perspective and to add to what Yakov just said, when you kind of look at the results of the quarter, they were really strong, and that's without Co-Pi being a material contributor yet.
Speaker Change: So, you know, when we look at kind of the guidance and the assumptions there, we don't take in any optimistic assumptions in our guidance before we see enough data.
Guy Melamed: So we haven't yet baked in any contribution related to CoPilot. We're seeing that healthy pipeline that Yakov talked about, and similar to what we have done in the past, we'll be happy to update you on any changes when the time is right. So, bottom line, it's not part of the current guidance, but we think it should serve as a tailwind for the future. Our next question comes from Brian Essex with JP Morgan. Please proceed with your question. Hi, good afternoon, and thank you for taking the question and congratulations for me as well.
Speaker Change: We are seeing that healthy pipeline that Yaki talked about and similar to what we have done in the past we will be happy to update you on any changes when the time is right. So, bottom line, we are looking at the future.
Speaker Change: This is not part of the current guidance, but we think it should serve as a tailwind for the business.
Speaker Change: Our next question comes from Brian Essex of J.P. Morgan. Please proceed with your question.
Brian Lee Essex: Nice, nice to see the acceleration or slight acceleration there along with better profitability and cash flow, particularly so early on in your transition process. And I guess that leads me to the question, you know, maybe for Guy, sustainability of profitability and cash flows here on out. How should we think about it, both in terms of the sustainability and level of, you know, potential margin expansion that we might expect? When you look at kind of our philosophy in terms of investments and growing top-line growth, we've always been very focused on kind of increasing that top line, but making sure that some of it's going to the bottom line and making sure that we're generating more meaningful cash generation. I think we've done that very well. As you mentioned, it's not easy to do that at the beginning of a transition.
Brian Lee Essex: Hi, good afternoon and thank you for taking the question and congrats for me as well. Nice to see the acceleration or slight acceleration there along with better profitability and cash flow.
Brian Lee Essex: Particularly so early on in your transition process and I guess that leads me into the question you know
Brian Lee Essex: Maybe for Guy, sustainability of profitability and cash flow here on out, how should we think about it, both in terms of the sustainability and level of, you know, potential margin expansion that we might expect?
Guy Melamed: When you look at kind of our philosophy in terms of the investments and growing top-line growth, we've always been very focused on
Brian Lee Essex: Kind of increasing that top five, but making sure that some of it's coming to the bottom line and making sure that we're generating more meaningful...
Speaker Change: Investment Manager, Ida Akshai-Kisa Vasant Agarwal, Joel Haffman, Author." As you mentioned, it's not easy to do that at the beginning of a transition, I think that we managed that very well. But when you look at the quarter, there were a couple of things that really contributed the strength of a quarter, and I think can help us drive
Guy Melamed: I think we managed that very well. But when you kind of look at the quarter, there were a couple of things that really contributed to the strength of the quarter and, I think, can help us drive top line growth and free cash flow going forward. We're definitely seeing shorter sales cycles on SaaS and also seeing healthy and much better new logo activity. That's being driven by the SaaS value proposition and the fact that we're eliminating the two biggest pushbacks from the customer. One is not wanting them to buy hardware, and the second one is that they don't have enough people to support the solution.
Speaker Change: Top line growth and free cash flow going forward. We're definitely seeing shorter sales cycles on SAG.
Speaker Change: and also seeing...
Speaker Change: [inaudible]
Guy Melamed: So kind of when you look at the momentum in the quarter, really the factors that drove that outperformance in the quarter were those two. And overall, we're really happy with the progress and want to make sure that we grow the top line and generate more meaningful free cash flow in the years ahead. Our next question comes from Joel Fishbein with Truist Securities. Please proceed with your question. Thanks for taking the question and congrats on the great execution.
Speaker Change: [inaudible]
Speaker Change: Our next question comes from Joel Fishbein with Truist Securities. Please proceed with your question.
Guy Melamed: Yaki, for you, you mentioned the hospital system that, you know, deployed Varonis during the quarter, and I would love to understand the competitive landscape around that deal or competitive dynamics. And also, Guy, if you could share, maybe, the size of the deal in primary care around that would be really helpful as well.
Joel P. Fishbein: Thanks for taking the question and congrats on the great execution. Yaki, for you, you mentioned the hospital system that...
Joel P. Fishbein: Deployed Varonis during the quarter, and I would love to understand the competitive landscape around that deal or competitive dynamics and also guys who can share maybe the size of the deal, any primers around that would be really helpful as well. Thank you.
Joel P. Fishbein: Thank you. Yeah, thanks. So overall, we don't see more competition in the pipeline. You know, for different use cases, we see different, different companies, but, Essentially, regarding this deal and others, what I think that it's very important to understand, I saw, you know... [inaudible] In order to protect your data, we are the first thing you need to do and the last thing that is going to save you. And you get world-class security people that are looking at it one to four by seven to make sure we don't have a data breach or a data loss. And this is just a common thing throughout all the deals.
Speaker Change: Yes, so overall we don't see more competition in the pipeline, you know, for different use cases we see different companies but
Speaker Change: Essentially, regarding this deal and others, what I think that it's very important to understand, I saw, you know,
Speaker Change: We have seen hundreds of big breaches in the last few years and they all usually have modern security stuff, world class EDR, modern firewalls, and this thing.
Speaker Change: But once you have an identity, there is no perimeter anymore, and you need a data-first solution in order to solve this problem. You can invest a lot without getting the benefits. Without that solution...
Speaker Change: Thank you very much.
Yakov Faitelson: And with more automation and more coverage, we have more use cases and more ways to get into enterprises. And in terms of the deal itself, what was very interesting about the deal was that they bought the full package, including the MVDR. So they wanted to make sure that we helped them in protecting against any breaches that might take place. And obviously, what we can do with them, we can do with many other customers.
Speaker Change: Thank you very much.
Speaker Change: And in terms of the deal itself, what was very interesting about the deal is that they bought the full package, including the NBDR. So they wanted to make sure that we helped them in protecting against any breaches that take place.
Yakov Faitelson: So this was several hundred thousand dollars in deal size. They bought the full package. They had about just over 6,000 users, so a very healthy deal in terms of what they consumed from a platform perspective and the AFC that we were able to get.
Speaker Change: And obviously what we can do with them, we can do with many other customers. So this was several hundred thousand dollars in deal size. They bought the whole package. They had about just over 6,000 users. So a very healthy deal in what they consumed from a platform perspective and the AFC that we were able to get there.
Guy Melamed: Our next question comes from Matt Hedberg with RBC. Please proceed with your question. Great, thanks for taking my question, guys. Congratulations as well.
Speaker Change: Our next question comes from Matt Hedberg with RBC. Please proceed with your question.
Matthew George Hedberg: You know, there were some questions earlier on about, you know, Gen AI and Copilot, but I wanted to focus on Office 365. I think you had an analyst day, I believe it was on March 23, and you talked about, you know, maybe 1% penetrated in the Office 365 base. I think you said at the time that that equated to maybe $125 million of cloud or SaaS ARR. I'm curious, could you give us an update about how that's progressing? It just seems like that's such a huge opportunity. I sort of wonder if there's an update on how you think about penetration within that opportunity. So you're absolutely right.
Matthew George Hedberg: Great. Thanks for taking my question, guys. Congrats as well. You know, there were some questions earlier on about, you know, Gen AI and Copilot, but I wanted to focus on Office 365.
Matthew George Hedberg: You had an analyst day, I believe it was in March of 23, and you talked about, you know, maybe 1% penetrated in the Office 365 base. And I think you said the time that that equated to maybe $125 million of cloud or SaaS ARR. I'm curious, could you give us an update about how that's progressing? It just seems like that's such a huge opportunity.
Speaker Change: Just sort of wonder if there's an update on how you think about penetration within that opportunity.
Guy Melamed: We laid out kind of the penetration, and when you look at Office 365 in terms of how that's contributing to total ARR, we've seen a steady increase as a percentage of total ARR coming from Office 365. But what's actually very interesting to see is that customers are now consuming more of the platform together with the MVDR, which is making this extremely more appealing to them and helps in kind of the whole conversation with the customer. So I wouldn't say that we're even close to scratching the surface.
Speaker Change: So, you're absolutely right. When we laid out kind of the penetration, it was...
Speaker Change: to about 1%. And when you look at the Office 365 in terms of how that's contributing.
Speaker Change: We've seen a steady increase as a percentage of total ARR that's coming from the Office 365. But what's actually very interesting to see is that customers are now consuming more of the platform together with the MVDR, which is making this a lot easier for them to do.
Speaker Change: [inaudible]
Guy Melamed: It's obviously improved slightly, but in terms of the opportunities, we're so far from kind of even getting to a point where it gets to the mid single-digit percentages. So we're far away from that, and that just shows kind of the essence of how we can take advantage of the opportunity going forward. Our next question comes from Fatima Boolani with Citi. Please proceed with your question. Hi, good afternoon.
Speaker Change: This is kind of the essence of how we can take advantage of the opportunity going forward.
Speaker Change: Our next question comes from Fatima Boolani with Citi. Please proceed with your question.
Fatima Aslam Boolani: Thank you for taking my question. Um, Guy, I wanted to ask you about MDDR. And if you can help put some numerical contours around some of the comments you made around the solution driving new customer velocity, better transaction velocity, influencing deal sizes, just wondering if you can add a little bit more quantitative color around that. And the reason I ask is that, you know, this time last year, you were very early in your SAS transition, and you didn't really have a formalized monetization model for MDDR, whereas this year So I'm wondering if you can compare and contrast how much MDDR has positively influenced the SAS momentum and the broader metrics. Thank you. Absolutely. I think that's a great question.
Fatima Aslam Boolani: Hi, good afternoon. Thank you for taking my question.
Fatima Aslam Boolani: Guy, I wanted to ask you about MDDR and if you can help put some numerical contours around some of the comments you made around the solution deriving new customer velocity, better transaction velocity, influencing deal sizes, just wondering if you can add a little bit more quantitative color around that. And the reason I ask is, you know, this time last year, you were very early in your SAS transition, and you didn't really have a formalized monetization model for MDDR, whereas this year you do. So I'm wondering if you can compare and contract.
Fatima Aslam Boolani: How much MVDR has positively influenced the SAS momentum and the broader metrics. Thank you.
Guy Melamed: Just to remind everyone, we actually introduced MBDR at the beginning of this year, so it's not even been full two quarters, but the way we're seeing both the sales force and our customers adopt it has been phenomenal. They've really embraced the simplicity of us doing things for them.
Speaker Change: Absolutely, I think that's a great question. Just to remind everyone, we actually introduced MBDR at the beginning of this year, so it's not even been full two quarters, but the way we're seeing
Speaker Change: They've been phenomenal. They've really embraced the simplicity of us doing things for them. So that's been very well received. In terms of exactly quantifying how much...
Guy Melamed: So that's been very well received. In terms of exactly quantifying how much it's increasing in terms of ASP, we're seeing the ASP go up. But if you remember, we talked a lot about the fact that the way we price MBDR is that either you buy additional licenses, and then you get MBDR at a reduced price, or if you want to buy MBDR as a standalone with, I'd say, the package plus, then you would pay a higher price.
Speaker Change: [inaudible]
Speaker Change: Or, if you want to buy MBDR as a standalone with, I'd say, the package plus, then you would pay a higher price. And what we've actually seen from a behavioral perspective is that the customers actually are going towards buying the...
Guy Melamed: And what we've actually seen from a behavioral perspective is that customers are actually going towards buying the extended package, which is helping us in terms of the ASP. I don't want to quantify it because it's so early, less than two quarters in, but I can tell you that in terms of adoption, it's been one of the fastest adopted.
Speaker Change: Extended Package.
Speaker Change: I don't want to quantify it because it's so early, you know, less than two quarters in, but I can tell you that in terms of adoption, it's been one of the fastest adopted. I call it platform because we're selling the platform with NDPR, so it's been one of the fastest adopting technology in the world, and we're already doing that.
Guy Melamed: I call it platform because we're selling the platform with MBDR, so it's been one of the fastest adopting platforms. And not only that, we truly believe that this offering should be part of every customer. It's obviously going to take time, but that's kind of the journey that we believe every customer should go through. We are also surprised with how effective, like this offering saving customers like many customers on a weekly basis from a catastrophe from attacks that people bypass the perimeter they have an identity and they can do massive amount of damage in the way that our user behavior analytics is working is all the telemetry that we are taking from active directory azure will be stuff like a of the dns and proxy make sure that most of the time they even don't get to the data if they get to the data we see immediately the abnormal behavior stop them in doing very effective forensics also on the data layer and they know exactly what happened so we just, It's just amazing to see how effective it is and how much value it can bring to customers.
Speaker Change: [inaudible]
Speaker Change: Like he's offering, saving customers, like many customers on a weekly basis from a catastrophe, from attacks that people have bypassed the perimeter.
Speaker Change: They have an identity and they can do a massive amount of damage in the way that our user behavior analytics is working with all the telemetry that we are taking from Active Directory, Azure AD, stuff like
Speaker Change: Thank you very much.
Speaker Change: It's just amazing to see how effective it is and how much value it can bring to customers.
Guy Melamed: Our next question comes from Shaul Eyal with TD Cowen. Please proceed with your question. Thank you. Good afternoon. Congratulations on the outperformance and improved guidance. Yaki or Guy, it's been about 10 days since the global crowd strike ID outage.
Speaker Change: Our next question comes from Shaul Eyal with TD Cowen. Please proceed with your question.
Shaul Eyal: Thank you, good afternoon, congrats on the outperformance and improved guidance. Yaki or Guy, it's been about 10 days since the global CrowdStrike ID outage.
Shaul Eyal: Just curious, Yaki, maybe for your views, and have you seen any increased interest, heightened interest over the course of this past very, very short period? And not, not, you know, not really, you know, the software updates can sometimes go wrong. What happened here, you know, how he is a great company; they're taking care of it. But in general, what we see is completely unrelated to CrowdStrike is that organizations understand that they need a data security platform.
Shaul Eyal: Just curious, Yakov, maybe for your views, have you seen any increased interest, heightened interest over the course of this past very, very short period?
Speaker Change: Not really, you know, the software updates can sometimes go wrong.
Speaker Change: What happened here in Al-Khalq Paheem.
Speaker Change: He's a great company, they're taking care of it, but in general what we see are completely unrelated to CrowdStrike is that organizations understand that they need a data security platform.
Shaul Eyal: I think that, in general, we understand that the limit of security is very important, but it's not enough, and you can be 99.9% okay, but then, if these bad actors are managed to bypass it in any way, and if we don't have something like ours, we will end up with a horrible breach.
Speaker Change: I think that, in general, we understand that perimeter security is very important, but it's not enough, and you can be 99.9% okay, but then...
Speaker Change: Ben Ackles managed to bypass it in any way, and if you don't have something like us, it will end up with the whole world breached.
Yakov Faitelson: So this is what we see in the market. Chess organizations need to understand that they need to be the first solution, and this is the way to protect valuable information. Our next question comes from Andrew Nowinski with Wells Fargo. Please proceed with your question. Okay, thank you. So you talked about now expecting more conversions in Q4, which obviously creates a revenue headwind, but I'm wondering what prompted this change in assumptions this quarter and what you saw in the results in Q2 that may have prompted that, because the guidance for the year suggests a fairly steep deceleration in Q4 revenue growth. So I was just wondering maybe what changed or what prompted the change.
Speaker Change: So this is what we see in the market, that chess organizations understand that they need to get the first solution and this is the way to protect their valuable information.
Andrew James Nowinski: I don't think there's any change in the way we're looking at Q2 and definitely not putting anything in a different light in Q4. But I think there are a couple of things to note about the conversion. First of all, Q4 is the largest quarter.
Speaker Change: Our next question comes from Andrew Nowinski with Wells Fargo. Please proceed with your question.
Andrew James Nowinski: Okay, thank you. So you talked about now expecting...
Andrew James Nowinski: More conversions in Q4, which obviously creates a revenue headwind, but I'm wondering what prompted this change in assumptions this quarter.
Andrew James Nowinski: And what you saw in the results in Q2 that may have prompted that, because the guidance for the year suggests a fairly steep deceleration in Q4 revenue growth. Just wondering maybe what changed, or what prompted the change. Thanks.
Speaker Change: I don't think there's any change in the way we're looking kind of at the
Speaker Change: at Q2, and definitely not putting anything in.
Speaker Change: In different light in Q4, I think there's a couple of things to note about the conversion. First of all, Q4 is the largest quarter, so we're taking advantage of any renewal as an attempt and desire to convert them into SAS.
Guy Melamed: So we're taking advantage of any renewal as an attempt and desire to convert them into SAS. RevenueBeat had a couple of mechanics behind this that had to do with it. First of all, I think it's important to note that ARR is kind of a leading indicator and was really strong this quarter, with good momentum in the business. I think that's very clear. During the transition, I think revenue is not really the indicator that would indicate the health of our company, and I think we've been very clear on that as well.
Speaker Change: And I think if you look at Q2, there was a large revenue leap, and that's...
Speaker Change: and RevenueBee.
Speaker Change: had a couple of mechanics behind this that had to do with it. First of all, I think it's important to note that ARR
Speaker Change: It's kind of a leading indicator and was really strong this quarter with good momentum in the business. I think that's very clear.
Speaker Change: During the transition, I think revenue is not really the indicator that would indicate on the health of our company, and I think we've been very clear on that as well.
Guy Melamed: And, you know, when we look at what we've said in the past, the more conversions we see from on-premises subscription to SaaS, the greater the headwind for our traditional income statement metrics. And this quarter... We actually had really strong conversions, and there were two positive factors that took place that didn't cause revenue headwinds. The first one was that we saw perpetual maintenance customers choose to convert to our SaaS platform. Since perpetual maintenance revenues are recognized rapidly, just like SaaS revenues, there is a tailwind when those customers convert to SaaS because of the uplift.
Speaker Change: And, you know, when we look at what we've said in the past, the more conversions we see from on-prem subscription to SaaS, the greater the headwind for our traditional income statement metrics. And this quarter...
Speaker Change: We actually had really strong conversions, and there were two positive factors that took place that didn't cause revenue headwinds. The first one was that we saw perpetual maintenance customers choose to convert to our SaaS platform.
Speaker Change: Since professional maintenance revenue is recognized radically, just like SAS is,
Guy Melamed: So as you remember, when we laid out the transition plan during investor day last year, we didn't initially plan for those customers to convert to our SaaS offering. So the fact that we're seeing this happen in a natural way is a huge positive for the business. And kind of the second factor that impacted Q2 is that we saw an increase in customers choosing to convert ahead of the actual renewal date, which doesn't serve as a headwind to revenue this quarter but will have an impact on our revenue in future quarters.
Speaker Change: There is a tailwind.
Speaker Change: When those customers convert to SAS because of the uplift.
Speaker Change: So, as you remember, when we laid out the transition plan during the investor day last year, we didn't initially plan for those customers to convert to our SaaS offering. So the fact that we're seeing this happen in a natural way is a huge positive to the business.
Speaker Change: And kind of the second factor that impacted Q2 is that we saw an increase in customers choosing to convert ahead of the actual renewal date, which doesn't serve as a headwind to revenue this quarter.
Guy Melamed: So really, to summarize, when you look at kind of the momentum of the business, it's really strong. And although revenue should not be the measure for the health of the business, the reason it was stronger this quarter is because of the perpetual maintenance customer conversion and the early on-prem customer conversions that will impact revenue in Q3 and Q4. Our next question comes from Roger Boyd with UBS. Please proceed with your question. Hey everyone.
Speaker Change: We'll have an impact on our revenue in future quarters.
Speaker Change: So really to summarize, when you look at kind of the momentum of the business, it's really strong.
Speaker Change: And although revenue should not be the measure for the health of the business, the reason it was stronger this quarter is because of the perpetual maintenance customer conversion and the early on-prem customer conversion that will impact revenue in Q3 and Q4.
Speaker Change: Our next question comes from Roger Boyd with UBS. Please proceed with your question.
Roger Foley Boyd: Thanks for taking the questions. And again, congrats on the good results. You launched a number of database SKUs at the beginning of the year, including Snowflake. Can you just talk about the momentum you're seeing with those products, and particularly with the Snowflake SKU? Have the data security concerns stemming out of the incident there benefited the uptake or pipeline of that product? Thanks. I think that we're starting to see a lot of concern from every data repository that is being complicated in the permission model, and the use is a lot of collaboration, and Snowflake is one of them.
Roger Foley Boyd: Hey everyone, thanks for taking the questions, and again, congrats on the good results. You launched a number of database SKUs at the beginning of the year, including for Snowflake. Can you just talk about the momentum you're seeing with those products, and particularly with the Snowflake SKU?
Speaker Change: Have the data security concerns stemming out of the incident there benefited the uptake or pipeline of that product? Thanks.
Speaker Change: I think that we see, we're starting to see a lot of concerns from every data repository that we...
Speaker Change: Be complicated in the permission model and the...
Speaker Change: Thank you very much.
Yakov Faitelson: We're definitely starting to see a lot of momentum for these products, and we also see that the very unique intellectual property that we have, the big technology that we have, is very much needed there. The other thing that we see is that exactly what I said about the perimeter is true: if you want to protect data, you need to protect data. You need the data first solution. Because if you don't have it, as I said, once you have an identity, that's it.
Speaker Change: The other thing that we see is that exactly what I said about the perimeter is if you want to protect data, you need to protect data. You need a data-first solution.
Yakov Faitelson: You are in the data, and I just think that once you have the right product, organizations are starting to take their security very seriously. Our next question comes from Joe Gallo with Jeffries.
Speaker Change: Thank you very much.
Joseph Anthony Gallo: Please proceed with your question. Hey guys, thanks for the question. I just want to double click on the new logo business.
Speaker Change: Our next question comes from Joe Gallo with Jeffries. Please proceed with your question.
Guy Melamed: How was it this quarter? Any quantitative metrics, whether it's total customers or growth that you can share? And should we expect that side of the business to accelerate now that you have copilot and MDDR in addition to the sales comp changes? So the majority of the new ATV and Q2 is driven by new logos.
Joseph Anthony Gallo: Hey guys, thanks for the question. Just wanted to double click on the new logo business. How was it this quarter? Any quantitative metrics, whether it's total customers or growth that you can share? And should we expect that side of the business to accelerate now that you have Copilot and MDDR in addition to the sales comp changes? Thanks.
Guy Melamed: We're definitely seeing shorter sales cycles in the SaaS field, and SaaS is really opening up new markets for us because it eliminates, as I said before, the two biggest pushbacks we used to get. One is that they don't have the people or don't want the hardware.
Speaker Change: So the majority of the new ACV and Q2 is driven by new logos. We're definitely seeing...
Speaker Change: Shorter sales cycles on the SAS field.
Speaker Change: And that is really opening up new markets for us because it eliminates, as I said before, the two biggest pushbacks we used to get. One is that they don't have...
Guy Melamed: So when you look at kind of the opportunity of growing the new business, and we talked a lot about kind of SaaS and MVDR combined simplifying the conversation, making it easier for our sales teams to talk to customers and kind of talk about the value proposition in a simple way. I obviously hope, and I think we have good indicators that the new customer will continue going forward. But I can tell you that when you look at the results in Q2, the Q2 new business was very strong. Our next question comes from Jason Adder with William Blair. Please proceed with your question. Yeah, good afternoon, guys.
Speaker Change: The people don't want the hardware.
Speaker Change: So when you look at kind of the opportunity of growing the new business, and we talked a lot about kind of SaaS and MVDR combined, simplifying the conversation, making it easier for our sales teams to talk to customers and kind of talk about the value proposition in a simplistic way. I obviously hope and I think we have good indicators that the new customer would continue going forward.
Speaker Change: I can tell you that when you look at the results in Q2, the Q2 new business was very strong.
Speaker Change: Our next question comes from Jason Ader with William Blair. Please proceed with your question.
Jason Noah Ader: I wanted to ask about gross margin. I guess I was a little surprised at how strong it was in the quarter, just given the growing mix of SAS. Can you just talk about what your expectations are for the second half of the year and into next year for gross margin? And are there any kind of specific idiosyncrasies around gross margin beyond just the rising SAS mix, which obviously has a negative impact? Yeah, you're 100% right. We were very happy with the growth margins. They were really strong.
Speaker Change: Good afternoon, guys. I wanted to ask about gross margin.
Jason Noah Ader: I'm just a little surprised at how strong it was in the quarter, just given the growing mix of SAS. Can you just talk about what your expectations are for the second half of the year and into next year for gross margin? And are there any kind of specific...
Speaker Change: Idiosyncrasies around the gross margin beyond just the rising SAS mix, which obviously has a negative impact.
Guy Melamed: I think that when you look at kind of the ARR contribution margin and do it based on calls, you'll see that we were really at the same percentage that we had last year, which was 12%. So we were extremely happy with that. If you look ahead, the one thing that we want to make sure is that we convert our customers to SaaS. So the quicker we convert them, the more headwind we'll get from a revenue perspective. And on top of that, we have to make some investments to support the transition really.
Speaker Change: Yeah, you're 100% right. We were very happy with kind of the growth margins. They were really strong. I think that when you look at kind of the ARR contribution margin and do it based on cost,
Speaker Change: You'll see that we were really at the same percentage that we had last year, which is 12%, so we were extremely happy with that.
Speaker Change: [inaudible]
Guy Melamed: So you should see gross margins kind of declining slightly, but I can say to you that when we look at gross margins in the bigger picture, we're really happy with where we are, especially with the initial investments that we need to make to support this transition, and we expect to see leverage even further in the years ahead. So Guy, just to be clear, the gross margin for Q3 and Q4 you expect to be below where Q2 was? So we don't really guide on gross margins on a quarterly basis.
Speaker Change: [inaudible]
Speaker Change: [inaudible]
Speaker Change: So Guy, just to be clear, the gross margin for Q3 and Q4, you expect to be below where Q2 was?
Guy Melamed: I'll talk conceptually about the fact that overall, when you look at gross margins this quarter versus last year on the ARR contribution margin, you didn't see much of a change. You might see a bit of a change because of the investments that we're making, but overall, in the big picture, the gross margins are really healthy, and we're really happy with what we're seeing from the margins on the SaaS product. And on top of that, there's leverage that you see in the different departments.
Speaker Change: So we don't really guide on the gross margins on a quarterly basis. I'll talk conceptually about the fact that overall, when you look at kind of gross margins this quarter versus last year on the ARR contribution margin, you didn't see much of a change. You might see a bit of a change
Speaker Change: because of the investments that we're making. But overall, in the big picture, the gross margins are really healthy. And we're really happy with what we're seeing from kind of the margins on the SaaS product. And on top of that, there's leverage that you see in the different departments.
Guy Melamed: You know, you get leverage in sales and marketing. There's leverage down the road in R&D when you stop supporting two types of code. So the fact that we're making those investments in kind of the support team and the customer success team to support the transition doesn't really impact the overall bottom line, and we're very committed to showing operating margin improvement. So when you look at the ARR contribution margin, we saw a really nice increase versus loss. The next question comes from Rob Owens with Piper Sim.
Speaker Change: [inaudible]
Speaker Change: Thank you.
Robbie David Owens: Please proceed with my question. Great, thank you for taking my question. I was hoping maybe you could elaborate a little bit on compressing sales cycles on the SaaS front and if you could quantify that versus maybe where your traditional sales cycles are.
Speaker Change: Next question comes from Rob Owens with Piper Stem. Please proceed with your question.
Guy Melamed: And I guess secondarily, what you're seeing from a renewal standpoint. Thank you. I can definitely dig into this.
Robbie David Owens: Great, thank you for taking my question. I was hoping maybe you could elaborate a little bit around compressing sales cycles on the SAS front and if you could quantify that versus maybe where your traditional sales cycles are and I guess secondarily what you're seeing from a renewal standpoint. Thank you.
Guy Melamed: I think what we're seeing in the sales cycles is that they're shorter on the fast versus the on-prem subscription. I think it comes to the fact that the value proposition of our platform, together with the simplicity of the story, is causing that shortening deal cycle when you compare it to the on-prem subscription deals. You know, we said from day one that we expected sales cycles to be shorter on SAS versus the on-premise subscription because of the simplicity. How much it came down shouldn't really be a focus point.
Speaker Change: So I can definitely dig into this. I think what we're seeing in the sales cycles are really that they're shorter on the fast versus the on-prem subscription. I think it comes to the fact that the value proposition of our platform, together with the simplicity of the story, is causing that shortening deal cycle when you compare them to the on-prem subscription deals.
Guy Melamed: Whether it's 25%, 33%, or even 50% shorter, the point is really that we're seeing a significant enough reduction for us to talk about it and call it out today. So really, it gives us a lot of momentum, and I think it's a critical benefit that we talked a lot about the fact that we transitioned to SAS and the benefits that that generates. In terms of renewal rates, we're seeing very healthy renewal rates, and we're very happy with them. And we've also said that we expect, over time, to have renewal rates increase with the SAS offering.
Speaker Change: How much it came down shouldn't be really a focus point, whether it's 25%, 33%, or even 50% shorter.
Speaker Change: The point is really that we're seeing a significant enough reduction for us.
Speaker Change: to talk about it and call it out today. So, really, it gives us a lot of momentum, and I think it's a critical benefit that we talked a lot about on the fact that we transitioned to SAS and the benefits that that generates.
Speaker Change: In terms of renewal rates, we're seeing very healthy renewal rates. We're very happy with them. And we've also said that we expect, over time, to have renewal rates increase with the SAS offering.
Guy Melamed: Our next question comes from Joshua Tilton with Wolf Research. Please proceed with your question. First of all, congrats on a great quarter. I guess what I'm trying to understand is just, I think if I look back, this is probably one of your best beats on ARR, total ARR in quite some time.
Speaker Change: Our next question comes from Joshua Tilton with Wolf Research. Please proceed with your question.
Joshua Alexander Tilton: And I'm just trying to understand what exactly changed this quarter that drove that rate of change to the positive, and how durable is that going forward? I know you mentioned that Gen AI is not contributing to the model yet, but did you just do way more conversions this quarter? Did MDDR just start showing up in the numbers?
Joshua Alexander Tilton: Hey guys, thanks for taking my question. First of all, congrats on a great quarter. I guess what I'm trying to understand is just...
Joshua Alexander Tilton: I think if I look back, this is probably one of your best beats on ARR, total ARR in quite some time. And I'm just trying to understand what exactly changed this quarter that drove that rate of change to the positive, and how durable is that going forward? I know you mentioned that, you know, Gen AI is not contributing to the model yet, but did you just do way more conversions this quarter? Did MDDR just start showing up in the numbers?
Speaker Change: or is it just a function of maybe maintenance to SaaS uplift is just much higher than what you've seen on your, you know, prior conversion rate. So just help us understand exactly what drove this rate of change and how durable you think this outperformance that you delivered today is going forward.
Guy Melamed: Or is it just a function of maybe the maintenance to SaaS uplift is just much higher than what you've seen in your prior conversion rates? So just help us understand exactly what drove this rate of change and how durable you think this outperformance that you delivered today is going forward. First of all, thank you. We're really happy with the kind of results for the quarter. And as you mentioned, the strong quarter is really without the co-pilots being a material contributor yet.
Speaker Change: First of all, thank you. We're really happy with kind of the results of the quarter. And as you mentioned, the strong quarter is really without the co-pilot being a material contributor yet.
Guy Melamed: I think when you look at kind of the underlying factors that helped drive this quarter, one of them was the shorter sales cycles on fat. And the other one was much better new logo activity. Those were kind of two of the elements that drove it.
Speaker Change: I think when you look at kind of the underlying factors that help drive this quarter,
Speaker Change #100: One of them was the shortest sales cycle was on fat.
Speaker Change #100: And the other one was much better, New Logo Activity. Those were kind of two of the elements that drove.
Guy Melamed: I think it kind of ties to the fact that MDDR, together with our SaaS offering, is making things much easier for our customers to consume. So when you look at kind of the overall health of the business, we're really happy with where we are. Obviously, we're very focused on continuing that execution. But I wouldn't say that the conversion is what drives the business.
Speaker Change #100: that
Speaker Change #100: I think it kind of ties to the fact that MDDR, together with our fast offering, is making things much easier for our customers to consume.
Speaker Change #100: So, when you look at kind of the overall health of the business, we're really happy with where we are. Obviously, we're very focused on continuing on that execution, but I wouldn't say that the conversion is what drove the business.
Speaker Change #100: What drove the business in Q2 was the new logo activity and the shorter sales cycles that we saw in the past.
Guy Melamed: What drove the business in Q2 was the new logo activity and the shorter sales cycles that we saw in Q1. Our next question comes from Rudy Kessinger with D.A. Davidson. Please proceed with your question. Hey guys, thanks for taking my questions and congrats on the numbers. Looks like a good quarter.
Rudy Grayson Kessinger: Our next question comes from Rudy Kessinger with D.A. Davidson. Please proceed with your question.
Rudy Grayson Kessinger: I guess I'm curious, you know, on Copilot. You've talked about it, you know, becoming a healthier material contributor to pipeline. If we combine that with what you said about some of these faster sales cycles on SaaS, and obviously, those deals being SaaS deals, I guess, that would imply we should start to see some material benefit to your new business from Copilot probably several quarters out from now. Is that the right way?
Rudy Grayson Kessinger: Hey guys, thanks for taking my questions, and congrats on the numbers, looks like a great quarter. I guess I'm curious, you know, on CodePilot, you've talked about it,
Rudy Grayson Kessinger: [inaudible]
Rudy Grayson Kessinger: deals, I guess.
Speaker Change #102: That would imply we should start to see some material benefit here.
Guy Melamed: We should be thinking about it? Or with some of these deals around Copilot, are you seeing them progress, you know, slower, faster than your typical deal, just given how, you know, the pace of how those companies are rolling out Copilot? So one thing we try to do is only comment on the kind of data that gives us enough confidence to call it out.
Speaker Change #102: [inaudible]
Guy Melamed: And you've heard us talk about the expectation that sales cycles on SAS would be much shorter from day one of announcing the transition. But this is kind of the first quarter that we feel confident in calling it out, because I don't know how CoPILOT kind of changes the data. I can promise you that from a transparency perspective, we've tried to be very clear in providing color when we see data that materializes, but I think if you look at CoPILOT starting to contribute, we really don't know if it can contribute later this year or in 2025.
Speaker Change #103: So one thing we try to do is only comment on kind of data that gives us enough confidence to call it out. And you've heard us.
Speaker Change #103: We are excited to be here to talk about the expectation that sales cycles on SAS would be much shorter from day one of announcing the transition. But this is kind of the first quarter that we feel confident in calling it out because it's a big market.
Speaker Change #103: [inaudible]
Speaker Change #103: If you look at copilots starting to contribute, we really don't know if they can contribute later this year or in 2025. What I promise you is that once we see data that supports that, we'll call it out and provide you that. The way to think about it, we believe, is to understand that if this...
Yakov Faitelson: What I promise you is that once we see data that supports that, we'll call it out and provide you with that color. The way to think about it, we believe, is to understand that if these CoPILOT tools are going to be in the hands of knowledge users, the security, the need for security will be, you know, almost inevitable. And without a doubt, at this point, we believe that we have the best product in the market.
Speaker Change #103: Co-pilot tools are going to be in the hands of knowledge users.
Speaker Change #103: The security, the need for security will be, you know, almost...
Speaker Change #103: Inevitable. And without a doubt, at this point...
Yakov Faitelson: So if this tool is in the hands of users, and we believe that there is a real AI revolution based on LLM, and you will need a solution like VORANCE in order to protect it. Our next question comes from Shanique. Robert W. Baird.
Speaker Change #103: We believe that we have the best product in the market, so if this tool will be in the hands of users, and we believe that there is real AI evolution based on LLM,
Speaker Change #103: You will need a solution like VOANS in order to protect it.
Speaker Change #103: Our next question comes from Shrenik.
Shrenik Kothari: Kothari with Robert W. Baird. Please proceed with your question.
Shanique: Please proceed with your question. Yeah, thanks for taking my question and a great job this quarter. Yaki, you highlighted, of course, the short field cycles and the pricing uplift continues to be strong. In some cases, you've seen deal sizes increase in excess of what customers as a result of customers consuming more of the platform upon conversion, and Kyler, the real estate firm, was immediately able to reduce the footprint and the maintenance by moving to SaaS.
Shrenik Kothari: Thanks for taking my question and great job this quarter. Yaki, so you highlighted, of course, the shorter field sizes and the pricing uplift continues to be strong. In some cases, you're seeing deal sizes increase.
Shrenik Kothari: https://www.patreon.com
Yakov Faitelson: Just that that's all great, but I'm just curious if you still have a long tail of the on-prem base, which might be a bit more price sensitive and a bit more averse to the transition that we kind of have been hearing. So you have sales incentives you touched upon, but just can you elaborate a bit on how you plan on working with these customers to demonstrate that the value proposition justifies this price uplift of the SaaS platform for the existing cohort of on-prem customers and have a quick follow-up for Guy. Yeah, I think that with the vast majority of our customers, it's just very compelling to move to SAS because of the automated output.
Speaker Change #105: Thank you.
Speaker Change #106: And you have sales incentives you touched upon, but just can you elaborate a bit on how do you plan on working with these customers to demonstrate that the value proposition justify this price uplift of the SaaS platform for this existing cohort of on-prem and have a quick follow-up for Guy.
Guy Melamed: Yeah, I think that with the vast majority of our customers,
Yakov Faitelson: So it's just you want to make sure that you can avoid a breach without almost any effort, and it works very well. These transitions are hard work. You need great attention to detail, and a lot of execution.
Guy Melamed: It's just very compelling to move to SAS because of the automated outcomes.
Speaker Change #107: Thank you.
Guy Melamed: These transitions are hard work. You need great attention to detail, a lot of execution.
Yakov Faitelson: You need to go to the customers that use one product, and you need to make sure that they understand that this is something completely different and demonstrate it. But, you know, we know how to do it. We know how to do transitions, but I can tell you that, you know, every day is just a lot of work, and you need to do it diligently and effectively.
Guy Melamed: You need to go to the customers that use one product and you need to make sure that they understand that this is something completely different.
Yakov Faitelson: But this is exactly what we are doing, and you can see the results. Yeah, yeah. It appears we have no further questions at this time. We would now like to turn the floor back over to Tim Perz for closing comments. Thanks for your interest in Varonis.
Guy Melamed: We know how to do it, we know how to do transitions, but I can't tell you that every day is just a lot of work, and you need to do it diligently and effectively, but this is exactly what we are doing, and you can see the results.
Speaker Change #108: Yeah, yeah.
Speaker Change #109: It appears we have no further questions at this time.
Speaker Change #109: We would now like to turn the floor back over to Tim Perz for closing comments.
Tim Perz: We look forward to speaking with you all at conferences this quarter. This concludes today's teleconference. You may disconnect your lines at this time.
Tim Perz: Thanks for the interest in Varonis. We look forward to speaking with you all at conferences this quarter.
Operator: Thank you for your participation. Copyright 2020 Mooji Media Ltd. All Rights Reserved. No part of this recording may be reproduced without Mooji Media Ltd.'s express consent.
Speaker Change #111: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
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