Q3 2024 Varonis Systems Inc Earnings Call
Speaker Change: Greetings and welcome to the Verona Systems Inc. 3rd quarter 2024 earnings conference call.
Speaker Change: At this time, all participants are in the list and only mode. A brief question and answer session will follow the formal presentation. Should anyone require operator assistance during the conference, please press star 0 on your telephone keypad. As a reminder, this conference is being recorded.
Speaker Change: It is now my pleasure to introduce your host Tim Perz and Best of Relations. Thank you, you may begin.
Tim Perz: Thank you, operator. Good afternoon. Thank you for joining us today through a view of Ronin's third quarter financial results. With me on the call today, our Yakov Faitelson Chief Executive Officer and Guy Melamed Chief Financial Officer and Chief Operating Officer of Ronin's
Tim Perz: After preliminary remarks, you'll hope in the call to a question and answer session.
Tim Perz: During this call, we may make statements related to our business that would be considered forward-looking statements under federal securities laws, including projections of future operating results for our fourth order and full year ending December 31, 2021.
Tim Perz: Due to a number of factors, actual results may differ materially from those that force in such statements.
Tim Perz: These factors are set for the earnings press release that we issued today under the Section Tax and Forward-looking Statements and these and other important risk factors are described more fully in our reports files of the Securities and Exchange Commission.
Tim Perz: We encourage all investors to read our SEC violence.
Tim Perz: These statements reflect our views only as it today and should not be relied upon as representing our views as of any subsequent date.
Tim Perz: Veronica, expressly this plan, any application or undertaking through least publicly any updates or revisions, any forward-looking statements made here and.
Tim Perz: Additionally, non-gap financial measures will be discussed on this conference call.
Tim Perz: A reconciliation for the most directly comparable gas financial measures is also available in our third quarter 204 earnings press release in our investor presentation. Which can be found at www.rowness.com in the Investor Relations section.
Tim Perz: Lastly, please note that a webcast that today's call is available on our website and the Investor Relations section.
Speaker Change: With that, I'd like to turn the call over to our chief executive officer, Yakov Faitelson, Yakov.
Yakov Faitelson: Thanks, Tim, and good afternoon, everyone. Thanks for joining us today to review our state court results. Today, I would like to discuss our suspension vision progress and the key drivers of our business.
Yakov Faitelson: First, is often due on these calls. I would like to remind you why I will not exist and the problem we saw.
Yakov Faitelson: Next to its people, they are the most valuable assets of any business. So it is the primary target for bed actors and cyberattacks.
Yakov Faitelson: Most organizations focus on securing endpoints and perimeter, but leave many gaps for cyber attacks on their data.
Yakov Faitelson: with the expansion of the cloud and the emergence of generative AI for the activity and collaboration have improved.
Yakov Faitelson: But the risk of overexposing sensitive data is very increased.
Yakov Faitelson: Shenzhen's Sepshen of our company, we have taken a data first approach to security, which allows our customers to locate their sensitive data in visualise with access to it, lock it down and detect and respond to threats on it.
Yakov Faitelson: Now, with the automation of our SAS platform, our customers can spend less time in effort for texting their data.
Yakov Faitelson: Our Marx data detection and response offering which recall MDR, saves them even more time and make them much more protected.
Speaker Change: Stimpley Puth, the one is the law organization to use the iron collaborate in a massive way.
Speaker Change: Turning to a third quarter result, air agu 80%.
Speaker Change: to 610 million dollars.
Speaker Change: In South Iraq, now it present approximately 43% of total Iraq.
Speaker Change: or approximately 260 million dollars, which reflects the growing momentum of our South Plot phones and our MDR offering as well as a small contribution from January.
Speaker Change: Here today we generated 88.6 million dollars of free cash flow versus 46 million dollars last year.
Speaker Change: While a federal business under a profound expectation, a strong performance this quarter was led by our enterprise business, who is healthy contributions from new logos growth and converging activity from both on-point subscription.
Speaker Change: and perpetual maintenance customers. Guy will review how he's all in our updated guidance in more detail shortly.
Speaker Change: Our South Transition, continue to get momentum because of the many benefits our customer realized is a reminder they are.
Speaker Change: Pastonovative automated outcomes, which means the insured data is protected with very little effort.
Speaker Change: Sass is quicky to deploy in operation life, with significantly lower infrastructure and personal investments in Sass is easier to maintain and upgrade.
Speaker Change: Additionally, the strict key benefits we continue to realize are shorter cell cycles, larger initial length and emerging benefits over time.
Speaker Change: The Square we continue to see.
Speaker Change: Moe Poof of these benefits in our fast conditions and MDDR, as well as very early contribution from generative AI solutions.
Speaker Change: At the beginning of the year, we introduced M.D.R. the first managed service for monitoring and protecting critical data built on top of our South platforms in their fall only available to our South customers.
Speaker Change: It protects data in a more automated way, this offering is so important for an organization.
Speaker Change: Because the 13th Vilement Girls, more dangerous by the day, and when a bridge happens, every second comes.
Speaker Change: Security teams are stretching and struggling to see and respond to threats as quickly as they must with today's threat act.
Speaker Change: With MDR, we address the problem for leveraging our unique telemetry, user-beadial analysis, and you have experienced building highly-acquired threat models to detect and stop potential data breaching.
Speaker Change: While we have been selling and the deal out for only 24 quarters, customers are seen in immediate and impactful benefits.
Speaker Change: and MDDR is becoming a key driver of new business wins in such conversions. The previously said, we believe that MDDR is a gain changer, and that we are just catching the surface of this opportunity.
Speaker Change: Another thing that we have discussed is the impact of January, July and large language models. This topic remains top of mind and a key thing in our discussion with post-picture customers.
Speaker Change: The Productivity Benefit of Genial.
Speaker Change: are one of those two.
Speaker Change: In companies, I will happily start to understand the related risks.
Speaker Change: As a reminder, the use of AI makes it easier to create an access data which benefits employees but makes the job of an insider threat or outside attacking a natural easier.
Speaker Change: Generative AI tools utilize native access controls to determine which data is available.
Speaker Change: To the identity and that in using the Pope, these controls must be optimized. All Generalary Vali tools we create immense free scoho organizations, increasing the risk of cyberattacks.
Speaker Change: Varunic Health Organization mitigates these risks, but in short, that only the high people have access to the information that they need to do their job and monitoring what they do access.
Speaker Change: He did the correctly of Su AI.
Speaker Change: Once the bad actor bypasses perimital contours, verones that are automatically locked out the company might use their or machine preventing damage from happening. In the third quarter, Jenny I, the small quality impact.
Speaker Change: to our reported metrics.
Speaker Change: It is very early, so we are taking a major approach with regards to our expectations around the NRI contribution to our results.
Speaker Change: But they behave.
Speaker Change: We are seeing from customers give us additional confidence that we should see momentum grow as its adaption increases.
Speaker Change: With that, I would like to briefly discuss a property customer wins one year's play.
Speaker Change: and the American company, the Kevin Verones Casto Melondiscuro.
Speaker Change: This organization is subject to many state privacy and data regulation and wanted to better protect its data after it suffered multiple ransom attacks.
Speaker Change: The lof focussed on visualizing the risk automatically locking their data down and being able to monitor it as they continue to go to M&H.
Speaker Change: They also wanted to ensure their data was protected when deploying Microsoft Co-Pilot.
Speaker Change: Pire to bringing in Vagonis, the team unsuccessfully tried to lock down their data using the LP solution.
Speaker Change: A risk assessment revealed over 40% of the sensitive data was open to every employee, including 60,000 of Faitelson, with anyone on the internet.
Speaker Change: Ultimately, the purchase of the Sony SOT hybrid package with MDR, the Sony SOT co-pilot, GitHub, Salesforce and databases.
Speaker Change: This will allow this customer to safely adapt Microsoft Co-Pilot automatically reduce over exposure and scale and meet its regulatory requirements.
Speaker Change: We also saw continued song demand with existing customers looking to convert the Varoni Satsu's M.D.R. protection. One example of this was a loud insurance company.
Speaker Change: That has been a perpetual license customers since 2016.
Speaker Change: Using Varunis to audit user accessibility for its on-prem Windows environment, this organization was looking to change the data classification window while...
Speaker Change: Locing down the over exposed data in the unmonitled Microsoft 365 in Wyoming.
Speaker Change: A risk assessment in Microsoft 365 identified 40,000 files with social security numbers that will open to all employees.
Speaker Change: It also encarves 10 terabytes of unlabeled files in 1 drive.
Speaker Change: After failing to protect.
Speaker Change: The data with the existing DLP and the same window, the ultimately purchased the Varunic South Hybrid package with MDRL and Varunic for data purposes.
Speaker Change: In addition to automatically locking down the data escape, the one in the MDR will practically monitor the high-boying environment.
Speaker Change: In summary, the system momentum that we saw from our Sadplad, from the NDRD's Coral leaves us excited as we...
Speaker Change: Head into the first quarter. We are confident in our ability to capitalize on the tailwind of MDR or GNI and increasing the centric compliance regulation to capture our significant market opportunity.
Speaker Change: Without let me turn the call over to Guy. Guy.
Guy Melamed: Thanks, Yakov. Good afternoon everyone. Thank you for joining us today.
Guy Melamed: We're looking at the quarter. This was our strongest performance across the business since embarking on this past transition.
Guy Melamed: These results reflect the strong adoption trends of our own assets and NDR, coupled with a small contribution from Gen AI.
Guy Melamed: Our performance this quarter gives us increased confidence as we look to close out the year. In our SAS Transition, continues to game momentum with SAS Now-Representing 43% of our total company ARR.
Guy Melamed: We saw strong contributions from both ULOGOs and existing customer conversions, including conversions from perpetual maintenance customers, and many of the secular tell-winds we have noted this year are continuing to have a positive impact on our business.
Guy Melamed: Our Enterprise Business was the driver of our strong performance disorder with strong new business activity, healthy conversions and very early contributions from Gen AI to our reported metrics.
Guy Melamed: Our Federal Business, however, underperformed our expectations by several million dollars.
Guy Melamed: We have decided to make changes to the management team of our federal business and believe those changes coupled with our expectations to Fendraham Authorization next year will better position us to capture that market opportunity going forward.
Guy Melamed: Looking at the quarter and more detail.
Guy Melamed: The key drivers were against Sats and MDR. Our Sats platform and MDR offering together eliminates the two biggest perspectives of one not wanting hardware and two not having the head count to manage the platform or a Spongeboller.
Guy Melamed: The automation of our task offering, together with a simplicity of the story, continued to drive positive momentum and shorter sales cycles when compared to the on-prem subscription deal.
Guy Melamed: As we have said for a few quarters, Gen. AI continues to come up in nearly every customer conversation, but this was the first quarter where the Gantz contribute to our results.
Guy Melamed: We believe Gen AI is still very early in the adoption curve, which keeps us measured in our expectations around the timing and sizing of its contributions to our results.
Guy Melamed: This quarter gave us additional confidence that we should benefit from this tailwind as its adoption increases over time.
Guy Melamed: The strong Q3 performance coupled with our healthy pipeline allows us to raise our full year ARR guidance.
Guy Melamed: Because it is still a very early in its adoption, we're not assuming material, genuine eye contribution and our updated guidance.
Guy Melamed: As we look ahead to the fourth quarter, we anticipate converting more customers to our SaaS platform.
Guy Melamed: Tricing continues to be in line with our price list increase of 25 to 30% and in some cases we see dealsizes increase in access to that. Its customers consume more of the platform upon conversion to set.
Guy Melamed: We expect that the ramp up of this phase will not be linear and momentum should grow each quarter with SAS Conversion showing further acceleration in dollar terms in 2025 and 2022.
Guy Melamed: In the third quarter, ARGrew 18% year over year to $610 million. And here today we generated $88.6 million as a free castle, which was up from $46 million generated over the same period lost year.
Guy Melamed: These metrics demonstrate our commitment to balancing top-line growth with improving cash flow generation during the transition.
Guy Melamed: Turning now to our third quarter results in more detail. As a reminder, the leading indicators of our transition are the three-nourced stars. AR, free cash flow and AR contribution margin.
Guy Melamed: As we have said many times, the fact that we progress through the transition, the more headwinds we will experience to our traditional income statement metrics, but we view these in a positive light.
Guy Melamed: The macro environment remains stable, while sass and NDDR are resonating well, and we feel increasingly confident in the trajectory of the business, following our third quarter result.
Guy Melamed: Q3 Total Revenue, who were $148.1 million, up 21% year over year, reflecting our strong performance, as well as a higher contribution from perpetual maintenance converting to sad.
Guy Melamed: During the quarter, as compared to the same quarter last year, we had approximately a 5% headwind to our year-over-year revenue growth rate as a result of having increased facel's in our booking mix.
Guy Melamed: which are recognized radibly versus the upfront recognition of our on-prem subscription products.
Guy Melamed: In the third quarter, SADS revenue was $57.8 million.
Guy Melamed: Termites and subscription revenues were $68.8 million and maintenance and services revenues with $21.5 million is our renewal rates were again over 90%.
Guy Melamed: Maintenance and Services revenues declined by 13% year over year, with a majority of the decline driven by perpetual maintenance customers converting to our SAMH platform.
Guy Melamed: Moving down the income statement, I'll be discussing non-gap results going forward.
Guy Melamed: Gross Profit for the third quarter was $125.8 million representing a gross margin of 85% compared to 87.3% in the third quarter of 2023.
Guy Melamed: Gross margin continues to be strong and the year over year change is due to the revenue headwind associated with a higher mix of sack sales, increased headcount to support the transition and increased hosting costs.
Guy Melamed: Operating expenses in the third order, total $116.7 million dollars.
Guy Melamed: This includes approximately $6.7 million of acquired in-processed research and development expenses within the R&D expense line due to a small asset purchase made during the quarter.
Guy Melamed: As a result, third quarter operating income with $9.1 million or an operating margin of 6.1%.
Guy Melamed: This compares to operating income of $4.9 million, or an operating margin of 4% in the same period last year.
Guy Melamed: During the third quarter, it's compared to the same quarter last year.
Guy Melamed: We had approximately a 4% headwind to our operating margin as a result of having increased staff sales in our booking mix, which are recognized radically versus the upfront recognition of our on-prem subscription product.
Guy Melamed: This quarter ARR contribution margin was 15% out from 11.1% last year.
Guy Melamed: The significant leverage improvement, even during the transition, reflects our ability to drive strong incremental margins while growing ARR and transitioning to SAC.
Guy Melamed: During the quarter, we had financial income of approximately $9.7 million driven primarily by interest in someone our cash, deposit, and invest in marketable security.
Guy Melamed: Net income for the third quarter of 2024 was $13.8 million or 10 cents per diluted shares. Compared to net income of $10.4 million or $8 per diluted share for the third quarter of 2023.
Guy Melamed: This is based on 134.7 million and 126.7 million diluted chairs outstanding for Q3 2024 and Q3 2023 respectively.
Guy Melamed: In the September 30th, 2024, we had 1.2 billion in cash, cash equivalent, short term deposits and marketable securities.
Guy Melamed: 332.3 million of which is included within long-term market security.
Guy Melamed: Our liquidity position also reflects $394.1 million of net proceeds from the successful issuance of convertible notes in early September, which strengthens our already healthy balance sheet.
Guy Melamed: For the nine months ended September 30, 2024, we generated $90.9 million of cash from operations, compared to $49 million generated in the same period last year.
Guy Melamed: and Capac was $2.3 million compared to $2.9 million last year.
Guy Melamed: Turning now to our updated guidance in more detail.
Guy Melamed: So the fourth quarter of 2024, we expect total revenues of $162 million to $167 million, representing growth of 5% to 8%.
Guy Melamed: Non-Gap operating income of $20 million to $22 million and non-Gap net income per diluted share in the range of 13 cents to 14 cents.
Guy Melamed: This assumes 135 million diluted shares outstanding, which includes 6.8 million shares related to the issuance of convertible notes maturing in 2029.
Guy Melamed: For the fall year 2024, we now expect ARR of $635 million to $639 million, representing growth of 17% to 18%.
Guy Melamed: Free cash flow of $95 million to $100 million. Total revenues of $554.4 million to $559.4 million, representing growth of 11% to 12%.
Guy Melamed: Non-Gap operating income of $20.6 million to $22.6 million, non-Gap net income per diluted share in the range of 26 cents to 27 cents.
Guy Melamed: This assumes 134.9 million diluted shares outstanding.
Guy Melamed: In summary, when looking at the quarter, this was our strongest performance across the business since embarking on the sad transition.
Guy Melamed: This strength was driven by Ronin Sack, the strong reception to MDR in the secular tailwind benefiting our business.
Guy Melamed: The growing demand for ruin is strengthening our AR performance and cash flow generation.
Guy Melamed: and these tell in position us the unlock meaningful value for our customers, our company, and our shareholders. With that, we would be happy to take questions. Operator.
Speaker Change: Thank you.
Speaker Change: We will now be conducting a question and answer session. Each person will be allowed to ask one question and no follow up.
Speaker Change: If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your hands and set the 4% in the star keys.
Speaker Change: One moment please while we pull for questions.
Speaker Change: The first question is from Matt Headberg from RBC. Please go ahead.
Matt Headberg: Hey guys, thanks for taking my questions, congrats on the results. There's a lot of, lots on the pack, it's hard to think about one question here, but I guess I would have focused on one.
Matt Headberg: I couldn't help it here. You talk about Jenny and I, although early, positively impacting results. I guess I just wanted to put a finer point on what aspects of the portfolio.
Matt Headberg: are contributing to customer-genii spending and if we look forward to another couple of years. I mean, how do you think the products that attribute to genii spending could expand over time?
Guy Melamed: Hi Matt, so, by Melamed, I'm related to Kowpilot and I'm sitting in the room there.
Guy Melamed: is 365, but eventually obviously you have Einstein's circles in the editful depar, and there's a thing that is going to be power and free.
Guy Melamed: Every work of life, the reality is that at the beginning we saw this small POC in the hands of IT that immediately exposed the problem, the very security problem, the very smart thing that is...
Guy Melamed: But what we started to see now is that more knowledge will be using it in the West, in the West, in the West.
Guy Melamed: He just serving the problem become almost inevitable.
Guy Melamed: So in Jessie, that the Greek or the two, the lot of Greek, the data of the two, the general, the Greek, the data.
Guy Melamed: The students generate outside of policy.
Guy Melamed: Starting to just using the wrong intent, it's just extremely dangerous.
Guy Melamed: and the Translucingian and Tiri Caldera.
Guy Melamed: So you know the beginning it was on the PSP of six stage, but now when knowledge was all about demanding it and they are trying to buy it and you just started to hit critical mass within organization that are using the product.
Guy Melamed: The General and Trot of Urgent C2, to buy a protection for...
Guy Melamed: General and Copilot Melian and Jislogin, who is going to work for us today, and I believe in the solution to solve it at the moment.
Speaker Change: The next question is from Hamza, Fauderuala from Morgan Stanley. Please go ahead.
Speaker Change: Yeah, good afternoon. Thanks for taking my question. Yakki, you and Guy, tease us a bit with a lot of the Jenny I contribution commentary, but it didn't quite size the opportunity, at least today. I know it's early innings, but we're seeing some of the problems in terms of...
Speaker Change: Over Permissioning and Daily Kits with Code Pilot.
Speaker Change: You've had some customer case studies already.
Speaker Change: We're customers are using Grownet for Jenny I.
Speaker Change: There's a Jenny I readiness program with some of your partners like E-Plus.
Speaker Change: There seems to be some momentum there. I'm just curious if you're not willing to sort of give up.
Speaker Change: Air R revenue contribution today. Well, percent of your pipeline, would you say, is Jenny I related customers coming to you and trying to prepare themselves for this for Jenny I going forward. Thank you.
Speaker Change: And we've been talking about co-pilot for about a year now. This time is slightly different. I think you've kind of noted that. And here's why this quarter we finally started to see some deals close.
Speaker Change: But as he said, and as we've talked a lot about it, it's still early on, which is why we're not baking in any material announced closing into our Q4 guidance.
Speaker Change: But the fact that we started to see deals close this quarter gives us increased confidence.
Speaker Change: The Wich is benefit as genuine eye adoption increases and as Yakimanshin, it's not just around the Microsoft Co-Pilot, it also includes
Speaker Change: He inturned me built LLM, Salesforce Einstein and others. When we look at the pipeline,
Speaker Change: It comes up really in every conversation with our customers.
Speaker Change: A lot of our customers are talking to us about it, but again this quarter we started to see some deals close, but it's still a very small amount of an immaterial amount for the quarter. But it's a constant centre in every conversation.
Speaker Change: We believe that over time, it's been inevitable that it will bring the hands of any knowledge or care. She just put for activity games to amend us. In one of the people who are using it with the organization, he is exposing...
Speaker Change: Many times the data security problem, the fact that the data is over exposed, the fact that you can use this.
Speaker Change: and the soba in malicious intent. It's very, very dangerous. But we believe that it's going to be big part of the future of Faity, and we are one position to be to protect organizations and make sure that they can be really in the situation.
Speaker Change: The next question is from Sagitt Kaliya from Berkeley's, please go ahead.
Speaker Change: Okay, great. Hey, guys. Thanks for taking my question.
Speaker Change: Joe, up to Matt's earlier point, a lot to unpack, particularly in Jenny I, but maybe I could switch gears a little bit.
Speaker Change: I've got in the question from investors, just around how much of the net new ARR generally through this process has come from conversion.
Speaker Change: And of course that isn't something that we disclose.
Speaker Change: But I think that what a lot of people are trying to figure out is how does demand look excluding that conversion activity?
Speaker Change: So is there a way that you can talk to us about that qualitatively? Just as we think about sort of base net new ARR next year, plus any conversions, plus a lot of the other good things that you talked about with Gen AI.
Speaker Change: The target, I think one of the biggest misconceptions that we've talked a lot about this during a lot of the conversations that we've had with investors is this conception that the conversion you just plug it in the Excel and it happens very quickly and very easily.
Speaker Change: When you look at what drove them momentum and the strength of this quarter, it definitely came from the Fast Platform and the MDR. We continued to see shorter sales cycles on SASS.
Speaker Change: and very strong new logo activity, which was really driven by the MDD offering. And that's really because the SACS value proposition eliminates the two biggest pushbacks of customers. And we talked a lot about it. One being not willing to buy hardware in the second, that they don't have enough people to support the solution.
Speaker Change: The Convertions, we won't have gotten to 43%.
Speaker Change: of Total AR being sad or approximately $260 million, but the conversions take time.
Speaker Change: and Conversion's art, you know, you have to talk about the legal elements of it with a customer and it takes time to slip them. It's not a problem play, but at the end of the day it provides more value to our customers. That's why we do it. That's why our customers are buying assets and converting the tax.
Speaker Change: But at the end of the day, which drove them a mention in this quarter and also lost what when you look at the commentary that we gave last time is the new logos, the MDDR offering and that's really what's driving the business.
Speaker Change: The next question is from Brian Essex of JP Morgan. Please go ahead.
Brian Essex: Good afternoon. Thank you for taking the question and great to see the profitability and cash flow here. So early on still in the transition phase. You may be Yakis, last quarter we caught up in...
Brian Essex: In terms of talking about the transition, I thought you had a crazy analogy where I don't want to see the viewer guy talk about, you know, stage one of the transition with the care phase and then phase two is the stick and then you said that.
Brian Essex: and Sarah Faitelson is growing so well, you don't feel like you need to use the stick.
Speaker Change: Is that still the case? I mean, how much visibility do you have in a Vat transition pipeline and how smoothly is it going?
Speaker Change: for those existing customers that you're converting over now. How much runaway do you have left with those easier converts if I can meet?
Speaker Change: Put it that way.
Speaker Change: In terms of our work, our vision and our ability to get to outcomes, there is satisic and to numb. Similarly, the reality is that bad act of many times, we are not glitching in the Arab logging in. And once you have an identity, there is no perimeter anymore.
Speaker Change: and we are your best best. Data-centric data security platform is the first thing you need to do in the last thing that really will save you.
Speaker Change: So anytime I'm all castu Melamed on this tasting
Speaker Change: The Automated Outcomes that we provide.
Speaker Change: It's just it's a game changer. Let's stop at the driving with all the remediation robots. The MDR, you know, just, you know, release the MDR and what it is catching.
Speaker Change: on weekly basis, mind blowing even to us and our ability to automate everything.
Speaker Change: and also we know that we are covering more of a data in news reports that there is just a very low-volt variable issue. So once customers take it and understand, yes, they're regular volume of very high quality.
Speaker Change: Sats out to the action of the primarily automated outcomes that they can get to most of the very little daily doing nothing automatically generates a lot of appetite to do the conversion.
Speaker Change: One thing to add, and I think it's a very good question in terms of kind of a valuable position and kind of the commentary that we gave the belt effect that many of our customers are asking for SAS and wanting to switch to SAS because it's a much better product, but if we take a step back for a second.
Speaker Change: And when you look at kind of when we announced the transition, we're just under two years into the transition and we expect to be at approximately 50% of the business.
Speaker Change: Coming from Sass, that's a huge milestone for us. So when you look at kind of the progress that we have had through this transition, it's been extremely healthy. We're very happy with the progress that we are. And you know that note is correctly, we're doing that with significant generation of cash flow.
Speaker Change: So when you look at the free cast, so uping on guidance and getting to levels that are very healthy, we're very happy with that. We think we can continue on that path and do better, but we're very happy with the progress we've had so far.
Speaker Change: The next question is from Drull Fish Bain from Krueist Securities. Please go ahead.
Speaker Change: and I'm going to ask a quarter. Yakov, you mentioned on the call that the federal business under performed just curious there, whether or not that was-
Speaker Change: sort of self-inquipped to that execution or if there's something going on there, it's been a good area. This is a new year still on track for Fed Gramp. I love to get a little bit more color there. I really appreciate it.
Speaker Change: So that's a great question. I'll take that. The federal business did underperform by several million dollars.
Speaker Change: So let's keep things in perspective that vertical accounts for mid-single-digit percentages out of total ARR. So when we look across the remaining 95% of business, this is the best quarter we've had since the start of the transition, and that momentum was driven by continued strength in the enterprise segment.
Speaker Change: is very well did what it was supposed to do. This would have been a picture perfect quarter for us.
Speaker Change: So, after several years of underperformance from the federal business, we decided to bring in a new management team, and we believe that these changes coupled with the expectation for Fed Grant's authorization next year, will better position us to capture that market opportunity going forward.
Speaker Change: Thank you.
Speaker Change: The next question is from Faity Mabulani of City. Please go ahead.
Speaker Change: and thank you for taking the question. Guy, I wanted to double back on an earlier question with respect to some of the conversion momentum that you're seeing in the base, you know, understand that it's not like flipping a switch, but I'm curious to understand how much the real install base has actually converted and as a related matter, is your guidance for SAS ARR mixed for the full year at 48 still intact? Thank you.
Speaker Change: So again, when we look at kind of where we are from SAS at a total ARR, getting to 43% was definitely, you can't get to that percentage without having existing customers converting.
Speaker Change: are Q3 Conversion, with very similar in dollar terms to the Q2 Conversion amount.
Speaker Change: So again.
Speaker Change: As the same commentary that we gave in Q2, the strength of the quarter came from new business, the MBR, and the fact that we're seeing shorter sales cycles.
Speaker Change: on the SaaS offering.
Speaker Change: And when we look at kind of where we want to end, we talked about 48% kind of finishing the year. We're looking now to be in that 49% seismic at the end of the year. And we think that even that metric.
Speaker Change: gives us a lot of confidence to deliver in the same manner, we deliver it on other metrics to Austin.
Speaker Change: The next question is from Roger Boyd from UBS. Please go ahead.
Roger Boyd: Great, thanks for taking my questions. I know there's a variety of ways you're monetizing MDDR, but are we getting to a point where you might be able to quantify the size of that business or alternatively any color you can give on the typical uplift you see to ACV when you do bring that in the customer engagement. Thanks.
Roger Boyd: For one of the things that we've talked a lot about is our desire to be able to extract more dollars from our customers through the MDDR offering. It's part of a bundle basically.
Roger Boyd: and there are multiple ways to buy the MDBR. If you want to buy it separately, without additional licenses that we have as part of the bundle, you will pay a higher price.
Roger Boyd: But we wanted to see and what is actually happening.
Roger Boyd: is that many of our customers are actually buying more of the platform and getting NDDR to reduce price trust.
Roger Boyd: It doesn't really matter. We want to provide the value and we think that if they consume more of the platform, they get a much better...
Roger Boyd: Value for Money and at the end of the day it allows us.
Roger Boyd: The increase on SPs.
Roger Boyd: So at the end of the day everyone went here. When we look at kind of the adoption of MDR, we only had two full quarters. Don't forget we introduced it at the beginning of the year. So January was the first time it was introduced to RSA, else force.
Roger Boyd: is very well adopted by our customers, very well adopted by the Salesforce, because it's a no brain. It helps on the sales cycle, it helps on the conversation, the value that is provided to customers is great. We haven't quantified because we're providing a lot of color in terms of the numbers, and I think that MDDR at the end of the day.
Roger Boyd: needs to be with every single customer we have. We've talked a lot about that. It doesn't happen overnight, but at the end of the day, it's something that can help all of our customers.
Speaker Change: The next question is from Andrew Noinsky from Wells Fargo. Please go ahead.
Andrew Noinsky: Okay, thank you for taking the question. I just want to get a better understanding of how you're defining.
Andrew Noinsky: A material impact from Jenny I. I mean, are you guys measuring it based on the number of new logo ads you get when they tell you their buying's RONUS for an LLM support or can it existing customers that roll out an LLM also have an impact on your area. I guess I'm just trying to understand.
Andrew Noinsky: How you define a material impact and what that might look like.
Speaker Change: Thanks for the question, we are analyzing the FIFC, we look at the pipeline and the stemming very well.
Speaker Change: Historically, while customers in post-except bind the reports.
Speaker Change: and many times we see in what we call risk assessment that when the reason copilot is exposing the problem in a big way and we also see that it's a customer.
Speaker Change: is a many time experiencing the purchasing post process.
Speaker Change: and looks that we've intent.
Speaker Change: to release the Kumpaioporat.
Speaker Change: to more and more knowledge workers. This is how we see it.
Speaker Change: and you know before it was very contained in IP department, but it's time goes by. You just see that once they released it to evolve the population, they need to understand that they...
Speaker Change: must make sure that only the right people can access the right data, they need to be able to oil it activity, they need to make sure the thing is the quail is in self, quail is that makes sense because it's not this to many stores in the public a lot a lot of damage.
Speaker Change: One thing to add, when we look at kind of the copilot, we talked a lot about it, we have it as a separate skew, we have it as part of the MBR.
Speaker Change: And we've talked a lot about the fact that when customers have the office 365, they have a lot of protection that can help them with the copilot. The copilot has additional functionality, but the true value in dollar terms is selling copilot to new customers.
Speaker Change: and when we quantify materiality we quantify in-dollar terms. So when we looked at kind of the copilot's cues in, in, in, sold in Q3, as a standalone, it didn't have a material impact, but...
Speaker Change: As I said before, there is difference and that was part of our prepared remarks. We did see deals close that were related to coal pilot in a way that gives us increased confidence that it will become a tailwind in the near and medium term future.
Speaker Change: Thank you, the next question is from Joseph Gallow with Jeffries. Please proceed with your question.
Joseph Gallow: Hey guys, thanks for the question. I appreciate the federal commentary earlier, but anything else to note on the overall business environment.
Joseph Gallow: and then just any expectations for a 4-2 budget loss, just trying to understand your 4-2 guide where Net New Air R is relatively similar to your 3-2, so just trying to understand there's anything else we should be aware of. Thanks.
Speaker Change: So when we look at the philosophy of guidance that really hasn't changed, that's why we didn't taken any additional...
Speaker Change: Gen AI contribution
Speaker Change: We've always been under the assumption or philosophy has always been that we don't bake in any positivity until we see it translate into data and that's why we're kind of staying through the same philosophy for Q4. In terms of budget flush.
Speaker Change: It's not something that we've seen in the past. There is the regular seasonality within the business, where Q4 is the largest quarter of the year. We expect that to be the same this year, but we haven't seen any changes in terms of budget flush.
Speaker Change: When we move to the SAS, if we see anything, we'll obviously provide commentary post-quarter.
Speaker Change: Thank you. The next question is from Jason Adder with William Blair. Please to see with your question.
Jason Adder: Thank you, good afternoon, Guy. Just wanted to.
Jason Adder: See if you had any early thoughts on 2025, I know you're not providing any specific guidance but just maybe
Jason Adder: Can you help us think through the impact of the SaaS transition on 2025 relative to elements like revenue growth, operating margin and operating margin was...
Speaker Change: Down this year from last year.
Speaker Change: I would assume from the South Transition.
Speaker Change: Will it stabilize you thinking in 2025? Will it go down more? And then on the revenue growth, the same thing. It actually probably outperform probably what most people expected this year.
Speaker Change: But we're, you know, what are some guide posts for 2025 and how should we be thinking about that?
Speaker Change: So, this is an off-start by kind of re-insurizing the three North Stars, which are ARR.
Speaker Change: ARR Contribution margin and precast flow. I think looking at regular standard.
Speaker Change: Financial statement metrics that relate to revenue and operating margin through a transition are very misleading because of the radical recognition of revenue through SAS versus the upfront recognition of the unconsuscription.
Speaker Change: So I would highly, highly, highly recommend.
Speaker Change: Not looking at revenue and the regular operating margin because...
Speaker Change: [inaudible]
Speaker Change: Not reflective of anything.
Speaker Change: We're in the business.
Speaker Change: So when I look at the AR contribution margin, it was actually moving very nicely throughout this year. We're showing nice leverage compared to 2023.
Speaker Change: and when we look at kind of our commitment.
Speaker Change: We've talked about our desire to continue to grow but also.
Speaker Change: from an AR contribution margin, show improvement and generate more cash. And I think when you look at the free cash flow generation, it's been progressing really nicely. We believe that obviously that's one of the essence of having a company who want to generate healthy, healthy free cash flow. In terms of the 2025 color, we'll provide more color as we finish Q4, obviously Q4 is the largest year. We're very focused and we feel good getting into the Q4 and we'll provide.
Speaker Change: Additional color on 2025 as we see kind of the trends in Q4. But overall we're entering Q4 with strong pipeline and the leaves that we can do well.
Speaker Change: Thank you the next question. Is from Rob Owens the Piper Sandler? Please proceed with your question.
Rob Owens: Yeah, thanks for taking my question and just a quick one for me. I think you called out, you know, prepared remarks of small asset persons that you made during the quarter. Could you elaborate on that?
Speaker Change: Yeah, we bought the...
Speaker Change: Just a small team of programmers that can help us say...
Speaker Change: Excellency of the Rosemar, we have just an order of near many.
Speaker Change: Exciting, you call it a speech on the roadmap and this was just a short and important market, just a very small position.
Speaker Change: and just to get some color from the financial statement side, Yakov said we purchased code. So this is a small technological tucking.
Speaker Change: and the Yakimanshan Health Shortenars are a time to market from a cash flow perspective.
Speaker Change: The asset purchase at max.
Speaker Change: Total 6.7 million in on the incomplete, the full amount is expensive immediately. So you will see that amount of acquired in-process research expense within the non-gap R&D expense line item. We don't expect any AR or material expense because of the very small size of the asset purchase.
Speaker Change: The next question is from Josh Wittleton from Wolf Research. Please go ahead.
Josh Wittleton: Hey guys, thanks for sneaking me in here.
Josh Wittleton: One for me, I guess, is clearly a positive that you guys are calling out contributions from Gen AI. I guess we can interpret that as copilot adoption is possibly going a little bit more mainstream in the enterprise than it was maybe 12 months ago.
Josh Wittleton: And I guess my question is...
Speaker Change: It feels like prior to this AI high cycle and this warmth or need to adopt some typical palestrategy. So you guys kind of lived on this very secluded island when it came to competition. I think part of the reason why we all love this story is because...
Speaker Change: There was really no competition for your car offering, especially when it was on prem.
Speaker Change: And I guess my question is, as you see co-pilot adoption become more mainstream, more customers want to deploy the technology, look for ways to secure their data. It just feels like the competitive landscape is getting increasingly more noisy, and I'm curious how you think about the fact that there are so many companies coming after.
Speaker Change: The data security market, the data security opportunity as you had in 2025 and maybe how that changes the competitive positioning that you once had as an on-premise business.
Speaker Change: The response to seeing no change to the competitive landscape, no self-order fluency, we analyze each and every one.
Speaker Change: and we know we have a competition but what we do see is there is just a lot of knowledge, a lot of awareness, and our data must be our data, most breaches, our data breaches.
Speaker Change: and the soul notion that organizations spend an hour and a leg on security and constantly have bridges that are most sophisticated and attacking data which is losing proposition. So I think that what you see is that...
Speaker Change: Data Security, become a front-end center of organization's understanding of the need, data security. It's a very complex problem to solve. You have massive volumes of data with a lot of data.
Speaker Change: and data stores and meet integrated in YouTube. They have a lot of additional streams in order to really store the problems. To make sure that only the right people can access the data to understand if you have any of normal behavior and to find critical assets.
Speaker Change: and this is something that we are actually doing extremely well. But this time there is no change whatsoever until the company is left.
Speaker Change: The next question is from Rudy Kessinger from DA Davidson. Please go ahead.
Rudy Kessinger: I think I'm taking my question. So what is the socket? I get a lot of questions from investors just on the conversion system.
Rudy Kessinger: and Contribution towards Growth. Guy, you said in response to a question earlier, you converted about the same amount in Q3 as you did in Q2. If I look at the numbers here, the step down in your term and perpetual AR was about 5 million higher.
Rudy Kessinger: Tutu, Q3, and Q1, the Q2. So it looks like from those numbers you could purchase a good chunk more. So I'm curious how gross retention...
Rudy Kessinger: had been trending and how it wasn't Q3 versus Q2 in prior quarters just as you started the lean into the conversion motion more clear to the student customers.
Speaker Change: We look at our renewal rates, they're consistent in the over 90%.
Speaker Change: So we're happy with what we're seeing there.
Speaker Change: I can tell you that when you look at kind of the conversion
Speaker Change: We have seen more conversions happen.
Speaker Change: from our customer's own maintenance of perpetual.
Speaker Change: and that's part of the reason you're seeing.
Speaker Change: That revenue increased because in a way there's no headwind.
Speaker Change: When you convert to maintenance of perpetual.
Speaker Change: to SAS when you look at the maintenance and services line items and when you look at the decline there, the majority of that decline in that line item is actually coming from conversion.
Speaker Change: So when you look at it...
Guy Melamed: Our conversion that we're happy with customer converting but again, Guy.
Guy Melamed: and society's enough.
Guy Melamed: When you look at what drove the momentum in this quarter, it was new customers, it was the MDDR, we're very happy with the way our new customers are adopting MDDR and the way our self-force is selling the new customers.
Guy Melamed: and we saw growth in the new customers. I'm very healthy. Dollar increase with our customers.
Speaker Change: The next question is from Shrenik Kothari from Robert W. Beard. Please go ahead.
Shrenik Kothari: Thanks a lot for taking my question and comrades on great execution. So Guy, you mentioned about the upsized...
Speaker Change: Conorbitable notes offering and the strategic flexibility to provide with MNB in one potential avenue, and Yakikli's Faitelson chime in.
Speaker Change: Any specific areas in your product portfolio or market segments that you might be eyeing that the line with your core data security focus, specifically what we focus on on certain technologies that the complementary are existing offerings.
Speaker Change: Expans or a reach or provide new capabilities, either in context of computer dynamics or not to provide some time.
Speaker Change: I think I don't just dare.
Speaker Change: We are very much at this very difficult task for our country, all the activities and a lot of telemetry in the big historical production of the Yakovagaya Automigera.com.
Speaker Change: And we just open up a lot of the logical expansion that is a lot of me from the bottom to do very, very interesting things that provide a lot of value.
Speaker Change: The great engineering organization in Europe, capacity there.
Speaker Change: But you know, we also should be with people and we look at the opportunity and we see something that makes sense to a good team that can help us accelerate our roadmap. We will consider.
Speaker Change: To add some more on in terms of the convert and how we look at it. Obviously, our 2020 convert was coming due in August 2025. So we obviously didn't want to wait for the last minute in the side to opportunistically raise.
Speaker Change: in a really favorable, convertible market. But as Yakov mentioned, the convertible really allows us to be more offensive. As we've talked about the fact that our opportunity has never been bigger than it is today, but we did not think that doing a deal is an necessity to achieving our $1 billion ARR target.
Speaker Change: Rather, this sets us up to grow at healthy levels way beyond the 1 billion of AR, with additional capital allocation flexibility.
Speaker Change: But I think that what's very important to note is that this allows us to look at slightly larger M&A, but nothing crazy or changing the risk profile of the business. So, just want to emphasize that.
Speaker Change: There are no further questions at this time. I would like to turn the floor back over to Tim Perz for closing comments.
Tim Perz: Thanks for joining us today. I appreciate the interest in the Brown. I send a look forward to speaking with everybody at the conference of this quarter.
Tim Perz: Sittai, this is the end.
Speaker Change: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Speaker Change: Music Music
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Speaker Change: The first time I've seen a movie, I've seen a movie that I've never seen before. [inaudible]