Q1 2025 Varonis Systems Inc Earnings Call
Speaker Change: Greetings and welcome to the Varonis Systems Inc. 1st quarter 2025 earnings conference call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation.
Speaker Change: If anyone should require operator assistance during the conference, please raise a star and then zero on your telephone keypad As a reminder, this conference is being recorded It is now my pleasure to introduce your host, Tim Perz. Thank you, you may begin
Speaker Change: Thank you operator, good afternoon. Thank you for joining us today to review Varonis' first 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.
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 second quarter and full year ending December 31, 2025
Speaker Change: Due to a number of factors, actual results made different materially from those that were from substatement.
Speaker Change: These factors are said for us 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 RSEC filings. These statements reflect our views only as of today and should not be relied upon as representing our views as of any self-sequent date.
Speaker Change: Varonis expressly disclaims any application they're undertaking to release publicly any updates or revisions to any forward-looking statements made herein.
Speaker Change: Additionally, non-GAAP financial measures will be discussed on this conference call. A reconciliation for the most directly comparable GAAP financial measures is also available in our first quarter 2025 earnings press release and our investor presentation which can be found at boronis.com and the investor relations section.
Speaker Change: Lastly, please note that a webcast of today's call is available on our website in the Investor Relations section. With that, I'd like to turn the call over to our Chief Executive Officer, Yaki Faitelson, Yaki.
Yaki Faitelson: Thanks to you, and good afternoon, everyone. Thank you for joining us today to view our first quarter results. The progress of a SAS transition to remind you, why Varonis is best positioned to secure the world's data?
in the face of uncertainty in the world today. [inaudible]
Yaki Faitelson: There is one constant, which pushes the business-case for Varonis, no matter what will happen. People will eat, sleep and create data, do all this completely dependent on data and because of its importance.
Yaki Faitelson: Bear actors who want to steal it. At the same time, company struggled to protect it.
Yaki Faitelson: Most organizations deploy technologies to protect their endpoints and their perimeters These technologies are very important but they aren't enough to protect data [inaudible]
Yaki Faitelson: Varonis takes a data first approach and helps companies to locate the sensitive data, visualized with access to it, automatically locks down, and then automatically be taken respond to Frettoni.
Yaki Faitelson: Last quarter we announced that we were accelerating our such transition . . .
Yaki Faitelson: and a Q1 results prove that we are well on track.
to complete it by the end of the year.
The reason we are accelerating this transition is because...
The Strong Demand
Yaki Faitelson: for SaaS Solutions and the benefits to our customer's company.
Yaki Faitelson: Simply put, Varonis Sass is much better way to deliver our platform and to protect our customers' data more effectively and efficiently. With Varonis Sass, customers are able to realize greater value from our platform without effort.
Yaki Faitelson: which leads to more satisfaction and we believe will better position our company to accelerate growth.
Yaki Faitelson: In the first quarter, ARR won 19% to $664.3 million, and we continue to progress towards completing a third transition. We sat ARR now representing approximately 61% of total ARR.
Yaki Faitelson: All $403.9 million. We generated $65.3 million of free cash flow this quarter, up to $56.4 million in the same period last year. Guy will review our results.
Yaki Faitelson: and updated guidance in more details shortly. Our first quarter results reflect strong contribution on both new and existing customers that driving our overall business momentum. Organization
As the master is today's bed-actors. [inaudible]
The automated value proposition of Varoni's such platform in the area of the ring.
Yaki Faitelson: Revanites with security things. With Varonis, these organizations can secure their data with very little effort because we do the hard work for them.
Yaki Faitelson: This is an outcome that simply cannot be achieved by using point solutions or manual law. We also continue to see very healthy customer interest.
in safely deploying co-pilot and other generative AI tools. [inaudible]
Yaki Faitelson: which is serving as a reason for new customers to engage with Varonis and also for existing ones to convert to a SaaS platform.
Yaki Faitelson: We see massive opportunity to increase the ARR from our existing customer base.
Yaki Faitelson: And in the first quarter, we continue to see existing customers expand their deployment and increase their spend with us.
Loris Suss
Yaki Faitelson: is a no bueno for customers because of the value that it offers. In the first quarter, we were able to convert existing customers to such more respectively because of the lessons we learned last year and the additional investments that we made in our team.
Yaki Faitelson: This is now also freeing up capacity of our self-teams, their bringing in healthy levels of new customers while also upselling additional platforms.
Tuo Boriel, Caston Arbeis
Yaki Faitelson: Existing such customers, continue to expand their journey with Varonis, while many of our customers...
Yaki Faitelson: Choose to start with the Varonis deployments by protecting data in Microsoft 365 or on-prem storage platforms
Yaki Faitelson: because that was their top security concern, they realized that they had sensitive data in many places beyond the areas where they originally deployed us. This is why we have significantly expanded our coverage in recent years to include...
Leading cloud data stores which means we cover data everywhere.
Yaki Faitelson: Albrecht and Dez of Coverage has become one of our biggest competitive advantages which means that we are able to provide customers with automated data security wherever they have sensitive data.
Yaki Faitelson: And you and you won, we continue to see customers looking to Varonis
to secure data across these neural cloud data stores. [inaudible]
And we believe our ability to execute...
Yaki Faitelson: into this large and fast-growing market position to continue to accelerate goals once we completed this fast transition.
Yaki Faitelson: Another benefit of SAS is that it gives us the ability to innovate much faster. Doing Q1, we did exactly that, announcing Varonis for Agent Pulse, which allows organizations to safely enable a Jenny Gaye roll-outs in Salesforce.
Yaki Faitelson: With you, Agent K.I. is a massive opportunity, because agents inherent the permissions of the users who want them.
Yaki Faitelson: If the bank uses cell phones to process mortgages, guess? [inaudible]
Yaki Faitelson: What would happen when you upload your financial documents with your application? Or that information ends up in Salesforce's records files and attachments?
Yaki Faitelson: Fix Exposure to a very complicated permission model detects threats on the data and safely
Yaki Faitelson: To finish our example, Varonis automatically removes access to ensure your sensitive mortgage application is not unnecessary exposed by an engine.
In March, we announced the acquisition of Cyril, which explains...
Yaki Faitelson: Our Data Security Platform to include Next Generation Database Activity Monitoring, Cyril Innoveri reports.
Yaki Faitelson: The database activity monitoring is quickly and allows customers to upgrade their costly legacy solutions.
and unified the structure and unstructured data security monitoring.
which means...
Varonis Conserv is a single pane of glass.
for securing any kind of data.
is a unified platform.
Yaki Faitelson: We'll now be able to address more auditing and compliance use cases.
Yaki Faitelson: In addition, to being a strong strategic fit, this market is attractive to us because it has established budgets and it's right for destruction.
Yaki Faitelson: due to a lack of innovation for encounters in recent years. It's a position spills our time to market and expand our total available market drastically.
Yaki Faitelson: As we enhance our ability to help customers protect their data and allow them to consolidate their data security budgets with loans, is that I would like to briefly discuss the capital to keep customer loans from Q1.
Yaki Faitelson: New Lovers continue to be key driver of our business and this quarter, a large healthcare system with over 100,000 employees became Varonis customer after suffering a ransomware attack that impacted millions of patients.
While you customers go most of the momentum this quarter.
Yaki Faitelson: We are also seeing strong demand from existing customers looking to convert to a SaaS platform and expand the protection to cover new critical cloud data stores I mentioned a few moments ago.
Yaki Faitelson: An example from the score of the multinational consumer poor company with approximately 6,000 employees.
Yaki Faitelson: because they were severely understaffed and faced an executive mandate to safely deploy Corp Island.
Over the time [inaudible]
Yaki Faitelson: They had been our customers, Varonis fixed over 10 million overexposure on-prem, in ten of thousands of overexposed links in Microsoft 365, which convinced them that they would be able to safely deploy a coal pilot.
Discustomer Purchase Loni Sass for Hyde with Invalidance [inaudible]
Yaki Faitelson: as well as the ones for AWS, Azure, Google Cloud, Snowflake and GitHub, which will enable them to safely protect their data in the cloud and in such applications.
Yaki Faitelson: In summary, we are excited by the continued momentum we are seeing across the customer base that is driving our growth. Our solution has never been more relevant.
Guy Melamed: And we look forward to completing a fast transition this year which will unlock many more benefits for customers and our company as we execute on our significant market opportunity. Is that? Let me turn the call over to Guy.
Guy Melamed: Thanks, Yakki. Good afternoon, everyone. Thank you for joining us today.
Guy Melamed: Our first quarter performance represents a solid start to the year highlighted by an acceleration in ARR growth, sustained improvement in free cash flow, and continued progress towards the completion of our SAF transition
Guy Melamed: This performance allows us to raise our full-year ARR guidance as we focus on executing on factors within our control while closely monitoring the uncertain macroeconomic backdrop.
Guy Melamed: We remain confident in our outlook because of the underlying drivers of our business and our well-position to capitalize on our growing customer demand.
Guy Melamed: RQ1 results demonstrate sustained new customer momentum and that the investments we made in our team and lessons we learned regarding existing customer conversion is working.
Guy Melamed: As a result of this momentum, we ended Q1 with 61% of total company ARR coming from Saket, an 8-point increase in the Saket mix from the 53% we reported in Q4.
Guy Melamed: When we look at the SAS NRR, we continue to see very similar trends to last year, which was significantly above our total company NRR reported in 2024
Guy Melamed: This shows us that SaaS customers are coming back and buying more, which combined with a healthy new customer momentum that we are seeing gives us confidence that we can return to more than 20% ARR growth.
Guy Melamed: In the first quarter, ARR was $664.3 million, increasing 19% year-over-year [inaudible]
Guy Melamed: In this quarter, we generated $65.3 million of free cash flow, up from $56.4 million in the same period last year.
Guy Melamed: In the first quarter, total revenues were $136.4 million, up 20% year-over-year The first quarter, total revenues were $136.4 million, up 20% year-over-year-over-year-over-year-over-year--over-year--over-year--over-
Guy Melamed: which are recognized radically versus the upfront recognition of our on-prem subscription product.
Staff revenues were $88.6 million.
Guy Melamed: Term license subscription revenues were $31.5 million, and maintenance and services revenues were $16.4 million, as our renewal rates were again over 90%.
Guy Melamed: Maintenance and services revenues declined by 32% year-over-year, with a vast majority of the decline driven by perpetual maintenance customers converting to our SaaS platform.
Guy Melamed: Moving down to the income statement, I'll be discussing non-GAAP results going forward.
Guy Melamed: Gross Prophet to the first quarter was $109.4 million, representing a gross margin of 80.2% compared to 83.3% in the first quarter of 2024
Guy Melamed: Operating expenses in the first quarter totaled $115.9 million As a result, first quarter operating loss was $6.5 million, or an operating margin of negative 4.7%.
Guy Melamed: This compared to the operating loss of $10.6 million, or an operating margin of negative 9.3% in the same period last year.
Guy Melamed: During the quarter as compared to the same quarter last year, we had approximately a 1% headwind to our operating margin as a result of having increased staff sales in our booking mix, which are recognized fully ratable versus the upfront recognition of our on-prem subscription product.
Guy Melamed: The significant leverage improvement reflects our ability to drive strong incremental margins while growing ARR and transitioning to SAG.
Guy Melamed: During the quarter, we had financial income of approximately $10.7 million, driven primarily by interest income on our cash, deposits and investments in marketable security.
Guy Melamed: Net income for the first quarter of 2025 was $0.7 million or 0 cents per diluted share compared to a net loss of $3.7 million or net loss of $3 cents per basic and diluted share for the first quarter of 2024
Guy Melamed: This is based on 136.7 million diluted shares outstanding and 110 million basic and diluted shares outstanding for Q1 2025 and Q1 2024 respectively.
Guy Melamed: As of March 31, 2025, we had 1.2 billion in cash, cash equivalents, short-term deposits and marketable security
Guy Melamed: For the three months ended March 31, 2025, we generated $68 million of cash from operations compared to $56.7 million, generated in the same period last year
Guy Melamed: During the first quarter, we repurchased 1 million 476456 shares at an average purchase price of $41.49 for a total of $61 $3 million.
Guy Melamed: Turning now to our updated 2025 guidance in more detail our acquisition of silo is not expected to have any impact on a R or revenue. This year and is expected to add approximately $4 million of operating expenses in 2025.
Guy Melamed: For the second quarter of 2025, we expect total revenues of 145 million to $150 million representing growth of 11% to 15%.
Guy Melamed: non-GAAP operating loss of negative $5 million to negative $2 million and non-GAAP net income per diluted share in the range of zero cents to one thing.
Guy Melamed: This assumes $135 2 million diluted shares outstanding.
Guy Melamed: For the full year of 2025, we now expect a R. R. A 742 million to $750 million representing growth of 16% to 17%.
Guy Melamed: Free cash flow was 120 million to $125 million.
Guy Melamed: Total revenues of 610 million to $625 million representing growth of 11% to 13%.
Guy Melamed: non-GAAP operating income of <unk> 5 million to $10 $5 million non-GAAP net income per diluted share in the range of 14.
Guy Melamed: 17 cents this assume $135 8 million diluted shares outstanding.
Guy Melamed: In summary, we are encouraged by our first quarter results, which were highlighted by broad based strength and is leading to healthy AOR growth operating leverage and cash flow generation.
Guy Melamed: This performance gives us confidence to raise our full year guidance as we progress towards the completion of our SaaS transition later this year.
With that we would be happy to take questions.
Guy Melamed: Freighter.
Speaker Change: Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star and then one on your telephone keypad.
Guy Melamed: A confirmation tone will indicate your line is in the question queue.
Speaker Change: Can I push star and then two if you'd like to remove your question from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Speaker Change: It is a question that everyone. Please keep to one question at a time.
Speaker Change: One moment please poll for questions.
Speaker Change: Okay.
Speaker Change: The first question is from Matt Hedberg of RBC. Please go ahead.
Speaker Change: Great. Thanks for taking my question guys. Congrats on the results. So it's really great to see the SaaS transition continued.
Speaker Change: Continue to accelerate and finished by year end.
Speaker Change: The key questions that I get from a lot of investors is you know what gives you guys confidence that air are can grow short module 20, guys you illustrated.
Speaker Change: I think you mentioned.
Speaker Change: Yes.
Speaker Change: And are already significantly above total enrolled but is there any other things that you would give us a guidepost around the confidence in that.
Speaker Change: Element.
Matt Thanks for the question when we look at our ability to grow.
Speaker Change: Plus percent there are a lot of tailwind that are working in our favor.
Speaker Change: One of the things that I mentioned in the prepared remarks is our SaaS and our our and when you look at SAS and IRR and to remind everyone that doesn't include any impact from conversion. It was very healthy this quarter. So we continue to see very similar trends to what we saw last year without SASSA, an IRR that is.
Speaker Change: Significantly above our total reported company N all wrong.
Speaker Change: So this really shows that the SaaS customers see value and they want to protect additional platform. So they are coming back and buying more which combined with a healthy new customer momentum that we're seeing gives us the confidence that we can return to that they are our growth of more than 20%.
Speaker Change: And Matt It's Yoki and it's also very important to understand.
Speaker Change: This is the best way to avoid the data breach.
Speaker Change: But we're not breaking into a lot of them no time to compromise identities and then if you can protect your you can make sure that Tony delighted delighted entities can access that data and stop any abnormal behavior you will suffer severely.
Speaker Change: You will suffer distributor.
Speaker Change: Data breach and data is going to relentlessly on all platforms and is extremely valuable and this is the most effective way to avoid the data breach and with our SaaS platform customers are benefiting benefiting for meat and.
Speaker Change: <unk> formation is protected in an automated way.
Speaker Change: The next question, we have from Joel Fishbein of choice Securities. Please go ahead.
Joel Fishbein: Thank you for taking my question and great results.
Speaker Change: Get some more color around MD, Dr adoption and all that.
Competitive environment around that and then how that could potentially be an upturn.
Speaker Change: To get to match question potentially be an accelerant to our IRR.
Speaker Change: So in that in terms of the overall value.
Speaker Change: I see so many breaches, whose customer and usually they come one come and gone. All this organization has a model security stock.
What would class Edr, a modern firewall it seem that collect the logs and its severe bleach in order to make sure that you are protecting customers from a data breach you need to have a very data centric approach. If you want to protect data protect data make sure that you can remediate what you called the Blackberry excessive access control automatically understand abnormal yeah.
Speaker Change: Yeah and also wonder is once there is a compromise the identity.
Speaker Change: Oh and inside of there is no perimeter anymore. So we are in.
Speaker Change: Analyzing extremely well the user behavior will identities and they use them.
Speaker Change: To make sure we understand any abnormal behavior and starting to automatically.
Speaker Change: We believe that.
Speaker Change: If.
Speaker Change: Somebody wants to make sure that they don't take the data breach.
Speaker Change: They need something like voice and the other thing to understand is also down the whole ANZ.
Speaker Change: Something happened you want to understand what's happened to yield data vehicles. The fact that you can understand who is patient zero you know.
Speaker Change: What happened to it and.
Speaker Change: And point them to re configuring all way up to the right.
Speaker Change: And use the repository and you don't know what happened to the data they called the liability can be endless so even the ability to do a tech people and they need to be completely data center. Because this is what you see from the M. D. D. L and we are doing it automatically for customers and we build a lot of they are we build a lot of security agents that <unk>.
Speaker Change: Ali This is working extremely well every day real savings.
Speaker Change: Enterprises.
Speaker Change: From a numbers perspective, just to add to that I think sometimes investors forget that M. D. D. R was only introduced five quarters ago.
Speaker Change: Has been by far the fastest adopted platform sale, we have ever had so we're very very happy with the with how customers are adopting it.
Yaki Faitelson: A no brainer really is yockey mentioned, but when we look at the number and the adoption we truly believe that at the end of this journey every single customer should have and DDR to be better protected it's obviously going to take some time, but when you look at this adoption of this platform. It's been really outstanding we're very happy with the way it's performed so.
Speaker Change: Hi.
Speaker Change: The next question we have is from kit <unk> of Barclays. Please go ahead.
Speaker Change: Okay, Great Hey, guys. Thanks for thanks for taking my question here.
Speaker Change:
Speaker Change: Guy you said from the beginning that the north stars.
Speaker Change: This transition or are going to be a RR SaaS mix and free cash flow.
Speaker Change: But but I wanted to ask about the income statement just for a second and maybe the question is how far are we from the trough in operating margins as we think about this transition accelerating and are there any other dynamics that you want us to think about.
Speaker Change: As we kind of think about sort of the model going forward with respect to that.
Speaker Change: So as you mentioned and the North stars are the a our free cash flow in the year, our contribution margins and when you look at those kind of numbers all of them have been performed extremely well.
Speaker Change: About the transition and if you look at the results in Q1, they are all pointing in one direction.
Speaker Change: We're moving nicely quickly and keeping kind of the cost structure in a very prudent way. So so I do want to emphasize that before I talk about the P&L.
Speaker Change: But from a P&L perspective, there is a lot of things that are going.
Speaker Change: <unk> into the mix during a transition at the conversions and the revenue is recognized differently. So it becomes extremely messy, but I do think that the trough.
Speaker Change: Will happen this year and then obviously next year you still have some lumpiness because on the comparable side.
Speaker Change: You'll get some volatility, but less hum, but I definitely believe that as we progress to complete the transition. This year. The income statement starts to look more quote unquote normalized but again keep everyone's focused on during the transition to look at the three north stars they are the <unk>.
Speaker Change: Leading indicators a R R.
Speaker Change: Cash flow and they are our contribution margin.
Speaker Change: Okay.
Speaker Change: The next question we have is from Joshua Tilton Awful research. Please go ahead.
Speaker Change: Hey, guys can you hear me.
Speaker Change: We can.
Speaker Change: Awesome.
Speaker Change: Congrats on a great start to the year I just wanted to double down Guy and one thing you said I know you mentioned that you're monitoring the macro pretty closely could you maybe just double click on you know what if at all impact in the quarter you saw because of the current macro and maybe how you're thinking about or how you incorporate a macro expectations.
Speaker Change: Into the guide for this year. Thank you.
Speaker Change: I think that's a great question.
Speaker Change: When we look at the macro obviously, there's a lot of macro uncertainty but.
Speaker Change: But we had a really good quarter and kind of the drivers that we talked about last quarter are really all in place whether it's the SaaS transition M. D D R or Gen AI.
Speaker Change: When you think about kind of the guidance and how we think about it our philosophy hasn't changed and we treat the numbers, we give wall street very seriously and we feel very good about the pipeline in front of us. So when you think about the macro uncertainty and despite it really we have never been so confident about the long term opportunity.
Speaker Change: As we see it today. So we try to remain focused on factors within our control and we're confident in our ability to capitalize on a growing customer demand.
Speaker Change: Another thing that makes us feel really good is that in the first quarter. We saw strong demand from both new and existing customers, which led to that acceleration, we talked about that continued leverage in our model and the strong cash flow generation. So when you combine all of these in these results and kind of the underlying drivers in our business as well.
Speaker Change: It gives us the confidence to raise our guidance by that $5 million and increase our SaaS mix to 80% for the full year. Despite that uncertainty that we see in my in the macro environment.
Speaker Change: Yeah.
Speaker Change: The next question, we have from Roger Boyd of UBS. Please go ahead.
Roger Boyd: Great. Thanks for taking the questions and I'll Echo the comments on congrats on a strong quarter Guy you mentioned, good traction with new logos in the quarter I'm wondering if you could talk about one.
Roger Boyd: Are we getting to the point, where we can kind of quantify how often your new logos are landing with some of the newer offerings brought us for some of the SaaS applications cloud storage isn't databases and then similarly on the strength in use cases around securing copilot and other AI tools are.
Roger Boyd: Are we getting to a point there where we can kind of quantify how big that traction is thanks. Thanks a lot.
Speaker Change: Hi, Jackie I think that just to quantify just mathematically it's still hard but I would tell you in every data repository people have critical data and critical data and SaaS applications like.
Salesforce and established now in cloud.
Speaker Change: Positively like databases.
Speaker Change: Snowflake any data breach and they need to protect or you still have a lot of data on prem and in the 365 and what happens with all the AI tools.
Speaker Change: They put a spotlight on the data security problems. So you know these.
Speaker Change: Agents. These co pilots what are you doing essentially they just using all the potential hospice and give you a lot of these formations and create a lot of information that the staggering right. So there is excessive access control immediately.
Speaker Change: Employees will get their information it shouldn't get you can poison these N E.
Speaker Change: And I am wondering and you can also talk.
Speaker Change: So.
Speaker Change: As you see more adoption.
Speaker Change: The AI tools, you will understand that in order to enable them you need data security and automated data security in order to make sure you can manage their attention.
Speaker Change: Between the productivity and security and this is something that we are doing very well, we believe that with US people, who just stay eventually protect every data repository that he has and this is why we see a lot of success with the VA trial.
Speaker Change: Eh working really well for us we are very happy with all the investments we have done the last few years in data repository use the depositary protecting it with AI to automate the classification they will come to fruition.
Speaker Change: The next question we have is from Keith Weiss of Morgan Stanley. Please go ahead.
Keith Weiss: Excellent. Thank you guys for taking my question and congratulations on a solid quarter.
Keith Weiss: Wanted to ask a little bit about the recent acquisition that you need in the database activity monitoring space.
Keith Weiss: It seems like a pretty logical extension, even if water per view of.
Keith Weiss: The data within an enterprise as a state can you talk to us about sort of where that fits in how you plan to kind of add into portfolio and then a follow on question to that.
Keith Weiss: I think probably everyone on the line just came back from RSA last week, a lot of talk about data and data security.
Keith Weiss: It feels like the environment's getting perhaps more competitive can you talk to us about how youre seeing the competitive environment evolving as this issue really come to the forefront of the minds of Caesars.
Keith Weiss: Yes. Thanks for the question. So first in terms of database is it just a natural extension for us and we started to see a lot of success with da cloud classifying These database depositaries understanding.
Keith Weiss: Configuration and.
Keith Weiss: Hey, Adnan usage and just customers came in and told US that this is not happy with the incumbents and if you look at it if they have compliance requirements. We can answer everything in there you've got Bob had been attacked it always going for my data repository to it would be.
Keith Weiss: And they said if you can go deep into the quality it will be great and then logically they want to replace the.
Keith Weiss: The <unk> solution that they're using and using why one scalable.
Keith Weiss: Data security platforms that give them all these the automated outcomes.
Keith Weiss: Kitchen.
Keith Weiss: Classification.
Keith Weiss: And remediation in terms of the competitive environment is at this point is just doing a very good for us so.
Keith Weiss: Nothing changed for us in the competitive.
Keith Weiss: Environment in terms of stock like.
Keith Weiss: You know office 365, and older Microsoft collaboration tools on the unplanned stoppages in file buys systems on sea and Oh.
Keith Weiss: Any any file system and will always nice device and all the DSP M space, primarily these are biggest security towards primarily data.
Keith Weiss: Really a tour.
Keith Weiss: That.
Any time still having hard time to scale and don't give you automation. They don't have remediation. They don't give any level of threat detection, they're not integrated with the identity layer in what it does for us it's actually a discount increasing overall total available market and everything that we're doing and IATA and others.
Keith Weiss: Cloud data repository regenerate.
Keith Weiss: Molly awareness and when customers are testing them. They understand that these are not security tools you can do forensics, which then can do remediation don't understand if you haven't had an attack and I think that the fact that these say becoming.
Keith Weiss: More rfps more refi, it's really contributing for the success of vehicle.
Speaker Change: The next question, we have some Joseph Keller of Jefferies. Please go ahead.
Joseph Keller: Hey, guys. Thanks for the question and nice quarter last quarter, you mentioned elongation of conversion cycle times has that length of cycle time for conversions changed in any way and then how is the gross retention rates and a S. P upside recognized again for those customers.
Speaker Change: Thanks.
Speaker Change: Victor were a lot of lessons that we have learned from the conversion process last year and we are trying to implement them. Starting this year I think we've done a very good job and when you look at kind of the conversions that we had in Q1.
Speaker Change: They were really strong and I think all of the investments and the lessons learned were implemented in a way that we're we're happy to start the year with them. When you look at the gross retention rate. When you look at the renewal rate, they're all very strong we definitely feel good about where we are and what we're seeing.
Speaker Change: And we talked a lot about the fact that SaaS is purely a better product.
Speaker Change: Therefore, we are seeing our existing customers try it and then want to buy more and be better protected.
Speaker Change: But really when it's important to note that the conversions werent the only strong element this quarter and we're definitely seeing strong new customer adoption.
Speaker Change: Again, it kind of relates to that task by for them that is as being.
Speaker Change: The offering is so much better so.
Speaker Change: When you look at.
Speaker Change: Kind of the growth rate in our ability to get to that acceleration is coming from our existing customers buying more.
Speaker Change: And our new customers that were really strong this quarter.
Brian Essex: The next question, we have is from Brian Essex of J P. Morgan. Please go ahead.
Brian Essex: Great. Thank you good afternoon, and thank you for taking the question Duffy.
Speaker Change: Okay I got a question for you great to see the innovation outside of Microsoft co pilot into other gentex applications like <unk>.
Speaker Change: C O M M could you.
Speaker Change: Maybe provide a little bit of color in terms of your expectations for any different go to market motion.
Speaker Change: One of the concerns that investors may have had is it.
Speaker Change: And the officers 65 environment, you're competing against per view are you seeing a pull in from from Salesforce and other Isps you might be working with and do you anticipate maybe less friction with that go to market motion.
Speaker Change: I just think that as you will see more.
Speaker Change: <unk> overall AI.
Speaker Change: What it does it just it.
Speaker Change: Just.
Speaker Change: Put the data security problems in your face if you will using these agents and immediately you get information that.
Speaker Change: You Shouldnt get it's very problematic.
Speaker Change: It would be very helpful organizations, two functions like that so you'd want to enable the organization to safely use AI you need something like Barneys you need to understand the activity you need to rightsize. The permissions you need to do everything automatically you need to look at the pumps and make sure that people are asking.
Speaker Change: The legitimate questions because if not it's an accident waiting to happen.
Speaker Change: The next question, we have is from Rob Owens of Piper Sandler. Please go ahead.
Speaker Change: Okay. Thanks for taking my question. This is Ethan on for Rob This afternoon.
Speaker Change: Did you guys think about consolidating more of the data security budget.
Speaker Change: Natural adjacencies in the space that you think the platform can be well suited to address going forward. Thanks.
Speaker Change: I think that obviously database activity monitoring.
Speaker Change: It is a big one a lot of stuff that related to.
Speaker Change: Understanding identity behaviour is things that are relevant to the MDI environment. There is just a lot more we also didn't get a lot of the additional capabilities that.
Speaker Change: And take additional budgets, but definitely in social.
Speaker Change: So the budget is the AI budgets as organizations are.
Speaker Change: Trying to adapt.
Speaker Change: Want to do it in a in a secure way.
Speaker Change: Having to have this allocated budgets for <unk>.
Speaker Change: AI security.
Speaker Change: Enabling the organization to use AI and we are benefiting from.
Speaker Change: The next question, we have is from Shaul Eyal of TD Cowen. Please go ahead.
Shaul Eyal: Thank you good afternoon, and congrats on a solid set of results and guidance.
Shaul Eyal: Yeah, Okay I wanted to ask for every two little a quick questions. One on whats the head count that you're adding with the small tuck in acquisition.
Shaul Eyal: And on macro Guy Oreo.
Shaul Eyal: Bilge, specifically not talking about tariffs et cetera, but don't specifically have you seen anything emerging this quarter.
Shaul Eyal: <unk>.
Shaul Eyal: I'll start with the second question and thanks for them shown.
Shaul Eyal: When we look at federal and I want to remind everyone. The federal business for US. It is still a relatively small about 5% of total company a R.
Shaul Eyal: And when we look at kind of the when.
Shaul Eyal: When we look at the contribution in Q1 Q1 is not considered a.
Shaul Eyal: A large quarter for them their largest quarter.
Shaul Eyal: Is Q3, so when you think about kind of how we look at that federal we didn't see anything kind of evolved from Dodge and the way we think about it from a guidance perspective is that we didn't assume any significant contribution in comparison to last year or so.
Shaul Eyal: We are very happy with the progress of the fed ramp certification. It really is progressing as planned and we hope to get it in the next few months.
Shaul Eyal: So we definitely believe in that long term opportunity in that vertical so that kind of.
Shaul Eyal: Relates to the federal question in terms of Xyrem.
Shaul Eyal: We didn't have a significant number of head count so it's a.
Shaul Eyal: It's a small number that doesn't impact us much but.
Shaul Eyal: But when we think about that expense addition throughout the year, it's approximately $4 million of additional expense throughout.
Shaul Eyal: Throughout the year, if you look at kind of the guidance you can see that it hasnt changed much. So we're able to absorb it from a from a guidance perspective.
Shaul Eyal: And we're not expecting any more revenue contribution from the Ferro acquisition this year.
Speaker Change: Next question, we have is from Fatima <unk> of Citi. Please go ahead.
Speaker Change: Hey, Good afternoon, guys. This is mark Burford team. Thanks for taking my question, maybe just wanted to dig a little bit more into the new logo momentum you're seeing it really comes despite.
Speaker Change: Adjusting the sales org focused this year on really been new all conversions. So can you maybe give a sense of the drivers there how much does this outperformed expectations and maybe can you speak to any discernible changes that new customer adoption behavior aside from maybe the.
Speaker Change: Ah turbine purchases and any guardrails and how we should think of the contribution between new versus conversions to our guide this year.
Speaker Change: We talked a lot about the fact that with the MD, Dr offering and kind of the fact that we have our co pilot addressing any really any generative AI.
Speaker Change: It really is a no brainer for new customers to adopt the platform and we've absolutely seen a change in the way we can address.
Speaker Change: Those customers.
Speaker Change: We truly believe that our Tam has increased with the new offering the simplicity of the offering and the fact that there is so much automation and the M. DDR has really allowed us.
Speaker Change: Together really with the with our copilot being such an issue for our customers that want to adopt it.
Speaker Change: <unk> helped us address the simplicity of going to new customers that we werent able to sell through before and make that value proposition to be very very much adopted in a healthy way. So we started that last year. We said we saw this continue this year you heard us talk in the last earning call.
Speaker Change: What about the fact that we want to move as quickly as we can throughout the transition and complete it in 2025 I think the results in Q1 are a very good start and showing that we're moving in that direction.
Speaker Change: So we try to balance that.
Speaker Change: Sure that when we're not only completing the transition but the eye on the ball is still on getting new customers. Our sales force has done a really good job.
Speaker Change: Balancing those two and I think that's kind of the reason we were able to show that acceleration that beat on that.
Speaker Change: The raise on the AOR guidance.
Speaker Change: And the leverage in the model and the contribution.
Speaker Change: Contribution margins, so I think those those.
Speaker Change: Two elements.
Speaker Change: Addressing new customers and being able to convert our customers in a more efficient way or what is what's helping us move forward. The way we have so far.
Speaker Change: The next question, we have is from Jason Ader of William Blair. Please go ahead.
Jason Ader: Yeah. Thank you good afternoon, guys I wanted to ask on the gross margin outlook.
Jason Ader: I know that the SaaS transition is impacting that can you just talk about what you expect for the remainder of 2025, and then kind of more medium term outlook.
Jason Ader: And then just sort of related to that.
Jason Ader: Why is the non-GAAP operating income range.
Jason Ader: So wide can you just speak to that.
Jason Ader: Well going back to the revenue.
Jason Ader: Listen revenue.
Jason Ader: The P&L in general throughout 2025 is going to get messy you have to keep in mind that.
Jason Ader: <unk>.
Jason Ader: The way revenue is recognized through SaaS and on Prem subscription is so significantly different than it is generating a lot of volatility.
Jason Ader: And it's a lagging indicator and doesn't indicate of the health of the business at all so you get the conversions and that generates a lot of messiness.
Jason Ader: Gross margin really when you think about 2025 is not going to be reflective of anything.
Jason Ader: When we did our Investor day in 2023, we gave out.
Jason Ader: Like a five year model and we've put in our gross margin expectation.
Jason Ader: Each one.
Jason Ader: At the end of 2027 to be in that range of the 80%.
Jason Ader: Can tell you that overall as a concept and I'm not talking about 2005, when we gave guidance.
Jason Ader: From a revenue perspective.
Jason Ader: But when we look at the performance of our cost on SaaS.
Jason Ader: Exceeding our expectations significantly so as a general concept in just to keep in mind, we are doing better than what we thought when we initiated the transition.
Jason Ader: But youre going to see that volatility until we complete the transition and the reason that the range is so is so wide is because there's so many factors that are embedded in this transition it listen it's not an easy task and to.
Jason Ader: To take a ship and completely transition it from on Prem subscription to SaaS I think we've done a great job, so far and we want to make sure that we complete the transition at the end of this year, so getting to 65%, 61% in Q1 was a great start but again, there's a lot of volatility.
Jason Ader: Trying to bake in and consider what are the conversions and how it is going to impact and that's why we took on.
Jason Ader: An extra range, which I think is prudent.
Speaker Change: The next question, we have is from Rudy Kisner of D. A Davidson. Please go ahead.
Rudy Kisner: Hey, great. Thanks for taking my question, Firstly Guy I want to make sure I heard right I think in response to <unk> question earlier, you said, 80% mix.
Rudy Kisner: Mix by year end on <unk>, I think thats versus 78% expected previously I want to make sure I got that right and then secondly, I guess my real question.
Rudy Kisner: Does it feel like we're getting any closer to an inflection point on the co pilot in <unk>. Just what are you seeing from customer behavior. How is maybe the macro impacting the rollouts of the agent force co pilot et cetera. Thank you.
Rudy Kisner: I think that the overall organization.
Rudy Kisner: I understand that these are.
Rudy Kisner: AI tools.
Rudy Kisner: Productivity gains.
Rudy Kisner: Definitely I think that they will distill.
Rudy Kisner: Clearly to have their heads how theyre going to use exactly how to roll it out to all of.
Rudy Kisner: The employees, but definitely we see it as a driver and we believe is going to be more and more in the hands of just knowledge work here you will see just more of a need in the state.
Rudy Kisner: Demand for.
Rudy Kisner: Data data security. So this is definitely something that we.
Rudy Kisner: We see across the board and I did want to confirm yes youre right.
Rudy Kisner: We raised our guidance on the SaaS mix from 78% to 80% at the end of the year.
Speaker Change: The next question, we have is from Shneur <unk> of Robert W. Baird. Please go ahead.
Speaker Change: Yeah. Thanks for taking my question just on a related note from the previous question.
Speaker Change: So historically your strength has been in an unstructured environment then of course with the circle acquisition and increased focus on <unk>.
Speaker Change: I'll play at Cod airbags Macquarie There've been broadening into infrastructure data just just curious yoki like how are customers responding to this kind of more a unified view across structured unstructured assets do you see this more of a greenfield expansion and are there like real gaps in an automated.
Speaker Change: Immigration there or are you seeing budgets kind of ship from potentially legacy Classic magazine vendors into our platform I'm. Just curious what are you seeing thanks.
Speaker Change: Yeah.
Speaker Change: I think that the organization is just a snapshot to make sure that yes.
Speaker Change: We are protecting all of the data with us.
Speaker Change: All the automated outcomes that we provide they want one unified.
Speaker Change: Classification and Jeremy this is exactly what they need from us which is getting much better security, we had second to nine data centric user behavior analytics.
Speaker Change: We also work a lot on the <unk>.
Speaker Change: The direct OEM.
Speaker Change: Okay.
Speaker Change: I am so monitoring identities and auto screams like firewall.
Speaker Change: <unk>. So this is just natural extension extension for them and it works very well for them to make sure that we don't have data bleach to make sure that bill.
In compliance and they can do it in an effortless way, but also that they can go and show them.
Speaker Change: Board is superior.
Speaker Change: They've done a good job that in a tangible way the classified we see in the labeling.
Speaker Change: Now the blast radius without breaking business more sensing they did everything automatically result, adding any additional headwinds.
Speaker Change: Okay.
Speaker Change: The next question, we have is from Jonathan recovery of Cantor. Please go ahead.
Jonathan: Yeah, Hi.
Speaker Change: Can you talk about the <unk> AI capabilities that you've announced Whitney and.
Speaker Change: M DDR and specifically what you're looking at Gentex system. The adoption curve is still.
Speaker Change: Very early so so when would you expect the jet take AI to actually begin to contribute materially to customer outcomes and in revenue growth and specifically as it relates to M. D D or how do you plan to monetize that as those new features.
Speaker Change: Okay. Thanks, Paul Thanks for the question what is happening we have world class analyst looking at customer data 24 by seven and we also have a very unique dataset that features the behaviour of use.
Speaker Change: User and <unk> accounts, and you know all identities into the data and enrich it with a lot of information.
Speaker Change: But what we did we just let them know how to build these very security agents that looking at the data and can close everything takes.
Speaker Change: A lot of events and many alerts.
Speaker Change: All of them.
Speaker Change: Domestically to make sure that the analysts can be extremely productive so once the customer onboarding with our MDT all the best in the world using the data centric platform and just didn't.
Speaker Change: But that is helping them and the tireless 12 to 24 by seven at the customers' environments and make sure that they don't have the data breach and it works extremely well we are getting to tremendous automation and this is how we are augmenting our annually than the once you have of NPD L.
Speaker Change: An extension of your team the best people in the world events and pending data security that are working for you on the call.
Speaker Change: Ample global.
Speaker Change: Thank you ladies and gentlemen, we have reached the end of the question and answer session and I would like to turn the floor back over to Tim <unk> for any closing remarks.
Thanks again for the interest in <unk>, we look forward to seeing you all at conferences this quarter.
Speaker Change: Goodbye.
Speaker Change: Ladies and gentlemen that concludes today's conference. Thank you for joining US you may now disconnect your lines.
Speaker Change: Okay.
Speaker Change: [music].