Varonis Systems Inc Q3 2024 Earnings Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Matt Hedberg - RBC Capital Markets - Analyst : Yaki, there's a lot to unpack. It's hard to think about one question here, but I guess if I were to focus on one. I couldn't help but hear you talk about GenAI, although early positively impacting results. I guess I just wanted to put a finer point on what aspects of the portfolio are contributing to customer GenAI spending. And if we look forward another couple of years, I mean how do you think the products that attribute to GenAI spending could expand over time?

Question: Hamza Fodderwala - Morgan Stanley - Analyst : Yaki, you and Guy teased this a bit with a lot of the Jenai contribution commentary, but 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 over permissioning and data leakage with Copilot. You've had some customer case studies already where customers are using Varonis for there's GenAI readiness program with some of your partners like ePlus. So there seems to be some momentum there. I'm just curious if you're not willing to sort of give ARR revenue contribution today, what percentage of your pipeline would you say is GenAI related customers coming to you and trying to prepare themselves for this for GenAI going forward?

Question: Saket Kalia - Barclays - Analyst : To Matt's earlier point, a lot to unpack, particularly in GenAI, but maybe I could switch gears a little bit. Guy, I've gotten the question from investors just around how much of the net new ARR generally through this process has come from conversion. And of course, that isn't something that we disclose but I think that what a lot of people are trying to figure out is, how does demand look excluding that conversion activity. So is there a way REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 29, 2024 / 8:30PM, VRNS.OQ - Q3 2024 Varonis Systems Inc Earnings Call 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 GenAI.

Question: Brian Essex - JPMorgan - Analyst : Maybe Yaki, I think last quarter, we caught up in terms of talking about the transition, I thought you had a great analogy where I don't know if it was either you or guy talked about stage one of the transition with the [carrot] phase and then Phase 2 is the stick. And then you said that the carrot phase is going so well. You don't feel like you need to use the stick. Is that still the case? I mean, how much visibility do you have in that transition pipeline? And how smoothly is it going for those existing customers that that you're converting over now, how much runway do you have left with those easier converts, if I can maybe put it that way.

Question: Joel Fishbein - Truist Securities - Analyst : Yaki, you mentioned on the call that the federal business underperformed. Just curious there, whether or not that was sort of self-inflicted execution or if there's something going on there. It's been a good area of business. I know you're still on track for FedRAMP. I'd love to get a little bit more color there. I really appreciate it.

Question: Joel Fishbein - Truist Securities - Analyst : Great. Thank you.

Question: Fatima Boolani - Citi - Analyst : 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 understand that it's not like flipping a switch, but I'm just curious to understand how much of your installed base has actually converted, and as a related matter, is your guidance for SaaS ARR mix for the full year at 48 still intact?

Question: Roger Boyd - UBS Equities - Analyst : 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 into customer engagements?

Question: Andrew Nowinski - Wells Fargo Securities, LLC - Analyst : I just want to get a better understanding of how you're defining a material impact from GenAI. I mean are you guys measuring it based on the number of new logo adds you get when they tell you they're buying Varonis for an LLM support? Or can existing customers that roll out in LLM also have an impact on your ARR. I guess I'm just trying to understand how you define a material impact and what that might look like.

Question: Joseph Gallo - Jefferies - Analyst : I appreciate the federal commentary earlier, but anything else to note on the overall business environment. And then just any expectations for 4Q budget for us? Just trying to understand your 4Q guide where net new ARR is relatively similar to your 3Q. So just trying to understand if there's anything else we should be aware of.

Question: Jason Ader - William Blair & Company - Analyst : I just wanted to see if you had any early thoughts on 2025. I know you're not providing any specific guidance, but just maybe 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 down this year from last year, primarily, I would assume, from the SaaS transition will it stabilize, you think, in 2025? Could it go down more? And then on the revenue growth side, same thing. I mean, it actually probably outperformed probably what most people expected this year. But we're -- what are some guideposts for 2025? And how should we be thinking about that?

Question: Robbie Owens - Piper Sandler Companies - Analyst : And just a quick one for me. I think you called out in your prepared remarks a small asset purchase that you made during the quarter. Could you elaborate on that?

Question: Joshua Tilton - Wolfe Research - Analyst : One for me, I guess, it's clearly a positive that you guys are calling out a contribution from GenAI. And 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. And I guess my question is, it feels like prior to this AI hype cycle and thus want or need to adopt some type of Copilot strategy, you guys kind of lived on this very secluded island when it came to competition. I think part of the reason why we all loved the story is because there was really no competition for your core offering, especially when it was on-prem. And I guess my question is, as you see Copilot adoption become more mainstream, more customers want to deploy this 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 the data security market, the data security opportunity as you head into 2025 and maybe how that changes the competitive positioning that you once had as an on-premise business.

Question: Rudy Kessinger - D.A. Davidson & Company - Analyst : [Similar to Socket], I get a lot of questions from investors just on the conversions 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 REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 29, 2024 / 8:30PM, VRNS.OQ - Q3 2024 Varonis Systems Inc Earnings Call perpetual ARR was about $5 million higher Q2 to Q3 than Q1 to Q2. So it looks like from those numbers, you converted a good chunk more. So I'm curious how gross retention has been trending and how it was in Q3 versus Q2 and prior quarters just as you've started to lean into the conversion notion more of your existing customers.

Question: Shrenik Kothari - Robert W. Baird & Co., Inc. - Analyst : So Guy, you mentioned about the upsized convertible notes offering and the strategic flexibility it provides. And with M&A being one potential avenue, right? And Yaki, please feel free to chime in. Any specific areas in your product portfolio or market segments that you might be eyeing that kind of align with your core data security focus. Specifically, would you be focusing on certain technologies that complement our existing offerings, expand overall reach, or kind of provide new capabilities, either in context of competitive dynamics or not, if you can just kind of provide some sense there.