Varonis Systems Inc Q4 2024 Earnings Call Transcript

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

Question: Michael Richards - RBC Capital Markets - Analyst : This is Mike Richards on for Matt. Thanks for taking the questions, and congrats on the results and the accelerated timeline here. Maybe if we're sitting here a year from now, and we're talking about upside to that flat net new ARR growth, could you talk about maybe where there might be some conservative assumptions around either Copilot uptake or conversions of the base? And how are you accelerating that Phase 2? Is that going to be through a care and stake approach? Or are we looking at sales incentives? Just any detail on that would be great.

Question: Hamza Fodderwala - Morgan Stanley - Analyst : I'm a little confused by your earlier comments on the renewal process. Are you talking about pulling forward renewal deals, so that way, you can get more conversion to SaaS from the existing customer base? And then just more on a high level, it seems like you're going to be down with the SaaS transition, spend this year are largely complete. That's two years ahead of your initial plan. But as we think about the durability of this mid-teens growth, right, once you surpass this transition broadly, how do we get confidence in the ability to sustain that? Is it going to come from more momentum on the AI front? Is there sort of another product cycle that you're quite confident about? Because I think that's really one of the key areas investors are focused on. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. FEBRUARY 04, 2025 / 9:30PM, VRNS.OQ - Q4 2024 Varonis Systems Inc Earnings Call

Question: Saket Kalia - Barclays - Analyst : Okay. Great. Guy, maybe for you just dovetailing off that last kind of topic. It's interesting to hear the team sort of bring up the idea of getting back to 20%-plus ARR growth someday. Can you just maybe unpack that a little bit in terms of what needs to happen to accomplish that? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. FEBRUARY 04, 2025 / 9:30PM, VRNS.OQ - Q4 2024 Varonis Systems Inc Earnings Call Maybe how much of that is coming from conversions versus new, obviously, a very new -- a very successful new logo component this year, maybe there's new products like MDDR. Any additional color on that goal would be super helpful.

Question: Brian Essex - JPMorgan - Analyst : Great to see the reacceleration of customer growth here. I guess on that, either Guy or Yaki, I think we've previously talked about Phase 1 versus Phase 2, and Phase 2 being kind of the stick phase where you push customers or incentivize them a little more aggressively to convert. Could you help us understand as you're pursuing more aggressive incentives to bring customers over to the SaaS platform, how should we get comfortable or how do investors get comfortable that you won't see accelerated attrition from the platform? And what are those conversations like? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. FEBRUARY 04, 2025 / 9:30PM, VRNS.OQ - Q4 2024 Varonis Systems Inc Earnings Call I think you talked about learnings from what you've seen over the past year or so. But how can we kind of maybe get some a little bit of insight from those learnings to get us comfortable for durability of the customer base on your platform?

Question: Brian Essex - JPMorgan - Analyst : That's helpful. I mean, have you seen resistance from customers? Or is it a lack of resistance that maybe gives you confidence that you can maybe go more aggressively about converting them to the SaaS platform and MDDR?

Question: Joel Fishbein - Truist Securities - Analyst : Guy, just for you. I'd love some more color and if you can quantify it in any way, the backlog that you currently have and how the pipeline is? I understand you're having some challenges via the conversions, but I just want to understand the health around that pipeline and the backlog.

Question: Joseph Gallo - Jefferies - Analyst : You guys have done a nice job of innovating and adding protection for different data stores, whether it's Salesforce, ServiceNow, Databricks, Snowflake, et cetera. Any quantitative disclosures you can provide on just traction you're seeing there? And then which of those buckets do you expect to see the most benefit to ARR in 2025? Just trying to see outside of Copilot, what areas you can see the most growth in.

Question: Roger Boyd - UBS - Analyst : Guy, I wanted to come back to conversions. And I get the dynamic there of wanting to focus on that conversion now and the increased effort required to sell that conversion. But it's like a couple of quarters ago, there was more optimism around attaching more of the platform at the time of conversion. I guess am I getting that right? And if so, have you seen any change to that ability to attach more of the platform? Or conversely, has there been any change to how you're pricing those SaaS conversions?

Question: Shaul Eyal - TD Cowen - Analyst : Our checks indicate that you're seeing no headwinds whatsoever from Microsoft's Purview. I would even characterize that you guys are seeing tailwinds when compared with their products. Can you talk to us about your Microsoft relations also as we think about it from a Copilot perspective and the potential growth, it could be seen in 2025 and beyond?

Question: Rob Owens - Piper Sandler - Analyst : I was hoping you could elaborate a little bit more around the AI contribution comments that you made, saying it was meaningful for the first time this quarter. Can you quantify it or talk about anything that may be changed quarter over quarter that made it become more meaningful?

Question: Jason Ader - William Blair - Analyst : I guess the first thing I wanted to make sure of is, so the revenue miss in the quarter relative to your guidance, that was purely a function of the

Question: Jason Ader - William Blair - Analyst : All right. Great. And then so I understand the revenue headwind, but I'm struggling a little bit on the ARR headwind. So I just wanted to make sure I fully understand because there is an uplift in a normal SaaS conversion, correct? Like a price uplift when you convert somebody. Can you just talk about the sort of the puts and takes there because it seems like even with the price uplift, you're hitting some headwinds?

Question: Andrew Nowinski - Wells Fargo - Analyst : I just wanted to ask about maybe the size of this conversion. I mean, it looks like you added about $215 million in SaaS ARR in 2024, and your guidance assumes about another $362 million. So significantly more ARR. And I think you just said you still have about two-thirds of your customers left to convert to SaaS. So it's a pretty big chunk of customers as well. I guess what gives you confidence that you can massively increase, I guess, the conversions to SaaS this year versus what you saw in 2024?

Question: Rudy Kessinger - DA Davidson - Analyst : As the conversions, I guess, start to wind down, and I guess it's not really winding down this year, but more so next year. You're obviously going to have cross-sell, upsell and/or new logo ARR, net new ARR start to simultaneously pick up if you're going to sustain discounted growth profile, going back to Hamza's question earlier. So how do you ensure that happens? Like if your reps are so heavily focused on conversions this year, how do you, at the same time, make sure you're building up that cross-sell and upsell pipeline heading into '26 to make sure that pipeline is there to support that sustainable growth profile?

Question: Shrenik Kothari - Robert W. Baird - Analyst : You mentioned that a key benefit of accelerating this SaaS transition, of course, id the eventual freeing up of sales and engineering resources to concentrate on features and expansion, and I'm presuming AI security, all of that's part of that, rather than focusing on conversion and logistics around that. Could you help us better understand the resource reallocation comment and plans, some specifics? Are you anticipating kind of repurposing the sales pre-Salesforce into more specialized roles focusing on like advanced AI and that driven demand security since you mentioned about AI seeing inflection? And then just like how do you see this intersect with the Phase 2 in your transition, particularly around converting these large on-prem accounts, which might have pretty specific data residency, regulatory requirements? Really appreciate your thoughts here.

Question: Joshua Tilton - Wolfe Research - Analyst : Hey, guys, can you hear me?

Question: Joshua Tilton - Wolfe Research - Analyst : I just have maybe a two-parter. The first one is -- and I apologize to beat a dead horse here, but on this decision to kind of accelerate the transition, many times on the call, you pointed out, you guys are already tracking ahead of your initial plan to convert to SaaS. So I guess I'm trying to understand, did something change this quarter that's making conversions more challenging than they were previously to the point where you felt like you needed to incentivize an acceleration in the rest of the transition? And then my second part of the question is just how contingent or how necessary is it for you to actually accelerate the transitions in 2025 in order for you to hit the ARR guidance that you gave us tonight?

Question: Matt Dezort - Needham & Company - Analyst : All right. I wanted to ask about the Gen AI pipeline. Just curious how your balance is for Copilot across new and existing customers, what the opportunity looks like? And since it sounds like it's being bundled in more and more with MDDR, what sort of uplift are you seeing with those two when included in a deal?