Varonis Systems Inc at Citi Global Technology Conference Transcript

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

Question: Mark Zhang - Citi - Analyst : Maybe just a quick overview for those who aren't familiar with what you guys do and what's Varonis' mission. Can you just maybe give a quick summary on the state of the union, what you guys do, who you are and what your capabilities and solutions solve for?

Question: Mark Zhang - Citi - Analyst : Got you. Okay. Perfect. Now I guess it sounds -- obviously, you guys protect data, playing in cybersecurity space. But cybersecurity is a broad landscape and that's getting broader every day. Can you maybe help just frame exactly where you play in this cybersecurity space? What does your solution help maybe protect against? Who are the threat actors here, basically, target and protect your customers against?

Question: Mark Zhang - Citi - Analyst : Got you. No, that's great. And it's great that you actually mentioned a real-world experience, whether it's with Uber and other data breaches. But any other sort of examples you could maybe give a sense of a full chain of whether it's from an attack to, I guess, like remediation to how to basically get back to -- I guess like run state back -- I guess back to normalization?

Question: Mark Zhang - Citi - Analyst : All right, all right. That sounds like a unique offering and very competitive in the market. So maybe if I am a security analyst today, if I don't use Varonis, what are my alternative options? What else are you... REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. SEPTEMBER 06, 2023 / 6:30PM, VRNS.OQ - Varonis Systems Inc at Citi Global Technology Conference

Question: Mark Zhang - Citi - Analyst : Got you. And then to that point, can you maybe give us a sense of what the competitive landscape looks like, who you compete against? How do you differentiate yourself when it comes to maybe a platform vendor like a Microsoft? Obviously, Microsoft is this 300-pound gorilla or 800-pound gorilla that is spanning everyone. Do you guys see sort of a threat from them as well? And how do you sort of differentiate yourself from this?

Question: Mark Zhang - Citi - Analyst : Got you. Okay. No, that's great. And now the platform is maturing and you guys actually recently started to talk more about your new model transition to SaaS. Maybe we'll get Guy more involved here as well. But maybe can you give us a sense of what does transition entails, what kind of modes of delivery you've had, and what, I guess, like essentially if net new, would assess model transition?

Question: Mark Zhang - Citi - Analyst : Got you. You say it's a better product, but can you maybe give us a sense of why that SaaS product is different or better from the previous version for customers? Does it drive just greater adoption, just greater sales motion? I mean you mentioned a greater sales motion, but anything else that we should keep in mind as you're going through this transition?

Question: Mark Zhang - Citi - Analyst : Got you. Okay. No, that makes sense. And I guess like through the SaaS transition and even from the beginning, do we need to see more investments from you guys, whether from a sales force capacity standpoint or from a capability standpoint that needed to be done to facilitate this transition?

Question: Mark Zhang - Citi - Analyst : Got you. And I guess, given our state of the economy and the macro headwinds, have you seen any impact from macro on your transition to SaaS?

Question: Mark Zhang - Citi - Analyst : Got you. And I guess, once you're completely through the SaaS transition, does this change your competitive positioning in cybersecurity at all? Does it change sort of your value that you -- changes the value that you bring to your customers? But does this also open up your competitive landscape?

Question: Mark Zhang - Citi - Analyst : Got you. No, that makes sense. Maybe just on the financial impact of the transition. From our understanding, the revenue recognition for SaaS is different from your prior model. Can you describe how it works and what's changed? And what's the sort of KPIs that we should look forward to? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. SEPTEMBER 06, 2023 / 6:30PM, VRNS.OQ - Varonis Systems Inc at Citi Global Technology Conference

Question: Mark Zhang - Citi - Analyst : Got you. It's interesting, you mentioned free cash flow, margins, ARR contribution, but you left out operating margins and operating income. Is there a reason why operating income isn't a good indicator?

Question: Mark Zhang - Citi - Analyst : Got you. And then just maybe delving a little bit into the recent performance as you're going through a transition, you guys have clearly outperformed on the ARR aspect and also the transition mix percentage. But we haven't seen maybe as strong of an uplift on your full year guidance as your mix or adoption rate may suggest. So maybe can you square the new and upsell mix, which is now expected to be 50% versus 35% previously and I guess, like maybe a little bit more prudent on the ARR guide? Is that more so caution on your part? And if there's any other just delta we should keep in mind? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. SEPTEMBER 06, 2023 / 6:30PM, VRNS.OQ - Varonis Systems Inc at Citi Global Technology Conference

Question: Mark Zhang - Citi - Analyst : Got you. Okay. And then just in terms of the transition between Phase 1, Phase 2, obviously, we're still in Phase 1. But any sense of what inning are we in through this transition? When should we start -- I guess, like you've mentioned the 1 to 2 years. But given your strong results of customer adoption, is there any sense of there's a pull forward of the time line? Anything in terms of just like upside to the transition pace?

Question: Mark Zhang - Citi - Analyst : Got you. And then just on the time line for Phase 2, it seems obviously longer than Phase 1. Any sort of specific details to call out now that you're in Phase 2, going into your existing customers and transitioning them to SaaS? When does that maybe take longer? Should the existing customers see the value that SaaS brings and shouldn't that transition be faster?

Question: Mark Zhang - Citi - Analyst : Got you. And are you seeing any potential pushback from existing customers that want to stay on-prem? And how do you address sort of the reluctance to go to SaaS, even though there's a lot of value there? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. SEPTEMBER 06, 2023 / 6:30PM, VRNS.OQ - Varonis Systems Inc at Citi Global Technology Conference

Question: Mark Zhang - Citi - Analyst : Got you. Okay. Okay. And then I guess like now that we're 4 or 5 years down the line into the transition, 75% -- you've you achieved 75%, it's 90% SaaS. What does Varonis look like from a financial standpoint, from a go-to-market standpoint, from just your mission standpoint?

Question: Mark Zhang - Citi - Analyst : Got you. Yes, that sounds terrific. It seems like the demand is there. And I think to your point, there's existing customers asking you guys for SaaS today. So why not roll out, I guess, like Phase 1, Phase 2 together? Why focus more on Phase 1 first, selling new and then moving on to the existing? Is it just more so friction in the sales motion, confusion on the customer side? Just -- why not just flood doors open, open it up to existing as well currently?

Question: Mark Zhang - Citi - Analyst : Got you. Yes. No, that's terrific to hear. And we certainly like to see ARR [beaten and few misses]. So maybe just moving beyond the SaaS transition. Just on, I guess, like the other pieces of your business, especially federal. Federal seems like a very large opportunity for you guys. What are sort of the hurdles that you need to maybe clear before you start seeing more federal opportunities come to fruition? I know obviously, there's FedRAMP that you may need to achieve. So in terms of time line of achieving FedRAMP, and what the opportunity could look like once you have...

Question: Mark Zhang - Citi - Analyst : Sure. So maybe to -- I guess, frame the federal opportunity, who is serving, I guess, like that federal space today? Are they using a Varonis -- like a substitute that you could go in and look to displace? Or is this net new dollars from the federal budgets that you would like to capture?

Question: Mark Zhang - Citi - Analyst : Got you. No, that makes sense. So there's about 3 minutes left. I wanted to field the audience for any questions before we wrap up, otherwise... Unidentified Analyst Now that you have SaaS products, have you been able to reach new customers that you weren't able to reach before? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. SEPTEMBER 06, 2023 / 6:30PM, VRNS.OQ - Varonis Systems Inc at Citi Global Technology Conference

Question: Mark Zhang - Citi - Analyst : Great. And then maybe just a quick check-in on DA Cloud. How has that -- maybe the success so far and SaaS translate over to DA Cloud? I understand that piece is still small. But what's the transactions there -- traction there and the expectations going forward?

Question: Mark Zhang - Citi - Analyst : Got you. Okay. We have about 1 minute left. Would definitely want to leave some time for David and Guy to maybe make their final statement to the audience. What's the 1 or 2 key messages you guys want everyone to take away from Varonis...

Question: Mark Zhang - Citi - Analyst : Yes. Okay. David, any last words? 20 seconds on the shot clock...