Varonis Systems Inc at Morgan Stanley Technology, Media & Telecom Conference Transcript

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

Question: Hamza Fodderwala - Morgan Stanley & Co. LLC - Analyst : <_ALACRA_META_ABSTRACT>All right. Let's jump right in. Brian, it seems like data protection is more important than ever. Maybe just briefly explain why that is and Varonis' place in that.

Question: Hamza Fodderwala - Morgan Stanley & Co. LLC - Analyst : Yes. And maybe to bring you in a little bit, Guy, as well, one of the things you've been talking about is every organization is trying to figure out how to deploy generate AI application in the enterprise. And obviously, before you do that, you have to make sure your data is prepared. So what's been the momentum there more recently?

Question: Hamza Fodderwala - Morgan Stanley & Co. LLC - Analyst : I wanted to give a Guy a break because we'll grill him soon enough. Maybe speaking of it, Guy, so one of the things Varonis has been -- also been doing in the last couple of years is they've been embarking on the SaaS transition. Obviously, a much significant product improvement as well as there's financial implications as well. You initially had targeted that the SaaS transition would be complete by 2027, where 70% to 90% of the total ARR would be on your SaaS product. You're two years ahead of that plan. You're expecting to be within that threshold this calendar year. So one, maybe explain to us why you were able to do it so quickly. And what it means when you onboard a customer to SaaS, what is the lifetime value potential of that customer versus on-prem?

Question: Hamza Fodderwala - Morgan Stanley & Co. LLC - Analyst : That's a great point. I want to make sure I sort of double-click on that. So you're saying we know the on-prem-to-SaaS uplift has been, I believe, 20% to 30%, in that range, which I would say is even low compared to what you could charge for, it seems like. But just a SaaS for SaaS, when the customer onboards on SaaS, even those ASPs are going up 20% once they're on board?

Question: Hamza Fodderwala - Morgan Stanley & Co. LLC - Analyst : I think the customer lifetime point that you make is a very important one because I think one of the debates has been, in the last couple of quarters, in particular, is, yes, we've seen the ARR growth of Varonis accelerate in the last 18 to 24 months or so, but the conversion time line has been pulled forward as well. And the implication would be that it's largely conversion driven, which may be true, but the reason for that is you want to get all the customers on the SaaS product. And to what extent is that coming at the expense of existing term license upsell?

Question: Hamza Fodderwala - Morgan Stanley & Co. LLC - Analyst : That makes a lot of sense. And I mean, typically, when we see companies go through a SaaS transition, it usually takes four or five years to get to half of your ARR base being SaaS and you guys have been able to do it in just a couple of years. So it's quite remarkable. Maybe to bring Brian into the conversation as well, I mentioned you're charging the SaaS product at about a 25% uplift versus the on-prem, which I would say, relative to the ROI that you're getting, is probably fairly low.

Question: Hamza Fodderwala - Morgan Stanley & Co. LLC - Analyst : Just so maybe just explain to us what are some of the productivity or the ROI improvements that you do see when a customer moves to SaaS?

Question: Hamza Fodderwala - Morgan Stanley & Co. LLC - Analyst : Just maybe a question on the landscape, the competitive landscape, so I mean, it does feel like, every other week, you hear about a new data security company either getting funding or getting acquired. So there hasn't been more attention on this category, I think, ever. Maybe the first question on the competitive side, because you mentioned their name, around Microsoft, Microsoft has a product called Purview. I think any investor who's gone to any of these industry conferences, they'll see that you and Microsoft partner pretty closely together. So maybe just if you could explain, in that data governance, data protection life cycle, what does Varonis do? What does Microsoft do when you do partner in some of these Copilot deployments?

Question: Hamza Fodderwala - Morgan Stanley & Co. LLC - Analyst : Maybe, Guy, a question for you. I mean, there's been a lot of attention on this category. A lot of companies who are scaling to tens of millions of ARR, no one that's anywhere close to the size of Varonis, but all that attention to the category, what has that done from a -- both an opportunity standpoint versus a competitive standpoint?

Question: Hamza Fodderwala - Morgan Stanley & Co. LLC - Analyst : Maybe just one more question, and then I'll open up to the audience. From a go-to-market perspective, has there been any change, from a sales compensation perspective, this year to really incentivize the SaaS transition? And then related to that, anything that you're doing in the channel differently as well?

Question: Hamza Fodderwala - Morgan Stanley & Co. LLC - Analyst : Any questions from the audience? (technical difficulty) probably a bit sleepy after lunch. Maybe a question for -- on the public sector side. Obviously, it's a big topic. If you could remind us again what percentage of the business roughly is coming from US federal or just public sector in general and anything you've seen?

Question: Hamza Fodderwala - Morgan Stanley & Co. LLC - Analyst : You mentioned profitability a few times, too. I mean, yes, the free cash flow we've seen obviously inflect quite positively in the last couple of years. One of the things I've also been impressed by is the gross margin, which has been pretty healthy despite the higher SaaS mix. So what's driving that? And are there any other areas of efficiency? You're finding a lot of companies are using generative AI internally to drive those efficiencies. So if you could maybe talk about that a little bit.

Question: Hamza Fodderwala - Morgan Stanley & Co. LLC - Analyst : Any questions? I'll try more time? Okay. I can keep going. From a macro standpoint, obviously, you've had a couple of years now selling the SaaS product. Can you just comment on pipeline coming into 2025 versus '24 or prior years?

Question: Hamza Fodderwala - Morgan Stanley & Co. LLC - Analyst : You mentioned the sales cycle point a couple of times. Just if you're comfortable disclosing, what are the sales cycles on the on-prem versus the SaaS product today?

Question: Hamza Fodderwala - Morgan Stanley & Co. LLC - Analyst : You recently raised some capital. You announced a share buyback recently as well. But just on the capital allocation strategy, can you talk a little bit about M&A versus buyback, how you're thinking about balancing?

Question: Hamza Fodderwala - Morgan Stanley & Co. LLC - Analyst : All right. Last question. So you talked about a lot there. You talked about higher lifetime value on the SaaS product, a category that seems to be inflecting in terms of demand. What is the confidence level, from your standpoint, of getting back to 20%-plus ARR growth post the SaaS transition? You're growing 18% today. So how are you feeling about that?

Question: Hamza Fodderwala - Morgan Stanley & Co. LLC - Analyst : 15% and 20% is definitely well above market. But with that Guy, Brian, thank you for coming. It's always a privilege and honor to host you guys, and we hope you all come back again. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MARCH 03, 2025 / 9:50PM, VRNS.OQ - Varonis Systems Inc at Morgan Stanley Technology, Media & Telecom Conference