Varonis Systems Inc at Needham Technology and Media Conference Transcript

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

Question: Alex Henderson - Needham & Company - Analyst : So a while back, you guys executed a superb transition to a subscription model and did that in very rapid order. You're now embarking on another transition to a SaaS approach, cloud deliverable approach. Can you go over what it is that's different now versus when you were selling the subscription and how that is manifesting?

Question: Alex Henderson - Needham & Company - Analyst : So it seems to me that the biggest benefit upfront to this is the ability to do proof of concepts very seamlessly with a lot less friction. And that ultimately determines what your pipeline looks like as well as probably your close rates. So can you talk a little bit about the difference in the time it took to set up and execute a proof of concept on the prior model versus the current model? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MAY 16, 2023 / 1:30PM, VRNS.OQ - Varonis Systems Inc at Needham Technology and Media Conference

Question: Alex Henderson - Needham & Company - Analyst : In this world environment that we're in today, where winning new customers is particularly challenging, even getting proof of concepts is challenging. I would think the cutting of the amount of time and effort needed by the target customer has got to be a big benefit. So how much time do you save them upfront from their IT department spending time on setting up and choosing the settings when you're doing your deploy?

Question: Alex Henderson - Needham & Company - Analyst : Compared to --

Question: Alex Henderson - Needham & Company - Analyst : So one of the other elements of this transition is difference in pricing. You're able to save them a bunch of money as a result of them not having to put out servers. You're able to charge 25% to 30%-plus better on pricing. That's pretty unusual, right?

Question: Alex Henderson - Needham & Company - Analyst : So this is not an apples-to-apples cost, though, either. So you're able to share those server assets across multiple customers that, to some extent, gives you a lower cost than it would have cost an individual customer, correct -- is that correct?

Question: Alex Henderson - Needham & Company - Analyst : No doubt. One of the other elements of the mix on the more pondside is there are two code bases here, correct? So how do you manage the process of going out to market with two code bases? How do you manage the existing customers, who've already bought or subscribed to the older code base? And how long will you persist with the older code base?

Question: Alex Henderson - Needham & Company - Analyst : So I know there's always these challenges when you start to launch something, things that were in process on the prior architecture suddenly have two options. How has the sales force managed through the complexity of choosing the right thing and not going to SaaS if it was almost a completed deal or how are the customers reacting to that transition flux?

Question: Alex Henderson - Needham & Company - Analyst : So how do we think about NRR for you over the next several years, given a heavy focus to new customers and probably not as much upsell focus?

Question: Alex Henderson - Needham & Company - Analyst : So what about the existing customers, moving them to SaaS? I know the focus is on new customers today. When do we start to think about how to get more of those existing install base customers to transition?

Question: Alex Henderson - Needham & Company - Analyst : So just mechanically, to understand, I've got a customer, they bought the product before you did the subscriptions, they actually own it. They bought the servers and all that good stuff. And let's say, the servers are four years old, just to choose a number. I want to change that customer to the SaaS model. Am I giving him a significant -- I mean, very large discount on the existing stuff he already owns? I mean, how do I think about that impact on revenues?

Question: Alex Henderson - Needham & Company - Analyst : So the North Star ARR and cash flow in the first quarter, which is the first real glimpse at how you execute here, come in 18% ahead on ARR, pretty damn good, right? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MAY 16, 2023 / 1:30PM, VRNS.OQ - Varonis Systems Inc at Needham Technology and Media Conference

Question: Alex Henderson - Needham & Company - Analyst : So can you talk a little bit about the percentage as we go through the year of uplift to ARR and what the headwinds look like from that?

Question: Alex Henderson - Needham & Company - Analyst : Well, you can wait for me to ask it. Clearly, it's a fourth quarter problem.

Question: Alex Henderson - Needham & Company - Analyst : So fourth quarter has a lot of renewals in it. And so you never know what's going to happen with that mix particularly as well. So the June quarter probably has the highest mix in that of the next three quarters. Is that the right way to think about it and then maybe a little lower in the back half?

Question: Alex Henderson - Needham & Company - Analyst : I see. Okay. So if we were to look at the headwind implied by that, what is the impact on revenues?

Question: Alex Henderson - Needham & Company - Analyst : Particularly in the fourth quarter.

Question: Alex Henderson - Needham & Company - Analyst : So when I look at the competitive landscape, we talk to VARs, the one thing we hear from you all the time is, well, we don't really have any meaningful competitors, yet we do hear about Microsoft's Purview occasionally. Can you talk about where you see Purview, how often it comes up, and whether that's an issue you have concern about?

Question: Alex Henderson - Needham & Company - Analyst : Before I open it up to questions, there was a big delta between the exceptional result you had in the US and EMEA in the most recent quarter. Can you talk a little bit about why there was such a differential? Is it sales organization acceptance? Is it macro conditions? What were the factors that were behind that divergence? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MAY 16, 2023 / 1:30PM, VRNS.OQ - Varonis Systems Inc at Needham Technology and Media Conference

Question: Alex Henderson - Needham & Company - Analyst : Yeah. Just to point out, you had called out a risk that you could have churn in your sales force because people were resistant to making this transition. That appears not to have happened, right? Can you give us some sense of where you are on that clarity?

Question: Alex Henderson - Needham & Company - Analyst : So I'd be remiss not bringing up the macro environment and particularly in the financial community, SVB, Signature, and the like, any evidence of it impacting your business?

Question: Alex Henderson - Needham & Company - Analyst : I think you said on the call that April was a little bit better. Is that so? I know you don't want to comment on the second quarter, but April was a little bit better than the tail end of March in that context.

Question: Alex Henderson - Needham & Company - Analyst : Okay. I need to open it up for questions from the audience. So let me see if there's any questions down there. And if not, I will continue to ask questions. Can you go back to the FedRAMP stuff? When do you think you might be able to get that process completed? And where are you on the various, there's three or four levels of FedRAMP?

Question: Alex Henderson - Needham & Company - Analyst : So what portion of FedRAMP would you be attaining by next year?

Question: Alex Henderson - Needham & Company - Analyst : Is it FedRAMP moderate, FedRAMP high, or the --

Question: Alex Henderson - Needham & Company - Analyst : Yeah. Are you able to sell both into the civilian side and to the government -- the defense side?

Question: Alex Henderson - Needham & Company - Analyst : Yeah, okay.

Question: Alex Henderson - Needham & Company - Analyst : Any questions from the field there? If not, let me power ahead. So can you remind us, you've got a fairly large operation in Israel. The shekel is at two-year lows. It's almost five-year lows. And it's been falling out of bed particularly because of the turmoil in the political landscape there. So how does that impact you guys? I know you have a hedging program in place, but what's the impact? And how do we see it playing through your numbers over time?

Question: Alex Henderson - Needham & Company - Analyst : So if it stays where it is, nobody wants to forecast exchange rates, but if it stays where it is, that's a pretty big tailwind for costs on 2024 then.

Question: Alex Henderson - Needham & Company - Analyst : Sure. At your Analyst Day, you talked about innovations in SaaS and going deeper into GitHub and Azure, particularly the DevSecOps piece. Can you talk a little bit about where you are on that?

Question: Alex Henderson - Needham & Company - Analyst : So have you also gone back into the Snyks of the world and the HashiCorps of the world and partnering back into that side? I know that's not as much your focus, but --

Question: Alex Henderson - Needham & Company - Analyst : If I were to shift gears over to the cost side of the equation, particularly on the R&D side, $100 million worth of R&D to launch the cloud. You're carrying two code bases for a while. So, obviously, there's some double duplication there. How does your spend on R&D -- what's the trajectory of it over time? Does the efficiency start to come out? The ability to use micro services and push continuously updates, how do we think about that impacting your productivity of your R&D and potentially allowing you to keep the cost a little tighter?

Question: Alex Henderson - Needham & Company - Analyst : Yeah. Just remind us, you have a target of, [what a billion] ARR by 2027? What were the other metrics that you offered?

Question: Alex Henderson - Needham & Company - Analyst : Just kind of like those numbers. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MAY 16, 2023 / 1:30PM, VRNS.OQ - Varonis Systems Inc at Needham Technology and Media Conference

Question: Alex Henderson - Needham & Company - Analyst : Relatively speaking, in this environment, how are you approaching near-term spending given what is clearly a challenging macro environment?

Question: Alex Henderson - Needham & Company - Analyst : Can you remind us what those numbers might look like?

Question: Alex Henderson - Needham & Company - Analyst : Going back to the environment, we talked about the US, we talked a bit about Europe. What's going on in APAC?

Question: Alex Henderson - Needham & Company - Analyst : Any information you can provide us in terms of closure rates, the deal duration time, things of that sort that has been clearly identified by most companies as points of concern given the macro environment? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MAY 16, 2023 / 1:30PM, VRNS.OQ - Varonis Systems Inc at Needham Technology and Media Conference

Question: Alex Henderson - Needham & Company - Analyst : Well, your timing on getting that SaaS product out couldn't have been better because it's extremely difficult, but most companies to get new customers and your pipeline actually looks pretty robust, yes?

Question: Alex Henderson - Needham & Company - Analyst : Any content around that we can weasel out of you?

Question: Alex Henderson - Needham & Company - Analyst : Please. Unidentified Participant (inaudible - microphone inaccessible)

Question: Alex Henderson - Needham & Company - Analyst : We've run over. I think you can see why I like him as a speaker. He's very articulate. Thank you so much, everybody, for joining us. I'm Alex Henderson, the security analyst; Tim Perz; Brian Vecci.