Varonis Systems Q4 2024 Earnings Results & Report

Varonis Systems EPS Results

• Actual EPS: -$0.10
• Consensus EPS: $0.14
• Beat/Miss: Missed by -$0.24
• One Year Ago EPS: N/A
• EPS Beat Rate: 5 of last 8 quarters

Varonis Systems Revenue Results

• Actual Revenue: $158.51 million
• Expected Revenue: $165.13 million
• Beat/Miss: Missed by -$6.62 million
• YoY Revenue Growth: N/A

Varonis Systems (NASDAQ:VRNS) develops data security and cyber-risk management software for organizations seeking to protect sensitive information from unauthorized access, misuse, and cyberattacks. Its platform helps customers discover and classify data, analyze access permissions, identify unusual activity, and remediate security exposures across on-premises and cloud-based environments.

The company’s offerings are designed to secure data stored in file systems, collaboration platforms, databases, email, and other enterprise repositories. Varonis provides capabilities including data discovery and classification, permissions management, threat detection, data governance, and automated remediation. Its Data Security Platform is available through a cloud-based software-as-a-service model and supports security teams in monitoring and protecting critical data.

Founded in 2005 by Yaki Faitelson and Ohad Finkelstein, Varonis became a publicly traded company on the Nasdaq under the symbol VRNS in 2014. The company serves businesses and other organizations internationally, with operations and customers across North America, Europe, Asia-Pacific, and other global markets. Yaki Faitelson is a co-founder and serves as the company’s chief executive officer.

Varonis Systems Q4 2024 Earnings Call Transcript

Key Takeaways

• Accelerated SaaS transition: Varonis added over $200 million of SaaS ARR in 2024 to end the year with $340 million (53%) of total ARR, and now aims to complete its SaaS migration by end-2025, two years ahead of its initial timeline.
• Double-digit ARR growth: Q4 ARR rose 18% to $641.9 million, with new customer momentum driven by the simplicity of its SaaS platform, MDDR managed service and rising demand to secure generative AI deployments.
• Record free cash flow: The company generated $108.5 million in free cash flow in 2024, more than doubling last year’s $54.3 million and crossing the $100 million milestone for the first time.
• Automated data security platform: Its cloud-native solution automatically locates, classifies and remediates sensitive data across on-prem, SaaS, PaaS and hyperscaler environments while detecting and stopping threats.
• GenAI tailwinds: Increased customer interest in deploying Microsoft CoPilot and other AI tools drove meaningful AI-related ARR contributions, with protected Microsoft 365 users nearly doubling year-over-year.

Presentation

[Operator]

Greetings and welcome to the Varonis Systems Inc. fourth quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. It is now my pleasure to introduce your host, Tim Perz. Thank you. You may begin.

[Tim Perz, VP of Investor Relations at Varonis Systems]

Thank you, Operator. Good afternoon. Thank you for joining us today to review Varonis's fourth quarter and full year 2024 financial results. With me on the call today are Yaki Faitelson, Chief Executive Officer, and Guy Melamed, Chief Financial Officer and Chief Operating Officer of Varonis. After preliminary remarks, we will open the call to a question-and-answer session. During this call, we may make statements related to our business that would be considered forward-looking statements under federal securities laws, including projections of future operating results for our first quarter and full year ending December 31st, 2025. Due to a number of factors, actual results may differ materially from those set forth in such statements.

[Tim Perz, VP of Investor Relations at Varonis Systems]

These factors are set forth in the earnings press release that we issued today under the section captioned Forward-Looking Statements, and these and other important risk factors are described more fully in our reports filed with the Securities and Exchange Commission. We encourage all investors to read our SEC filings. These statements reflect our views only as of today and should not be relied upon as representing our views as of any subsequent date. Varonis expressly disclaims any application or undertaking to release publicly any updates or revisions to any forward-looking statements made herein. Additionally, non-GAAP financial measures will be discussed on this conference call. A reconciliation for the most directly comparable GAAP financial measures is also available in our fourth quarter 2024 earnings press release and our investor presentation, which can be found at varonis.com in the Investor Relations section.

[Tim Perz, VP of Investor Relations at Varonis Systems]

Lastly, please note that a webcast of today's call is available on our website in the Investor Relations section. With that, I'd like to turn the call over to our Chief Executive Officer, Yaki Faitelson. Yaki?

[Yaki Faitelson, CEO at Varonis Systems]

Thanks, Tim, and good afternoon, everyone. Thank you for joining us today to review our fourth quarter and full year 2024 results. Today, I would like to update you on the progress of our SaaS transition and to review why Varonis is best positioned to capitalize on the growing opportunity to secure the world's data. We introduced Varonis SaaS to the world a little over two years ago, and we are excited by the progress that has been made in that time. During 2024, we added over $200 million of SaaS ARR and ended the year with approximately $340 million of SaaS ARR, or 53% of total company ARR. This is happening so fast because our SaaS offering is a better product that allowed customers to better secure their data with less effort.

[Yaki Faitelson, CEO at Varonis Systems]

While these numbers suggest that providing a better product is easy, there has been a lot of hard work going on behind the scenes to make that happen. I would like to take a moment to thank our team for their efforts. We still have many existing customers to convert to our SaaS platforms, but it is clear that we are well on our way to becoming a SaaS company. Although we have started to realize some of the benefits of SaaS, there are so many more to realize once the transition is complete. For example, once we are fully transitioned to SaaS, our customers would enjoy a greater level of security with much less effort, and we expect to see better retention rates and, over time, a market into which we can re-accelerate our upsell motion.

[Yaki Faitelson, CEO at Varonis Systems]

This is a key reason why we plan to accelerate our transition time. Now we expect to complete it by the end of 2025, a year earlier than our previous outlook and two years earlier than our initial expectations. Turning to our fourth quarter results, ARR grew 18% to $641.9 million, and for the first time, SaaS ARR now represents the majority of our ARR base. New customer momentum was the single biggest driver of these results, and this is due to the simplicity of our SaaS platform and our MDDR offering, as well as customer interest in deploying GenAI, which requires them to fortify their data security strategy. While our existing customer conversions continue in a healthy way during the fourth quarter, these conversions are time and resource intensive.

[Yaki Faitelson, CEO at Varonis Systems]

We believe our sales efficiency and ability to drive growth from our base will actually accelerate post-transition once our reps are able to focus on SaaS upsell and cross-sell rather than converting self-hosted customers. In 2024, we continue to balance strong top-line growth with improved cash flow generation, and we generated $108.5 million of free cash flow versus $54.3 million last year. Crossing the $100 million of free cash flow is an important milestone for our company, and we plan to continue to generate meaningful free cash flow going forward. Guy will review our results and initial guidance in more detail shortly. Now I would like to take a step back and discuss the growing need for data security and why we are best positioned to win in this market. Our world's run on data, and because of its importance, everyone knows that they need to secure it.

[Yaki Faitelson, CEO at Varonis Systems]

When we created Varonis SaaS, we had the benefit of more than a decade of experience securing large, complex environments. We used those learnings and our considerable resources to transform Varonis into an automated data security platform based on a world-class, scalable cloud architecture. It was critical that we did it in the right way because every day more data is created in more places, and it's become harder to secure. This means automation and scalability are not just core differentiation for Varonis, but also the only way to stay ahead of today's threat environment. As time passes, the need for our automated platform and the value we give to our customers grows stronger. For many years, we had to evangelize our approach, but now the market gets it. Data is where the damage happens, and stopping breaches is not only about avoiding fines. It's about keeping the lights on.

[Yaki Faitelson, CEO at Varonis Systems]

And in the age of AI, securing data has never been more important, but data has never been more at risk. Today, bad actors don't break in; they log in. Attackers instantly become insiders and can easily collect data because the blast radius is unmanaged and everything is connected. AI makes attackers' job even easier and insiders' much more dangerous. They just have to ask the data, and AI will compile it for them. Companies understand this and spend a lot on perimeter technologies, but breaches keep happening. We show that these technologies are important, but they are insufficient. Many organizations are also trying to address data security with manual work and point solutions, and they are failing. Varonis automatically secures data with our unified platform. Our goal is to make data security as reliable and effortless as owning a credit card that protects you against fraud.

[Yaki Faitelson, CEO at Varonis Systems]

Our cloud-native unified data security platform has a wide coverage and deep functionality to secure data at scale wherever it lives. We automatically locate and classify sensitive data, and because we understand what an identity can access and what it should be able to access, we are able to automatically reduce the blast radius. We monitor and understand data-related behavior, so we are able to detect suspicious behavior, and if a bad actor gets in or an insider emerges, we help minimize the damage. Our platform has allowed us to bring our unique functionality to every enterprise data domain, from on-prem data stores to SaaS, PaaS, and hyperscalers like AWS, Azure, and Google Cloud.

[Yaki Faitelson, CEO at Varonis Systems]

Expanding our coverage into these additional data stores has enlarged our total available market and brought us into new projects where we sometimes compete in RFPs and POCs with point vendors that do discovery and basic posture management. While these vendors help us to build the market for data security, in most cases, we still do not face direct competition when it comes to actually securing large data sets wherever they are, in the cloud or in the data center. When we do a risk assessment, our differentiated value becomes clear. Simply finding sensitive data does not ensure that it is secure. Once sensitive data is located, remediating overexposure at scale is not possible through manual work. Varonis is unique in that we discover and classify sensitive data, automatically fix issues, and then detect and stop threats on data, which is the only way to secure data.

[Yaki Faitelson, CEO at Varonis Systems]

Switching gears, a year ago, we introduced MDDR, which is the first managed service for monitoring and securing critical data. This offering is built on top of our SaaS platforms and leverages our unique data-centric telemetry alongside the AI and machine learning embedded into our platform to deliver automated data security. MDDR has been the fastest adopted new product launch in the history of Varonis. We are already seeing this drive meaningful new business and existing customer conversions, and we are still just scratching the surface of this massive opportunity. The proliferation of AI is also expanding our technical moat as we leverage our unique data sets to help prevent data breaches. This gets stronger as we add more coverage and automation, and the network effect grows as we add more customers to our SaaS platform. Customers want to deploy AI, which also brings data security conversation front and center.

[Yaki Faitelson, CEO at Varonis Systems]

We saw growing impact during the fourth quarter from these GenAI initiatives. With that, I would like to briefly discuss a couple of key customer wins from Q4. New logos are the driver of our business momentum, and this quarter, a large hospital system with 10,000 employees became a customer. They were looking to deploy Copilot but knew that data security and privacy would be a big concern, and this was confirmed by a risk assessment. As a result, they purchased Varonis SaaS for hybrid with MDDR and Copilot. In one week, they automatically locked down 43,000 exposed files and labeled 98% of their sensitive data through the power of automation in Varonis SaaS. This success empowered the CISO to recommend to the board that the company could safely deploy Copilot throughout the organization and enable this hospital to be a leader in GenAI adoption.

[Yaki Faitelson, CEO at Varonis Systems]

We continue to see strong demand from existing customers looking to convert to our SaaS platform. One of those was a large bank with 6,000 employees that first became a customer in 2019. Originally using Varonis for visibility into their file shares, understanding data ownership, and automating entitlement reviews over time, they have significantly expanded their deployment to include data classification, alerting on threats, automatically fixing exposures on-prem, and then doing all of this in the cloud before ultimately converting to SaaS this quarter. On conversion, they purchased Varonis SaaS hybrid with MDDR and Copilot and Salesforce. This will allow them to safely deploy Copilot and find and fix overexposed sensitive data in Salesforce. In summary, we are excited by the approximately 50% increase in ARR from new customers, which was driven by the simplicity of SaaS and MDDR, as well as generative AI raising awareness for our solution.

[Yaki Faitelson, CEO at Varonis Systems]

We look forward to continuing our momentum and completing our SaaS transition in 2025, which will unlock many more benefits as we capture our massive opportunity. With that, let me turn the call over to Guy Melamed.

[Guy Melamed, CFO and COO at Varonis Systems]

Thanks, Yaki. Good afternoon, everyone. Thank you for joining us today. We are pleased with our fourth quarter results, which reflect the story of two companies. One, our momentum with new SaaS customers driven by the simplicity of the platform and Copilot, which for the first time saw meaningful contribution from AI-related purchases. And two, our existing self-hosted customers, which despite seeing very healthy conversions activity, is currently diluting our growth rate, which I will expand on shortly. As a result of the strong new customer momentum and sizable existing customer conversions, we ended Q4 with 53% of total company ARR coming from SaaS.

[Guy Melamed, CFO and COO at Varonis Systems]

Historically, a majority of our ARR growth was driven by expansion within our base, but with the move to SaaS, our new business has been exceptionally strong and is the number one driving force behind the momentum in our results. This is happening because of the simplicity of SaaS and MDDR, as well as GenAI raising awareness for the need to secure your data. SaaS is also increasing the size of and our ability to penetrate our TAM as we're leveraging our platform to expand into new data stores. We feel very good that the success we have seen selling to new customers will continue going forward. Conversions of self-hosted customers were also very strong because customers see the value of SaaS and MDDR, which help customers achieve their goal with very little effort as we do almost all of the work for them.

[Guy Melamed, CFO and COO at Varonis Systems]

At the same time, these conversions require a lot of effort due to legal and procurement work, and SaaS security checklists require us to get customers to convert to SaaS from self-hosted. Despite the healthy uplift we recognize upon conversion, the amount of time spent on this part of the sales cycle is greater than a traditional upsell or cross-sell. In addition, our growth for many years was driven by upsells, and until we convert customers to SaaS, the upsell motion is on hold. This means that conversions are diluted to sales efficiency during the transition and serve as a headwind to our ARR growth and expansion motion when compared to historical levels. In the fourth quarter, we had a huge volume of conversions, and these took a lot of time and effort for our sales team, and yet we still had strong results despite this temporary productivity headwind.

[Guy Melamed, CFO and COO at Varonis Systems]

Our view is that when almost all of our customers are converted, we expect that our teams will become more productive primarily due to increased customer satisfaction with a SaaS platform and also a simpler selling process once a customer is on a SaaS contract. Because of this, we're making a strategic decision to accelerate phase two and now expect 78% or approximately $580 million of our total ARR will come from SaaS by year-end, completing the transition two years earlier than our initial target and one year earlier than what we said last year. The strength of our business and the inherent leverage in our model have allowed us to show significant margin improvement. As a reminder, we set a long-term target of 20% ARR contribution margins by 2027 at our Investor Day in March 2023 and ended 2024 at 16.6%, so we are well ahead of that plan.

[Guy Melamed, CFO and COO at Varonis Systems]

The leverage of our model allows us to continue to show margin improvement while making strategic investments to re-accelerate our top-line growth back to 20+% and capture the larger opportunity that we see developing. We expect these investments, coupled with sustained new logo momentum, will also enable us to continue to grow ARR at healthy levels this year, despite the conversions taking more time and effort to do. In addition, we believe that accelerating the transition will better position us to accelerate our growth post-transition and will provide us with several benefits over time, including: one, better sales productivity, two, better ability to upsell these SaaS customers, and three, further increases to our already healthy gross retention due to MDDR and the automation of our SaaS platform, allowing a customer to be better protected with very little effort on their part.

[Guy Melamed, CFO and COO at Varonis Systems]

To summarize, we're thrilled with the momentum of the new business, and we're accelerating phase two of our transition from a position of strength. We now expect to complete the SaaS transition a full year earlier than what we told you a year ago, and we expect our business to remain strong in 2025 with continued commitment to improved leverage, although at a slightly slower pace than last year, as we see a much greater opportunity we want to take advantage of. In the fourth quarter, ARR was $641.9 million, increasing 18% year-over-year, and this year we generated $108.5 million of free cash flow, up from $54.3 million last year. These metrics illustrate the ability to drive top-line growth, margin leverage, and cash flow generation while transitioning to SaaS. We ended the year with 5,600 subscription customers, which grew 13% year-over-year.

[Guy Melamed, CFO and COO at Varonis Systems]

ARR per new customer grew approximately 20% year-over-year as we are successfully moving upmarket to larger organizations and also selling more of the platform in the initial deal. A dollar-based net retention rate for subscription customers was 105% at the end of 2024, adjusted for FX, which reflects steady gross retention and more limited upsell and cross-sell activity as reps prioritize converting self-hosted customers to SaaS. In the fourth quarter, total revenues were $158.5 million, up 3% year-over-year. During the quarter, as compared to the same quarter last year, we had approximately an 18% headwind to our year-over-year revenue growth rate as a result of having increased SaaS sales in our booking mix, which are recognized ratably versus the upfront recognition of our on-prem subscription product. SaaS revenues were $72.2 million.

[Guy Melamed, CFO and COO at Varonis Systems]

Term license subscription revenues were $66.8 million, and maintenance and services revenues were $19.5 million as our annual rates were again over 90%. Moving down the income statement, I'll be discussing non-GAAP results going forward. Gross profit for the fourth quarter was $133.8 million, representing a gross margin of 84.4% compared to 88.5% in the fourth quarter of 2023, despite significant revenue headwinds, which were largely offset by SaaS platform efficiency. Operating expenses in the fourth quarter totaled $118.4 million. As a result, fourth quarter operating income was $15.3 million, or an operating margin of 9.7%. This compares to an operating income of $27.2 million, or an operating margin of 17.7% in the same period last year.

[Guy Melamed, CFO and COO at Varonis Systems]

During the quarter, as compared to the same quarter last year, we had approximately a 13% headwind to our operating margin as a result of having increased SaaS sales in our booking mix, which are recognized fully ratable versus the upfront recognition of our on-prem subscription products. Fourth quarter ARR contribution margin was 16.6%, up from 13.4% last year. The significant leverage improvement reflects our ability to drive strong incremental margins while growing ARR and transitioning to SaaS. During the quarter, we had financial income of approximately $11.6 million, driven primarily by interest income on our cash, deposits, and investments in marketable securities. Net income for the fourth quarter of 2024 was $23.9 million, or $0.18 per diluted share, compared to net income of $34.3 million, or net income of $0.27 per diluted share for the fourth quarter of 2023.

[Guy Melamed, CFO and COO at Varonis Systems]

This is based on $135.1 million and $126.1 million diluted shares outstanding for Q4 2024 and Q4 2023, respectively. As of December 31st, 2024, we had $1.2 billion in cash, cash equivalents, short-term deposits, and marketable securities. For the 12 months ended December 31st, 2024, we generated $115.2 million of cash from operations, compared to $59.4 million generated in the same period last year, and CapEx was $6.7 million, compared to $5.1 million last year. I will now briefly recap our full year 2024 results. Total revenues grew 10% to $551 million. In 2024, as compared to 2023, we had approximately a 10% headwind to our year-over-year revenue growth rate as a result of having increased SaaS sales in our booking mix, which are recognized ratably versus the upfront recognition of our on-prem subscription products. Our full year operating margin was 2.9%, compared to 5.8% for 2023.

[Guy Melamed, CFO and COO at Varonis Systems]

In 2024, as compared to 2023, we had approximately an 8% headwind to our operating margin as a result of having increased SaaS sales in our booking mix, which are recognized fully ratable versus the upfront recognition of our on-prem subscription products. Turning now to our initial 2025 guidance. As a reminder, our initial ARR guidance reflects flat net new ARR as a starting point for the year, similar to the approach that we used last year. For the first quarter of 2025, we expect total revenues of $130 million-$135 million, representing growth of 14%-18%. Non-GAAP operating loss of -$14 million to -$11 million, and non-GAAP net loss per basic and diluted share in the range of -$0.06 to -$0.04. This assumes 113.6 million basic and diluted shares outstanding.

[Guy Melamed, CFO and COO at Varonis Systems]

For the full year 2025, we expect ARR of $737 million-$745 million, representing growth of 15%-16%. Free cash flow of $120 million-$125 million. Total revenues of $610 million-$625 million, representing growth of 11%-13%. Non-GAAP operating income of $0.5 million-$10.5 million. Non-GAAP net income per diluted share in the range of $0.13-$0.17. This assumes 137.5 million diluted shares outstanding. In summary, we are excited to finish 2024 with a majority of our ARR coming from SaaS for the first time and are encouraged by the step function change in the new customer momentum we are seeing. We look forward to completing our SaaS transition in 2025, which we believe will better position the company to accelerate growth and show continued free cash flow improvement on our way to our $1 billion ARR target.

[Guy Melamed, CFO and COO at Varonis Systems]

With that, we would be happy to take questions. Operator?

[Operator]

Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press Star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up their handset before pressing the star keys. We also ask that each person in the queue to only limit themselves to one question to allow others a chance to ask their question. One moment, please, as we pull for questions. Our first question comes from the line of Matthew Hedberg with RBC Capital Markets. Please proceed with your question.

[Mike Richards, Equity Research Senior Associate at RBC Capital Markets]

Hey, guys. This is Mike Richards on for Matt. Thanks for taking the question 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 two? Is that going to be through a carrot and stick approach, or are we looking at sales incentives? Just any detail around that would be great. Thanks.

[Yaki Faitelson, CEO at Varonis Systems]

I think so the question is either primarily the acceleration within the base is that customers want to avoid a data breach, make sure that they don't have compliance fines, and protect everything effortlessly. And this is what we are doing.

[Yaki Faitelson, CEO at Varonis Systems]

So, just natural expansion and the way that we have this deep functionality, a lot of automation in our platform, just covering a lot of data stores. Just many times it's hard for customers to get everything right off the bat. But with time, they understand that they need everything, and we just provide this automation. And AI just makes the data security problem inevitable. You see what's going on on a daily basis. And I think that Copilot is one of them, but you see many Copilots, and everybody will work with these agents. But primarily, what they do by design is take all the data that they can get to. If these robots will not be able to get only to the data that they need to get, it will end up in a disaster. So we just see the demand on all fronts.

[Guy Melamed, CFO and COO at Varonis Systems]

In terms of the conversions, we saw a lot of success in 2024 converting our existing customers to SaaS. And during the process of doing so, we learned a lot. So when we look at those learnings, we're making some strategic investments in sales and customer success, support, and legal to support the transition. And we really plan to start our renewal process even earlier this year to allow for more time to process the additional paperwork associated with moving to SaaS. So overall, we feel very good about the opportunity to accelerate our SaaS transition and enable our company to realize the benefit of SaaS a year earlier than our previous expectations and two years earlier than our initial plan.

[Mike Richards, Equity Research Senior Associate at RBC Capital Markets]

Thanks, guys.

[Operator]

Thank you. Our next question comes from the line of Hamza Fodderwala with Morgan Stanley. Please proceed with your question.

[Hamza Fodderwala, Executive Director at Morgan Stanley]

Hey, thanks for taking my question. Guy, 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 done with the SaaS transition by end of this year, 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. Thank you.

[Guy Melamed, CFO and COO at Varonis Systems]

So first of all, in terms of the renewals, we're talking about the actual renewals that expire within the year. We want to make sure that we're ahead of the game, and then we're talking to customers about the benefits of SaaS. It's a no-brainer for them to move, but sometimes there's additional paperwork that is part of the process. And obviously, when you move from on-prem to SaaS, it's a different checklist from a security perspective. So there's a lot of documentation. It's not a technological challenge. It's more of a documentational challenge that we want to be ahead of. And that's why we want to start the conversation with customers that are about to renew earlier than what we did last year. So that kind of takes care of that component. When we look at kind of the growth within 2024, the growth of new customers was outstanding.

[Guy Melamed, CFO and COO at Varonis Systems]

We're really pleased with the ACV new customer growth growing at 50%, and the actual conversions and kind of the lack of upsell, because none of our reps are really dealing with the upsell opportunity when you're an on-prem subscription customer. You want to make sure that you move them first to SaaS, and only then you'll start talking to them about additional platforms to sell, so there's a lot of goodness that can happen once we move through and become a fully SaaS company, and that's what we're planning on doing in 2025.

[Yaki Faitelson, CEO at Varonis Systems]

It's important to understand that the discrepancy in value between the self-hosted and the SaaS is drastic. You're talking about 10% of the effort for the customers and really what we call 10x more value in terms of just the speed that you get and the way that you are protected.

[Yaki Faitelson, CEO at Varonis Systems]

When you're talking about a customer in SaaS that will protect the data in the cloud and on-prem, all the data repositories, proxy, DNS, our experts backed by AI look at it 24 by 7. We label and classify everything automatically, reduce the blast radius. Look at the intent of these Copilots. It's just like second to none, and once you have all the customers there, because think where the world is going. You have more and more data repositories, Databricks and Snowflake, everything that you have on IaaS, and what you want to do eventually is to avoid the data breach and to have this automated value proposition that can make sure that you understand any abnormal behavior, you understand any identity, human and non-human, how they are accessing data. There is just so much to do in the data space.

[Yaki Faitelson, CEO at Varonis Systems]

And our ability on this very unique cloud architecture that we build to innovate very fast works very well. And the other thing that works extremely well for us, it's a massive problem of scale. And we build this architecture that it can scale. So we really believe that everything that we have in terms of innovation is extremely relevant for our customers and believe that it's what we call high probability innovation, that we can innovate, it can come to the customers and organically stemming from what they bought just to expand to more and more.

[Operator]

Thank you. Our next question comes from the line of Saket Kalia with Barclays. Please proceed with your question.

[Saket Kalia, Managing Director at Barclays]

Okay, great. Hey, guys, thanks for taking my question here. 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? Maybe how much of that is coming from conversions versus new, obviously 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.

[Guy Melamed, CFO and COO at Varonis Systems]

Absolutely, Saket. When you look at kind of our discussion about going back to the 20+%, and if you look at the behavior and the performance in 2024, and we talked about it in the prepared remarks, you really see kind of a tale of two companies. You see how the new business is performing.

[Guy Melamed, CFO and COO at Varonis Systems]

You see the increase in ASPs. You see the fact that new business grew 50% in ACV. All of that is trending very well. We're very pleased with that type of performance. When you look at the NRR number, the NRR came in at 105%, and we believe that should improve post-transition, so really, when you look at kind of the behavior of where we are, we kind of put ourselves to try and move as quickly as we can in 2025, and that's why we're kind of speeding up the transition, and we believe that as we complete the transition, we're better set up not only to provide value to our customers, but also to go to those customers once we show them the value and sell them additional licenses, which we believe can increase the NRR.

[Guy Melamed, CFO and COO at Varonis Systems]

With the simplicity of the MDDR and the fact that Copilot, there's a lot of tailwinds that are working that we expect them to continue and be durable. That kind of gets us to where we expect to be as a company growing 20+%.

[Yaki Faitelson, CEO at Varonis Systems]

It's very simple if you think of it from a perspective of the anatomy of a breach. A breach can happen on your self-hosted on 365, on your file shares, on Databricks, on Snowflake, on databases. What happened with our SaaS socket is that we completely reduce friction. It's almost that the only thing that the customer needs to do is to buy, and we will do everything for them. The AI is working for us on so many levels. One level is we are protecting AI, permissions first, abnormal behavior, and then intent.

[Yaki Faitelson, CEO at Varonis Systems]

But this is one thing that is super critical. But the other thing that is happening is that what we are doing with the MDDR and the robots is just enhancing AI that our analysts and people can be so much more productive. So we're just getting to a place that there is just no reason to say no. We can do everything for the customer, just super-fast deployment. And from day one, what we're doing is automatically looking at the data, monitoring it, and make sure nothing bad is happening to it without stopping any business process. And this is a very, very, very strong value proposition.

[Saket Kalia, Managing Director at Barclays]

Very helpful. Thanks, guys.

[Operator]

Thank you. Our next question comes from the line of Brian Essex with JPMorgan. Please proceed with your question.

[Brian Essex, Executive Director at JPMorgan]

Hi, good afternoon. Thank you for taking the question. Great to see the re-acceleration of customer growth here. I guess on that, either Guy or Yaki, I think we've previously talked about phase one versus phase two, and phase two 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? I think you've talked about learnings from what you've seen over the past year or so. But how can we kind of maybe get a little bit of insight from those learnings to get us comfortable for durability of the customer base on your platform? Thank you.

[Guy Melamed, CFO and COO at Varonis Systems]

We definitely took a lot of the learnings from our previous transition, and I can tell you that one of the things that we have put as the forefront of everything we do is the benefit for the customer and what is better for them, and one of the things that we're seeing is that the SaaS product is by far a better product for them, gives them better protection, and the MDDR offering is not there with the on-prem subscription. It's only there with the SaaS offering, and it allows us to do a lot of the work for them and make sure that our platform is the one that's provided in an automated way a lot of those benefits. When we think about kind of the move, we want to make sure that we do it in the right way.

[Guy Melamed, CFO and COO at Varonis Systems]

And with that customer in kind of the way we're thinking about it, we've also, for 2025, made sure that from a commission perspective, we're incentivizing our sales team on the conversions without neglecting new business. So the new business is at the forefront of everything, but we're absolutely making sure that it's in everyone's best interest, and it's a win-win to make sure that we complete the transition in 2025.

[Yaki Faitelson, CEO at Varonis Systems]

It was a very hard undertaking to build this very robust, scalable architecture because data is a massive problem at scale, as you know. But then what happened now, the innovation is just moving so fast for us and paying massive dividends for customers. So you have all these new features and this new world of AI. It's almost the data security problem became robots against robots.

[Yaki Faitelson, CEO at Varonis Systems]

It just makes sense for our customers to move there with all the automation. Humans manually cannot solve this problem. We just have everything in our cloud to make sure that most probably customers will not have just a data breach and we protect them around the clock.

[Brian Essex, Executive Director at JPMorgan]

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?

[Yaki Faitelson, CEO at Varonis Systems]

As you can see, it moved much faster than we thought. The MDDR is such a strong offering and all the remediation automation that we have in the cloud. Value is everything. Customers get value in a frictionless way. Then you can expand. You see all these massive data stores. Almost every big breach is a data breach.

[Yaki Faitelson, CEO at Varonis Systems]

And this is what organizations want to avoid. You go to a CISO today, we tell you, "I want to make sure I don't have a data breach. I want to make sure I don't have compliance fines. And I want to make sure I'm doing it in an effortless way with a relatively lean team." And this is what we are doing for them. But in order to do it, we need to do it in the cloud. This is why we just put we are accelerating it. We want to make sure that we are adding value to all of our customers. And in order to do that, they need to be in SaaS.

[Brian Essex, Executive Director at JPMorgan]

Okay, that's helpful. Thank you.

[Operator]

Thank you. Our next question comes from the line of Joel Fishbein with Truist Securities. Please proceed with your question.

[Joel Fishbein, Managing Director at Truist Securities]

Thanks for taking the question. 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. Thanks.

[Guy Melamed, CFO and COO at Varonis Systems]

I wouldn't say that when we talk about the conversions, I think they're weighing on the growth when you look at kind of the new business behavior. But I wouldn't say that it's not something that we can deal with. When you look at the pipeline, we have a healthy pipeline. We have a lot of conversations with our existing customers on the conversion to SaaS. We're trying to start the process, as I mentioned before, earlier than what we would otherwise. I think in terms of setting ourselves up for 2025, we feel very good with where we are today, both on the new customer side and on the existing customer conversion.

[Joel Fishbein, Managing Director at Truist Securities]

Okay, thank you.

[Operator]

Thank you. Our next question comes from the line of Joseph Gallo with Jefferies. Please proceed with your question.

[Joseph Gallo, Senior VP at Jefferies]

Hey, guys, thanks for the question. You guys have done a nice job of innovating and adding protection for different data stores, whether it's Salesforce, ServiceNow, Databricks, Snowflake, etc. 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. Thanks.

[Yaki Faitelson, CEO at Varonis Systems]

Yeah, I think that some of them, it's early. We just released the coverage. Overall, in terms of demand, we see it all over because you see that this is where breaches are happening. I think that the realization that we see from the marketplace is that there is an acute need for data security. Data security is making sure that we don't have a breach. Just think about the sheer data size that they can do it automatically. That discovery by itself will not work with the mentally posture. Most of the time, you're not adding value. You really need to make sure that you can understand all the critical data and remediate automatically. It's coming from all over. We see that the demand is coming from all over the repositories if you are doing it right. Once we can apply all the features, once we can apply the automated remediation, the UBA, and everything around it.

[Yaki Faitelson, CEO at Varonis Systems]

But we see interest in most of these data stores. Source code repositories are critical. Databricks is critical. Snowflake is critical. Think about Salesforce is where you have PII. Most of the ransomware attacks still happening on file shares on-prem. It's everywhere. And the other thing that works extremely well for us, it's also everything that we are doing around identity in the other stream. So when you look at our MDDR, most of the bad actors we catch before they get to the data, once they get compromised identity. What happens today is that bad actors are not breaking in. They are logging in. And as we get them, and once there is a compromised identity, there is no perimeter anymore. And obviously, insiders are a big threat. So we just, many times, catching them, most times, actually, before they get to the data.

[Yaki Faitelson, CEO at Varonis Systems]

And this is also something that's getting a lot of traction for us.

[Joseph Gallo, Senior VP at Jefferies]

Thank you.

[Operator]

Thank you. Our next question comes from the line of Roger Boyd with UBS. Please proceed with your question.

[Roger Boyd, Director at UBS]

Great. Thanks for taking the question. 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 felt 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? Thanks.

[Guy Melamed, CFO and COO at Varonis Systems]

No, we don't see any change in terms of the pricing. We're seeing healthy uplifts on the conversions themselves. We talked a lot about the fact that the price list of SaaS is 25%-30% higher than the on-prem subscription. We're seeing very healthy conversions in terms of pricing. We feel good about the ability to convert our customers. But keep in mind, we only announced the transition two years ago. It's the beginning of 2023, and we're already at 53% SaaS of ARR. So when you think about the magnitude and the dollar value that's involved in order to get so many of our customers to SaaS, you have to take that into consideration. 53%, getting to the majority of our ARR coming from SaaS within two years is something that we feel very proud of.

[Guy Melamed, CFO and COO at Varonis Systems]

And with our decision to kind of complete the transition in 2025, if we can execute the way we believe we can, we'll be completing the transition in three years. That's two years quicker than what we initially thought and a year shorter than kind of what we talked about a year ago. So we're very pleased with our ability to convert. The pricing is holding very well. We feel that once we convert our customers, there's an additional opportunity to sell them more platforms. It's in their benefit to move to SaaS. They'll be better protected. And it's also better for us. So it's a win-win for everyone. And that's why we're so happy with where we are so far. And we're very optimistic with going into 2025.

[Roger Boyd, Director at UBS]

Appreciate the cover. Thanks.

[Operator]

Thank you. Our next question comes from the line of Shaul Eyal with TD Cowen.

[Shaul Eyal, Managing Director and Equity Research Analyst at TD Cowen]

Please proceed with your question. Thank you. Good afternoon, Yaki and Guy. Congrats. 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 product. 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 seeing in 2025 and beyond?

[Yaki Faitelson, CEO at Varonis Systems]

So we have a good partnership with them. Primarily, it's working on a case-by-case basis. We have maybe 20% overlapping features with Purview, but by and large, it's completely, completely different value proposition in terms of the automated remediation, the UBA, everything that's related to threat detection, very accurate classification at scale. But more than anything else, we work extremely well together. We're using their labels and work very well with customers.

[Yaki Faitelson, CEO at Varonis Systems]

Varonis and Microsoft, one plus one equals five. It works very, very well for customers, and we have a good partnership with them. Primarily, very good value proposition together.

[Operator]

Thank you. Our next question comes from the line of Rob Owens with Piper Sandler. Please proceed with your question.

[Rob Owens, Managing Director and Senior Research Analyst at Piper Sandler]

Yeah, good afternoon. Thanks for taking the question. 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 maybe changed quarter over quarter that made it become more meaningful? Thanks.

[Guy Melamed, CFO and COO at Varonis Systems]

Absolutely. When we look at our new customer ARR growth, it really accelerated to approximately 50% in Q4. This was driven both by MDDR and Copilot. And when we look at kind of MDDR and Copilot and the way we price it and the way we allow kind of the packaging of it, it could be sold individually, but the packaging really incentivized selling both as part of a platform sale with one SKU. And when we look at kind of the behavior of our packaging throughout 2024, it's worked really well. And it's worked so well that it's really hard to pinpoint exactly which one of these two strong growth vectors is driving our business. And we've said in the past that MDDR could be like DatAlert, as every customer should have it. And we talked about GenAI as raising awareness for our solution and driving demand for Microsoft 365 and Copilot offering. So we really try to be as transparent as we can and provide as much information as possible.

[Guy Melamed, CFO and COO at Varonis Systems]

So we spend a lot of time trying to provide a metric, and we have one that I think can really stand out. When we look at 2024, we added nearly 100% more new users protected by Microsoft 365 offering when you compare that to 2023, which we think is driven by the increased customer interest in protecting Microsoft 365 and Copilot. So really, at the end of the day, it's clear that the new customer momentum is working really well. And both MDDR and Copilot are the key drivers of that. And we believe this trend is very durable.

[Rob Owens, Managing Director and Senior Research Analyst at Piper Sandler]

Thanks, Guy.

[Operator]

Thank you. Our next question comes from the line of Jason Ader with William Blair. Please proceed with your question.

[Jason Ader, Equity Research Analyst and Co-Head Technology Group at William Blair]

Yeah, thank you. Good afternoon, guys. 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 faster-than-expected transition to SaaS, or was there some other elements there, maybe FX or anything else?

[Guy Melamed, CFO and COO at Varonis Systems]

When you go back to our guidance for Q4, we talked about a SaaS mix of 49% for Q4, and we actually got to 53% SaaS of ARR, so there's $11 million of headwind, which is 7% of headwind to our guide, so we're very happy that we were able to move quicker, and we talked so many times about the fact that the quicker we move, the more headwind we get on revenue because of the revenue recognition difference between on-prem subscription that is recognized upfront versus the SaaS revenue recognition, which is ratable.

[Guy Melamed, CFO and COO at Varonis Systems]

So if we continue to miss on revenue because of the fact that we're moving quicker, I think all of us will be happy. Investors will be happy. And that's what happened in Q4.

[Jason Ader, Equity Research Analyst and Co-Head Technology Group at William Blair]

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 want 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.

[Guy Melamed, CFO and COO at Varonis Systems]

So we talked a lot about the fact that when you look at kind of the uplift, it's 25%-30% when we do the conversions. But the one thing to keep in mind is that we're approximately a third of our existing customers that converted over a two-year period. So if you take that 25%-30% uplift and you extrapolate that over a two-year period, it basically gets you somewhere in that NRR number, which is the 105. And we talked about kind of the conversion being somewhat of a drag on the business, especially when you look at how simple the message is to new customers and how the MDDR and now we saw in Q4 the Copilot is resonating so well to a point where we saw a significant increase in the new customers. So yes, we are getting that uplift, and we're seeing very strong pricing from the uplift. But at the end of the day, we only converted approximately a third of our customers over a two-year period.

[Guy Melamed, CFO and COO at Varonis Systems]

That's part of the reason we want to accelerate our conversions in 2025 and be done with the transition in one more year.

[Jason Ader, Equity Research Analyst and Co-Head Technology Group at William Blair]

Understood. Thank you.

[Operator]

Thank you. Our next question comes from the line of Fatima Boolani with Citi. Please proceed with your question.

[Analyst at Citi]

Hey, good afternoon, guys. This is Mark on for Fatima. Thanks for taking our questions. Maybe just digging into the behavior of customers that have converted. Now that we're well into the transition, can you maybe share some of the expansion behavior and cadence of converted installed base in year one? And what are some of the patterns of adoption you're seeing in year two? And then additionally, with these observed learnings and the accelerated transition timeline, how should we think of the trajectory of NRR through calendar 2025? Thanks.

[Guy Melamed, CFO and COO at Varonis Systems]

Very good questions. I'll try and address them one by one. First of all, when you look at kind of the behavior, we only announced the transition at the beginning of 2023, so we're only two years there. We don't have a full set of data of analyzing how the behavior of SaaS customers progresses because really there's not enough history there. But from the numbers that we have analyzed, we have seen that the 2024 NRR numbers are actually higher, nicely higher than the 105% that we reported for the full existing customer base. So that gives us a lot of confidence that as we complete the transition, we have the ability to sell additional licenses to our existing customers. The richness of the platform is great. There's a ton of opportunity to sell to the base.

[Guy Melamed, CFO and COO at Varonis Systems]

We just need to make sure that we move them to SaaS, they get the MDDR, that we talk about the automation, and they feel the automation. And with that automation, we can come back and sell them additional platforms. So overall, we feel very optimistic. And that's part of the reason that we want to move as quickly as we can in 2025.

[Analyst at Citi]

Great. Thank you.

[Operator]

Thank you. Our next question comes from the line of Andrew Nowinski with Wells Fargo. Please proceed with your question.

[Andrew Nowinski, Senior Research Analyst at Wells Fargo]

All right. Thank you for taking the question. 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.

[Andrew Nowinski, Senior Research Analyst at Wells Fargo]

I think you just said you still have about 2/3 of your customers left to convert to SaaS. 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?

[Guy Melamed, CFO and COO at Varonis Systems]

If you remember when we did our Investor Day in March of 2023, we kind of outlined the plan to complete our transition in 2027. We defined completing the transition when we get to 70%-90% of total company ARR coming from SaaS. Now we expect to complete, obviously, in 2025. We talked about kind of the number that we see at the end of the year being 78% of ARR coming from SaaS.

[Guy Melamed, CFO and COO at Varonis Systems]

So from a numbers perspective, the assumption is that SaaS ARR is going to be approximately $580 million by year-end. And as you mentioned, it's a significant increase. As we sit here today, the assumption is $240 million of SaaS ARR in 2025, a meaningful increase versus the $215 million that we had in 2024. But you're thinking about it of completing the transition by getting to 100%. And we're talking from a numbers perspective and where we sit here today of completing the transition when you get anywhere between 70%-90%. And our starting point for the year is 78%. I actually think we can do better than that, but as we sit here today, that's the starting point for us.

[Yaki Faitelson, CEO at Varonis Systems]

Because it's very important to understand that we really narrowed a lot of the parity gap between the on-prem and the SaaS platform when we build a lot of automation to make sure that we can migrate fast to the SaaS, also to make sure that the migration itself will work in a frictionless, more automated way.

[Andrew Nowinski, Senior Research Analyst at Wells Fargo]

Got it. Thank you.

[Operator]

Thank you. Our next question comes from the line of Rudy Kessinger with D.A. Davidson. Please proceed with your question.

[Rudy Kessinger, Managing Director and Senior Equity Research Analyst at D.A. Davidson]

Hey, thanks for taking my question, guys. So 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 to have cross-sell, upsell, and/or new logo ARR, net new ARR start to simultaneously pick up if you're going to sustain this kind of growth profile going back to Hamza's question earlier.

[Rudy Kessinger, Managing Director and Senior Equity Research Analyst at D.A. Davidson]

So how do you ensure that happens? 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 2026 to make sure that pipeline is there to support that sustainable growth profile?

[Guy Melamed, CFO and COO at Varonis Systems]

So first of all, let's talk about 2024. We finished the year with ARR growth of 18%, and our NRR was at 105. So when you do the math, you basically see that the driver, what drove the business in 2024, was the new business. So I actually think that when we complete the transition, it puts us in a better position to do the upsell.

[Guy Melamed, CFO and COO at Varonis Systems]

And if we can continue to sell to new customers and with the platform that we have and the simplicity and the MDDR and the Copilot, and there's a lot of tailwinds that are working in our favor, when you bake that in and you kind of eliminate the headwind that the conversions are generating, it puts you in a much better position. So look at the results in 2024 and kind of understand where the growth, where the drivers came from. And I think that if you look at how this company can look post-transition, it's at a much healthier position with the richness of the platform that allows you to go back to much better NRR numbers that we believe we can get to post-transition.

[Operator]

Thank you. Our next question comes from the line of Shrenik Kothari with Robert W. Baird. Please proceed with your question.

[Shrenik Kothari, Sector Head VP of Infrastructure Software and CyberSecurity Equities at Robert W. Baird]

Hey, yeah, thanks for taking my question. Hey, you mentioned that a key benefit of accelerating this SaaS transition, of course, is 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 kind of the resource reallocation comment and plans, some specifics? Are you anticipating kind of repurposing the sales presales force into more specialized roles focusing on advanced AI and that-driven demand or security since you mentioned about AI seeing inflection? And then just how do you see this intersect with the phase two in your transition, particularly around converting these large on-prem accounts, which might have pretty specific kind of data residency regulatory requirements? Really appreciate your thoughts here. Thanks.

[Guy Melamed, CFO and COO at Varonis Systems]

So when you look at kind of the 2025 comp plan, each rep has a specific target to convert their self-hosted customers to SaaS. And that's something that we didn't have in 2024. With that said, we're not losing the focus on new customers. And the new customers is what drove us in 2024. And we believe that with the tailwinds that we have and the simplicity of the platform, we can continue seeing that in the years ahead. So I think it's not that some of the resources that we're getting are on top. We already did some hiring, and we're also doing additional hiring for the purpose of making sure that we can cater to the documentational challenges that we're seeing with the conversion. But at the end of the day, it's not like we're changing the framework of the sales force. Everything's staying the same.

[Guy Melamed, CFO and COO at Varonis Systems]

We're doing things in a very prudent way. When you look at the expense and the ARR contribution margin, we've progressed very well over the last two years since we started the transition, and we're at 16.6% ARR contribution margin. So everything we're doing, we're doing with thinking very well about the leverage, bringing some of it to the bottom line, and the free cash flow. So think about where we are two years into the transition, free cash flow being at $108.5, doubling that number from last year. I think all that we're doing is trying to make sure that the experience for the customer is as easy and smooth as possible. And some of the lessons that we took from 2024, we're trying to implement in 2025.

[Operator]

Thank you. Our next question comes from the line of Joshua Tilton with Wolfe Research. Please proceed with your question.

[Joshua Tilton, Senior VP and Equity Research Analyst at Wolfe Research]

Hey, guys. Can you hear me?

[Guy Melamed, CFO and COO at Varonis Systems]

We can.

[Joshua Tilton, Senior VP and Equity Research Analyst at Wolfe Research]

Great. Thanks for squeezing me in here at the end. I just have maybe a two-parter. The first one is, and I apologize for beating the dead horse here, but on this decision to kind of accelerate the transitions, 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 transitions? 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?

[Guy Melamed, CFO and COO at Varonis Systems]

I think when you look at, let's start with the guidance first. So I think when you look at the guidance that we gave for 2025, it goes based on the same philosophy that we had in 2024, meaning that the net new ARR contribution from previous year is kind of a starting point. And as we sit here today, there's a lot of benefits that we think can become tailwinds for us, whether it's the regulation, MDDR, the threat environment, GenAI, basically the increased demand for Varonis as a whole. So I think when you look at the guidance, it's a good starting point for the year. And as we have done in the past, we'll be more than happy to update our guidance as the year progresses. So that kind of takes care of the guidance question.

[Guy Melamed, CFO and COO at Varonis Systems]

I think when you look at the conversions, I don't think there's anything new in what we're saying now versus what we said versus what we said over the last two quarters. You heard us talk a lot about the fact that conversions are not what is leading the company. We got a lot of questions over the last couple of months from investors that thought that what's driving the business and what's driving ARR is kind of the conversions and what's going to happen when the company finishes the conversion process, and I think when you look at the numbers in 2024 and you look at the ARR number and you look at the NRR number, you understand that everything that we've said over the last couple of quarters actually is reflected in the numbers.

[Guy Melamed, CFO and COO at Varonis Systems]

What's driven the growth in 2024 with the new business? I think it's in everyone's best interest that we accelerate the transition. It's in our customer's best interest. It's in our investor's best interest. It's in the company's best interest, and we're making sure that we're doing it the right way in a prudent way, but in a very strategic way to make sure that our customers could be better protected much quicker than if they stayed on-prem subscription.

[Yaki Faitelson, CEO at Varonis Systems]

But what the value is just the functionality on top of this cloud architecture, is the overall software, and the way that it works is that we need to bring our customers to SaaS to realize value. Once they're there, the only thing that they need to do in order to get the value is to buy the software, almost nothing else, and this is everything.

[Yaki Faitelson, CEO at Varonis Systems]

This is where we want to put our customers. Once it's there, they can not have data breaches. They can be in compliance all the time. To do it with a very, very lean team, as I said before, this is what we are trying to do. We want to make sure that they are in a. It's really 10% of the effort, 10x more the value in many, many, many cases. This is where we want to be. Once we are there, everything is much easier for our customers, and everything is much easier for us.

[Joshua Tilton, Senior VP and Equity Research Analyst at Wolfe Research]

Super helpful, guys. Makes sense. Thank you.

[Operator]

Thank you. Our next question comes from the line of Matt Dezort with Needham & Company. Please proceed with your question.

[Matt Dezort, VP of Equity Research at Needham & Company]

Great. Thanks for squeezing me in. Congrats on the quarter, guys. I wanted to ask about the GenAI 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? Thanks.

[Yaki Faitelson, CEO at Varonis Systems]

Yeah, this Copilot is something that we believe that almost every knowledge worker eventually will have. And I think that so far it's working exactly as we expected. As you roll it out, as you roll Copilot more within organizations, the data security problem becoming more evident. You can't ignore it. These robots are bringing you a lot of data that you shouldn't get, and many times employees are doing things that they shouldn't do. So Varonis is the foundation for a secure deployment of AI.

[Yaki Faitelson, CEO at Varonis Systems]

But you can also see it for Microsoft that it's still in the early innings for them, but I believe that eventually it will be in the hands of every knowledge worker. So it's everywhere. Every organization that is using AI will need us to protect it, and you can see it with existing customers, prospects from all over.

[Operator]

Thank you. And this concludes the question-and-answer session. Therefore, I would like to turn the call back over to Tim Perz for closing comments.

[Tim Perz, VP of Investor Relations at Varonis Systems]

Thanks for the interest in Varonis. We look forward to meeting everyone this quarter at the investor conferences.

[Operator]

Goodbye. Thank you. And ladies and gentlemen, this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.

Participants

Executives

• Tim Perz, VP of Investor Relations
• Yaki Faitelson, CEO
• Guy Melamed, CFO and COO

Analysts

• Mike Richards, Equity Research Senior Associate at RBC Capital Markets
• Hamza Fodderwala, Executive Director at Morgan Stanley
• Saket Kalia, Managing Director at Barclays
• Brian Essex, Executive Director at JPMorgan
• Joel Fishbein, Managing Director at Truist Securities
• Joseph Gallo, Senior VP at Jefferies
• Roger Boyd, Director at UBS
• Shaul Eyal, Managing Director and Equity Research Analyst at TD Cowen
• Rob Owens, Managing Director and Senior Research Analyst at Piper Sandler
• Jason Ader, Equity Research Analyst and Co-Head Technology Group at William Blair
• Analyst at Citi
• Andrew Nowinski, Senior Research Analyst at Wells Fargo
• Rudy Kessinger, Managing Director and Senior Equity Research Analyst at D.A. Davidson
• Shrenik Kothari, Sector Head VP of Infrastructure Software and CyberSecurity Equities at Robert W. Baird
• Joshua Tilton, Senior VP and Equity Research Analyst at Wolfe Research
• Matt Dezort, VP of Equity Research at Needham & Company