We're gonna, you know, this is the first one after lunch. Everybody's probably a little bit like a post-lunch malaise. We were talking about some walk-on music to kinda get everybody energized, but instead we've got one of the most exciting conversations with Varonis. And we're gonna keep this exciting and we've got a lot to talk about. Absolutely. So thanks for being here with us, guys. As always, Guy Melamed, CFO of Varonis. David Gibson, what is your... I wrote down SVP Strategic Programs. Is that, is that- That's it. What, what does that actually mean? 'Cause I- you do, like, everything at Varonis, but what does that, what does that title actually mean? That's a great question. That's a great question. I'm in charge of the walk-on music every now and then. Okay, okay. But- Yeah, you seem like you do everything. I mean, but, you know, I mean, maybe for those that aren't as... everybody knows Guy, but maybe David, just help people understand what you do, what you do at Varonis. Sure. So I started at Varonis in 2006 in as a sales engineer, and I've worn a lot of hats since at Varonis. I ran marketing for quite a while. These days, I'm mostly with customers- Okay ... and, you know, really talking to some of the larger, more strategic customers that we've got, as well as, doing some other strategy. Ooh, good. All right. Well, we've got a lot of questions for you. All right, let's get into it. Q3, you guys had a really good Q3, a couple weeks or so now. From a high-level perspective, Guy, can you talk about sort of what drove the strength? And are you... You're seeing some different dynamics than others, so you've got a little bit of a transition going on here. But, you know, are you starting to see some signs of maybe some stabilization and maybe even improvement in kind of end market buying behavior? I think if you look at the macro, we were one of the earlier companies to call out- Yep ... kind of the deterioration last year. Mm-hmm. If you look at Q3 of this year, I think the headline that should be used is stabilization. Yeah. We definitely saw kind of the macro. We're still seeing longer sales cycles- Yep ... we're still seeing, kind of the deal scrutiny on, on every purchase, but we definitely saw a stabilization. That's the headwind. The tailwind- Yeah ... is the SaaS transition. Yeah. When we announced the transition at the beginning of this year, we talked about the first six months being kind of the most challenging part of the transition, because you have to, you have to go through the entire pipeline that was initially introduced as self-hosted, on-prem subscription, and convert it into SaaS. Every time you introduce a new concept into a conversation with a customer, you're injecting turbulence. Yep. So that's why the first six months, as we anticipated, were kind of the most challenging parts. And in Q3, we started seeing how we kind of go past that, and the results were healthy. We were happy with kind of the performance in terms of the SaaS offering. If you look at the SaaS mix, it's moving in very good progression, better than what we initially expected. Yeah, yeah. We're at 15% SaaS out of total ARR, and that's only in three quarters. Yeah. So, if you have to break it down into kind of the different components, new customers are consuming SaaS off the bat, but what's been actually pretty surprising is kind of the conversions of existing customers. We're seeing our existing customers, asking us to convert. It's happening in a natural way. This is prior to phase II, and we can talk about phase I and phase II- Yeah ... if we can dig into that later. But this is kind of happening before we even initiated phase II, and the fact that it's happening in a natural way is very encouraging. Yeah. Well, that was a dovetail into what I was gonna ask. And by the way, these guys are masters of this isn't your first time around a transition, and the first one that was executed extremely well, and I think we were all surprised at how fast that moved, and I think we're equally excited how quickly this one's moving from phase I to aspects of phase II. So maybe talk to people about the phase I, and why you're starting to see maybe these phase II conversions maybe sooner than you expected. When we introduced the transition, and we had an Investor Day in March of this year- Yep ... we talked about kind of a plan of, the transition being five years. Yep. We broke it into two phases. Phase I would be targeting new customers, trying to sell SaaS to those new customers with an expectation of one to two years in terms of completing that. And then phase II, that should have started when we get close to the end of phase I. Yeah ... that should take three to four years, and that's focusing on existing customers that would convert from self-hosted, on-prem subscription to SaaS. So overall timeframe, five years, and we define the transition to be complete when we get to 70%-90% of total ARR coming from SaaS. Right now, we're at 15%, and we went from 10%-15% in one quarter, from Q2 to Q3. So obviously we got a lot of questions on, on whether the pace is shortening kind of the transition period, and we said that we completely understand the math and the extrapolation. Yeah. Therefore, at the end of this year, we're gonna revisit the timeframe that we initially provided to see and update everyone about it. Sure. When you think about why this is happening- Yeah ... I think this is probably the most important question, the simplest answer, SaaS is a much better product. Yeah. No two ways about it. The customer satisfaction, the time to value, the ability to provide updates and alerting in SaaS is way easier than the on-prem subscription. So overall, what we're getting, the feedback we're getting from both reps and our customers is extremely positive, and that's really part of the reason that it's been working so well. Hmm ... and it's, it's been going so, so quickly. But I think there's another element that people just need to be aware of. We talked about the AI- Yep ... coming out. That's an update, that's a function that is only part of the SaaS offering. So it's an important milestone because it's kind of an inflection point in the difference between the on-prem subscription offering and the SaaS offering. And if you think about the fact that the SaaS offering is already a superior product, and that's only after three quarters, how is this gonna look like in a year- Yeah. In a year's time? Yeah. When you kind of look at the amount of updates that have come out over the last three quarters within that SaaS offering, it's in scale and magnitude that is not even close to the level of updates and upgrades that we've provided under the on-prem subscription license. That's, that's- So the evolution of the license, and the ability to provide value, and the ability to have kind of an area in the world where you see something happening, and you can generate an update and give it to all of your customers worldwide within minutes, literally, is really powerful. Yeah ... when you think- Yeah ... about where we, where we are and how we wanna protect our customers. Sure. From a customer perspective, yeah, a lot of times on the marketing side, on the product side, but from a customer dialogue, are you hearing what's the voice of the customer through this kind of rapid, kind of maybe faster move into phase II than what we would've thought? Well, it, it's providing tremendous value very quickly. The ease of installation right from the get-go, it's an easy install. Customers don't have to even let us on the system to help us kind of do the risk assessment, so we've reduced some of the friction that we almost kind of forgot that we had with SaaS, and made that process even smoother. The things that I think really are interesting for folks, though, is the automated protection that we've expanded in our SaaS solution. We're able to not only show them where they've got data that's open to way too many people, which is a risk for insiders, of course- Yep, yep ... and now Copilot is an even bigger risk. We're automatically able to lock that down without them having to spend effort. We're also offering our proactive incident response portion of our software, where we're automatically detecting an attack that might be underway and calling them if we think there's something they need to know. So they're getting so much value without having to do- Yeah ... hardly anything. Yeah, yeah. That's really resonating. On this conversion, you talked about an uplift that you're seeing when customers migrate from a self- on-premise self-managed subscription to a SaaS contract. What are some of the uplifts that you're seeing? Noting it's still obviously early. Our price list, the SaaS price list, apples to apples, the same products, the same users, is 25%-30% higher on the SaaS versus the on-prem subscription. When we look at kind of the behavior, and I think it's probably important to touch on the way we're selling, we're selling the platform, we're not selling individual licenses as we did in the past. Yep. In 2022, we provided bundles- Yep, yep ... under the on-prem subscription. That worked very well. There's, when you have 40+ SKUs, the richness of the technology, could actually be confusing in conversations between reps and customers, and we saw that in the past. Therefore, in 2022, we started to consolidate, and in 2023, with the SaaS offering, it was a tremendous opportunity for us to double down on that. So today, when you buy the SaaS offering, you're buying the platform. You're not buying individual licenses, which means that if you have a customer that owns on-prem subscription and they're switching to SaaS, in many cases, they have to basically increase the number of licenses that they initially have. So, if you're buying the same apples to apples, same number of licenses, and we're kind of moving away from licenses- Yeah ... so I don't want this to confuse anyone. But if, if you're buying the same platform in SaaS, we've seen from a price perspective that that 25%-30% uplift is working. But we are seeing, in many cases, that they're increasing that more than that 25%-30%- Sure ... because they're consuming more of the platform, and in some cases, they're actually buying more users under the SaaS offering. Well, there's a huge ROI savings, too, for the... Not only there's better software, but it's just an ROI savings as well. The total cost of ownership for the customers is lower- Yeah ... for that 25%-30%. Yeah. Even with that 25%-30% uplift, because they're saving on the actual hardware, and they're definitely saving on the number of resources that they need in order to support the platform. Hmm. So, so overall, when we talk to customers, they're not deterred by that 25%-30% uplift. Yeah. And that, that's been fairly consistent so far. I mean, obviously we'll see where it goes, but that's a nice, Yes, I- ... proof point thus far ... here, here's the thing, Matt, it's very simple. Our selling process has always been very visual. Yeah. We always want to get to a point where we show you files that you can identify, and how they're open to everyone- Yep ... in the company. Yep. So if I told you that it's pretty safe to say that there are about 15 million files open to everyone in the company today, and people here, probably with all the companies that they work for, that's not a far-fetched figure, people would shake their heads, and go make coffee, and take a cookie from the RBC stand. Because that's what happens. Yeah. But if I actually, if we were able to show you, the list of top stocks to pick for 2024, long and short, that hasn't been published yet, but it's accessible to anyone within the organization, and also accessible to anyone joining the company's guest Wi-Fi, and they can have access to that file, that's the jaw-dropping moment. That's when people freak out, and that's how we sell. So we always wanna try and generate that understanding that the sensitive files are open to everyone in the company- Yeah. and we wanna show them files that they can identify. So the selling motion and the visualization is still a critical component of our selling process, but in SaaS, it's just easier. It's easier. I guess, understanding that it's still a tough selling environment out there, and you know, IT dollars are somewhat constrained, are you seeing, from a sales perspective, faster sales cycles because of SaaS and cloud than, you know, kind of apples to apples versus an on-prem, you know, self-managed subscription? I can tell you that the process of the installation is faster. The experience, once installed, it actually is easier. We don't need to call the customer at all, even to schedule a Zoom. It's actually a more stable product. There's really no issues there, and if there were, that's on us, right? We don't have to bother the customer from that. As far as the translating into sales cycles, it's early. Just in terms of sales cycles, the on-prem subscription sales cycles have been historically between three to nine months- Yep. On the larger deals, up to 12 months. Since we only introduced the SaaS offering at the beginning of this year, the beauty of statistics is that no matter what you close right now, it's shorter than the standard sales cycle. So we need some more time in order to gather data, but there's pretty much an understanding that because it's simpler and because customers get value, the expectation is that the sales cycles will be shorter. Interesting. That's great, yeah, so another vector of potential growth there. Yaki made some interesting comments on the last quarter call about how AI could ultimately become a tailwind for the business, and we've often thought, you know, given your presence in data governance, data security, it really felt like gen AI and AI was, you know, a perfect use case for you guys. You know, he mentioned on the call two types of risks. The first he called self-inflicted risk. Can you talk more about that, and like, what is self-inflicted risk? Sure. So, you know, people have access to more data than they need, you know? It, people tend to overshare, especially in the cloud. People share data with everybody in the company. It's easier to share externally. It's easier to, unfortunately, even share data publicly on the internet, with these cloud repositories. And if you're going to turn on an AI, like Copilot, and then do analysis of that data set, and then allow your employees to have access to that, they're going to see much more easily- Yeah ... any data that they have access to, right? So that's the way that these solutions work, 'cause they honor the access controls. But if they're not locked down, it's like these cracks in the wall. There's gonna be an enormous amount of pressure, and it's gonna force data through the cracks. You know, people aren't always hunting for data they don't have access to- Yeah ... but this is just gonna show them, show it to them, whether they really should have access to it or not, and then it will generate more data that more people have access to. So that's more sensitive data that will start to multiply. We saw the same thing happen with enterprise search. When people started to deploy, to deploy enterprise search solutions, they would quickly turn them off, because when people searched for something like payroll or compensation, they'd see all sorts of data they shouldn't see. Yeah. We're going to see the same kinds of things with AI. In fact, Microsoft actually recommends, to prepare for Copilot, to lock access controls down. Well, we know how hard that is without automation. So, it's a natural question. If people are using and embracing Copilot, and they're not using Varonis, what are they doing? Well, when I talk to CISOs, they're very scared. They're under pressure now from the business to deploy, for productivity reasons, AI, right? And there's, not just Copilot, right? Einstein and Salesforce. People are looking to analyze many data sets with these large language models, but they're scared. Are we sure that we're analyzing the right stuff? Is there sensitive data in the corpus that we want to analyze? And then how do I make sure that it doesn't leak data? This could explode. So they're really under pressure, that they're struggling to balance, and so when we connect the dots for them, that becomes a nice use case for us. That is, that's super helpful. The other risk, besides self-inflicted risk, is the risk of external hackers, that I know Yaki talked about as well. We speak to that risk as well, 'cause obviously there's, that's, takes on a sort of an unquantifiable, you know, opportunity to you know, explode that risk, I guess. Sure. It's already being used, AI, to, for example, make it easier to craft a convincing phishing email. We're seeing things like FraudGPT, WormGPT, these creatively named AIs to help hackers do things like that, as well as create new malware. So we think the barrier to entry for hacking is going to be lower. Another kind of difficult problem that AI is presenting is it's helping attackers generate synthetic data that resembles a company's data, and they say, "We got your data," you know, "Pay us," when it's not, in fact, their data. But then that's quite an effort to go validate whether this is your data or not. Yeah. Right? So it's, there's several use cases, which I think are pretty concerning for customers. So how does Varonis help in both those—I mean, some of these use cases? It, yeah, 'cause I mean, I think the self-inflicted risk is obvious. The external, how does... You know, how are you guys positioned there? Yeah, we have been helping people detect and stop ransomware, advanced attackers for many, many years. We actually use AI for good, right? We have a lot of AI and machine learning built into our threat models and built into our recommendations engine, where we see people have more access than they need. So we're no stranger to using AI to not only lock data down, which is really that important use case there from deploying Copilot, but also we use the same technology to monitor the heck out of what people are doing with data and detect an insider, detect ransomware, detect an APT, an advanced persistent threat, and then automatically shut it down. And then we call you now to say, "Look, this is what we see here, and we can help you recover. Interesting. I'm gonna ask a few more, and then we'll see if there's questions out here from the group. But the question that every investor asks is, "This sounds great." You know, generative AI sounds like it's, you know, a potential tailwind. Talk about monetization, 'cause ultimately I think, you know, investors wanna know, like, will it actually impact growth? Either of you. I definitely think we can monetize AI into our advantage, both from kind of the tailwind that it could generate, in the environment that we just talked about. But we had conversations of whether we should come out with a separate SKU for AI. Yeah. And because we've been in that mode of consolidation of SKUs and selling the platform, to us it made more sense to have it as part of the platform. But because AI will make the product better, when your customer satisfaction is higher, and when you see alerts that make way more sense and it's simplified and everything's easy, you'd wanna protect additional platforms. So through the AI functionality, I think we can definitely monetize, but in a slightly different way. So how, how would... From an external perspective, how are we gonna know that that's actually benefiting the business? Well, there's a lot of things that are part of the tailwind. It's when you think about AI, you think about the SEC regulation- Yeah ... that has just come into place. Yeah. At the end of the day, the pipeline that is generated is coming from many different sources. It's the risk that is escalating by the day, hackers that get into organizations and take data. It's the insiders that take the information and give it to competitors. That's happening as we speak, and all of that is, together with the SEC and all of the regulation out there, is an excuse to have a meeting with a customer, and then we go through that visualized selling process. So to put a pinpoint on exactly the dollar amount that would be monetized from each and every element- Yeah ... is very challenging. But I think the overall theme is that time is working in our favor, and we have a much larger opportunity to take advantage of. So, we'll see it in, ultimately, sort of like longer-term durable growth, yeah. It could be in growth. It could be in the expansion within existing customers. Yeah. It could be within renewal rates. Okay. Okay. Okay. Because overall, if your customer's happy and you're providing value in a simplistic way, they buy more and, and they wanna be protected, and that's what we're here for. I'm gonna take a pause here. We've got a lot more to cover. Is there any questions from folks out here for these guys? If one comes up, raise your hand, but we'll keep going here. We'll scan the audience periodically for questions. I guess, you know, thinking about then some of these tailwinds, you know, in the spirit of the five-year transition, 'cause I know when first you guys announced that, a lot of people were like, "Ooh, I don't know if I wanna wait five years for this transition." Obviously, it feels like it's happening a lot quicker than what you first suggested. Any ideas on, like, how quickly that could ultimately happen now at this point? I think we'll give the actual timeframe, the updated timeframe, and revisit the numbers at the end of the year. Q4 is the largest quarter of the year historically, and we expect that to be the case this year, in dollar terms when you think about it. We also guided in dollar terms of how much we think the conversion is gonna take place. We had $10 million converted in Q3, and the expectation is that we'll have $12 million- Yeah ... of conversions in Q4. So we just wanna see all the pieces of the puzzle kinda come into place, and then we'll, we'll be able to give an updated timeframe. But I think it's pretty reasonable when you look at the numbers and the extrapolation of that- Yeah ... 5% SaaS from Q2 to Q3. It's pretty clear and obvious why so many investors are asking us about an updated timeframe. So Q4? So Q4- Okay ... is when we're planning on coming out with that. But I think that overall when you think about, you know, where we were in March, when we did the Investor- You've come a long way. ...when we did the Investor Day, you know, there are so many things that are happening better than we initially expected. It's the adoption, it's the fact that it's... All of our reps worldwide are adopting this transition. And Matt, you were with us in 2019 when we did the other transition. Yeah ... and we only had certain geographical locations that adopted that transition. Now, everyone's on board, so that's a great place to be in. And customers adopting it is also kind of exceeding our expectations. And when you look at the cost structure, the cost to host and the margins, when you look at the margins of SaaS, they've actually exceeded our expectations as well. So it doesn't mean we don't need to invest in order to support- Yeah, yeah ... SaaS. We need, you know, some extra people in customer success. But the one thing to keep a close look at is kind of the benefits of SaaS on some of the other departments. You know, R&D as a percentage of ARR has been in the high 20s%. Yeah. And when you think about maintaining two types of code, that's part of the reason that it's been so high.... Eventually you get to a point where you only wanna support one- Yep set of code, and it becomes an easier one to support. Yeah. But you get a lot of leverage coming from that component alone. Also, when you look at kinda the support, the number of tickets have come down significantly when you compare SaaS customers to on-prem subscription customers, because so many of the things can be done without even bothering the customer. So if we see something, we fix it. We don't need the customer to alert on anything. Professional services, much easier to do with SaaS versus on-prem subscription. Customer success, much easier, so many components out there could benefit the margin profile and the leverage within the model. And if you only look at Q3, I think one of the things that we're most proud of, we showed 750 basis points improvement on the ARR contribution margin, Q3 2023 versus Q3 2022. Mm. 750 basis points improvement during a transition and with the initial- Yeah ... investments that need to be made is definitely something that we're happy about. Right. And if you look at the free cash flow, where we guided for $40 million-$45 million positive free cash flow, and that's compared to about flat last year. So everything's kinda moving in the direction that we wanna see, and we definitely wanna make sure that we continue to grow, but also improve our operating margin and generate significantly more free cash flow. That's the essence of every business in our mind. I think what's been so surprising, too, is even with your revenue headwinds, you're still expanding gross margins, even with a growing cloud business. Talk about just, like, the gross margin. I mean, that, that's... I mean, yeah, you know, cash flow and op margins is great, but, I mean, to me, it starts with gross margins. 100%, you're right. When we started kinda the transition, we had certain expectations in terms of the margin profile that we expect to see under SaaS. This is still early, so we need to see this work at larger scale, but so far, it's been exceeding our expectation. And a lot of it has to do with the way the technological architecture has been built to generate more efficiency through our hosting. So that's definitely a positive that we wanna capitalize on at a margin- Sure ... much larger scale. You know, as we think about calendar 2024, you haven't guided there, but what are some sort of building blocks you'd share to help us think about growth and margins next year? So the overarching theme is that we wanna continue to grow. And we wanna bring some of it to the bottom line, and we wanna improve our operating margin, but I would point out that we don't want to bring too much of it to the bottom line, because we wanna still continue to invest- Yeah ... and take advantage of the larger opportunity. So it's a balancing act that we wanna make sure that we continue to do in kinda the same way we've done in the past. And obviously, free cash flow is the anticipation and desire from our perspective is to continue to generate more and more cash. I think there's one element that is probably worth pointing out, and that's the phase II. Obviously, with everything kinda moving quicker, we anticipate that phase II will happen somewhere within the 2024 year. But I think two frameworks to keep in mind, if you look at phase II, and let's just for the sake of example, say that that would last, that three to four years. I'm just- Sure ... an example. Yeah. We don't expect that to be linear within the years, so every year should have kind of a larger portion of conversions. So you should expect acceleration within the years, but you should also expect an acceleration within the year itself. Okay. Those are kinda two elements to keep in mind as you look at the modeling of next year and the years ahead. Is there... You know, obviously, it goes without saying, the, what's going on in Israel is a tragedy. Are there... And I know you kind of quantified it from a head count perspective, but is there an additional risk that if this continues to escalate, is there a revenue, you know, or, or maybe not a revenue, but is there a broader impact that we should think about next year, or? When we look at things right now, there's minimal impact to the business. From a top-line perspective, Israel accounts for less than 1% of sales. It's not an area that has been a major focus from a selling perspective. It's mostly the center of R&D, and when you look at the productivity of the people there, yeah, we do have some people in reserves. I'd say low single-digit percentage is out of total employees in the company. But overall, the productivity coming out of there is best-of-class and still happening at a pace that we're happy with. So when you look at kinda the updates and the upgrades that have come out, and I talked about this before, you look at what has come out in the last year alone, and even since the war started, it's a pace that we've never seen- Mm ... under the on-prem subscription. So currently, as we sit, we don't see an impact to the business. Me, I, you know, I normally close these with what are you most excited about? I think I know the answer. It's the, you know, cloud SaaS transition. I guess, what's the most important decision that you as a management team will have to make to ensure success and maybe just a faster transition than we think? Well, I'll say probably the most important decision we made was kind of the transition. Okay. And that's definitely an element that puts us at a much better place than we were under the on-prem, with way more value to customers, but also an ability to generate, from a financial perspective, a much stronger company than we would've been under on-prem. I think one element that we will have to think of going forward is when the right time to try and push to one set of code? Yeah. Obviously, you... It's very delicate. You wanna keep your customers happy, and you never wanna break that relationship. But when you think about kinda the product- Yeah ... and the fact that it's- Yeah ... so much better already- Yeah ... give it another couple of years, and it becomes such a you know, the on-prem subscription- Yeah ... will become a less- Bit of a relic. ... protective product. Yeah. Yeah. You wanna make sure that your customers have the best, best-in-class technology to support against an evolving environment that only gets scary and scarier as we sit here. Excellent. Well, with that, we're out of time. But from all of us at RBC, I love these—we've had these conversations for years and years, and we're looking forward to next year. Maybe, who knows, we'll be sitting here next year, and we'll be talking about a much shorter transition, hopefully, and but best of luck from all of us. Thanks very much. Cool. Thanks, guys.