Varonis Systems FY Conference Summary Company Overview - **Company**: Varonis Systems (NasdaqGS: VRNS) - **Event**: FY Conference held on December 10, 2025 Key Points Business Segmentation - Varonis is transitioning into two distinct business segments: SaaS and on-premises subscription [7][8] - The SaaS business is performing well with a 76% SaaS of ARR, while the on-prem subscription business is underperforming with lower-than-expected renewal rates [9][12] Renewal Rates and Churn - The renewal rates for the on-prem subscription business were below expectations, contributing to overall performance concerns [8][13] - Three main factors contributed to the lower renewal rates: 1. Many customers were single-threaded, using Varonis for specific use cases without a broader cybersecurity need [15] 2. Sales team performance issues in presenting quotes effectively [16] 3. Increased deal scrutiny towards the end of the quarter [17] - The federal business also underperformed due to factors like the timing of FedRAMP certification and sales team handling [19][21] Customer Engagement and Market Dynamics - Customers who did not renew were often not using Varonis as a security tool, indicating a need for better engagement with security teams [28][30] - Despite competitive noise in the DSPM market, Varonis did not see a change in competitive win rates, maintaining strong sales execution [34][58] Future Guidance and Strategy - Varonis plans to focus on SaaS growth rates and expects to grow at 20% or more for the foreseeable future [49] - The company aims to complete the transition to 100% SaaS by the end of 2026, with no remaining non-SaaS ARR [96] Profitability and Cost Structure - The company is targeting an ARR contribution margin of 18%-22% by the end of 2027, with expectations of a quick recovery in margins post-transition [91][95] - The shift to SaaS is expected to reduce support costs and improve overall profitability [93] Competitive Landscape - Varonis is enhancing its integration with Microsoft Purview, positioning itself as a complementary solution rather than a competitor [75][76] - The company is entering new markets such as database activity monitoring through acquisitions, aiming to displace legacy tools [78][80] Sales Strategy Adjustments - Changes in sales compensation plans are being considered to refocus efforts on new customer acquisition rather than conversions [63][68] - The emphasis will be on selling to new customers and upselling to existing SaaS customers [69] Additional Insights - The transition to SaaS is seen as critical for long-term growth and investor confidence, with a clear strategy to phase out on-prem offerings [96] - The company is actively engaging with customers to understand their plans for transitioning to SaaS, with a focus on minimizing churn [46][48]

Financial Data and Key Metrics Changes - The company reported an 18% year-over-year increase in Annual Recurring Revenue (ARR), reaching $718.6 million [6][19] - Total revenues for the third quarter were $161.6 million, reflecting a 9% year-over-year growth [19] - Gross profit was $128.3 million, resulting in a gross margin of 79.4%, down from 85% in the same quarter last year [20] - Net income for the third quarter was $8.4 million, or $0.06 per diluted share, compared to $13.8 million, or $0.10 per diluted share, in the same period last year [21] Business Line Data and Key Metrics Changes - The SaaS business now accounts for 76% of total company ARR, indicating a successful transition to SaaS ahead of schedule [5][15] - SaaS revenues for the third quarter were $125.8 million, while term license subscription revenues were $24.8 million [19] - The company experienced weaker than expected renewals in both federal and non-federal on-premises subscription businesses, impacting overall performance [7][16] Market Data and Key Metrics Changes - The federal business has historically contributed around 5% of total ARR, with recent renewals showing a decline [81] - The company noted that the decline in renewal rates was observed in both federal and non-federal sectors, leading to adjustments in guidance [81] Company Strategy and Development Direction - The company plans to end-of-life its self-hosted solution by December 31, 2026, to focus entirely on its SaaS offerings [7][15] - Investments in partnerships, particularly with Microsoft, and acquisitions like Cyral and SlashNext are expected to drive future growth [12][56] - The company aims to enhance its SaaS platform's capabilities, particularly in data security and compliance, to meet evolving customer needs [10][12] Management's Comments on Operating Environment and Future Outlook - Management expressed disappointment with the performance of the on-prem business but remains confident in the SaaS business's growth potential [23] - The company is taking a conservative approach to guidance, reflecting recent underperformance and the decision to phase out on-prem solutions [8][22] - There is a strong demand for the SaaS platform, driven by automation and the need for enhanced data security in the age of AI [11][12] Other Important Information - The company generated $111.6 million of free cash flow year-to-date, up from $88.6 million in the same period last year [19] - A $115 million share repurchase program has been authorized by the board, supported by a strong balance sheet [23] Q&A Session Summary Question: What led to the decision to reduce the federal team? - Management indicated that the federal business has not performed as expected, prompting a reevaluation of strategy and a reduction in team size to focus on SaaS transitions [26] Question: What were the reasons for lower on-prem renewals? - Management noted that there was no single theme for the non-renewals, but issues with account management and a focus on SaaS customers contributed to the decline [30][42] Question: How does the company plan to address the churn in the on-prem business? - The company is focusing on improving account management and ensuring that customers understand the value of transitioning to SaaS [30][69] Question: What is the expected contribution from recent acquisitions? - Management expressed confidence that acquisitions like SlashNext and Cyral will enhance the company's offerings and drive growth [56] Question: Is there a risk of alienating customers with the push to SaaS? - Management believes that moving to a 100% SaaS model is essential for operational efficiency and customer value, despite potential pushback from some customers [59][63]

Financial Data and Key Metrics Changes - The company reported an 18% year-over-year increase in Annual Recurring Revenue (ARR), reaching $718.6 million [6][19] - Total revenues for the third quarter were $161.6 million, reflecting a 9% year-over-year growth [19] - Free cash flow for the year-to-date was $111.6 million, up from $88.6 million in the same period last year [19][22] - Gross profit for Q3 was $128.3 million, with a gross margin of 79.4%, down from 85% in Q3 2024 [20] Business Line Data and Key Metrics Changes - The SaaS business now accounts for 76% of total company ARR, indicating a successful transition to SaaS [5][15] - SaaS revenues for the third quarter were $125.8 million, while term license subscription revenues were $24.8 million [19] - The company experienced weaker than expected renewals in both federal and non-federal on-premises subscription businesses [7][16] Market Data and Key Metrics Changes - The federal business has historically contributed around 5% of total ARR, but faced headwinds in renewals during Q3 [78] - The company noted strong demand for its SaaS platform, particularly in cloud environments, which represents a significant growth opportunity [9][15] Company Strategy and Development Direction - The company plans to end-of-life its self-hosted solution by December 31, 2026, to focus entirely on its SaaS offerings [7][15] - Investments in partnerships, particularly with Microsoft, are aimed at enhancing integration and capitalizing on AI-related data security needs [11][12] - The company is focusing on upselling existing SaaS customers and expanding its market potential [9][18] Management's Comments on Operating Environment and Future Outlook - Management expressed disappointment with the performance of the on-prem business but remains confident in the SaaS business's growth potential [23] - The company is taking a conservative approach to guidance for Q4, reflecting the recent underperformance in renewals [17][22] - Management highlighted the importance of addressing customer needs and ensuring effective account management to improve renewal rates [30][44] Other Important Information - The company has authorized a $115 million share repurchase program, supported by a strong balance sheet with over $1 billion in liquidity [23] - The company is implementing a 5% reduction in headcount to reallocate resources more effectively [8][23] Q&A Session Summary Question: What led to the decision to terminate some federal team members after receiving FedRAMP High authorization? - Management indicated that the federal business has not performed as expected, leading to a reevaluation of strategy and a reduction in team size to focus on SaaS transitions [26] Question: What were the reasons for lower than expected renewals in the on-prem business? - Management noted that there was no single common theme for the non-renewals, but identified issues with account management and customer engagement as contributing factors [30][67] Question: How does the company plan to address the churn in the non-SaaS ARR base? - Management is baking in conservatism in guidance and will evaluate Q4 performance to determine if the recent trends are isolated or indicative of a larger issue [38][75] Question: What is the expected contribution from recent acquisitions like SlashNext and Cyro? - Management expressed confidence that these acquisitions will enhance the company's offerings and contribute positively to growth [55] Question: Is the push to migrate to SaaS alienating some customers? - Management believes that moving to SaaS is essential for long-term value and efficiency, despite potential short-term challenges with some customers [58][61]

Financial Data and Key Metrics Changes - The company reported an 18% year-over-year increase in Annual Recurring Revenue (ARR), reaching $718.6 million [4][19] - Total revenues for Q3 were $161.6 million, reflecting a 9% year-over-year growth [19] - SaaS revenues accounted for $125.8 million, while term license subscription revenues were $24.8 million, and maintenance and services revenues were $10.9 million [19] - Gross profit for Q3 was $128.3 million, resulting in a gross margin of 79.4%, down from 85% in Q3 2024 [19] - Net income for Q3 was $8.4 million, or $0.06 per diluted share, compared to $13.8 million, or $0.10 per diluted share in Q3 2024 [20] Business Line Data and Key Metrics Changes - The SaaS business now represents 76% of total company ARR, indicating a successful transition to SaaS completed ahead of schedule [4][16] - The on-premises subscription business has underperformed, particularly in the federal sector, leading to a reduction in team size and a more conservative outlook for renewals [5][16] Market Data and Key Metrics Changes - The company experienced weaker-than-expected renewals in both federal and non-federal on-premises subscription businesses during the final weeks of Q3 [5][17] - The federal business has historically contributed around 5% of total ARR, and recent renewals in this segment have faced challenges [78] Company Strategy and Development Direction - The company plans to end-of-life its self-hosted solution by December 31, 2026, to focus entirely on its SaaS offerings [5][16] - Investments in partnerships, particularly with Microsoft, and acquisitions like Cyro and SlashNext are expected to enhance the company's product offerings and market position [10][54] - The company aims to capitalize on the growing demand for data security solutions, especially in the context of AI and cloud environments [10][11] Management's Comments on Operating Environment and Future Outlook - Management expressed disappointment with the on-prem business performance but remains optimistic about the strong demand for the SaaS platform [15][23] - The company is taking steps to manage expenses, including a 5% reduction in headcount, to reallocate resources effectively [6][23] - Future guidance has been adjusted to reflect conservatism due to recent performance issues, particularly in the on-premises segment [17][23] Other Important Information - The company generated $111.6 million of free cash flow year-to-date, up from $88.6 million in the same period last year [19] - A $115 million share repurchase program has been authorized by the board, supported by a strong balance sheet with over $1 billion in liquidity [23] Q&A Session Summary Question: What led to the decision to reduce the federal team? - The company lacks empirical evidence to justify continued investment in the federal sector due to ongoing underperformance, prompting a reevaluation of strategy [26] Question: What were the reasons for the lower on-prem renewals? - There was no single theme identified; issues included account management and a lack of comprehensive engagement with on-prem customers [28][44] Question: How does the company plan to address the non-renewal of on-prem customers? - The company is focusing on improving account management and ensuring that customers understand the value of transitioning to SaaS [28][44] Question: What is the expected contribution from recent acquisitions? - The company anticipates that acquisitions like SlashNext and Cyro will enhance its product offerings and contribute positively to growth [54] Question: Is there a risk of alienating customers with the push to migrate to SaaS? - The company believes that moving to SaaS is essential for operational efficiency and customer value, despite potential concerns from some customers [58][60]

Core Insights - Varonis Systems, Inc. reported an 18% year-over-year increase in annual recurring revenues (ARR), reaching $718.6 million as of September 30, 2025 [6] - The company's SaaS ARR constituted approximately 76% of total ARR, reflecting strong demand for its SaaS platform [2][6] - The company generated $122.7 million in cash from operations year-to-date, compared to $90.9 million in the previous year [6] - Free cash flow for the year-to-date was $111.6 million, up from $88.6 million in the prior year [6] - Varonis announced a $150 million share repurchase authorization [6] Financial Performance - Total revenues for the third quarter were $161.6 million, compared to $148.1 million in the same quarter of 2024 [5] - SaaS revenues increased significantly to $125.8 million from $57.8 million year-over-year [5] - Term license subscription revenues decreased to $24.8 million from $68.8 million, primarily due to customer transitions to the SaaS platform [5] - Maintenance and services revenues also declined to $10.9 million from $21.5 million, again attributed to the shift to SaaS [5] - The GAAP operating loss was $35.9 million, compared to a loss of $23.6 million in the third quarter of 2024 [5] Business Developments - The company acquired SlashNext, enhancing its email security capabilities with AI-driven solutions [6] - Varonis launched new products, including Varonis Interceptor for email security and Next-Gen Database Activity Monitoring (DAM) for database security [6] - The company introduced AI identity protection for Salesforce Agentforce, improving visibility and control over data accessed by AI agents [6] Guidance and Outlook - Varonis has reduced its full-year ARR guidance due to lower-than-expected renewals in the Federal vertical and non-Federal on-prem subscription business [7] - The company anticipates a lower renewal rate for its on-prem subscription business in the fourth quarter [7]

Core Insights - Varonis Systems, Inc. has launched Varonis Interceptor, an AI-powered email security solution designed to detect and block advanced social engineering attacks that traditional methods may miss [1][3][12] Company Overview - Varonis is recognized as a leader in data security, focusing on protecting sensitive data across various environments including SaaS, IaaS, and hybrid cloud [6][7] - The company utilizes a cloud-native Data Security Platform that continuously discovers and classifies critical data, removes exposures, and detects advanced threats through AI automation [6] Product Features - Varonis Interceptor employs multi-layered AI technologies such as natural-language processing, computer vision, and behavioral analysis to identify and eliminate novel threats in real time [4] - The solution is API-based, can be deployed in five minutes, and includes a look-back feature to identify threats that existing email security solutions may have overlooked [5] - It offers multi-channel defense, protecting users across various platforms including Microsoft Teams, Slack, and WhatsApp [11] Strategic Acquisition - The development of Varonis Interceptor is powered by the acquisition of SlashNext, which enhances the company's capabilities in combating AI-driven social engineering attacks [3]