Varonis Systems, Inc.

Greetings. Welcome to Verona Systems Incorporated third quarter 2022 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. Please note this call is being recorded. I will now turn the conference over to Tim Pers, Investor Relations. Thank you. You may begin.

Thank you, operator. Good afternoon. Thank you for joining us today to review Varonis' third quarter 2022 financial results. With me on the call today are Yaki Fidelson, 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 fourth quarter and full year ending December 31st, 2022, as well as the full year ending December 31st, 2020. Due to a number of factors, actual results may differ materially from those set forth in such statements. These factors are set forth in the earnings press release that we issued today under the section caption, 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 filing. 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 third quarter 2022 earnings press release and investor presentation, which can be found at www.veronis.com in the investor relations section. Lastly, please note that an updated investor presentation as well as a webcast of today's call are 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 Fileson. Yaki?

Thanks, Tim, and good afternoon, everyone. Today marks an important milestone in the evolution of our company, and I want to talk about our short- and long-term vision and walk you through the trends, challenges, and opportunities we see today. Let's start by reviewing our third quarter results. ARR grew 26% year-over-year to $447.8 million, or 30% year-over-year, when adjusting for effects and the impact of exiting our Russia business. Even when adjusting for the $9.2 million headwind, To our reported results, caused by the weakening of the euro and the pound, our organic results were still below our expectations. The primary reason was our EMEA segment, where economic uncertainty and additional deal scrutiny led to a software and anticipated outcome. We previewed some of this last quarter, but the continued effects of the war in the Ukraine, the energy crisis, and general economic slowdown were more impactful than we expected. The second factor was our U.S. federal business, where our close rates had an impact of approximately 4 million to 5 million against our expectation. However, despite the challenges we faced in the quarter in our federal and EMEA business, We see no change in our long-term view that these should both be strong contributors to our business. Total revenue grew 23% year-over-year to $123.3 million, a 27% adjustment for effects in Russia. In North America, our revenue grew 30% year-over-year. A strong performance in our commercial business was somewhat offset by worse than expected results, in the federal vertical. In EMEA, reported revenues were down 3%, but grew 16% after adjusting for FX in Russia. Because of acutely resolved expectations that these headwinds with persisting Q4 were adjusting our full-year ARR guidance specifically, our updated guidance assumed that economic conditions continue to deteriorate in EMEA, and that this also begins to moderately affect our U.S. business. This also factors an incremental headwind due to unfavorable changes in the euro and the pound. These factors will impact our full-year revenues guidance as well, and Guy will walk you through those details. As a result of our updated top-line guidance, we are taking thoughtful and prudent steps to manage expenses across the business, which include a 5% reduction in headcount in addition to other cost reduction initiatives. We have always said that we seek to tie our level of investment to the revenues we plan to achieve. And given the greater short-term uncertainty in the macro environment, we believe this is a prudent approach at this time. Now, I would like to take a step back from our near-term results and discussed our vision. We founded Varonis to help organizations solve their biggest data protection challenges. And today, the strategic priority is more critical and yet more challenging than ever. What makes data protection so hard? The explosive growth of data across cloud and on-prem data stores have expanded the attack sources, which open organizations to greater risk. The growing sophistication of bad actors has made the threat environment more dangerous, making the kind of automation we provide critical to protect against those attacks. And the penalties for not securing data continue to grow because of increasing government regulation. These trends generate challenges for organizations all over the world, but also create opportunities for warrants. Since our funding, we have invested heavily in innovation, to address these problems, going to a comprehensive data security platform. With our platform, we provide visibility into who can and does access sensitive data and where it's at risk. We automatically shrink the blast radius or damage that a single compromised user or machine can cause, while also alerting on unusual behavior and importantly, stopping it before any harm is done. All of our technological innovation ultimately led us to innovate within our business model as well. As we grew the platform, we realized that our customers could utilize additional licenses at a lower upfront cost if we delivered them via subscription. So in 2019, we announced the transition of our on-premises perpetual model to a term-based subscription licensing model. This reduced the upfront cost to consume Voronis as a platform and increased the total lifetime value of the customer. We were able to complete this transition in just four or five orders because the demand from our customers increased significantly as our subscription offering made the buying process easier. Today's introduction of our flagship data security platform as a SaaS is the next stage in the evolution of our company and builds on the success we had with our perpetual to term license transition. While the success of the OPS transition was primarily defined by a record pace we performed it, we expect to take a more measured approach to make this transition another success. The SaaS delivery model has been in our roadmap for many years, in part because we have seen that companies want additional flexibility in how they consume the platform. Throughout the last two plus years, we have invested over $100 million, and a significant part of our engineering group has worked relentlessly to transform the features of our on-prem subscription offering into SaaS offerings. To be clear, we will continue to sell our existing DL Cloud product which are delivered solely as a SaaS alongside our flagship data security platform, which for the time being will be offered either as a SaaS or through term-based on-premise subscription licenses. I would like to review in more detail some of the benefits we expect to realize by offering our flagship data security platform as a SaaS deployment. First, risk assessment, the core of our sales motion, are expected to be quicker to deploy, which once our sales force gets past the initial ramp-up phase and is fully trained on the new selling motion, should help shorten our sales cycle. Second, customers will be able to more quickly and easily deploy and maintain our solution with significantly reduced infrastructure requirements and lower upfront costs. We expect that this will have the effect of customers realizing a faster time-to-value which should ultimately be beneficial to us in contract-free means. Third, the owners will have more visibility into usage behavior and the ability to spot threats more quickly, which will better inform our product innovation. Fourth, customers will benefit from continual threat model and classification updates that will help them stay prepared for new and evolving threats and regulations. We expect that this will also help the renewal rate as customers get greater value from our products. And finally, the SaaS model will allow us to deliver additional features and functionality to customers more efficiently. Taking together these enhancements creates significant value for our customers, and in turn, we expect them to continue driving meaningful growth for us as the macroeconomic situation ultimately improves. In closing, we founded Voronis to help customers solve their most urgent data protection needs. And today, the launch marks an important milestone in helping them achieve that goal with additional flexibility. We believe the introduction of our SaaS delivered flagship data security platform will guide significant long-term value for our shareholders and we continue our march towards $1 billion in ARR and VU. With that, let me turn the call over to Guy.