Varonis Systems, Inc.

Greetings, and welcome to Verona Systems, Inc. Third Quarter 2023 Earnings Conference Call. At this time, all participants are on 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. As a reminder, this conference is being recorded. It is now my pleasure to introduce Tim Peirce, Investor Relations. Thank you. You may begin.

Thank you, operator. Good afternoon. Thank you for joining us today to review Varonis' third quarter 2023 financial results. With me on the call today are Yaki Fidelson, Chief Executive Officer, and Guy Mohamed, 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 31, 2023. 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 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. Ronis 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 2023 earnings press release, and investor presentation, which can be found at www.Veronis.com in the investor relations section. 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 Keidelson. Yaki?

YAKI KEIDELSON, Chief Executive Officer, Yaki Keidelson, Thanks, Tim, and good afternoon, everyone. Thank you for joining us today. Let me start by saying Our thoughts are with our employees, customers, partners, and all of those impacted by the recent events in Israel. We will continue to do whatever it takes to support our employees. Today, I would like to review our Q3 results and discuss how AI can serve as a meaningful tailwind to our business in the years to come. But first, I would like to remind you why Valence exists and the problems we solve. is the prime target for bad actors because of its importance to a business. Data is also out of control. The explosion of the cloud and remote work has improved collaboration but has also made securing data more difficult. Voronis helps companies locate sensitive data, visualize who has access to it, and automatically lock it down. This allows companies to collaborate safely and get value from their data while managing risk and AI will only make this an even greater priority. Our third quarter results reflect the continued healthy adoption of Veroni SaaS. We saw further evidence that our transition to a SaaS business model is working, and SaaS ARR now represents approximately 15% of total company ARR. Third quarter SaaS mix came in at 59%, comfortably ahead of our guidance of 45%. ARR grew 16% year-over-year to $517.5 million, and we have generated $46 million of free cash flow year-to-date, up from $800,000 through the same period last year. Guy will review our Q3 results and our updated guidance in more detail. From a macro standpoint, we continue to see a high level of deal scrutiny and longer sell cycle this quarter, but remain encouraged by the progress of our SaaS transition against these headwinds. Now, I would like to spend some time on how AI presents a meaningful opportunity for Voronis. In my conversation with customers and prospects, AI comes up more and more. And my key takeaway for Voronis is that the growth of AI has the potential to generate significantly more data, significantly more risk, and significantly increase the need for data security. Stepping back, generated AI presents both opportunity and risk for companies. It has an opportunity to boost productivity and efficiency, but in order to safely realize these benefits, there are security risks that businesses must mitigate first. These risks present opportunities for companies like Voronis. The first risk is related to what I call self-inflicted risk, which happens when businesses start using AI to suggest content to employees. Unless data is locked down, there is little to prevent AI from analyzing the company's entire data estate and revealing critical business assets like customer lists, payroll files, or bank account information to the wrong people. Microsoft recommends mitigating this risk by securing sensitive data before deploying CorePilot, which is the company's AI system, and specifically recommend having the right information access controls and policies in place. This is precisely what Varonis does. Without Varonis, right-sizing access control is very challenging. Managing access controls only gets harder over time if the data support and AI will surely contribute further to this problem. Without the right controls in place, AI doesn't know who should see what and surface everything for everyone. This becomes a huge risk for organizations and bad actors who won't even need to search for content they want to steal AI will help them to find it automatically. AI will also increase the risk that companies face from external attackers. A few examples of this include helping bad actors create and translate phishing emails so they can use them in many languages, creating fake data sets in order to trick companies into paying ransoms and creating miles. Unfortunately, the use of AI will continue to lower the barriers to entry for hacking. Varonis helps organizations mitigate this risk by ensuring that only the right people have access to information that they need to do their job. Varonis can help organizations ensure that employees only see content suggestions that are relevant to their job function. If a bad actor bypasses perimeter controls, Varonis can lock out the compromised users or machines, preventing damage from happening. Although it is early and we are still quantifying timing and sizing, we see AI becoming a gross tail into our business as it gains momentum and has a detailed plan to execute it. Apart from demand opportunities that we see arising from security risks related to AI, we are also leveraging this technology in new ways to improve our customer experience. Varonis has been using machine learning and AI for many years in our analysis engine and threat models, for example, and today we are announcing two exciting generated AI capabilities in our SAS data security platform, AI system security operation center, or what we call SOC, and natural language search. Although we do not plan to sell AI as a separate SKU, Our AI Assistant SOC will provide security analysts with an intelligent AI Assistant specialized in performing investigations, remediating threats, and proactively hardening environments. Our SaaS platform can analyze alerts and provide context and next steps to help analysts more efficiently resolve security incidents. With natural language search, AI makes everyone's user a power user. from the help desk to CISO can use natural language to get fast and accurate answers to questions such as, do we have any files containing passwords that are exposed to everyone on the internet? Or, what users have been accessing our payroll files? Today's newly introduced generative AI features build upon the Voronix SaaS benefits that we have discussed with you over the past year and will further reduce the time to value for our customers and improve their experience with Vaughn's. I would like to spend a moment to remind you of the three key benefits of SaaS platform provider customers. First, customers are much better protected with much less effort with automated remediation and proactive incident response. Second, SaaS is quicker to deploy and has significantly lower infrastructure costs. And third, SaaS is easier to maintain and upgrade. Three of the key benefits that we realized are, one, shorter sales cycles, two, larger initial length, and three, margin benefits over time. This quarter, we continue to see additional proof points of these benefits. A large state government organization became a Voroni SaaS customer this quarter. We first gained a department of this state as a customer in 2022. Over the past year, we had a very successful deployment with the department that allowed us to build credibility and ultimately win the broader state government mandate. For this organization, SAS was a must-have because their security team is straight thin. Now, they will benefit from quicker time to value, faster deployment, and most importantly, they will be better protected with our proactive incident response team and automated remediation for Windows on-prem and Microsoft 365. We also continue to see healthy interest from existing self-hosted customers who converted to SaaS this quarter. One example was a multinational financial institution that first became a customer in 2020. Given the large volume of sensitive customer data, we needed to make sure that information was locked down. They originally purchased four on-prem subscription licenses to protect their on-prem Windows environment. This organization's success protecting on-prem Windows drove a desire to consume more of the platform by going both wider and deeper. Veroni SaaS will now help them shrink their blast radius in the cloud just as they did on-prem. Proactive incident response will supplement those thread detection capabilities and Varoni SaaS eliminates the need for this customer to manage their own hardware, which will improve their scalability. They converted their on-prem Windows licenses into a SaaS equivalent package, and they purchased an additional SaaS package for Microsoft 365, widening their coverage. The sustained momentum that we saw from our SaaS transition this quarter coupled with a faster pace of innovation, gets us closer to achieving a $1 billion ARR target and delivering meaningful stakeholder value. With that, let me turn the call over to Guy. Guy.