Varonis Systems, Inc.

Greetings and welcome to the Verona Systems Inc. 4th Quarter 2023 Earnings Conference Call. At this time, all participants are in listen-only mode. A brief 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 your host, Tim Peirce of Investor Relations. Thank you, Mr. Peirce. You may begin.

Thank you, operator. Good afternoon. Thank you for joining us today to review Varonis' fourth quarter and full year 2023 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 first quarter and full year ending December 31st, 2024. 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. 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 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 Fidelson. Yaki?

Thanks, Tim, and good afternoon, everyone. Thank you for joining us to discuss our fourth quarter and full year 2023 performance. Today, I would like to review our fast transition progress and discuss key drivers of our business in 2024, and how we are positioned to capitalize on them. One year ago, we discussed our initial excitement on Voroni SaaS. At the time, we talked about how we had invested heavily for years to build a world-class cloud native SaaS offering, which allowed our customers to secure their data automatically. We simplified our packaging to include automation that we know our customers need. We had confidence in our product, our team, and our plan, but it was early and we had a lot to prove. Despite ongoing macro challenges, TASERR grew from several million dollars in 2022 to approximately $125 million at the end of 2023. We are proud of the momentum we have achieved so far and how that set us up for 2024 and beyond. Our fourth quarter results reflect the sustained momentum of our SaaS platform, and I'm happy to announce that SaaS ARR represents approximately 23% of total company ARR at year-end. This progress gives us the confidence to accelerate our transition timeline. which we now expect to complete by the end of 2026, a year earlier than our initial . Fourth quarter SAS mix came at 66%, with a fall guidance of 60%. ARR grew 17% year-over-year to $543 million, and we generated $54.3 million of free cash flow in 2023, up from half a million dollars last year. The macro environment remains stable during Q4, and we continue to see a high level of deal scrutiny with multiple levels of approval. Overall, we are excited by the progress of our SaaS transition against this headwind. Guy will review our Q4 results and our 2024 guidance in more detail. We are still in the early innings with our transition to SaaS delivery model and the benefits we expect to realize are just getting started. But Q4 and 2023 overall marked a strong step in the right direction, and I'm very grateful to the entire Voronis team for how they have executed so far. Turning now to our strategic priorities for 2024, of course, Continuing our transition to SaaS will be a primary focus. And to briefly remind you, there are three key benefits our SaaS platform provides to our customers. Customers can achieve automated outcomes, which means we can ensure that data is protected with very little effort. SaaS is quicker to deploy and operationalize because of significantly lower infrastructure and personnel investment. And SAS is easier to maintain and upgrade. Additionally, there are three key benefits that we realized. They are shorter cell cycles, larger initial length, and margin benefits over time. We started to see evidence of these benefits in 2023 and expect them to continue in 2024. In addition to executing on our SAS transition, the dangerous threat environment is creating increased awareness for data security. Within that backdrop, we see three additional drivers. Our new managed data detection and response service, which we call MDDR, the adoption of enterprise-generated AI like CorePilot and Einstein, and increasing compliance requirements such as the new SEC disclosure rule around cyber events. With that, Let's tackle the overall environment and each of these drivers in more detail. Our foundation for innovation has been simple, to follow the data and automate. With SAS, we have been able to innovate much faster. We have gone wider with more coverage of enterprise data stores. And we have gone deeper, adding more automation so that our customers can achieve The business outcome is very little effort, but this is just the beginning. One year ago, we introduced proactive incident response, which provides our SAS customers with assistance from our world-class incident response team. Today, we are introducing the next evolution of this offering with the world's first managed data detection response service, which comes with an SLA and 24 by 7 coverage. Varonis MDDR is a paid service that takes responsibility of managing Varonis out of our customer's hands and places it with us. Customers will no longer have to monitor the Varonis alerts. Instead, our teams will leverage behavioral analysis, machine learning automation, and our unique metadata telemetry to protect them. We introduced this service because no security team or such team And MDDR builds upon the automation enabled by our SaaS platform and maximizes the return on investment. Another driver for us in the year ahead will be the impact of generative AI in large language models. We spent some time last quarter discussing what the stairwind means for Voronis. But to briefly review, generative AI represent both opportunity and risks for companies. The growth of AI has the potential to generate significantly more data and also significantly more risk, which in turn increases the need for automated data security. Without robust data security strategy, AI will reveal sensitive data to the wrong machines and people. Most generated AI tools utilize existing access controls which leaves organizations overexposed to this threat. Companies will also need to ensure that sensitive data is not being used when training LLMs. And hackers will leverage these tools to craft better phishing emails, create malware, or even search for data once inside an organization. Simply put, generative AI is forcing organizations to take a hard look at their data and they are realizing that access control must be correct to ensure sensitive data can be exposed. These are core use cases for Voronis. In support of this, two weeks ago, we announced a strategic partnership with Microsoft to help companies safely harness the power of Microsoft CoPilot. This integration helps customers improve their Microsoft 365 data security posture before, during, and after deploying CorePilot. As a result of increasing risks and regulation, we are seeing data security become more of a priority. Varonis is in a unique position to capitalize on this as we help organizations protect their data like a bank watches its money. Banks spot financial crimes by analyzing financial transactions. Varonis spots cyber crimes by analyzing data transactions. Our customers have Voronis watching the data and the infrastructure close to it, which limits the likelihood of damage. In addition to watching data usage, we lock in sensitive data, visualize access to it, and automatically lock it down. This allows companies to realize more value from their data, leverage it safely, and keep it protected. The world has never been more reliant on data than it is today, And if you dissect every major breach, the one common threat is that nobody was watching the data. Take for an example what happened at the large ride-sharing company with a very sophisticated security stack, but no data security platform. A group of teenagers was able to bypass the multi-factor authentication, access file shells, and steal critical data. It wasn't until the hacker posted messages in Slack but they knew they were breached. The biggest threats can come from insiders. Think about Wikileaks, Snowden, and the Pentagon breach. These breaches highlight the damage that can happen when insiders have access to far too much data. When the perimeter fails and you have a rogue insider, we are best positioned to catch it. Data breaches And the danger of ransomware used to be something we had to explain. And today, every organization knows that they are at risk. The increasingly dangerous threat environment has led governments to enact regulation. For example, the Security and Exchange Commission rule, which took effect in December, required public companies to disclose cybersecurity breaches in a form 8K within four business days after determining it has a material impact on the business. It also puts more structure into how they disclose their cybersecurity risk management strategy and governance while also detailing management in the board roles and expertise in handling these risks. This increased scrutiny on U.S.-listed public companies has raised awareness for cybersecurity, and we believe Veronix is well-positioned to help companies comply with these regulations. With that, I would like to briefly discuss a couple key customer wins from Q4. A real estate company with 5,000 employees became a new customer this quarter. The organization had an executive mandate to find sensitive data across its hybrid environment. During the risk assessment, our team discovered over 250,000 records containing PII and thousands of employment contracts and mortgage documents that were open to everyone in the organization. Our incident response team even stopped multiple data breaches attempts. This customer evaluated Voronis and two other vendors, but ultimately, Veronis was the only one who could automatically ensure their data was protected. As a result, they purchased Veronis SaaS package for Windows, Microsoft 365, Edge, AWS, and S3. We continue to see strong interest from customers wishing to convert to Veronis SaaS. One example is a large municipal government that became a Veronis on-prem subscription customer in 2018. They were leveraging our software to find and protect sensitive data and to monitor abnormal user behavior in a single department. The success this organization had protecting their on-prem environment enabled our team to win the mandate for the broader municipal organization. This quarter, they converted to Veroni SaaS and expanded from just 500 users to 25,000 users. SAS is the ideal fit for them because of automated remediation, improved scalability, and infrastructure saving. They purchased SAS package for Windows, Microsoft 365, Active Directory, and Exchange Online, which will allow them to protect their data without training their security teams. about a month ago, we had our first kickoff event here in New York. With the amount of changes and magnitude of innovation we had in 2023, it was important for us to bring our team together. And I cannot speak enough about the level of energy and enthusiasm during the event. I would like to thank our team for their tireless effort as none of this would be possible without them. We are excited about the reception of our SaaS platform and the momentum of our business. Leave me optimistic as I look ahead, not only to 2024, but also beyond as we approach our $1 billion ARR target. With that, let me turn the call over to Guy.