Varonis Systems, Inc. Q3 FY2025 earnings call

• SaaS transition complete: 76% of ARR from SaaS achieved in less than 3 years, ahead of plan.
• On-prem business challenges: Weaker renewals in federal and non-federal on-prem subscription led to team reduction and end of life for self-hosted solution by Dec 2026.
• SaaS demand: Strong demand for SaaS platform, especially for cloud environments, with traction in Varonis for cloud environments. Investment in Microsoft partnership, Cyral, and SlashNext for growth.
• Customer wins: Fintech and global financial services company converted to SaaS.
• Expense management: 5% headcount reduction to reallocate resources for higher ROI.

ARR increased 18% year-over-year to $718.6 million. 76% of total company ARR comes from SaaS, which is approximately $545 million. SaaS revenues were $125.8 million in Q3. Term license subscription revenues were $24.8 million, maintenance and services revenues were $10.9 million. The on-prem subscription business experienced weaker-than-expected renewals in the final weeks of Q3 in federal and non-federal segments.

• Fourth quarter 2025: Total revenues expected $165M - $171M (4%-8% growth), non-GAAP operating income breakeven to $3M, non-GAAP net income per diluted share $0.02 - $0.04.
• Full year 2025: ARR expected $730M - $738M (14%-15% growth), free cash flow $120M - $125M, total revenues $615.2M - $621.2M (12%-13% growth), non-GAAP operating loss -$8.2M to -$5.2M, non-GAAP net income per diluted share $0.12 - $0.13.
• Share repurchase: $150M share repurchase program authorized due to strong balance sheet and free cash flow.

• Uncertainty in on-prem renewal rates, particularly in federal and non-federal segments.
• Impact of end of life for self-hosted solution on remaining OPS business.
• Potential for continued underperformance in on-prem subscription business affecting overall guidance.

Q: Maybe a question for me is just in terms of kind of you guys had just received FedRAMP high authorization for the SaaS platform. And so I guess just what went into kind of some of the decision to kind of terminate some of the people on the federal team. And just how do you kind of pursue that opportunity going forward?

A: We have the FedRAMP moderate, but we just don't have just the empirical evidence that in terms of when we're looking at all of the investment, this is the place that we need to invest in. We said all along that it doesn't behave like the enterprise business. And we haven't figured out why the federal continued to underperform. It's just the result, we are reducing the footprint of our federal team and just grouping and reevaluating the strategy there. The data there is important, but we see when we just move these customers to SaaS, it's just a tremendous value proposition with all the automation, and we believe that the database activity monitoring and the e-mail is very strong and just want to mainly invest in the place that we can move these customers to SaaS as fast as possible.

Q: Yaki, was there anything you heard that was consistent for why the on-prem deals didn't renew? I mean, I guess, was there anything competitively? And then, Guy, you noted SaaS NRR trends remain at healthy levels. I wonder if you could put a finer point on what level that might imply.

A: Matt, so the win rates stayed the same. We have more than 75% of our ARR coming from the SaaS and the SaaS platform is performing very well. We identified that some of our [ apps ] were very focused on the SaaS customers. And unfortunately, they didn't have the account management trigger for the last leg of the OPS customers, primarily when they are single threaded and not using the full Varonis platform on-prem. You know our methodology of find, fix, alerts. Find the critical data, do the remediation and do the threat detection. And we're just going back to the basics and make sure we are getting back of taking care of these customers in the right way and that they are going to them in a very systematic way, demonstrating the value of SaaS almost treating them as a new sales campaign and just not assuming that the fact that there are good signs and positive conversations, they will just move on. When we look at it, there is just not one common thread. There is not one common theme why this OPS customer didn't renew. And this is why we are just very careful. But I think that what we have seen more than anything else that this is crystal clear tale of 2 companies, this automated platform with just all the coverage that is very easy to take all the rest of the integration. Many customers want DA Cloud and when we are competing with this, what we call, the DSPM ankle biters, we have very, very high win rates there to these OPS customers. So this is really what we are doing now is to make sure we are very focused on the last leg and to move these customers to SaaS. Guy Melamed: And Matt, in relation to your NRR question, as Yaki mentioned, this is definitely -- there's 2 companies right now in Varonis. We talked about that in the Q4 earnings call about the fact that the SaaS business is strong. And when we look at the results in Q3, I think the overall on-prem subscription business is somewhat dragging and masking the healthy business that we have in SaaS. When you look at NRR, and I'm looking at NRR on the SaaS side because that's really what matters. We're definitely seeing that NRR continuing to be in very healthy levels and well ahead of the total company NRR. We do disclose the NRR number on an annual basis, and we will provide the SaaS NRR at the end of Q4. But just to remind you, the conversion uplift is not included in that calculation. So it's really a reflection of kind of the ability to go back to our SaaS customers and continue to sell them additional licenses. And we definitely have plenty to sell to those customers with the amount of platforms that we have. So we're extremely encouraged by the numbers that we see there, and we feel very good about the SaaS business.