Varonis Systems, Inc. Q4 FY2025 earnings call

Key Points

• The company has a SaaS business and a legacy on-prem business. The SaaS business continued its momentum in Q4.
• The decision to end-of-life the self-hosted platform led to a record number of conversions. Q4 SaaS ARR was $638.5 million, 86% of total ARR.
• Announced the acquisition of Altu to strengthen protection against emerging AI risks.
• Highlighted key customer wins in Q4, such as a healthcare service organization that chose Varonis after uncovering misconfigurations and exposed records.
• Emphasized the importance of data security in the context of AI, as AI agents' security depends on data security.

In the fourth quarter, SaaS ARR was $638.5 million, which accounted for 86% of total ARR. SaaS ARR increased 32% year over year excluding the impact of conversion, and total ARR grew 16% year over year to $745.4 million. At the end of the fourth quarter, there was approximately $105 million of non-SaaS ARR remaining.

2026 Guidance

• SaaS ARR growth excluding conversions is expected to be 27% to 28%.
• Total SaaS ARR is projected to be $805 million to $840 million, representing growth of 26% to 32%.
• Free cash flow is expected to be $100 million to $105 million.
• Total revenues are expected to be $722 million to $730 million, representing growth of 16% to 17%.
• Non-GAAP operating income is expected to be breakeven to $4 million.

Risks

• There is a $30 to $50 million headwind on free cash flow and ARR contribution margin in 2026 due to federal and state government customers potentially not converting to SaaS.
• Risks associated with AI-powered threats, where cybercriminals leverage AI agents to infiltrate organizations, and the challenge of securing AI agents and their associated data.

Q: Matthew Hedberg asked about how the 18% to 20% SaaS ARR growth excluding conversions squares with the total ARR guide.

A: Guy Melamed explained that SaaS ARR excluding conversion is the key KPI focusing on new customers and existing expansion, with a starting point of $120 million net new organic SaaS ARR compared to $109.5 million in 2025.

Q: Saket Kalia inquired about the proportion from new customers vs existing and remnants of on-prem ARR.

A: Guy Melamed stated that no non-SaaS ARR is expected by the end of 2026, and reps can focus on new and existing customers with SaaS NRR potentially increasing.

Q: Brian Essex asked about the 110% net dollar retention and the impact of Copilot and AI demand.

A: Guy Melamed mentioned that SaaS NRR is on a larger base, impacted by rep focus on conversions but has the potential to improve, and Yakov Faitelson noted that AI is a significant driver with the Altu acquisition aiding in addressing AI-related security concerns.