Varonis Systems Inc Q1 FY2023 Earnings Call

Greetings, and welcome to the Varonis Systems First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Tim Perz, Director of Investor Relations. Thank you, sir. You may begin.

Thank you, operator. Good afternoon. Thank you for joining us today to review Varonis' first quarter 2023 financial results. With me on the call today are Yaki Faitelson, 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 second 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. 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 first quarter 2023 earnings press release and investor presentation, which can be found at www.varonis.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 Faitelson. Yaki?

Thanks, Tim, and good afternoon, everyone. Thank you for joining us to discuss our first quarter 2023 performance. I'm happy to share the progress on our SaaS transition, excited by the initial SaaS adoption we saw and feel optimistic about our ongoing SaaS journey. So let's start with our first quarter results. The reception of the Varonis SaaS continues to exceed our expectations, and this quarter provided us with additional proof points that our strategy to transition to SaaS is working. Our first quarter SaaS mix came in at 37%, well ahead of our guidance for 15%, and ARR grew 18% year-over-year to $478.1 million. We reported revenues of $107.3 million and free cash flow of $35.7 million. At the same time, the economic slowdown continues to impact our customers, and as a result, our near-term growth remains below where we believe it can be over the long term. We are still seeing additional scrutiny on deals in Europe and North America, but Varonis SaaS has come out at just the right time in an environment where all spending is being highly scrutinized. Varonis SaaS offers customers a faster time to value, with drastically reduced overall total cost of ownership because of the lower infrastructure and headcount-related expenses required to operate. We are pleased with the team's performance despite the difficult macro backdrop. And though we are only a quarter into the year, we are raising our SaaS mix and ARR guidance. Guy will review our Q1 results and our updated outlook in more detail. Before I talk more about the progress of our SaaS rollout and what we are hearing from customers, I want to remind you why Varonis exists and the problem we solve. Data is the most important asset that a company has next to its people. And because of its importance, data is a prime target for bad actors. At the same time, data is out of control. The growth of the cloud and remote device usage has only made securing data more challenging. Varonis helps companies locate sensitive data, visualize who has access to it and automatically lock it down. This allows companies to collaborate safely and get the most value from their data while managing risks. Recent events made it obvious how hard it can be to protect data from the risk of insiders, but it's less obvious that outside attackers become insiders when they compromise the system of a person. In either case, without our solution, employees and contractors can always ask for sensitive data they shouldn't access. Now let's turn to some of the feedback that we have recently begun hearing from customers who are using Varonis SaaS. As a reminder, last quarter and at our Investor Day in March, I spoke about three key benefits our customers receive from our SaaS plan. First, customers are much better protected with much less effort through our automated remediation and proactive incident response. Second, SaaS is easier to deploy and has significantly lower infrastructure costs. And third, SaaS is easier to maintain and upgrade. At our Investor Day, I spoke about three benefits we expect to realize: one, shorter sales cycle; two larger deals; and three, margin benefits over time. So it is still early, but we as a company and our customers are already beginning to see evidence of these benefits. One example is a specialty chemical manufacturer with 1,000 employees that suspected they had issues with overexposed data. However, prior to installing Varonis SaaS, they found it difficult to visualize who had access to data and configuration risks, let alone remediate them. Within the first day of installation, Varonis enabled them to see exposed sensitive information that was open to the entire company, and even sensitive files that were open to anyone on the Internet. For this link security team, stopping its visibility alone wouldn't have been enough. Manual remediation was a nonstarter as it does not scale and never ends. Before installing Varonis, this team had successfully tried multiple other point solutions that did not meet their needs due in part to the lack of automation. Leveraging the power of automation with Varonis SaaS has allowed them to classify PII, alert around ransomware, and most importantly, remediate overexposed links in Microsoft 365. In the end, they purchased Varonis SaaS packages to protect their on-prem Windows and Microsoft 365 deployments. Another example is one of the country's largest convenience store operators. This company was performing a gap analysis on its security architecture and realized that it was critical to understand who can and does access data in Microsoft 365, and they also had no way to locate sensitive data in their environment at scale. They could not see links shared with anyone on the Internet older than 30 days, and there was no way to remediate old links without breaking collaboration. Prior to bringing us in, they were trying to address these problems using Microsoft's built-in functionality, but it proved to be manually intensive and ultimately unsuccessful. Once they installed Varonis, this organization gained real-time visibility into these overexposed links. Not only that, but our proactive incident response team identified and stopped a live ransomware attack on their network. A customer had a number of perimeter technologies that were bypassed, but because we analyzed the data, we found files that were being encrypted on the network and immediately locked the bad actor out, stopping the incident. What started as a data classification project quickly expanded into much more. This customer purchased Varonis for Windows and Microsoft 365, allowing them to realize the benefits of proactive incident response, streamline procurement processes, and simplify the ongoing maintenance of the Varonis deployment. In addition to these new customer wins, we also had several existing customers convert to Varonis SaaS this quarter. One of these conversions was a Fortune 500 insurance company that first became a customer in 2020. As we prepared for renewal discussions, our customer mentioned a multi-year plan to migrate its on-premises data center into the cloud and wanted to leverage the power of Varonis SaaS. Prior to the renewal, they had 13 on-prem subscription licenses, and after the renewal, they purchased the Varonis SaaS package for Windows, Microsoft 365, Active Directory, and Exchange Online, as well as DA Cloud for AWS and S3. As a result of this conversion and upsell, we recognized an increase in ARR of greater than 30%, which gives us additional confidence in our pricing model. We are in discussions to protect our Salesforce.com and JIRA environments as well as expanding into additional geographies in Europe and Asia. In my conversations with customers, it is clear that the simplicity and automated protection of Varonis SaaS is resonating, which leaves me feeling optimistic about our outlook despite the economic slowdown that is impacting our customers. With that, let me turn the call over to Guy. Guy?

Thanks, Yaki. Good afternoon, everyone. In addition to providing more color on our first quarter performance and our updated 2023 full year outlook, I plan to focus my time today on our SaaS transition and how the economy continues to affect our customers and, in turn, our business. We are pleased with how the team performed during Q1 and are encouraged about what this means for the rest of the year. Although it is early and we have a lot of work to do, the reception of SaaS from our customers and our sales force, together with our confidence in the pipeline and the ARR uplift we are seeing, allows us to raise both our SaaS mix and our full-year ARR guidance. As I discussed at the Investor Day in March, ARR, free cash flow, and ARR contribution margin are the leading indicators for our business during this transition. The shift from on-prem subscription licenses, where approximately 80% of the deal value is recognized upfront, to a SaaS model with fully ratable revenue will cause initial headwinds on reported revenue as the SaaS mix increases. However, these headwinds are simply a function of accounting treatment and are not indicative of the trajectory of our transition or of our overall business. In fact, the greater these accounting-related headwinds are, the faster it means we are progressing throughout our transition, which we obviously view as positive. Given the momentum we saw in the first quarter and our pipeline and expectations going forward, we are raising our ARR and SaaS mix outlook, which also means we are adjusting lower our revenue outlook. Our better-than-expected start is being driven by Varonis SaaS, which is resonating with our customers and our sales force. Our first quarter SaaS mix represents 37% of new business and net new upsell ARR, exceeding our guidance of 15%, and the examples that Yaki just discussed are evidence of this reception. Early feedback and the average deal sizes we have seen so far give us further confidence in the pricing uplift that we previously provided. To that end, during the quarter, some of our reps did decide to go back to deals where an on-prem subscription quote was already put in front of the customer and introduced the SaaS product into the conversation. While some of these did convert, for other deals, it created some near-term disruption and elongated those sales cycles. We think this will work itself out in the second part of this year and has already been factored into our guidance. We even saw some existing customers during the renewal conversations express happiness at converting their entire platform to SaaS and buying additional SaaS licenses. Although the ARR impact of these renewal conversions wasn't material this quarter, it was ahead of our projection. As it relates to our updated guidance, we're not assuming significant conversions or a material change in the dollar value of these conversions versus Q1. But as a modeling note, if these conversions continue to trend ahead of our projections, this will further benefit our North Star metrics, which are ARR, free cash flow, and ARR contribution margin. At the same time, this would cause a headwind to reported revenue and operating margin, which you should view as a positive in terms of the progression of the transition. As I look at our Q2 pipeline of renewal conversions, it has increased significantly versus Q1, which you should keep in mind as you think through your models. Turning to our sales force, as expected, we saw some turnover, but we are pleased with the engagement of the vast majority of our sales force and their ability to transition to selling SaaS is tracking better than our initial expectations. Further, some of this success is being driven by our learnings from our 2019 transition, allowing us to set up programs to reduce friction while providing the right incentives for both the rep and the company. As Yaki mentioned, we believe we have the right solution for the market since Varonis SaaS allows customers to achieve a faster time to value with significantly lower infrastructure costs. And while it's still early in the year, we feel good about the benefits both our customers and we will achieve as a result of the SaaS transition. In the first quarter, ARR grew 18% year-over-year to $478.1 million, and assuming the same SaaS mix as we guided for, we would have been well ahead of our revenue guidance. We generated $35.7 million of free cash flow, which was up from $21 million in the same period last year, reflecting our commitment to top-line growth while improving cash flow generation. I'd like to elaborate on what I said earlier regarding the macro environment. During Q1, we saw the slowing economic climate continue to weigh on customers' purchasing patterns. Across the board, we continue to see an elevated level of deal scrutiny and extended sales cycles involving multiple layers of approval, with Europe, in particular, seeing the largest impact. We expect longer deal cycles to continue as a result of ongoing budgetary scrutiny, and our updated guidance already takes this and more into consideration. Turning now to our first quarter results in more detail. Before I get into the numbers, let me remind you of what we've said from the beginning. ARR, free cash flow, and ARR contribution margin are the leading indicators for this transition. Remember, the shift in our business from term licenses to a SaaS model will make our traditional income statement metrics less indicative of the true health of our business than they have been in the past. We have again included several slides in the investor presentation that illustrate the impact of the transition on various metrics. Now on to the numbers. Q1 total revenues were $107.3 million, up 12% year-over-year. During the quarter, as compared to the same quarter last year, we had approximately a 7% headwind to our year-over-year revenue growth rate due to the increased SaaS sales in our bookings mix, which are recognized ratably versus the upfront recognition of our on-prem subscription products. Subscription revenues were $83 million, and maintenance and services revenues were $24.4 million, as our renewal rates again were over 90%. In North America, revenues grew 18% to $81.2 million or 76% of total revenues. In EMEA, revenues declined 5% to $22.9 million or 21% of total revenues. Currency was a 7% headwind in the region. Rest of the World revenues grew 9% to $3.2 million or 3% of total revenue. Just to remind you, reported revenue growth rates throughout all regions were impacted by a higher SaaS mix. Moving down the income statement, I'll be discussing non-GAAP results going forward. Gross profit for the first quarter was $92.9 million, representing a gross margin of 86.5% compared to 85.6% in the first quarter of 2022. Operating expenses in the first quarter totaled $97.1 million. As a result, the first quarter operating loss was $4.3 million or an operating margin of negative 4%. This compares to an operating loss of $7.9 million or an operating margin of negative 8.2% in the same period last year. During the quarter, as compared to the same quarter last year, we had approximately a 6% headwind to our operating margin as a result of the increased SaaS sales in our bookings mix, which are recognized ratably versus the upfront recognition of our on-prem subscription products. First quarter ARR contribution margin was 5.6%, up from 4.1% last year, reflecting our ability to drive strong incremental margins while growing ARR and transitioning to SaaS. During the quarter, we had financial income of approximately $7.2 million, driven primarily by interest income on our cash deposits and short-term investments. Net loss for the first quarter of 2023 was $0.1 million or $0.00 per basic and diluted share compared to a net loss of $10.2 million or a loss of $0.09 per basic and diluted share for the first quarter of 2022. This is based on $108.4 million and $108.2 million basic and diluted shares outstanding for Q1 2023 and Q1 2022, respectively. As of March 31, 2023, we had $756.3 million in cash, cash equivalents, marketable securities, and short-term deposits. For the three months ended March 31, 2023, we generated $36.8 million of cash from operations compared to $24.5 million generated in the same period last year, and CapEx was $1.1 million compared to $3.5 million last year. During the first quarter, we repurchased 100,000 shares at an average purchase price of $25.19, and we have $41 million remaining on our share repurchase authorization. We ended the quarter with approximately 2,150 employees, roughly flat versus last quarter. Turning to our guidance in more detail. Our second quarter and full year guidance now assumes a 35% SaaS mix of new business and upsell ARR, up from 15% previously. A few additional modeling notes on this metric as we look to the back half of the year. First, Federal's largest quarter is the third quarter, and because we are not yet Fed-run certified, we expect this to be a headwind to our SaaS mix in Q3. Second, despite the momentum we saw this quarter, Q1 is still the smallest quarter of the year. As such, we are taking a prudent approach in building our outlook as the dollar value of deals we expect to close in the second half is much larger than in the first, which aligns with historical trends. And third, we're not assuming significant conversions of renewals from on-prem subscription to SaaS or a material change in the dollar value of these conversions versus Q1. We are raising our ARR guidance, which reflects the faster adoption from our customers to Varonis SaaS. This also results in a greater ARR contribution margin, which reflects our ability to focus on operating leverage during the transition. The higher SaaS mix drives corresponding adjustments to revenue and operating income guidance because of the ratable accounting treatment of SaaS versus the upfront accounting treatment of on-prem subscription. Ultimately, we view the update to our guidance as a clear sign that the transition is progressing in a positive direction and continue to view ARR, free cash flow, and ARR contribution margin as our North Stars during this transition. Lastly, as a reminder, our guidance continues to factor in headwinds from a macro perspective, which includes ongoing budgetary scrutiny, longer sales cycles, an increase in unemployment, and worsening of other economic conditions. From a SaaS transition standpoint, we are still factoring in a ramp-up period in the first half of the year, which assumes increased sales force turnover, lower sales productivity, and longer sales cycles as on-prem subscription deals in flight may convert to SaaS. Now turning to our guidance. For the second quarter of 2023, we expect total revenues of $118 million to $120 million, representing growth of 6% to 8%. Non-GAAP operating income of $0.5 million to $1.5 million and non-GAAP net income per diluted share in the range of $0.01 to $0.02. This assumes 127.2 million diluted shares outstanding. For the full year 2023, we now expect ARR of $520 million to $528 million, representing growth of 12% to 14%. Free cash flow of $20 million to $25 million, which includes a $6 million to $8 million headwind related to the TCJA capitalization of R&D provision. Total revenues of $510 million to $520 million, representing growth of 8% to 10%. Non-GAAP operating income of $29 million to $34 million and non-GAAP net income per diluted share in the range of $0.30 to $0.34. This assumes 126.8 million diluted shares outstanding. In summary, despite continued challenges in the macro environment, the year is off to a solid start with the adoption of Varonis SaaS showing positive momentum reflected by our first quarter SaaS mix of 37%. These results in our pipeline give us the confidence to raise our full year ARR outlook while driving strong incremental contribution margins. With that, we would be happy to take questions.

At this time, we will be conducting a question-and-answer session. Our first question comes from Matt Hedberg with RBC Capital Markets. Please proceed with your question.

Great, guys. Thanks for taking my question. And congrats on the execution. The environment certainly does not seem to be easy out there. Yaki, obviously, a lot of the focus on the call was on SaaS adoption. And I really enjoyed the example you give about a large insurance customer. I think you said they saw a 30% uplift in ARR when they converted to SaaS. I'm curious, is that sort of a standard uplift that you're seeing across the base when it converts? Or maybe said differently, if a customer just goes straight to SaaS initially, is a 30% increase in ARR or ACV spending typically what you're seeing versus an on-prem contract?

Hi, Matt. We're just in the early stages. Matt, as we discussed before, 25% to 30% is relatively easy to justify in terms of the total cost of ownership. It's a wash, but when we convert to SaaS, we also believe that a lot of customers will buy significantly more bundles. You know what is very exciting for us is that the automated outcome and coverage is really working. So far, the conversion to SaaS is really surprising us from every aspect and primarily the overall value proposition. So in terms of the total cost of ownership, when it's apples-to-apples, we think that it should result in an overall increase, but we also believe that customers will consume significantly more licenses.

Our next question comes from Hamza Fodderwala with Morgan Stanley. Please proceed with your question.

Hey, guys. Thank you for taking my question. Hamza here. So I just want to clarify, Yaki, the point you made earlier. Is it fair to say that the environment got worse in Q1 versus Q4? Or was it relatively consistent?

Yeah. Overall, I would say that it was relatively the same. It's a hard macro environment, but I will tell you what we do see, and historically, this is something that works for us. At the end of the day, attacks can come from anywhere and any device, but they're always going in one direction, and this is the data. When you have this hard environment, people analyze what will give them the biggest ROI. When you need to protect data, if you fail with everything else but protect the data with us, you did your job right. If the data is not protected and you have 99% perimeter security with one insider that we saw in the Pentagon incident, it can expose much of the data, leading to lasting damage. So our customers are very attentive. With SaaS, we're just reducing a lot of friction. What we discussed at the Analyst Day is that 10% of the effort leads to orders of magnitude of value. With DA Cloud and everything we are doing, we see more coverage and really with the incident response. It's pretty amazing. They need to do very little to get a lot of value. Hard macro, but I think that data security is a secular trend. If we keep doing what we're doing in terms of coverage and automation, we can, relative to others, perform very well.

Our next question comes from Saket Kalia with Barclays. Please proceed with your question.

Okay, great. Hey, good afternoon, guys. It's Saket from Barclays. Thanks for taking my question here. Yaki, maybe for you. Clearly, the SaaS transition is going faster than you expected. Maybe I could just shift to a product question. What's been the early feedback from customers in terms of feature parity between the SaaS products and the on-prem? And to the extent that there's still a gap, right, and you'll tell us whether there's a gap, how do you think about that narrowing over time? Does that make sense?

Yeah. So thanks for the question. For new customers, it's just a no-brainer because we have so much more advanced capability in remediation, mainly in 365, in proactive incident response, and all the benefits that come with SaaS. This is a non-issue. For customers that have some features that we still don't have in the SaaS platform, we are moving very fast to narrow the gap. Within several quarters, we expect to close all gaps and facilitate frictionless migration. Now we have 80% of what we have on the on-prem platform, but we are moving very, very quickly. As I said before, in every aspect of the SaaS transition, we have very positive indicators.

Our next question comes from Joel Fishbein with Truist Securities. Please proceed with your question.

Thank you for taking my questions. And good execution against your plan. Guy, for you. Can you just go through what the percent of business that were going to renew? I think you said something about a decent renewal in Q2, but I'd like to understand the cadence of that throughout the year. And then your assumptions around conversion rates would be helpful. Thank you.

First of all, if you're talking about the renewal rate, our renewal rate is consistently over 90%, and that's continuing. In terms of the conversion, I think that's a very good question. When we look at Q1, the conversions weren't significant. It was a couple of hundred thousand dollars. However, in Q2, we've seen increased renewal conversions in the pipeline. Now, more reps are talking about SaaS with our existing customers when renewals are coming up. To be clear, we're not providing any additional incentives for this; they're doing it on their own because customers see the SaaS benefits. It's a much better product, and reps receive higher commissions on the uplift. Based on this larger pipeline, we have factored in just over a million dollars into our Q2 guidance. While this isn't a significant number, we want to highlight it for modeling purposes, as if renewal conversions become more significant, it will lead to a larger headwind to revenue and operating margin, but that presents a positive development for us, especially on ARR.

Our next question comes from Fatima Boolani with Citi. Please proceed with your question.

Hi, good afternoon. Thank you for taking the question. Guy, you talked in your script about elevated sales turnover, which was pretty much in alignment with your expectations and what you articulated to us when you discussed some risks around the transition. I'm curious about your thoughts on sales capacity for the remainder of the year and how we should anticipate re-hiring or backfilling. Or should some of the dynamics, like ASP uplift and the discussions surrounding higher ACV conversions with existing customers, compensate for some of the turnover? So any commentary on sales capacity given the elevated turnover would be greatly appreciated.

As you mentioned, and as I talked in the prepared remarks, we did see some turnover, but it was very much as expected, and we're pleased with the engagement of the vast majority of our sales force and their ability to transition to selling SaaS is tracking better than our initial guidance. We're getting great feedback from our reps and customers on the product and the benefits. We're hiring in strategic positions and locations, wanting to continue to invest while doing so prudently. Overall, we're very pleased with the reception of SaaS and how the sales force has received that.

Our next question comes from Roger Boyd with UBS. Please proceed with your question.

Hey, thanks for taking the question. And congrats on the execution. Just to be clear, I think you talked about the prior revenue guide of 10% to 12% growth, assuming that the environment would deteriorate further from what you saw in Q3 and Q4. I guess, I'm wondering if you added any additional macro considerations to the model or if you hadn't seen the outperformance in SaaS mix, would you likely have reiterated the full year revenue guidance?

That's a great question. Our reduction of revenue, coming down by $9 million, is solely related to the increase in SaaS mix from 15% to 35%. We baked in macroeconomic uncertainty at the beginning of the year. We didn't change anything related to that, and the entire reduction of revenue is related to the SaaS uplift.

Our next question is with Brian Essex with JPMorgan. Please proceed with your question.

Hi, great. Thanks, good afternoon. And thanks for taking my question. Maybe I guess for either of you, if you could give us a little bit of color. I think you mentioned during the prepared remarks that you had some customers decide to convert to SaaS and some stuck with on-prem. Could you give us a little moment around the gating factors there for customers in the pipeline? What got them over the hurdle to convert? And then conversely, which ones decided to stay on-prem and why?

Yeah. We are not pushing conversion. Customers realize that some features we have with 365 and proactive incident response prompted them to convert. It made much more sense for them to migrate. Over time, we expect the vast majority of customers to want to shift to SaaS; it's simply a question of timing and feature availability.

To add, there are basically two types. One is new customers receiving quotes that had on-prem subscription pricing. We saw many of those deals convert to SaaS within the quarter and expect that to continue. As Yaki mentioned, the conversion of existing customers with renewals from on-prem subscription to SaaS wasn't significant in Q1, but the color I provided on the increased pipeline we see in Q2 is why we called that out.

Our next question comes from Rob Owens with Piper Sandler. Please proceed with your question.

Good afternoon. And thanks for taking my question. I'm curious how the shift to SaaS is impacting the top of the pipeline, any quantification standpoint you can provide. Thanks.

Overall, what I can say is that the offering is resonating much better with customers. If you go to every organization and say they only want the right people accessing the right data, everyone will agree. The question is how can you do it in a frictionless manner and ensure you are fully automated. This is what we're achieving with SaaS. The overall reception in terms of the value and deployability is much better now.

It's eliminating two of the biggest hurdles from customers when we sold on-prem subscriptions, namely, hardware management and insufficient personnel. These benefits are significant, generating a lower total cost of ownership for customers with enhanced automation, as Yaki pointed out.

Our next question comes from Josh Tilton with Wolfe Research. Please proceed with your question.

Hey, guys. Thanks for taking the question. I just have a quick one on the numbers. I think the previous commentary you ended 2022 with $3.5 million in ARR from DA Cloud. You also had a 10% SaaS mix. I'm trying to understand if that 10% SaaS mix, which is new and upsell business, is part of the $3.5 million that you finished the year with in DA Cloud? Or is that on top of the $3.5 million in ARR from DA Cloud? Thank you.

The 35% SaaS mix is related to Q1 2023. I think there's been some confusion regarding how that metric is defined, so let me clarify. The SaaS mix is the percentage of new growth ACV, which is based on a much larger denominator than if you calculate it from net new ARR. However, regarding your question, it relates to Q1 new ACV sales and is not related to last year.

Our next question comes from Chad Bennett with Craig Hallum Capital Group. Please proceed with your question.

Great, thanks for taking my question. Kudos on the accelerated shift to the SaaS business, and you're seeing deals in flight shift, which is good. Just Guy, considering the ARR, pretty dramatic ARR shift on a percentage basis from '15 to mid-30s in your expectations for this year from an ARR perspective to SaaS. It sounds like the price improvement related to the SaaS deals or ACV related to those has held, right, based on your commentary? However, I'm curious as to why the magnitude of going from 15% to 35% of bookings from SaaS would result in only a $6 million benefit in the guide. Am I missing something?

Let me clarify how we're thinking about this. First of all, this is the first quarter of the year, and as mentioned, Q1 is the smallest quarter of the year, coupled with macro uncertainty that we continue to factor into our guidance. We take our commitment to the Street very seriously. We feel very encouraged about the SaaS transition based on the feedback received. The pricing we've achieved thus far provides confidence in the 25% to 30% uplift. So it's early in the year, but we're very confident in where we stand after one quarter.

Our next question comes from Andrew Nowinski with Wells Fargo. Please proceed with your question.

Okay, thank you. You mentioned an existing Fortune 500 insurance company that renewed, and you upsold DA Cloud to that customer, which I think contributed in part to that 30% increase in ARR you saw. How much of that 30% increase was attributable to DA Cloud? What kind of attach rate of DA Cloud are you seeing when a customer buys the SaaS platform?

One of the things we talked about at Investor Day is that we will discuss Varonis SaaS as one mix to avoid confusion around the puts and takes. The 37% SaaS mix in Q1 and the guidance we provided for 35% for the year combine everything under SaaS. I can tell you that we're pleased with the adoption of both Varonis SaaS and DA Cloud. Customers definitely perceive the benefits, and we're excited to raise the number from a 15% SaaS mix to 35% after one quarter.

Regarding DA Cloud and attach rates, when you look at our customers, each one of them has multiple DA Cloud platforms that we support. We believe that just on paper, we can sell to all of them, and we think the market is becoming more prepared for this. Everything we had on-prem, along with the features in 365, we are bringing to these platforms. We believe the overall platform and value proposition hold massive potential.

Our next question comes from Shrenik Kothari with Robert W. Baird. Please proceed with your question.

Hey, thanks for taking my question. You mentioned from the SaaS transition standpoint that you're still factoring in the ramp-up period in the first half of the year, which assumes increased turnover and productivity and longer sales cycles. Given that you mentioned the faster transition and particularly the increased renewal conversions happening without additional incentives and the larger pipeline visibility you discussed, can you provide more granularity around the implications on the turnover and ramp productivity?

When we gave guidance at the start of the year, we talked about the first two quarters where we expected most of the friction due to higher sales turnover, which I can confirm has been as expected. The engagement of our sales force has been very positive, which is encouraging. The friction also stems from deals in flight where our sales force approach customers with on-prem subscription pricing and sought to transition them to SaaS, creating some friction in discussion. We expect this to clear within the second half of the year, as the majority of friction happens in the first six months, which we highlighted in the last call and Investor Day. That expectation remains unchanged, and we believe we can clear through those conversations with customers for the most part in Q2.

We have reached the end of our question-and-answer session. I would now like to turn the floor back over to Tim Perz for closing comments.

Thanks, everyone, for joining us. We appreciate your interest in Varonis.

This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time.