SaaS transition and ARR/subscription mix shift

“The SaaS conversions are working very well because of the offerings talking about completely automated outcomes.”

“The transition to SaaS delivery model is progressing quickly because of the many benefits that our customers realize. Customers can achieve automated outcomes which means they can ensure the data is protected with very little effort.”

“Additionally, there are three key benefits that we realize; they are shorter sales cycle, larger initial length and managing benefits overtime.”

“SaaS eliminates the two biggest prospects of not wanting hardware or having the headcount to manage the platform.”

“We're seeing that the value proposition of our platform together with the simplicity of our story is shortening deal cycles when compared to on-prem subscription deals.”

“We expect that the ramp-up to this phase will not be linear and momentum should grow in each quarter, with further acceleration in dollar terms in 2025 and 2026.”

“When we look at the conversions in Q2, that really helped us get to approximately 36% of total ARR coming from SaaS or really $210 million.”

“SaaS is really opening up new markets for us because it eliminates, as I said before, the 2 biggest pushbacks we used to get.”

“We're looking now to be in that 49% SaaS mix at the end of the year.”

“We expect that the ramp-up of this phase will not be linear and momentum should grow each quarter, with SaaS conversions showing further acceleration in dollar terms in 2025 and 2026.”

“Additionally, the three key benefits we continue to realize are: Shorter sales cycles, larger initial lands, and margin benefits over time.”

“SaaS ARR now represents approximately 43% of total ARR or approximately $260 million, which reflects the growing momentum of our SaaS platform and our MDDR offering as well as a small contribution from Gen AI.”

“At the same time, our SaaS business remains very healthy, even when excluding the impact of conversion, and we continue to see the SaaS NRR trend at very healthy levels.”

“As Yaki mentioned, we see Varonis as 2 companies: our healthy SaaS business which now represents 76% of our total ARR or approximately $545 million, and our on-prem business, whose weaker performance is masking the underlying growth of SaaS in total company results.”

“In summary -- although we are disappointed with the performance of our on-prem business during the final weeks of the third quarter, we continue to be encouraged by the strong demand we see for our SaaS platform, which now represents 76% of total company's ARR.”

“Despite the softness we experienced in our OPS business, we again saw strong demand for our SaaS platform during Q3. This is happening because customers are able to secure their data with significantly less effort.”

“We finished the third quarter with 76% of our total company ARR coming from SaaS which means that we have now completed the SaaS transition in less than 3 years and more than 2 years ahead of plan.”

“Our SaaS business, it drives our momentum as SaaS customers benefit from the simplicity and automated outcomes of the platform and our on-prem subscription business, the drag on total company ARR growth and masks the strength of our SaaS business.”

“Add to that, just when you go back to our Investor Day that we held in Q1 of 2023, we defined a transition to be complete when we get anywhere between 70% to 90% of our ARR coming from SaaS. This is actually the first quarter that we are above that 70% threshold, finishing at 76%.”

“So I think when we talked about growing 20-plus percent, we feel very confident with our ability to grow 20-plus percent on the SaaS business.”

“This is driven by 3 factors: one, continuation of the healthy new customer demand that we've seen since the introduction of our SaaS platform; two, an increased focus on the SaaS upsell motion starting next year due to the completion of the SaaS transition; and three, the investments that we've made in the Microsoft partnership and the acquisition of Cyral and SlashNext that we expect will start to generate returns.”

“At the current perpetual license revenue run rate, we believe the headwind to our reported total revenue growth from these perpetual license sales will start to normalize as we exit the current fiscal year.”

“Total ARR, the primary metric we use to measure underlying growth, accelerated 18% year-over-year to $711 million. Subscription ARR grew 32% year-over-year to $530 million and is now nearly 75% of total ARR.”

“SaaS momentum accelerated with Metallic ARR, up 77% year-over-year to $131 million. Metallic-SaaS net dollar retention rebounded to an impressive 130%.”

“We saw double-digit growth in term software licenses combined with an accelerating contribution of SaaS revenue, which was up over 80% year-over-year. Subscription revenue is now approaching 50% of total revenue compared to 42% one year ago.”

“As a reminder, our go-to-market motion is led by subscription. So perpetual license sales are generally sold in certain verticals and geographies.”

“So we're seeing just some declines year-over-year modestly on the conversion fees as well as the continued trends on term subscription length. So when we sell term subscriptions, our average term is now down to about two years.”

“We are seeing fewer conversions, so conversions from our existing perpetual support contracts being converted to term software licenses. In today's interest rate environment, those conversions usually come with a multiyear commitment, doing a three-year commitment and some of the interest rate factors and the cost of money as well as where customers are in their cloud journey at the same time.”

“Our updated guidance reflects a mix shift from subscription revenue due to a lower number of conversions from perpetual support contracts to term software compared to the prior year, as well as continued measured spending for lower multi-year transactions in a relatively high interest rate environment.”

“At this trajectory, we expect customer support revenue from term-based software licenses to become the majority of our customer support revenue next fiscal year.”

“At the current run rate, we believe that the headwinds to our reported total revenue growth for perpetual license sales are normalizing as we exit the current fiscal year.”

“At this trajectory, we expect customer support revenue from term-based software licenses to become the majority of our customer support revenue next fiscal year.”

“No, I would say, as I look into next fiscal year, I would say flat to slightly down is what I would expect on a full-year basis.”

“We transformed our business model from legacy perpetual to modern subscription and SaaS.”

“New SaaS ARR contributed two-thirds of our total ARR growth for the full fiscal year '24, and that now represents 22% of total ARR compared to just 15% a year ago.”

“We will see incremental renewal tailwinds again in fiscal year '25, but to a lesser extent than we saw in fiscal year '24. Our average terms are down to about two years now, so the consoles will go up, but the percentage increases will be less than we had in FY24.”

“We expect customer support revenue from term-based software licenses to become the majority of our customer support revenue in fiscal year '25, driven by the attach rate on term software license growth.”

“With the tailwinds we've seen starting to diminish, I think somewhere between flat and low single-digit decline is reflected in our guidance. I would expect that perpetual business headwinds will normalize, with a run rate of about $12 million to $15 million per quarter.”

“We expect the headwinds from perpetual license sales to diminish in fiscal year '25 and beyond.”

“We saw accelerated growth in SaaS ARR from hybrid cloud workloads and our newer workloads such as Active Directory and Cleanroom.”

“SaaS continues to be the primary driver of our new ARR growth, contributing over 60% of our total ARR growth in the quarter. SaaS now represents 23% of total ARR compared to just 17% a year ago.”