Varonis Systems, Inc. (VRNS) Earnings Call Transcript & Summary

Greetings, and welcome to the Varonis Systems, Inc. Second Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Tim Perz, Investor Relations. Thank you. You may begin.

Thank you, operator. Good afternoon. Thank you for joining us today to review Varonis second quarter 2026 financial results. With me on the call today are Yakov 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 third quarter and full year ending December 31, 2026. 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 available in our second quarter 2026 earnings press release and our investor presentation, which can be found at aronis.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. We appreciate you joining us to discuss our second quarter 2026 results. In Q2, SaaS ARR, excluding conversions, increased 25% year-over-year to $598.1 million and total SaaS ARR, including conversion was $726 million. The strong underlying trends we have seen in recent quarters continued in Q2, and we believe that our performance could have been even better if we had closed a few large deals that slipped due to the rumors in the news in the final week of the quarter. However, we have since closed some of those deals in July and Q3 is off to a strong start, which give us the confidence to raise our full year guidance for SaaS ARR above the second quarter beat. We are also seeing momentum in our pipeline because of the secular tailwind from the need to secure AI and the data that's powered by it as well as benefits from our expanded offering. Let me spend a moment on the positive underlying trends that we saw in Q2. First, we saw SaaS ARR from new logos grow by more than 20% in the quarter, which is an important signal that organizations are recognizing Varonis ability to secure their data and AI environments. Second, we saw growing momentum from our newer products, including Atlas Interceptor and database activity monitoring, which reinforces the breadth of our platform and the expanding set of use cases we can address for our customers. Guy will review our results and guidance in more detail shortly. Before discussing our key customer wins from the quarter, I want to step back from our near-term results and highlight why we believe Varonis is best positioned to help companies safely adopt AI and prevent data breaches. Our opportunity starts with a simple reality. As companies look to adopt AI, the value and risk associated with their data increases, customer wants to move faster and unlock the productivity benefits of AI, but they cannot do that confidently if sensitive information is overexposed, permissions are too broad and activity is not monitored or managed. This is exactly the problem Varonis was built to solve. We see three areas where this shift creating urgency: understanding and securing the data itself, controlling how AI systems and agents interact with data and defending against attackers that are using AI to move faster and operate at greater scale. First, customers need to know where their sensitive data lives, who can access it and where and whether that access is appropriate. AI makes this more important because it reduces the friction between employees, agents and the information those identity can reach. Data that was already exposed become easier to find, summarize and act on. Second, organization needs guardrails around the models, agents and pipelines that are being connected to enterprise data. It is not enough to know that an AI tool exists. Customers need to understand what data it can touch, what permissions it inherits, what action it can take and whether its behavior is normal. In an agentic environment, activity that once required a person to invest time searching, downloading and moving files cannot happen in seconds. That speed raises the stakes for automated remediation and real-time detection. Third, Customers are facing threat environment where adversaries are also using AI. Attackers can generate more convincing social engineering campaigns, automated their attacks and scale techniques that used to require more time and specialized resources. The attack surface also expand as agents gain access to e-mail collaboration tools, applications and data stores. This reinforces the need for security controls that are continuous, automated and deeply connected to the data layer. These dynamics create a strong secular tailwind for Varonis. Customers are asking the same sets of questions with greater urgency, what sensitive data do we have, where it is exposed, who or what can access it and how do we reduce risk without slowing the business down. Our answer is to secure data from the inside out through automation. This is also why data security and AI security cannot be treated as separate problems. AI inventory is more valuable when it tied to the data that AI systems can access. Runtime guardrails are stronger when they have context around identity, data exposure and accurate classification and labeling. Detection is more effective when it is informed by normal data access patterns. Customers want to move quickly, but they need confidence that the right controls are in place. Automation is the common thread. The traditional approach to security was built for a slow world when humans could review access, investigate alerts and manually clean up risk. That model does not work when data volumes are exploding, permissions are constantly changing and AI agents can act at machine speed. In our view, the only practical way to manage AI-driven risk with AI-driven defense. With that, I would like to briefly discuss a couple of key customer wins from Q2 that show how these themes are translating into real demand. This quarter, a health care organization with more than 40,000 employees became a Varonis customer. This company was looking to deploy AI in order to deliver better patient care and needed to establish guardrails around AI usage, monitor how data was being leveraged across more than 100 AI projects and automatically remediate overexposed HIPAA and PII data. Our risk assessment uncovered significant exposure of sensitive data, including patient record and HIPAA data and the customer ultimately purchased Varonis for Atlas Complete to safely adapt AI tools, including Copilot, cloud and internally built LLMs as well as Varonis for AWS, Azure, Databricks, Snowflake, Microsoft 365 and NVIDIA. Another highlight from this quarter was a financial services company that expanded its Varonis deployment after performing a vendor consolidation review. The customer was using Varonis to secure on-premise file servers and wanted to consolidate multiple point products such as PEM and e-mail security into our platform as part of a broader vendor rationalization initiative led by its CISO. They are also preparing to adopt AI and leverage automatic remediation to prevent attacks. We demonstrated how Varonis could secure data access across cloud, SaaS and AI environments while replacing several stand-alone tools. During the cloud evaluation, we automatically detected and prevented a significant security incident, which further validate the value of our platform. The customer ultimately expanded its coverage with Varonis for Atlas Complete, Interceptor DEM as well as Varonis for Ia, Salesforce and Microsoft 365. In summary, our Q2 results were highlighted by SaaS ARR, excluding conversion growth of 25%. SaaS ARR from new logos growing more than 20% and growing momentum from our newer products, including Atlas Interceptor and database activity monitoring. Organizations are prioritizing data and AI security, and we are uniquely positioned to help customers secure sensitive data, govern AI and automated risk reduction. With that, let me turn the call over to Guy. Guy?

Thanks, Yaki. Good afternoon, everyone. Thank you for joining us today. Our second quarter performance represents strong new logo activity as our team continues to execute on the tailwinds in our business and help customers secure their data and AI, and we continue to see increasing adoption of our newer products. While we came in above the top end of our guidance range, we believe our Q2 upside was limited because of some large deals that slipped at the end of the quarter due to the rumors in the news. As Yaki said, we have since closed some of these deals, including a 7-figure deal, and the third quarter is off to a strong start. The Q2 outperformance, coupled with a strong start to Q3 and our healthy pipeline, gives us the confidence to raise our full year guidance above the beat for SaaS ARR growth, excluding conversions and also for free cash flow. In the second quarter, SaaS ARR, excluding conversions, increased 25% year-over-year to $598.1 million, and total SaaS ARR was $726 million. In Q2, we had $11.4 million of conversion ARR, and we finished the quarter with approximately $59.3 million of non-SaaS ARR remaining. Year-to-date, we generated $69.1 million of free cash flow, down from $82.7 million in the same period last year, which reflects the previously communicated headwind from the end-of-life announcement of our on-prem platform and also includes approximately $11.9 million of acquisition-related costs related to the accounting treatment of our acquisitions. Adjusting for the acquisition-related costs, year-to-date free cash flow would have been approximately $81 million. We are confident in our cash flow generation and are raising our full year free cash flow guidance by $5 million. Now I'd like to recap our Q2 results in more detail. In the second quarter, total revenues were $180 million, up 18% year-over-year. SaaS revenues were $171.7 million. Term license subscription revenues were $4.2 million and maintenance and services revenues were $4.1 million. Our SaaS renewal rate was over 90%. Moving down to the income statement. I'll be discussing non-GAAP results going forward. Gross profit for the second quarter was $139.9 million, representing a gross margin of 77.7% compared to 80.6% in the second quarter of 2025. Our gross margin continues to be healthy and in line with our long-term target set at our Investor Day. Operating expenses in the second quarter totaled $136.1 million. As a result, second quarter operating income was $3.7 million or an operating margin of 2.1%. This compares to an operating loss of $1.9 million or an operating margin of negative 1.2% in the same period last year. Second quarter ARR contribution margin was 13.3%, down from 16.5% last year. This is in line with our expectations and as a reminder, is impacted in 2026 due to the end of life for our self-hosted platform. During the quarter, we had financial income of approximately $7 million, driven primarily by interest income on our cash, deposits and investments in marketable securities. Net income for the second quarter of 2026 was $5.3 million or net income of $0.04 per diluted share compared to net income of $3.8 million or $0.03 per diluted share for the second quarter of 2025. This is based on 130.8 million and 135.2 million diluted shares outstanding for Q2 2026 and Q2 2025, respectively. As of June 30, 2026, we had $911.5 million in cash, cash equivalents, short-term deposits and marketable securities. For the six months ended June 30, 2026, we generated $80.1 million of cash from operations compared to $89.3 million generated in the same period last year, and Capex was $9.4 million compared to $5.7 million in the same period last year. As a reminder, we will provide quarterly SaaS ARR, excluding conversion guidance for this year only. We are doing this because of the difficulty in modeling the year-over-year growth rates due to the impact of conversions in 2025 and 2026. We're also providing a bridge to quarterly total SaaS ARR in our investor deck, which again assumes 0 conversions from our guidance perspective to the upcoming quarter. For the full year 2026, we will provide annual guidance for both SaaS ARR, excluding conversions and total SaaS ARR. For more information, please see our earnings deck in our Investor Relations website, which includes a more detailed breakdown of our financial guidance. For the third quarter of 2026, we expect SaaS ARR growth of 22% to 23%, excluding conversions, total revenues of $185 million to $188 million, representing growth of 14% to 16% non-GAAP operating income of $2.5 million to $3.5 million and non-GAAP net income per diluted share in the range of $0.02 to $0.03. This assumes 131.1 million diluted shares outstanding. For the full year 2026, we now expect total SaaS ARR of $819 million to $850 million, representing growth of 28% to 33%. This represents SaaS ARR growth of 20% to 21%, excluding conversions. Free cash flow of $105 million to $110 million, total revenues of $735 million to $739 million, representing growth of 18% to 19%; non-GAAP operating income of $11 million to $13 million non-GAAP net income per diluted share in the range of $0.14 to $0.15. This assumes 131.5 million diluted shares outstanding. In summary, we continue to see many positive trends, including healthy new logo momentum, strong pipeline activity and a growing urgency from customers to secure AI systems and the data that powers them, which reinforces our confidence in the durability of our platform and the massive opportunity ahead. This confidence allows us to raise our full year outlook for SaaS ARR, excluding conversions growth, above the second quarter beat to 21% at the midpoint to $769 million to $775 million, which is a $5 million raise over last quarter. Now I'd like to turn it back over to Tim.

Before we proceed to Q&A, I would like to make one additional comment. You may have seen recent speculation in the media related to a potential transaction involving Varonis. As a matter of policy, we do not discuss rumors or speculation, and we will make no further comment on this. With that, we will be happy to take your questions on the quarter. Operator?

[Operator Instructions] The first question is from Saket Kalia from Barclays.

I'll keep it to one. Guy, it sounds like that there were some deals that pushed out at the end of the second quarter. Maybe the question is, can you talk about what the cadence was like of business through the quarter until those headlines hit? And how much of an impact could that have had on net new ARR in Q2 if you had to size it?

Thanks for the question, Saket. There were a lot of positive trends that we saw in Q2, and we think we could have done even better if it wasn't for some of those large deals that were impacted by the rumors in the news. We've already closed some of these in July, including a 7-figure deal, and we expect to close more of them during the third quarter. There are 3 factors which gave us the confidence to raise our full year free cash flow and SaaS ARR guidance, excluding conversions. Number one, in Q2, we saw new logo ACV grow more than 20%. Two, we saw increasing adoption of Atlas, DAM and Interceptor, which gives us confidence in our upsell motion over time; and three, we continue to see a healthy pipeline for the back end of the year, driven by the need to secure AI and the data that powers us. These positive tailwinds that we see give us continued confidence in our ability to grow 20-plus percent over the long term.

The next question is from Matt Hedberg from RBC.

Maybe as a follow-up to that, obviously, Ethos has been in the news, and it's seemingly generating a lot of cyber pipeline out there. I'm wondering if you could talk to how perhaps Ethos was driving some accelerated customer conversations? And have you had any luck do you think, converting any of that pipeline thus far?

Yes. I think that miss what it does, it's definitely exposing vulnerabilities. But what we see that is really starting to drive the business and build a lot of pipeline is where customers are in the just their maturity curve. A lot of them are just investing a lot of money in AI. A lot of it is -- some of it is experimental revenues, and now they are trying to get ROI. But the bottleneck is connecting this agent securely to data. What you saw that happened with OpenAI and Harding face, not exactly like that, but in different shape or form, happen now a lot with organizations, a misconfigured agent that you don't know what it is doing can inflict a lot of damage and can be just a breach from here. And this is what organizations are understanding that they need to do. So we just see CISOs and also Chief AI officers that are coming and spending a lot of time with us. They understand that AI without data is nothing, and you need to have all the life cycle of AI in order to take it to production in the right way to make sure you're in compliance and then to take care of the pipeline. And this is what we see that's starting to generate just a lot of pipeline. And it's also -- we see just massive synergies between Atlas and the DSP, the data the data security platform. This is something that works very well. So the net-net of what we see that AI that can be connected to data security can be a massive liability, and it's just -- we really can be the foundation to realize gains from this technology.

The next question is from Meta Marshall from Morgan Stanley.

Just wanted to get into kind of on the new ACV that you are seeing, are there any kind of characteristics of those new customers that they're either larger or adding more products kind of upfront? Any details on that would be helpful.

What we see essentially is everything we said, you need really 3 ingredients. You need coverage, you need automation for defined, fix and alert. And this is something -- and you also need scale. And this is what we have. And what's happening is that AI before when it was with humans, you needed to put a lot of effort in order to expose the data security problems that you have. Agent that is running almost all the time trying to expose the data access control to the maximum and have a lot of abnormal behaviors and also nondeterministic. You can give an agent the same instruction twice and will do something completely different. So we definitely see with AI that they are just buying more upfront. They are buying more upfront, more platforms and trying to connect it to more AI systems.

The next question is from Brian Essex from JPMorgan.

I was wondering if I could actually follow up on Saket's question. Yaki, could you dig into some of the -- I guess, the nature of some of those Swift deals? What -- how did you get customers comfortable that your relationship maybe would not be disrupted given the news that was out there? How complex were these deals? And what gives you the level of confidence that you can close these deals for the remainder of the year?

Like any other software company, a lot is happening in the last week of the quarter. So just the timing was bad. And we are just -- for us, it's business as usual. We're building high-value products and making sure that our customers are successful with them. And at the end, when you need approvals and stuff of this nature, things like that can just generate additional conversation that can elongate some sales cycles. But we're talking to our customers and just explain to them, we are -- we can't comment on any rumors, but we are committed to you, committed to your success, keep innovating and make sure that everything is working. And as Guy said, some of them we already closed, and we are in conversation with most of them. And so far, it's going very well.

And when you look at kind of the guidance characteristics, when you look at kind of by $5 million. If you look at the beat, about half of that raise is coming from that Q2 beat and our raise above that beat only includes some of the slip deals that happened at the end of the quarter. And so we're kind of keeping the same responsible guidance philosophy from our perspective. We haven't changed that. But when we look at the beginning of July, we had a strong start, and we're able to close some of those deals already, and the expectation is that we'll close for the most part -- most part of those deals throughout the quarter.

The next question is from Rob Owens from Piper Sandler.

Nice to see the new product momentum that you guys talked about with the three solutions, Atlas, Interceptor and the Database Access Management. My question is really around, is this doing anything relative to deal complexity, which could be impacting sales cycles, number one? And number two, are you finding it's a new buyer persona within organizations as the portfolio has expanded pretty rapidly and seems more kind of runtime defensive. But are you selling to a different buyer in organizations at this point?

Mostly the buyer is the CISO. It's also very interesting that the Chief AI Officer, we're also talking to them, but they just -- the CISO is bringing them because what is happening today in organizations, and I said in this adoption curve, that it's very hard for them to safely connect AI to data. So it became a business enabler. Interceptor is very synergetic to our MDDR. It's also very interesting how the MDDR is just transforming to AI detection and response. And databases, customers want to cover all the data and the databases activity monitoring. Remember, these are new products for us, and we also have a very steep maturity curve with them, and we are starting to replace incumbents like Imperva and IBM Guardium. So this also works for us. But it's usually just the same motion with some contribution from Chief AI Officer.

And when we analyze the sales cycles, we haven't seen any change in terms of a longer period. So we're basically tracking the same relatively sales cycles even with us selling a larger platform.

The next question is from Roger Boyd from UBS.

Guy, I know you're not guiding to ARR with conversions and that assumption for $50 million to $75 million in conversions for the year was unchanged. But can you talk qualitatively about what you saw in the first half of the year, kind of where that kind of stood out relative to your expectations for the first half? And anything we should be mindful of on conversions in the back half of the year, particularly when we look at federal in 3Q?

Absolutely. So I think first, I'll talk about the conversions, but I think it's very clear from our perspective, and I want to make sure it's clear from an investor's perspective that the most important metric to track in terms of the health of the business is SaaS ARR, excluding conversions. And that's the reason we're guiding that on a quarterly basis. We have provided a bear case scenario and a bull case scenario kind of keeping that range anywhere between $50 million to $75 million. That was provided at the beginning of the year, and we said throughout the year, we will not update that number because, a, that's not the focus; and b, we've seen customers actually that were up for renewal in the first part of the year, asking to extend the on-prem subscription until the end of the year with the expectation that, that conversion will happen will happen in the second part of the year. So guiding that on a quarterly basis would actually generate more confusion. But when I track the actual percentages, if you look at the first part of the year, we were roughly converting about 50% of the expected number. And if we continue with that pace, we will be at the low end of our $50 million guidance expectation. But if we actually convert in the second part of the year, 2/3 of what is expected to come up for renewal and conversion, we will be at the midpoint. And because of the factors that I talked about before, which is many of the customers -- we had some of the customers that wanted to wait until the later part of the year to actually do that conversion, getting to that 2/3 is definitely something that we see as an achievable target. But again, I do want to make sure that investors understand that the right focus should be on SaaS ARR, excluding conversion because that is really the metric that would show not only how we're performing as a leading indicator right now, but also will be an indicator of how we continue to grow post transition.

The next question is from Jason Ader from William Blair.

Can you guys talk about the go-to-market strategy? I know there was a question earlier about who the buyer is. And I assume that's not changing that much. But just maybe the overall strategy, how it might be changing to capture demand related to AI readiness? Are you guys doing anything different than what you've done historically?

Primarily now with Atlas and obviously, database activity monitoring and everything else that we have is just educating the customers of what we have and explain to them how they can get to immediate value and ongoing value. And just to follow the same playbook. This is how we're doing evaluation, show the success, build an operational plan and just win the business and make sure the customer will be successful. It's AI security and data security essentially is the same problem. And it's very synergetic to everything that we are doing. And also, you're starting to have this new technological stack slowly, but surely, not so slowly, the controls are starting to be more at the data and the AI level, and these are 2 places that Varonis sees playing very well.

The next question is from Shaul Eyal from TD Cowen.

Guy or Yaki, -- from a geographic perspective, was performance balanced around the 3 major theaters? And also on 7-digit transactions, would you characterize performance this quarter as equal to what you have seen over the course of the past few quarters, specifically on 7-digit transactions?

I'll start with the second part of your question. I think we've talked a lot about our desire and philosophy of going upmarket, and we have definitely seen that work well for us. So we're actually able to get larger deals as the land with the desire to show them the value, give them the protection with the MDDR and then be able to go back to them and do healthy upsells that will continue to generate customer lifetime value and increase the ARR numbers. So yes, we have seen that actually occur, and it's part of our focus of going upmarket. In terms of geographies, this quarter was definitely led by North America with healthy numbers coming from them, and that was really kind of the driver for this quarter.

The next question is from Joshua Tilton from Wolfe Research.

Maybe a quick one for me. I know everybody has kind of asked about the deals already, but I have more of a hypothetical one. I'm looking to everything that Yaki is talking about in the beginning of the question. You guys are using lines like AI security and data security are one and the same. It feels like demand for the Varonis platform will never be stronger than it is today given all the secular tailwinds around the AI story. So my question at a very high-level point is like why are we seeing more? Like where -- and where could we see more? Like why are we hearing more about momentum in newer products that don't feel super related to data and AI security, and we're not hearing more along the lines of inflection in demand for the core products or is a line out the door for Varonis because of this tailwind that you're speaking to. Does that make sense? It just feels like now more than ever, you guys should be the #1 ticket item. So is it like a capacity thing? Is it a timing thing? Like how do we think about maybe seeing all the good secular tailwinds we're talking about show up just a little bit more from a growth perspective, if that makes sense?

So first, remember that we are selling Atlas only for 3.5 months. And -- but in general, it's primarily related to the adoption of AI in organization. They spend a lot, as I said at the beginning, they spend a lot on AI and now they are trying to realize gains and they're understanding the risks. And now that they need to be more mature and connecting many more data stores in order to realize the value we believe that just over time, we see more and more demand and it will be the foundation for organization to realize value from AI. But the reality is that we just see that when we are selling the AI suite and the data suite, they are almost always going together.