Varonis SaaS Surges, But 2026 Cash Flow Headwinds Loom

Date of Call: Feb 3, 2026

Financials Results

• Revenue: $173.4 million, up 9% YOY
• EPS: $0.08 per diluted share, compared to $0.18 per diluted share for the fourth quarter of 2024
• Gross Margin: 80%, compared to 84.4% in the fourth quarter of 2024
• Operating Margin: 2.6%, compared to 9.7% in the same period last year

Guidance:

• SaaS ARR for Q1 2026 expected to grow 27% to 28% excluding conversions.
• Total Q1 2026 revenues expected to be $164 million to $166 million, representing growth of 20% to 22%.
• Non-GAAP operating loss for Q1 2026 expected to be negative $11 million to negative $10 million.
• Non-GAAP net loss per share for Q1 2026 expected to be $0.06 to $0.05.
• Full year 2026 SaaS ARR expected to be $805 million to $840 million, representing growth of 26% to 32% (18% to 20% excluding conversions).
• Full year 2026 total revenues expected to be $722 million to $730 million, representing growth of 16% to 17%.
• Full year 2026 non-GAAP operating income expected to be breakeven to $4 million.
• Full year 2026 non-GAAP net income per diluted share expected to be $0.06 to $0.10.
• Full year 2026 free cash flow expected to be $100 million to $105 million.

Business Commentary:

SaaS Business Momentum:

• Varonis Systems reported a record SaaS ARR of $638.5 million, representing 86% of total ARR, with a 32% year-over-year increase when excluding the impact of conversions.
• The company attributed this growth to the momentum in its SaaS business and the decision to transition to a fully SaaS model by the end of 2026.

Conversion and Transition Strategy:

• The company reported converting approximately $65 million of non-SaaS ARR in Q4, which was a significant factor in the 16% year-over-year increase in total ARR to $745.4 million.
• This conversion was driven by the end-of-life announcement for the self-hosted platform, which created urgency among customers to move to the SaaS model.

Product Adoption and Expansion:

• Products like MDDR and Copilot showed strong adoption trends, contributing to the company's growth in the SaaS segment.
• The expansion into more data platforms and the introduction of new use cases, such as database activity monitoring and e-mail security, were key to this growth.

AI and Security Synergy:

• The acquisition of AllTrue, an AI security company, highlights Varonis' focus on integrating AI into its security offerings to address emerging AI risks.
• This move aims to enhance Varonis' ability to provide end-to-end visibility and control across AI systems, aligning with the growing demand for AI security solutions.

Financial Impact and Guidance:

• Varonis expects a $30 million to $50 million headwind to free cash flow and ARR contribution margin in 2026 due to the end-of-life announcement.
• Despite this, the company anticipates a healthier financial profile beginning in 2027, following the removal of lower renewal self-hosted customers.

Sentiment Analysis:

Overall Tone: Positive

• Management expressed excitement about SaaS momentum, stating 'We are excited by the momentum we are seeing in our SaaS business' and highlighted a 'record number of conversions' in Q4. The acquisition of AllTrue was announced to accelerate AI security capabilities, and they believe the AI revolution is a 'big tailwind.'

Q&A:

• Question from Matthew Hedberg (RBC Capital Markets): Could you help square off the 10% kind of total ARR guide with how optimistic you are on the SaaS side of the house?
  Response: The 18%-20% SaaS ARR growth ex-conversions is the key forward-looking KPI, representing $120 million of net new organic SaaS ARR versus $109.5 million in 2025, and is a good starting point for the year.

• Question from Saket Kalia (Barclays Bank PLC): How much of the 18%-20% growth comes from new customers versus existing? Will there be any remnants of on-prem ARR at the end of '26?
  Response: Management assumes no non-SaaS ARR at the end of 2026, with SaaS ARR equal to total ARR. The growth is expected to come from both new customers and expansion within the existing SaaS customer base, with SaaS net retention rate expected to improve.

• Question from Brian Essex (JPMorgan Chase & Co): How does the 110% net dollar retention compare with prior periods? How much has Copilot/AI driven demand?
  Response: The 110% SaaS net retention rate was impacted by headwinds from focusing on conversions. AI, including Copilot and the broader AI security trend, is a significant driver, along with other products like database activity monitoring and the SlashNext acquisition.

• Question from Robbie Owens (Piper Sandler & Co.): Any broader changes overall where you are from a sales capacity perspective and how you're feeling from a sales maturity perspective?
  Response: Focus remains on selling to federal customers, but a portion of federal/state government non-SaaS ARR is not expected to convert. Sales capacity is being adjusted to focus on new products and AI security, with expectations for strong productivity gains.

• Question from Joshua Tilton (Wolfe Research): What are you actually getting from a conversion uplift and what should we expect that rate to be?
  Response: Management directed focus to SaaS growth ex-conversions as the primary driver, with conversions being a 'rearview mirror.' The expectation for 2026 is conversions of $50 million to $75 million of remaining non-SaaS ARR, but the focus is on new license sales for future growth.

• Question from Jason Ader (William Blair & Company L.L.C.): Can you help us understand the $30 million to $50 million headwind to contribution margin and free cash flow in 2026?
  Response: The headwind is due to lower renewal rates for the non-SaaS business, which would have masked the strength of the SaaS business. The end-of-life announcement generated urgency for conversions and would have resulted in higher long-term costs if not implemented.

• Question from Shaul Eyal (TD Cowen): Whether AI is augmenting security or whether there's room for concerns? Also, current relations with Microsoft.
  Response: AI presents both opportunities and risks, requiring strong data security. AllTrue acquisition addresses AI security needs. Relations with Microsoft are synergistic, with ongoing collaboration and pipeline development.

• Question from Meta Marshall (Morgan Stanley): What do you see as the biggest driver of upsells over the next year?
  Response: All new products (database activity monitoring, AI security, email compromise) are drivers, with strong integration and expansion into new budget areas like AI security, replacing incumbents and addressing social engineering threats.

• Question from Roger Boyd (UBS Investment Bank): Can you unpack the rebound in 4Q conversion rates? Confidence in remaining commercial customer base?
  Response: The $65 million conversion in Q4 was 50% higher than Q2 and driven by the end-of-life announcement creating urgency. The 2026 guidance of $50-$75 million conversions is a wide range accounting for uncertainties, with federal customers expected to convert at lower rates.

• Question from Fatima Boolani (Citigroup Inc.): Can you recrystallize the impact on OpEx and free cash flow from end-of-life headwind, nonrenewal assumptions, and acquisitions?
  Response: The $30-$50 million headwind primarily comes from lower renewal rates for non-SaaS business. Acquisitions add cost but have potential upside; guidance assumes modest contribution. The focus remains on improving profitability and cash flow going forward.

• Question from Michael Cikos (Needham & Company, LLC): Are you assuming any revenue/ARR contribution from Cyral or SlashNext? Changes to go-to-market and incentives?
  Response: Guidance assumes no major top-line contribution from acquisitions in 2026, but momentum is seen. Sales reps now focus on new and existing SaaS customer sales, with no incentive for conversions, aiming to increase productivity.

• Question from Rudy Kessinger (D.A. Davidson & Co.): Why is the $121.5 million net new SaaS ARR guidance conservative? What are the assumptions?
  Response: The guidance is a conservative starting point. With reps freed from conversion focus, management expects to perform better and improve throughout the year, with potential for higher net new ARR from new customer sales and upsells.

• Question from Joseph Gallo (Jefferies LLC): Can you explain the end-of-life headwind to free cash flow? Benefit for not supporting on-premise?
  Response: The headwind is the difference between historical renewal rates and expected lower non-SaaS ARR renewals. The end-of-life announcement created urgency for conversions, and removing the lower-margin on-prem base is expected to benefit the bottom line starting in 2027.

• Question from Junaid Siddiqui (Truist Securities, Inc.): How do you envision gross margins as MDDR becomes a material contributor?
  Response: No material change in gross margin expected for MDDR; it is an AI-based offering with high adoption and is already well-received by customers and sales.

Contradiction Point 1

Federal Business Contribution and Strategy

Inconsistent portrayal of federal business performance and strategic focus.

How have recent federal sales team changes impacted the overall go-to-market strategy and sales capacity for the new fiscal year? - Robbie Owens (Piper Sandler)

2025Q4: The federal business (approx. 5% of total ARR) remains an opportunity... The federal business (approx. 5% of total ARR) remains an opportunity, but a portion of federal/state/government non-SaaS ARR is assumed to not convert to SaaS in 2026, which is reflected in the conversion guidance range. - [Guy Melamed](CFO & COO)

Following FedRAMP high authorization for your SaaS platform, what prompted the federal team reduction and how will you advance this opportunity? - Meta Marshall (Morgan Stanley)

2025Q3: The federal business continues to underperform... The focus is shifting toward moving customers to the SaaS platform... - [Yakov Faitelson](CEO)

Contradiction Point 2

Root Cause and Handling of On-Premise Renewal Issues

Contradiction on whether non-renewal issues were isolated or part of a broader pattern.

What is the actual uplift from converting on-premise customers to SaaS, and what future gains are expected? Is the $30–$50 million 2026 headwind to free cash flow and contribution margin fully accounted for? - Joshua Tilton (Wolfe Research)

2025Q4: Management is directing focus to SaaS growth excluding conversions as the primary driver. Conversions are considered a rearview mirror factor. - [Guy Melamed](CFO & COO) and [Yakov Faitelson](CEO)

What were the root causes of lower-than-expected on-prem renewals (federal and non-federal), including the federal underperformance's relation to the government shutdown and customer awareness of the self-hosted end-of-life announcement before the quarter ended? - Joshua Tilton (Wolfe Research)

2025Q3: Multiple factors contributed to the renewal issues, but no single theme emerged... No clear link to the government shutdown or the end-of-life announcement, which was made after the quarter. - [Guy Melamed](CFO & COO)

Contradiction Point 3

Conversion Strategy and Incentives

Contradiction on the strategic focus and incentive structure regarding conversions.

Do you expect any revenue/ARR contribution from the Cyral or SlashNext acquisitions in 2026? What are the go-to-market changes, sales rep tenure, and incentive structure for the new year? - Michael Cikos (Needham)

2025Q4: The compensation plan for 2026 incentivizes selling to new and existing SaaS customers, not conversions. - [Guy Melamed](CFO & COO)

Will the 25-30% Annual Subscription Price (ASP) uplift for conversions ease? What percentage of on-premise customers may be unwilling or unable to transition to SaaS? - Joseph Gallo (Jefferies)

2025Q3: There is no indication yet of a need to change conversion incentives. - [Yakov Faitelson](CEO)

Contradiction Point 4

Competitive Landscape and Market Positioning

Statements about the company's market position and competitive advantages appear inconsistent.

Which of your products (MDR, identity protection, database activity monitoring, AllTrue) will be the biggest driver of upsells next year? - Meta Marshall (Morgan Stanley)

2025Q4: All products are seen as drivers. The company has created the data security market and is expanding naturally. - [Yakov Faitelson](CEO)

How does Varonis's move to SaaS affect its competition with Cyera? - Saket Kalia (Barclays)

2025Q2: Competitors like Cyera expand the total available market and raise awareness for cloud data security. - [Yakov Faitelson](CEO)

Contradiction Point 5

Operating Margin Normalization Timeline

Contradiction on the expected timing for operating margins to reach a trough and stabilize.

Can you discuss the rebound in Q4 conversion rates, confidence in converting the remaining $105 million of non-SaaS ARR, and the expected timeline for these conversions? - Roger Boyd (UBS)

2025Q4: The focus is on moving towards 100% SaaS. The company is committed to converting as many customers as possible but acknowledges that a small cohort will not move, and it is prepared to part ways with them. - [Yakov Faitelson](CEO)

How far are we from the operating margin trough with the accelerating SaaS transition? - Saket Kalia (Barclays)

2025Q1: The operating margin trough is expected to occur this year (2025), with less volatility next year. As the SaaS transition completes, the income statement will look more normalized. - [Guy Melamed](CFO & COO)