Strategic Performance and Market Dynamics

• Performance was driven by a strategic shift in sales focus toward new customer acquisition and SaaS upselling, following the reduction of time spent on legacy conversions.

• Management attributes growth to the '3% paradox,' where organizations struggle to connect data to AI systems securely, creating a critical need for Varonis' automated remediation.

• The strategic rationale for recent acquisitions, including Atlas, is to provide a unified control plane for securing AI agents, models, and data pipelines.

• Market dynamics are shifting as AI-powered adversaries use automation to scale attacks, making manual security processes obsolete and driving demand for automated 'find, fix, and alert' capabilities.

• Strategic positioning has evolved to capture budgets not only from legacy point solutions like database monitoring but also from broader AI and digital transformation initiatives.

• Operational execution focused on MDDR (Managed Data Detection and Response) which serves as a 'holy grail' for customers needing to monitor robotic-speed data access by AI agents.

Outlook and Strategic Assumptions

• Full-year guidance assumes a 'base case' conversion scenario of $50 million to $75 million from on-premise subscription to SaaS ARR.

• Management believes the company can sustain 20% to 21% SaaS ARR growth, excluding conversions, as it transitions into a fully SaaS-based business model.

• The guidance framework for Q2 remains 'responsible,' reflecting typical seasonality while accounting for a healthy pipeline of new logos and expansion opportunities.

• Future free cash flow is expected to be impacted by the end-of-life transition of the on-prem platform, with significant churn anticipated in Q3 due to federal and government cycles.

• Strategic initiatives for the remainder of 2026 focus on cross-selling newer products like Interceptor and Atlas, which are not yet materially baked into the current guidance.

Structural Changes and Risk Factors

• Q1 free cash flow included a $12.6 million headwind related to the accounting treatment of the AllTrue acquisition.

• The company previously saw sales rep productivity impacted by time spent on on-prem to SaaS conversions, but in 2026, they have restructured commission plans to focus on new business and upselling, leading to an acceleration in new customer contribution.

• Management identified a 'Reprompt' vulnerability in Microsoft Copilot, highlighting the inherent risks of unsecured AI systems that can bypass safety controls.

• A significant share repurchase program was executed in Q1, totaling $132.1 million for approximately 5.36 million shares.