VARONIS SYSTEMS INC

Previous wording

In response to the evolving needs of our customers and the growing threat landscape, we have begun our strategic transition to a SaaS delivery model. This transition is driven by the increased importance of a data-centric approach to security and the demand for comprehensive protection in the face of heightened cyber risks, collaboration across multiple platforms, the adoption of generative AI tools and the necessity for compliance. Enterprises now use many different combinations of on-premises and cloud data stores, SaaS applications and IaaS environments and this complexity requires a greater level of automated protection. We believe our offering provides comprehensive data coverage and our ability to address this demand will become key driver of our growth.

Current wording

In response to the evolving needs of our customers and the growing threat landscape, we are strategically transitioning to a SaaS delivery model. This transition is driven by the increased importance of an automated, data-centric approach to security and the demand for comprehensive protection in the face of heightened cyber risks, collaboration across multiple platforms, the adoption of generative AI tools and the necessity for compliance. Enterprises now use many different combinations of on-premises and cloud data stores, SaaS applications and IaaS environments and this complexity requires a greater level of automated protection. We believe our offering provides comprehensive data coverage and our ability to address this demand has and will continue to be a key driver of our growth.

Previous wording

In the second half of 2021, we launched our first SaaS offering, introducing new products and support for several cloud applications and infrastructure. On October 31, 2022 we announced the availability of our flagship Varonis Data Security Platform as a SaaS, which was previously only sold as a self-hosted solution. The benefits of SaaS delivery are widely established for both customers and providers, and we believe this evolution of a SaaS delivery option for the Varonis Data Security Platform will be transformational. The advantages include: quicker and easier deployment and maintenance of solutions with reduced infrastructure and personnel requirements; a lower total cost of ownership; faster deployment of risk assessments, which is the core of our sales motion; enhanced threat detection; continual threat model updates; increased automation for securing data in place; and the ability to deliver additional features and functionality to customers more efficiently.

Current wording

In the second half of 2021, we launched our first SaaS offering, introducing new products and support for cloud infrastructure environments and applications. At the end of 2022, we announced the availability of our flagship Varonis Data Security Platform as a SaaS, which was previously only sold as a self-hosted solution. The benefits of SaaS delivery are widely established for both customers and providers, and we believe this evolution of a SaaS delivery option for the Varonis Data Security Platform is transformational. The advantages include: quicker and easier deployment and maintenance of solutions with reduced infrastructure and personnel requirements; a lower total cost of ownership; faster deployment of risk assessments, which is the core of our sales motion; enhanced threat detection; continual threat model updates; increased automation for securing data in place; and the ability to deliver additional features and functionality to customers more efficiently. In addition, our Managed Data Detection and Response ("MDDR") offering further reduces both the likelihood of a breach and its potential impact by enabling automated 24x7x365 monitoring with a service level agreement (SLA) that requires Varonis to respond to alerts within a specified time frame. Our MDDR offering is only available for our SaaS customers because of the automation and visibility that’s built into our SaaS platform.

Previous wording

Recognizing the potential of a SaaS business model, we plan to transition to a predominately SaaS delivery model over the next several years. We expect our flagship Varonis Data Security Platform as a SaaS to grow significantly over this time and become the primary driver of our revenues. During this transition, we expect our revenues to be negatively impacted due to revenue recognition accounting treatment headwinds associated with the increase in SaaS sales and existing customer conversions to SaaS. These revenue headwinds will be dependent on the pace of the transition.

Current wording

Since launching our SaaS offerings, we have seen SaaS deployments grow significantly and expect them to continue to increase and become the primary driver of our revenues. During this transition, we expect our revenues to be negatively impacted due to revenue recognition accounting treatment variations associated with the increase in SaaS sales and existing customer conversions to SaaS. We expect these revenue variations to persist throughout the transition to a SaaS delivery model, which we believe will be complete by the end of 2025.

Previous wording

Varonis is a leader in data security as, since we started operations in 2005, we recognized that an enterprise's capacity to create and share data far exceeded its capacity to protect it. We believed that rapid data growth combined with increasing information dependence would change the global economy and the risk profiles of corporations and governments. Our focus has been on using innovation to address the cyber-implications of these trends, creating software that provides new ways to track, alert and protect data wherever it is stored.

Current wording

Varonis is a leader in data security as, since we started operations in 2005, we recognized that an enterprise's capacity to create and share data far exceeded its capacity to protect it. We believed that rapid data growth combined with increasing information dependence would change the global economy and the risk profiles of corporations and governmental agencies. Our focus has been on using innovation to address the cyber-implications of these trends, creating software that provides new ways to track, alert and protect data wherever it is stored.

Previous wording

We sell substantially all of our products and services to channel partners, including distributors and resellers, which sell to end-user customers, which we refer to in this report as our customers. We believe that our sales model, which combines the leverage of a channel sales model with our highly trained and professional sales force, has and will continue to play a major role in our ability to grow and to successfully deliver our unique value proposition for enterprise data. While our products serve customers of all sizes, across industries and across geographies, the marketing focus and majority of our sales focus is on targeting organizations with 1,000 users or more who can make larger initial purchases with us and, over time, have a greater potential lifetime value. Our customers span leading firms in the financial services, public, healthcare, industrial, insurance, technology, energy and utilities, consumer and retail, education and construction and engineering sectors. We believe our existing customer base serves as a strong source of incremental future revenues given our broad platform of products, their growing volumes and complexity of enterprise data and related security concerns. We will continue our focus on targeting organizations with 1,000 users or more who can make larger purchases with us initially and over time. We are also focused on maintaining a high renewal rate by focusing on the quality and reliability of our customer service and support to ensure our customers receive value from our products and providing software upgrades and enhancements when and if they are available. Our product offering currently contains coverage for more than 40 of the most critical on-premises and cloud data stores and applications and our renewal rate continued to be over 90% for the year ended December 31, 2023.

Current wording

We sell substantially all of our products and services to channel partners, including distributors and resellers, which sell to end-user customers, which we refer to in this report as our customers. We believe that our sales model, which combines the leverage of a channel sales model with our highly trained and professional sales force, has and will continue to play a major role in our ability to grow and to successfully deliver our unique value proposition for enterprise data. While our products serve customers of all sizes, across industries and across geographies, the marketing focus and majority of our sales focus is on targeting larger organizations who can make sizable initial purchases with us and, over time, have a greater potential lifetime value. Our customers span leading firms in the financial services, public, healthcare, industrial, insurance, energy and utilities, technology, consumer and retail, education and construction and engineering sectors. We believe our existing customer base serves as a strong source of future incremental revenues given our broad platform of products, their growing volumes and complexity of enterprise data and related security concerns. We will continue our focus on targeting larger organizations who can make sizable purchases with us initially and over time. We are also focused on maintaining a high renewal rate by investing in the quality and reliability of our customer service and support teams to ensure our customers receive value from our products and providing software upgrades and enhancements when and if they are available. Our product offering currently contains coverage for most mission-critical cloud and on-premises data stores and cloud infrastructure environments, and many critical SaaS applications. Our renewal rate continued to be over 90% for the year ended December 31, 2024.

Previous wording

We believe there is a significant long-term growth opportunity in both domestic and international markets, which could include any organization that relies on data stored in SaaS applications, IaaS environments, NAS devices, file shares, databases and email servers. For the year ended December 31, 2023, approximately 75% of our revenues were derived from North America, while approximately 22% of our revenues were derived from EMEA and approximately 3% from ROW. Additionally, despite the revenue recognition headwinds from the accounting treatment associated with the positive trend of our increase in SaaS mix and existing customer conversions to SaaS, total revenues still grew approximately 5% for the year ended December 31, 2023 compared with the year ended December 31, 2022. We continue to expect expansion in both domestic and international markets to be key components of our long-term growth strategy. During 2022 and throughout 2023, however, our operations around the world were negatively impacted by the broader macroeconomic conditions, including a higher inflation and interest rate environment, a general economic slowdown, the weakening of the Euro and the Pound Sterling and the exit of our Russia business. As a result, we have seen changes in customer buying patterns including, some budgetary tightening and longer sales cycles, a trend which may continue for the foreseeable future.

Current wording

We believe there is a significant long-term growth opportunity in both domestic and international markets, which could include any organization that relies on data stored in SaaS applications, IaaS environments, NAS devices, file shares, databases and email servers. For the year ended December 31, 2024, approximately 73% of our revenues were derived from the United States, while approximately 21% of our revenues were derived from EMEA and approximately 6% from ROW. Additionally, despite the revenue recognition variations from the accounting treatment associated with the positive trend of our increase in SaaS sales and existing customer conversions to SaaS, total revenues still grew approximately 10% for the year ended December 31, 2024 compared with the year ended December 31, 2023. We continue to expect expansion in both domestic and international markets to be key components of our long-term growth strategy. Over the last few years, we have seen changes in customer buying patterns including, some budgetary tightening and additional scrutiny on enterprise spending as a result of a higher inflation and interest rate environment.

Previous wording

We continue to expand our domestic and international operations as part of our long-term growth strategy. While the expansion of our domestic operations is focused primarily on our underpenetrated territories, the expansion of our international operations depends in particular on our ability to hire, integrate and retain local sales personnel in these international markets, acquire new channel partners and implement an effective marketing strategy. Given the nominal amount of our ROW revenues, our ROW revenue growth rates have fluctuated in the past and may fluctuate in the future based on the timing of deal closures. In addition, the further expansion of our international operations will increase our sales and marketing and general and administrative expenses and will subject us to a variety of risks and challenges, including those related to economic and political conditions in each region, compliance with foreign laws and regulations, and compliance with domestic laws and regulations applicable to our international operations.

Current wording

We continue to expand our domestic and international operations as part of our long-term growth strategy. While the expansion of our domestic operations is focused primarily on our underpenetrated territories, the expansion of our international operations depends in particular on our ability to hire, integrate and retain local sales leadership and personnel in these international markets, acquire new channel partners and implement an effective marketing strategy. Given the nominal amount of our ROW revenues, our ROW revenue growth rates have fluctuated in the past and may fluctuate in the future based on the timing of deal closures. In addition, the further expansion of our international operations will increase our sales and marketing and general and administrative expenses and will subject us to a variety of risks and challenges, including those related to economic and political conditions in each region, compliance with foreign laws and regulations, and compliance with domestic laws and regulations applicable to our international operations.

Previous wording

Since inception, we have continued to scale our business and execute on strategic initiatives which we believe have positioned us for durable long-term growth. During 2023, we have continued to grow our revenues despite revenue recognition accounting treatment headwinds associated with the increase in SaaS mix and existing customer conversions to SaaS. For the years ended December 31, 2023, 2022 and 2021, our subscription revenues were $400.9 million, $366.1 million and $270.8 million, respectively. For the years ended December 31, 2023, 2022 and 2021, our total revenues were $499.2 million, $473.6 million and $390.1 million, respectively. For the years ended December 31, 2023, 2022 and 2021, we had operating losses $117.2 million, $121.2 million and $98.7 million and net losses of $100.9 million, $124.5 million and $116.9 million, respectively.

Current wording

Since inception, we have continued to scale our business and execute on strategic initiatives which we believe have positioned us for durable long-term growth. During 2024, we have continued to grow our revenues despite revenue recognition accounting treatment variations associated with the increase in SaaS sales and existing customer conversions to SaaS. For the years ended December 31, 2024, 2023 and 2022, SaaS revenues were $208.8 million, $44.4 million and $2.2 million, respectively. For the years ended December 31, 2024, 2023 and 2022, our total revenues were $551.0 million, $499.2 million and $473.6 million, respectively. For the years ended December 31, 2024, 2023 and 2022, we had operating losses of $117.7 million, $117.2 million and $121.2 million and net losses of $95.8 million, $100.9 million and $124.5 million, respectively.

Previous wording

Due to the war that began on October 7, 2023, a portion of our employees in Israel have been called to active reserve duty and additional employees may be called in the future, if needed. The Company has a business continuity plan and will remain aware and responsive to the evolving situation. However, it is possible that some of our operations in the region may be disrupted if the situation deteriorates.

Current wording

Due to the war that began on October 7, 2023, a portion of our employees in Israel have been called to active reserve duty and additional employees may be called in the future, if needed. We have a business continuity plan and will remain aware and responsive to the evolving situation; however, any deterioration in the situation might have a negative impact on our operations.

Previous wording

Annual recurring revenues is a key performance indicator defined as the annualized value of active term-based subscription license contracts, SaaS contracts and maintenance contracts in effect at the end of that period. Subscription license contracts, SaaS contracts and maintenance contracts are annualized by dividing the total contract value by the number of days in the term and multiplying the result by 365.

Current wording

Annual recurring revenues is a key performance indicator defined as the annualized value of active SaaS contracts, term-based subscription license contracts and maintenance contracts in effect at the end of that period. SaaS contracts, term-based subscription license contracts and maintenance contracts are annualized by dividing the total contract value by the number of days in the term and multiplying the result by 365.

Previous wording

As of December 31, 2023, 2022 and 2021, ARR was $543.0 million, $465.1 million and $387.1 million, respectively, an increase of 17% and 20% period over period. The annualized value of contracts is a legal and contractual determination made by assessing the contractual terms with our customers. The annualized value of maintenance contracts is not determined by reference to historical revenues, deferred revenues or any other GAAP financial measure over any period. ARR is not a forecast of future revenues and can be impacted by contract start and end dates and renewal rates. We expect ARR to continue to increase in absolute dollars.

Current wording

As of December 31, 2024, 2023 and 2022, ARR was $641.9 million, $543.0 million and $465.1 million, respectively, an increase of 18% and 17% period over period, respectively. The annualized value of contracts is a legal and contractual determination made by assessing the contractual terms with our customers. The annualized value of these contracts is not determined by reference to historical revenues, deferred revenues or any other GAAP financial measure over any period. ARR is not a forecast of future revenues and can be impacted by contract start and end dates and renewal rates. We expect ARR to continue to increase in absolute dollars.

Previous wording

Over the last two years, we have strategically expanded our offering to include SaaS solutions. Recognizing the established benefits of SaaS for both customers and us, we plan to transition our business to a predominantly SaaS delivery model over the next several years. Due to differences in the revenue recognition accounting treatment, an increase in SaaS mix and existing customer conversions to SaaS produce revenue headwinds which may cause significant variation in the reported revenues for a given period compared to the same period in the previous year. As of December 31, 2023, SaaS as a percentage of total ARR was approximately 23% and we expect this percentage to increase as we continue the transition to a SaaS delivery model.

Current wording

Over the last three years, we have strategically expanded our offering to be delivered as SaaS solutions. Since that time, we have seen SaaS deployments grow significantly and expect them to continue to increase and become the primary driver of our revenues. Due to differences in the revenue recognition accounting treatment, the transition to a SaaS delivery model may cause significant variation in the reported revenues for a given period compared to the same period in the previous year. We expect these revenue variations to persist throughout the transition to a SaaS delivery model, which we believe will be complete by the end of 2025.

Previous wording

Remaining performance obligations ("RPO") represent contracted revenues that have not yet been recognized, which includes deferred revenues and non-cancelable amounts that will be invoiced. RPO was $378.2 million as of December 31, 2023. We expect RPO to continue to increase in absolute dollars as we transition to a predominately SaaS delivery model.

Current wording

Remaining performance obligations ("RPO") represent contracted revenues that have not yet been recognized, which includes deferred revenues and non-cancelable amounts that will be invoiced in the future. Our RPO was $729.7 million as of December 31, 2024. We expect RPO to increase in absolute dollars as we continue to transition to a SaaS delivery model.

Previous wording

Subscription Revenues. Subscription revenues consist primarily of subscription licenses and SaaS revenues. Subscription licenses are sold on-premises and are recognized at the point in time when the software license has been delivered and the benefit of the asset has transferred. Maintenance associated with subscription licenses is recognized ratably over the term of the agreement. Over the last two years, the Company began to offer SaaS solutions to its customers, including its (i) flagship Data Security Platform as a SaaS that was previously only sold as a self-hosted solution, (ii) DatAdvantage Cloud hosted solution and (iii) Data Classification Cloud. Each of these products allow customers to use hosted software, and the related revenue from these products is recognized ratably over the associated contract period. Over the next several years, we expect SaaS revenues to grow considerably and become the primary driver of our revenues. Conversions from a license sold on-premises to our SaaS offering are accounted for on a pro-rata prospective basis. Due to the transition to a predominately SaaS business model, the timing of renewals and renewal rates, we could produce significant variation in the revenues we recognize in a given period.

Current wording

SaaS Revenues. SaaS revenues relate to the Company's SaaS platform. Over the last three years, the Company began to offer SaaS solutions to its customers, including its (i) flagship Data Security Platform as a SaaS that was previously only sold as a self-hosted solution and (ii) DatAdvantage Cloud product lines. Each of these products allow customers to use hosted software, and the related revenue from these products is recognized ratably over the associated contract period. We expect SaaS revenues to continue to grow considerably and become the primary driver of our revenues in 2025, which is when we believe our transition to a SaaS delivery model will be complete. Conversions from a license sold on-premises to our SaaS offering during the original subscription period are accounted for on a prospective basis. Due to the transition to a SaaS business model, the timing of renewals and renewal rates, we could produce significant variation in the revenues we recognize in a given period.

Previous wording

Maintenance and Services Revenues. Maintenance and services revenues consist of revenues from maintenance agreements of past perpetual license sales and, to a lesser extent, professional services. Customers with maintenance agreements are entitled to receive support and unspecified upgrades and enhancements when and if they become available. We recognize the revenues associated with maintenance ratably over the associated contract period. We measure the renewal rate for our customers over a 12-month period, based on a dollar renewal rate for contracts expiring during that time period. Our renewal rate for each of the years ended December 31, 2023, 2022 and 2021 continued to be over 90%. We do not expect perpetual license revenues in the future and, therefore, we expect the associated maintenance and support to continue to decline despite the strong renewal rates. We also offer professional services, generally provided on a time and materials basis, focused on training our customers in the use of our products. We recognize the revenues associated with these professional services as we deliver the services, provide the training or when the service term has expired. Professional services have always been a small percentage of our total revenues and we expect it to continue to be a small percentage as our newer solutions can provide remediation in more automated ways. As such, maintenance and services revenues are expected to continue to decline.

Current wording

Maintenance and Services Revenues. Maintenance and services revenues consist of revenues from maintenance agreements of past perpetual license sales and, to a lesser extent, professional services. Customers with maintenance agreements are entitled to receive support and unspecified upgrades and enhancements when and if they become available. We recognize the revenues associated with maintenance ratably over the associated contract period. We measure the renewal rate for our customers over a 12-month period, based on a dollar renewal rate for contracts expiring during that time period. Our renewal rate for each of the years ended December 31, 2024, 2023 and 2022 continued to be over 90%. We do not expect perpetual license revenues in the future and, therefore, we expect the associated maintenance and support to continue to decline despite the strong renewal rates due to the transition to a SaaS delivery model. We also offer professional services, generally provided on a time and materials basis, focused on training our customers in the use of our products. We recognize the revenues associated with these professional services as we deliver the services, provide the training or when the service term has expired. Professional services have always been a small percentage of our total revenues and we expect it to continue to be a small percentage. Accordingly, maintenance and services revenues are expected to continue to decline.

Previous wording

The following table sets forth the percentage of our revenues that have been derived from subscription licenses and maintenance and services revenues for the periods presented.

Current wording

The following table sets forth the percentage of our revenues that have been derived from term license subscriptions, SaaS and maintenance and services revenues for the periods presented.

Previous wording

Our products are used by a wide range of enterprises, including Fortune 500 corporations and small and medium-sized businesses. Our customers span a broad array of industries and are located in over 90 countries.

Current wording

Our products are used by a wide range of enterprises, including Fortune 500 corporations and small and medium-sized businesses. Our customers span a broad array of industries and are located in over 95 countries.

Previous wording

Cost of revenues consist primarily of salaries (including payroll tax expense related to stock-based compensation), employee benefits (including commissions and bonuses) and stock-based compensation for our customer support, customer success and services employees; third-party hosting fees; amortization of acquired intangible assets; travel expenses; and allocated overhead costs for facilities, IT and depreciation. We recognize expenses related to these costs as they are incurred and expect that these costs will increase in absolute dollars as we continue to invest in our customer success and support teams, move to a SaaS delivery model and support the underlying programs that play a critical role in maintaining our high renewal rate.

Current wording

Cost of revenues consist primarily of salaries (including payroll tax expense related to stock-based compensation), employee benefits (including commissions and bonuses) and stock-based compensation for our customer support, customer success, MDDR and services employees; third-party hosting fees; amortization of acquired intangible assets; travel expenses; and allocated overhead costs for facilities, IT and depreciation. We recognize expenses related to these costs as they are incurred and expect that these costs will increase in absolute dollars as we continue to invest in our customer success, support and MDDR teams, move to a SaaS delivery model and support the underlying programs that play a critical role in maintaining our high renewal rate.

Previous wording

Gross profit is total revenues less total cost of revenues. Gross margin is gross profit expressed as a percentage of total revenues. As the majority of our expenses are relatively fixed quarter over quarter and due to the seasonality of our business, the first quarter typically results in the lowest gross margin as our first quarter revenues have historically been the lowest for the year. Conversely, the fourth quarter typically results in the highest gross margin as our fourth quarter revenues have historically been the highest for the year. As we transition to a predominately SaaS-based company, we expect this seasonality to decrease due to differences in the revenue recognition accounting treatment.

Current wording

Gross profit is total revenues less total cost of revenues. Gross margin is gross profit expressed as a percentage of total revenues. As the majority of our expenses are relatively fixed quarter over quarter and due to the seasonality of our business, the first quarter typically results in the lowest gross margin as our first quarter revenues have historically been the lowest for the year. Conversely, the fourth quarter typically results in the highest gross margin as our fourth quarter revenues have historically been the highest for the year. As we complete the transition to a SaaS delivery model, we expect this seasonality to decrease due to differences in the revenue recognition accounting treatment.

Previous wording

Research and Development. Research and development expenses primarily consist of personnel costs attributable to our research and development personnel, as well as allocated overhead costs. We expense research and development costs as incurred. We expect that our research and development expenses will continue to increase in absolute dollars as we further strengthen our technology platform and invest in the development of both existing and new products through the hiring of talented and capable employees.

Current wording

Research and Development. Research and development expenses primarily consist of personnel costs attributable to our research and development personnel, as well as allocated overhead costs and acquired in-process research and development. We expense research and development costs as incurred. We expect that our research and development expenses will continue to increase in absolute dollars as we further strengthen our technology platform and invest in the development of both existing and new products through the hiring of talented and capable employees.

Previous wording

Financial income (expenses), net consists primarily of interest income, foreign exchange gains or losses, amortization of debt discount and issuance costs and interest expense. Interest income represents interest received on our cash, cash equivalents, marketable securities, deposits and amortization of premiums and accretion of discounts related to our investment in available for sale marketable securities. Foreign exchange gains or losses relate to our business activities in foreign countries with different operational reporting currencies. As a result of our business activities in foreign countries, we expect that foreign exchange gains or losses will continue to occur due to fluctuations in exchange rates in the countries where we do business. Amortization of debt discount and issuance costs relate to the 2025 Notes we issued in May 2020. Interest expense consists of the contractual interest expenses associated with the 2025 Notes.

Current wording

Financial income (expenses), net consists primarily of interest income, foreign exchange gains or losses, amortization of debt issuance costs and interest expense. Interest income represents interest received on our cash, cash equivalents, marketable securities, deposits and amortization of premiums and accretion of discounts related to our investment in available for sale marketable securities. Foreign exchange gains or losses relate to our business activities in foreign countries with different operational reporting currencies. As a result of our business activities in foreign countries, we expect that foreign exchange gains or losses will continue to occur due to fluctuations in exchange rates in the countries where we do business. Amortization of debt issuance costs relate to the Notes we issued in May 2020 and September 2024. Interest expense consists of the contractual interest expenses associated with the Notes.

Previous wording

We operate in several tax jurisdictions and are subject to taxes in each country or jurisdiction in which we conduct business. Earnings from our non-U.S. activities are subject to local country income tax and may be subject to U.S. income tax.

Current wording

We operate in the U.S. and in foreign jurisdictions and are subject to taxes in each country or jurisdiction in which we conduct business. Earnings from our non-U.S. activities are subject to local country income tax and may be subject to U.S. income tax.

Previous wording

In addition, we are subject to the regular examinations of our income tax returns by different tax authorities. For example, we are currently subject to a withholding tax audit in Israel and a state tax audit in the United States. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes.

Current wording

In addition, we are subject to the regular examinations of our income tax returns by different tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes.

Previous wording

For the year ended December 31, 2023, our revenues increased 5% compared to the year ended December 31, 2022 despite the positive trend of increased SaaS mix and existing customer conversions to SaaS which cause headwinds due to accounting treatment differences in revenue recognition. Subscription revenues increased 9% from $366.1 million for the year ended December 31, 2022 to $400.9 million for the year ended December 31, 2023. The increase in subscription revenues was driven by existing customers expanding their deployment, new customer acquisitions and our high renewal rate. ARR was $543.0 million and $465.1 million as of December 31, 2023 and 2022, respectively, representing an increase of 17%. The anticipated decrease in maintenance and services revenues was due to churn and the conversion of existing customers to subscription licenses despite our renewal rate continuing to be over 90% for each of the years ended December 31, 2023 and 2022, as well as newer solutions providing remediation in more automated ways, requiring less professional services. As a result, we expected, and continue to expect less associated maintenance and services revenues in the future.

Current wording

For the year ended December 31, 2024, our revenues increased 10% compared to the year ended December 31, 2023 despite increased SaaS sales and existing customer conversions to SaaS which cause variations due to accounting treatment differences in revenue recognition for sales within the respective periods. SaaS revenues increased 370% from $44.4 million for the year ended December 31, 2023 to $208.8 million for the year ended December 31, 2024 as we continue to progress through our transition to a SaaS delivery model. The increase in SaaS revenues was driven by (i) new customer acquisitions, which are happening due to the simplicity of our SaaS platform and MDDR offering, as well as customer interest in Gen AI, (ii) existing customer conversions and (iii) our high renewal rates. Consequently, there was an expected decrease to term license subscriptions given the aforementioned transition and customer conversions, a trend we expect to continue in the coming years. ARR was $641.9 million and $543.0 million as of December 31, 2024 and 2023, respectively, representing an increase of 18%. The anticipated decrease in maintenance and services revenues was due to churn and the conversion of existing customers to SaaS despite our renewal rate continuing to be over 90% for each of the years ended December 31, 2024 and 2023. We continue to expect less associated maintenance and services revenues in the future.

Previous wording

The increase in cost of revenues was primarily related to a $3.5 million increase in third-party hosting costs associated with our transition to a SaaS delivery model. This is partially offset by a decrease of $1.5 million in salaries and benefits and stock-based compensation expense.

Current wording

The increase in cost of revenues was primarily related to a $11.3 million increase in salaries and benefits and stock-based compensation expense due to increased headcount for customer success personnel to assist with the transition to a SaaS delivery model, including our recently introduced MDDR offering, and ensure high customer satisfaction and maintain our strong renewal rates. The increase is also due to a $9.9 million increase in third-party hosting costs associated with our transition to a SaaS delivery model.

Previous wording

The increase in research and development expenses was primarily related to a $2.6 million increase in salaries and benefits and stock-based compensation expense for our employees as part of our focus on enhancing and developing our existing and new products. The increase is also due to a $2.1 million increase in third-party hosting costs associated with our transition to a SaaS delivery model and a $1.3 million increase in facilities and allocated overhead costs.

Current wording

The increase in research and development expenses was primarily related to a $6.7 million increase in acquired in-process research and development costs associated with our asset acquisition, a $3.2 million increase in salaries and benefits and stock-based compensation expense primarily due to increased headcount, an increase of $1.9 million in facilities and allocated overhead costs and a $0.8 million increase in third-party hosting costs associated with our transition to a SaaS delivery model.

Previous wording

The increase in sales and marketing expenses was primarily related to a $3.3 million increase in third-party hosting costs associated with our transition to a SaaS delivery model and a $1.5 million increase related to general sales and marketing expenses, including increased travel and marketing events. This is partially offset by a decrease of $1.6 million in salaries and benefits and stock-based compensation expense for our sales force and commissions on customer orders and a decrease of $0.4 million in facilities and allocated overhead costs.

Current wording

The increase in sales and marketing expenses was primarily related to an increase of $9.7 million in general sales and marketing expenses, including increased travel, marketing events and third-party hosting costs associated with our transition to a SaaS delivery model and a $1.8 million increase in salaries and benefits and stock-based compensation expense primarily due to increased headcount.

Previous wording

The increase in general and administrative expenses was primarily related to an increase of $10.9 million in salaries and benefits and stock-based compensation expense primarily due to increased headcount to support the overall growth of our business.

Current wording

The increase in general and administrative expenses was primarily related to an increase of $4.9 million in salaries and benefits and stock-based compensation expense primarily due to increased headcount to support the overall growth of our business and an increase of $0.5 million in facilities and allocated overhead costs.

Previous wording

The increase in financial income, net was primarily due to higher interest income, partially offset by less foreign currency gains.

Current wording

The increase in financial income, net was primarily due to higher interest income, partially offset by foreign currency losses.

Previous wording

Income taxes for the year ended December 31, 2023, including the increase in income taxes, were comprised of foreign and U.S. income taxes.

Current wording

Income taxes for the year ended December 31, 2024, including the decrease in income taxes, were comprised of foreign and U.S. income taxes.

Previous wording

When selling on-premises subscription products, our quarterly results reflect seasonality in the sale of our products and services. Historically, we have experienced a pattern of increased sales in the fourth quarter. This trend makes it difficult to achieve sequential revenue growth in the first quarter of the following year. Because of purchasing trends, demand for our products and services is typically slowest in the first quarter, resulting in a decrease in quarterly revenues from the fourth quarter to the first quarter of the subsequent fiscal year. Our gross margins and operating margins have been affected by these historical trends because the majority of our expenses are relatively fixed quarter over quarter. Our expenses, which do not vary directly with revenues, and the seasonal pattern described above have an impact on the cost of revenues, research and development expenses, sales and marketing expenses and general and administrative expenses as a percentage of revenues in each calendar quarter during the year. We expect the impact of these seasonal patterns to decline as we sell more of our SaaS offering to new customers and transition our existing customers to our SaaS platform. The majority of our expenses are personnel-related costs, which consist of salaries (including payroll tax expense related to stock-based compensation), employee benefits (including commissions and bonuses) and stock-based compensation. As a result, we have not experienced significant seasonal fluctuations in the timing of expenses from period to period.

Current wording

When selling on-premises subscription products, our quarterly results reflect seasonality in the sale of our products and services. Historically, we have experienced a pattern of increased sales in the fourth quarter. This trend makes it difficult to achieve sequential revenue growth in the first quarter of the following year. Because of purchasing trends, demand for our products and services is typically slowest in the first quarter, resulting in a decrease in quarterly revenues from the fourth quarter to the first quarter of the subsequent fiscal year. Our gross margins and operating margins have been affected by these historical trends because the majority of our expenses are relatively fixed quarter over quarter. Our expenses, which do not vary directly with revenues, and the seasonal pattern described above have an impact on the cost of revenues, research and development expenses, sales and marketing expenses and general and administrative expenses as a percentage of revenues in each calendar quarter during the year. We expect the impact of these seasonal patterns to decline as we sell more of our SaaS offering to new customers and transition our existing customers to our SaaS platform, due to the ratable revenue recognition of SaaS. The majority of our expenses are personnel-related costs, which consist of salaries (including payroll tax expense related to stock-based compensation), employee benefits (including commissions and bonuses) and stock-based compensation. As a result, we have not experienced significant seasonal fluctuations in the timing of expenses from period to period.

Previous wording

On December 31, 2023, our cash and cash equivalents, short-term marketable securities and short-term deposits of $533.7 million were held for working capital purposes. We believe that our existing cash and cash equivalents, short-term marketable securities, short-term deposits and cash flow from operations will be sufficient to fund our operations and capital expenditures for at least the next 12 months. Our future capital requirements will depend on many factors, including our rate of revenue growth, timing of renewals and renewal rates, the expansion of our sales and marketing activities, the timing and extent of spending to support product development efforts and expansion into new geographic locations, the timing of introductions of new software products and enhancements to existing software products, the continuing market acceptance of our software offerings and our use of cash to pay for acquisitions or share repurchases, if any.

Current wording

As of December 31, 2024, our cash and cash equivalents, short-term marketable securities and short-term deposits of $568.4 million were held for working capital purposes. We believe that our existing cash and cash equivalents, short-term marketable securities, short-term deposits and cash flow from operations will be sufficient to fund our operations and capital expenditures for at least the next 12 months. Additionally, as of December 31, 2024, we held $658.9 million in long-term marketable securities. Our future capital requirements will depend on many factors, including our rate of revenue growth, timing of renewals and renewal rates, the expansion of our sales and marketing activities, the timing and extent of spending to support product development efforts and expansion into new geographic locations, the timing of introductions of new software products and enhancements to existing software products, the continuing market acceptance of our software offerings and our use of cash to pay for acquisitions or share repurchases, if any.

Previous wording

Our operating activities are driven by sales of our products less costs and expenses, primarily payroll and related expenses, and adjusted for certain non-cash items, mainly depreciation and amortization, stock-based compensation, amortization of deferred commissions, noncash operating lease costs, amortization of debt discount and issuance costs and amortization of premium and accretion of discount on marketable securities, and changes in operating assets and liabilities. Changes in operating assets and liabilities are driven mainly by collection of accounts receivable from the sales of our software products and deferred revenue, which primarily consists of billed fees for our subscriptions, prior to satisfying the criteria for revenue recognition, which are subsequently recognized as revenue in accordance with our revenue recognition policy.

Current wording

Our operating activities are driven by sales of our products less costs and expenses, primarily payroll and related expenses, and adjusted for certain non-cash items, mainly depreciation and amortization, stock-based compensation, amortization of deferred commissions, non-cash operating lease costs, amortization of debt issuance costs, amortization of premium and accretion of discount on marketable securities, acquired in-process research and development costs, and changes in operating assets and liabilities. Changes in operating assets and liabilities are driven mainly by collection of accounts receivable from the sales of our software products and deferred revenue, which primarily consists of billed fees for our subscriptions, prior to satisfying the criteria for revenue recognition, which are subsequently recognized as revenue in accordance with our revenue recognition policy.

Previous wording

For 2023, cash provided by operating activities were $59.4 million. We have observed two seasonal patterns that impact our net cash provided by operating activities. First, a majority of our sales are made during the last three weeks of the quarter. Second, the highest dollar amount of sales of our products and services occurs in the fourth quarter. Consequently, we end the fourth quarter with our highest accounts receivable balance of any quarter which in turn generates the greatest amount of collections in the following quarter. In addition, there is negative sequential revenue in the first quarter, which results in a relatively lower amount collected during the second quarter. These seasonal trends also impact our operating loss because the majority of our expenses are relatively fixed in the short-term. For 2023, sources of cash inflows were $73.8 million, which included our net loss of $100.9 million, offset by non-cash charges of $174.7 million. Additional sources of cash inflows were from changes in our working capital, including a $69.9 million increase in deferred revenues and a $0.5 million increase in other long-term liabilities. This was partially offset by a $43.4 million increase in prepaid expenses and other current assets (including deferred commissions) and a $33.1 million increase in accounts receivable. Our days’ sales outstanding (“DSO”) for the three months and year ended December 31, 2023 was 82 and 72, respectively. Other sources of cash outflows were from a $5.3 million decrease in accrued expenses and other liabilities, a $2.3 million decrease in trade payables and a $0.6 million decrease in other long-term assets.

Current wording

For 2024, cash inflows from our operating activities were $115.2 million. We have observed two seasonal patterns that impact our net cash provided by operating activities. First, a majority of our sales are made during the last three weeks of the quarter. Second, the highest dollar amount of sales of our products and services occurs in the fourth quarter. Consequently, we end the fourth quarter with our highest accounts receivable balance of any quarter which in turn generates the greatest amount of collections in the following quarter. In addition, there is negative sequential sales in the first quarter, which results in a relatively lower amount collected during the second quarter. These seasonal trends also impact our operating loss because the majority of our expenses are relatively fixed in the short-term. For 2024, cash inflows were $102.1 million from our net loss excluding non-cash and acquired in-process research and development charges. Additional sources of cash inflows were from changes in our working capital, including a $110.4 million increase in deferred revenues, a $17.3 million increase in accrued expenses and other liabilities, a $3.6 million increase in trade payables, a $0.3 million decrease in other long-term assets and a $0.3 million increase in other long-term liabilities. This was partially offset by a $95.2 million increase in prepaid expenses and other short-term assets (including deferred commissions) and a $23.7 million increase in accounts receivable. Our days’ sales outstanding (“DSO”) for the three months and year ended December 31, 2024 was 77 and 74, respectively.

Previous wording

For 2022, cash provided by operating activities were $11.9 million. For 2022, sources of cash inflows were $63.2 million, which included our net loss of $124.5 million, offset by non-cash charges of $187.7 million. Additional sources of cash inflows were from changes in our working capital, including a $5.3 million increase in deferred revenues, a $1.4 million increase in other long-term liabilities and a $0.5 million decrease in other long-term assets. This was partially offset by a $28.2 million increase in prepaid expenses and other current assets (including deferred commissions) and a $18.8 million increase in accounts receivable. Our DSO for the three months and year ended December 31, 2022 was 79 and 70, respectively. Other sources of cash outflows were from a $9.1 million decrease in accrued expenses and other liabilities and a $2.4 million decrease in trade payables.

Current wording

For 2023, cash provided by operating activities were $59.4 million. Sources of cash inflows were $105.3 million, which included our net loss of $100.9 million, offset by non-cash charges of $206.2 million. Additional sources of cash inflows were from changes in our working capital, including a $69.9 million increase in deferred revenues and a $0.5 million increase in other long-term liabilities. This was partially offset by a $75.0 million increase in prepaid expenses and other short-term assets (including deferred commissions) and a $33.1 million increase in accounts receivable. Our DSO for the three months and year ended December 31, 2023 was 82 and 72, respectively. Other sources of cash outflows were from a $5.3 million decrease in accrued expenses and other liabilities, a $2.3 million decrease in trade payables and a $0.6 million decrease in other long-term assets.

Previous wording

Our investing activities consist primarily of capital expenditures to purchase property and equipment, including leasehold improvements, purchase and sale of deposits and changes in our marketable securities. In the future, we expect to continue to incur capital expenditures to support our expanding operations.

Current wording

Our investing activities consist primarily of capital expenditures to purchase property and equipment, including leasehold improvements, purchase in-process research and development, purchase and sale of deposits and changes in our marketable securities. In the future, we expect to continue to incur capital expenditures to support our expanding operations.

Previous wording

During 2022, net cash used in investing activities of $374.3 million was primarily attributable to net investments of $236.3 million in marketable securities, $126.6 million in net deposits and $11.4 million in capital expenditures to support our growth during the period including hardware, software, office equipment and leasehold improvements mainly in connection with existing office space.

Current wording

During 2024, net cash used in investing activities of $532.3 million was primarily attributable to net investments of $529.4 million in marketable securities, $6.7 million for in-process research and development and $6.7 million in capital expenditures to support our growth including hardware, office equipment and leasehold improvements mainly in connection with existing office space. This was partially offset by net proceeds of $10.5 million in deposits.

Previous wording

During 2023, net cash used in investing activities of $143.1 million was primarily attributable to net investments of $216.6 million in marketable securities and $5.1 million in capital expenditures to support our growth during the period including hardware, software, office equipment and leasehold improvements mainly in connection with existing office space. This was partially offset by net proceeds of $78.6 million in deposits.

Current wording

During 2023, net cash used in investing activities of $143.1 million was primarily attributable to net investments of $216.6 million in marketable securities and $5.1 million in capital expenditures to support our growth including hardware, software, office equipment and leasehold improvements mainly in connection with existing office space. This was partially offset by net proceeds of $78.6 million in deposits.

Previous wording

In 2022, net cash used in financing activities of $75.6 million was attributable to $56.4 million of repurchases of common stock and $31.1 million in taxes paid related to net share settlement of equity awards, partially offset by $11.9 million of proceeds from employee stock plans.

Current wording

In 2024, net cash provided by financing activities of $371.9 million was attributable to $449.6 million of net proceeds from the issuance of convertible senior notes and $16.1 million of proceeds from employee stock plans, partially offset by $55.5 million related to purchases of capped calls associated with the convertible senior notes and $38.3 million in taxes paid related to net share settlement of equity awards.

Previous wording

On May 11, 2020, we issued $253.0 million aggregate principal amount of the 2025 Notes. The net proceeds from the offering, after deducting initial purchaser discount and issuance costs, were approximately $245.2 million. In connection with the issuance of the 2025 Notes, we entered into the Capped Call Transactions. We used $29.3 million of the net proceeds from the 2025 Notes to purchase the Capped Call Transactions, as further discussed in Note 7 of our consolidated financial statements.

Current wording

On May 11, 2020, we issued the 2025 Notes. The net proceeds from the offering, after deducting issuance costs, were approximately $245.2 million. In connection with the issuance of the 2025 Notes, we used $29.3 million of the net proceeds to enter into Capped Call Transactions.