Joel Fishbein: Thanks for taking the question and again good strong execution. It was a good segue, the previous question of mine. I wanted to, Guy, I wanted to ask about the MDDR offering. Can you just give us a little color on how that will be priced? And then what do you think the adoption curve looks like in terms of time to revenue?
Guy Melamed: It’s a very good question. When you look at kind of our offering to date, we’ve offered the proactive incident response team for quite some time now, and the reception the way customers have received it has been extremely positive. So all we’re doing right now is charging for the service that we’ve provided for quite some time. And I think there as you look at kind of the MDDR, we expect it to generate a healthy uplift in terms of the ASP and what we can generate from our customers. So we don’t expect us to become a service company. We believe that over time, we can generate MDDR that is in licensed software margins. We feel that not only is it extremely beneficial for our customers, but it can also help with increased and improved renewal rates over time.
It can help with the opportunity to upsell additional platforms that a customer would see the value and would want to be protected on multiple platforms. And at the same time, it’s so appealing and for customers that it can actually help with closing rates. So I think the MDDR has an option on all of those fronts. The way we’ve structured the comp plan in 2024 makes it a no-brainer for our reps to introduce it to our customers. So I expect the adoption to be extremely healthy this year. And I think it’s a benefit for our customers, but also a significant benefit for us as an organization.
Joel Fishbein: Thank you very much.
Operator: Thank you. Our next question comes from the line of Andrew Nowinski with Wells Fargo. Please proceed with your question.
Andrew Nowinski: Great. Thank you for taking the question and congrats on the nice quarter. So I wanted to ask about total ARR guidance. You guys have outlined so many different positive growth drivers tonight. The mix of your SaaS revenue is 23%. I think it’s the fastest pace we’ve seen over the last four quarters. You’re getting that 25% to 30% price uplift on SaaS, you’re getting larger lands, as you mentioned. You got the new integration, of course, with Microsoft and the MDDR service, but your outlook for ARR implies a fairly steep deceleration. I’m just — given those growth drivers, why would we expect a deceleration in your ARR growth this year?
Guy Melamed: So when you look at the math, and I think the numbers that you look at, I completely understand the math that you’re doing and it makes sense. I think when you look at the prepared remarks, we had extremely bullish tone, and I do want to reconcile that with the guidance that we’ve provided. So when — as you look at us sitting here today, we’ve never had so many things working in our favour. Apart from the everyday increasing breaches that we’ve seen happen for years, there’s additional drivers and tailwinds that we’ve really never seen before. Yaki talked about the Copilot, there’s the cyber-security SEC regulation and also what we believe is a game changer for us, which is the MDDR, which we just introduced. But you have to remember, our sales cycles are three months on the shorter end and up to 12 months on the larger deals.
So when you look at kind of us sitting here right now and looking at the philosophy that we’ve guided for in the past for many, many years. It’s not something that we have done in the past to bake in positive assumptions into our guidance without seeing the data that supports it. So it’s really a starting point for the year. We’re sitting here in February, and there’s a long year ahead of us. We believe that we will see those trends that I’ve talked about, kind of work in our favour over the year. And as we have done in the past, we’ll be happy to update our guidance as the year progresses. But as I mentioned, there’s a lot of things that are working in our favour that we haven’t seen in the past.
Andrew Nowinski: Yeah, it certainly seems like that. All right. Thank you very much
Guy Melamed: Thank you.
Operator: Thank you. Our next question comes from the line of Fatima Boolani with Citi. Please proceed with your question.
Fatima Boolani: Thank you. Good afternoon. Thank you for taking my questions. Guy, this one is for you. I was hoping you could help unpack for us how much of the expected operating margin degradation that you’re anticipating this year is more due to the fact that the transition is actually accelerating because you did pull forward that timeline. So certainly, we appreciate the mechanical P&L impact to that. But just how much of that degradation on a year-over-year basis is tied to this sort of mechanical artefact versus some of your comments in the prepared remarks pertaining to a desire to reinvest in certain parts of the business? I believe you said some organic reinvestment. So just some directional help on that front would be great. Thank you.
Guy Melamed: That’s a very good question. And I think it’s a combination of some of the accounting in terms of the cloud costs and the way they’re recognized in terms of the expense in a ratable way versus kind of the ARR where you recognize it up on the day of the sale but there’s also this understanding that there is a tremendous opportunity ahead of us, and we want to take advantage of it. So when you look at kind of our philosophy over the last couple of years, we’ve been very focused on the top line growth and wanted to make sure that we show margin leverage and free cash flow generation. I think as we sit here today, we feel extremely confident about kind of the guidance that we provided during the Investor Day in March of 2023, about a 20% ARR contribution margin by 2027.
So kind of when you look at the progression, in terms of free cash flow, we’ve shown improvement from ’22 to ’23 and even in the guidance of 2024, there’s a significant improvement there as well. ARR contribution margin moved significantly from 2022 levels to 2023 levels and the 2024 guidance has an improvement as well. So I think some of the investments that we’re making today are ahead of what we want to see is a return to the ARR top line growth of kind of that 20 plus percent. So I think we’re definitely making the investments to take advantage of a larger opportunity. And we believe that with the tailwinds that we’ve talked about, there is a tremendous opportunity for us to take advantage of.
Fatima Boolani: Thank you.
Operator: Thank you. Our next question comes from the line of Roger Boyd with UBS. Please proceed with your question.
Roger Boyd: Great. Thank you for taking the question. Congrats on the quarter. Guy, I wanted to go back to the conversion math. You converted a little over $30 million from term license to SaaS this year really without any sort of formal go-to-market behind it. Apologies if I missed this, I think you noted that you’re expecting that to accelerate. But any rough cut assumptions on what you’re expecting in terms of conversions in 2024? And alternatively, kind of the puts and takes here around renewal timing, the sales ramp-up, which you know it will be kind of skewed towards the back half of the year. Thanks.
Guy Melamed: Absolutely. We finished 2023 with 23% SaaS out of total ARR so at $125 million. And our assumptions for 2024 is that we will finish at 46% SaaS percentage out of total ARR. That basically means $285 million of SaaS by the end of 2024. So a significant increase that basically means $160 million of SaaS ARR in 2024, a significant increase versus the $120 million of SaaS that we have generated in 2023. So obviously, our assumptions are that there will be some significant increase in the conversions themselves, but also that the percentage of SaaS sold to new customers would be pretty significant as well. I think the overall understanding and the feedback that we’re getting from our customers is that they prefer the SaaS offering because it’s a better product.
And in terms of, from a commission perspective, our reps retire quota on anything on top of that renewal. So on the uplift that they get from an existing customer in that conversion, that goes towards that quota retirement. So it’s actually a win-win. It’s a win-win for — it’s a win for our customers, and it’s a win for our sales team, and that’s the best way to kind of incentivize. And that’s why the 2023 has been a great surprise in the level of conversions that we saw and our expectation is for an acceleration in 2024, which would bring us to that $285 million of SaaS by the end of this year.
Roger Boyd: Very helpful. Thank you.
Guy Melamed: Thank you.
Operator: Thank you. Our next question comes from the line of Chad Bennett with Craig-Hallum. Please proceed with your question.
Chad Bennett: Great. Thanks for taking my questions. Guy, maybe just a prior question, when you talked about the MDDR opportunity and the ASP difference. Is there any way to kind of quantify kind of how material that uplift is or just the deal size difference you see in MDDR versus a traditional SaaS deal?
Guy Melamed: It’s very early still, but I can tell you that even as we sit here today, and we just spoke to our sales teams about it during the SKO that we had a couple of weeks ago, we’ve already seen that they’ve adopted it in a very healthy and positive way. We’ve actually seen some of the quotes where they go back and get an uplift. I don’t want to put a number quite yet just because it’s so early. But the MDDR does allow us to generate a pretty significant and nice uplift, but at the same time, provide customers the value with less of a need of people to actually be protected. And at the end of the day, that’s the best thing the win-win with our customers.
