Varonis Systems Inc
NASDAQ:VRNS

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Varonis Systems Inc
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Market Cap: 5.1B USD
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Earnings Call Transcript

Earnings Call Transcript
2018-Q3

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Operator

Greetings and welcome to the Varonis Third Quarter 2018 Earnings Conference Call. At this time, all participants will be in listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]

As a reminder, this conference is being recorded. I would now like to turn the conference over to James Arestia, Investor Relations. Please go ahead.

J
James Arestia
Investor Relations

Thank you operator. Good afternoon. Thank you for joining us today to review Varonis' third quarter 2018 financial results. With me on the call today are Yaki Faitelson, Chief Executive Officer and Guy Melamed, Chief Financial Officer and Chief Operating Officer. After preliminary remarks, we will open up 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 fourth quarter and fiscal year ending December 31, 2018. Actual results may differ materially from those set forth in such statements.

Important factors such as risks associated with the anticipated growth in our addressable market, competitive factors, including increased sales cycle time, changes in the competitive environment, pricing changes and increased competition, the risk that we may not be able to attract or retain employees including sales personnel and engineers, general economic and industry conditions including expenditure trends for data and cybersecurity solutions, risks associated with the closing of large transactions including our ability to close large transactions consistently on a quarterly basis, our ability to build and expand our direct sales efforts and reseller distribution channels, new product introductions and our ability to develop and deliver innovative products, risks associated with international operations and our ability to provide high quality service and support offerings could cause actual results to differ materially from those contained in forward-looking statements.

These factors are addressed 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 also available in our third quarter 2018 earnings press release, which can be found at www.varonis.com in the Investor Relations section. Also, please note that a webcast of today's call will be available on our website in the Investor Relations section.

With that, I would like to turn the call over to our Chief Executive Officer, Yaki Faitelson. Yaki?

Y
Yaki Faitelson
Chief Executive Officer

Thanks, James, and good afternoon, everyone. We had solid performance in the third quarter of 2015. Total revenues were $67.1 million, an increase of 26% year-over year and ahead of our guidance.

North America revenues increased 27% in the quarter, while EMEA revenues increased 20%. To drill down a bit more on North America, we were pleased with the region performance and the contribution from the West Coast. As we discussed with you last quarter, we felt confident in our ability to drive growth in North America where the demand for our product is very strong.

This is exactly what we saw in Q3. Now, I would like to discuss a few examples of how we are executing on a growth strategy. Let's begin with our customers. First, I'm pleased to report that we added 188 new customers in the third quarter. As you know, we made strategic decision several years ago to focus on customers with more than 1,000 employees.

Larger customers yield larger initial deals and strong up sell opportunities and offer a great deal of customer life time value. As an example, a global manufacturing company based in the U.S. with approximately 15,00 employees wanted to ensure it was doing everything it could to protect its valuable intellectual property and lockdown important data protected under GDPR. At Varonis data, risk assessment revealed the customers lost fear, expose intellectual property and personally identifiable information covered by GDPR.

The company purchased DatAdvantage to map and monitor the data stores. Data Classification engine to locate the sensitive data and GDPR Patterns to identify GDPR data in their environment. The customers also purchase automation engine to speed up mediation to expose data.

With Varonis, they will have a turnkey approach to finding and securing overexposed data through out their enterprise. This is another reminder of the GDPR regulation of not just relevant to our EMEA customers but to all multinational companies doing business in the EU. This example is only one of many where we are seeing of customers making bigger initial commitment to us validating that our operational approach to detect, prevent and sustain is working. Our customer will see the value we provide as they think more critically and comprehensively about their businesses in their data protection effort.

But it's not just new customer acquisition that is driving our business. It is upselling as well. We continue to have success with our journey of value. We are confident that once our customer use our product, they will then buy more. Upsell things continue to make progress helping our customers understand the value they can derive across the platform.

This quarter we continue to see number of customers, who purchased two or more and three or more products families increase year-over-year. At the same time percentage of licenses and first year maintenance from existing customers increased to 53% from 49% in the prior year period.

By way of example, a large accounting firm began using that DatAdvantage in 2015 to control access to sensitive client file and avoid potential risk and loss of business resulting from exposed data. Every year since they have continued to add Varonis product including Data Classification engine and DatAlert to identify sensitive information and monitor an alert on threats.

In the third quarter the firm once again turned to Varonis with the purchase of Automation Engine. Thanks to the visibility control and automation provided by Varonis the firm can automatically identify and classify data and remediate suspicious activity as it unfolds.

This is yet another example of what we are seeing across our customer base, will customer see the value for data security platform and the strength of the combination of DatAdvantage and Data Classification and DatAlert. And this makes perfect sense.

DatAdvantage provides the map, who can access data. Data Classification engine identify which data is critical. DatAlert analysis the excess activity and provides real time alert of abnormal behavior. The combination of risk reduction, sophisticated learning and simplified compliance offers our customers a unique value proposition.

DatAlert are compelling, when customer monitoring one type of data store, more so when they monitor multiple data store, in today's hybrid world the alert and the investigation capabilities behind them are invaluable. We have seen attach rates for DatAlert grow steadily and now just below 50%, which emphasize the potential to continue to sell DatAlert to our existing customers base.

Across all our offering the yields we have spent we have spent working with customers on remediation project has made our products and methodology better. And we are now using same approach with cybersecurity.

As an example North America aerospace company was recently under an active phishing attack. But the attackers were successfully able to compromise several user accounts. They reached out to us and we were able to help them determine whether additional machine were compromised and whether any GDPR information was affected.

I am also pleased to know the adoption of our Office 365 solution continue to be very strong. Our strategy remains towards customer manage and protect data anywhere whether it is stored on premises or in the cloud.

As an example in international educational organization where students and faculty around the world turned to Varonis to secure their hybrid on-premises and cloud environment. DatAdvantage will map and monitor the data stores. Data classification engine will give them visibility into sensitive file. Data Transport Engine will allow them to create tools and automatically migrate, archive or delete file. And DatAlert will analyze behavior to detect internal or external threats.

And through GDPR Patterns, they can run country-specific rules to locate and lockdown files contain personal data. Thanks to Varonis. The organization is taking a proactive approach to protect their hybrid data stores and will be prepared as they continue to migrate to the cloud. To further our cloud strategy, in July, we announced the upcoming integration with Box to secure enterprise content in the cloud. Box will be supported part of our Data Security platform, tracking user activity and providing customers with the ability to manage risk and secure the enterprise data wherever it lives.

In short, our financials and operational results this quarter reaffirms our belief that we are building durable and scalable company that can reach $1 billion in sales. I'm excited as I look forward to the fourth quarter and beyond. And I am confident that our strategy and team position us well for long-term profitable growth.

With that, let me turn the call over to Guy. Guy?

G
Guy Melamed

Thank you, Yaki. I'll begin by discussing our quarterly results and then move on to discussing our outlook for Q4 and the full year 2018. Total revenues for the third quarter were $67.1 million, an increase of 26% year-over-year and above our guidance. License revenues were $35.8 million, which represents a 23% increase from the second quarter of 2017. Maintenance and services revenues were $31.2 million, increasing 28% compared to the third quarter of 2017.

Our maintenance renewal rate in the third quarter was again over 90% and continues to increase as it has over the past several quarters. From a geographic viewpoint, we saw growth in both our major regions in the third quarter. We were pleased with the strong growth we saw across all regions in North America where revenues increased 27% to $44.9 million or 67% of total revenues.

EMEA revenues increased 20% to $19.8 million or 29% of total revenue, rest of World revenues which represents 4% of total revenues or $2.4 million. For the third quarter, existing customer license and first year maintenance revenue contribution was 53% compared to 49% in prior year period.

As Yaki mentioned, we added 188 new customers during the quarter compared to 208 in Q3 of 2017. The decrease in net new add year-over-year is in line with our strategy to focus on companies with 1000 or more employees which continues to result in customers making larger initial commitments to us.

At the same time, we continue to see increased revenues from our existing customer base, which serves as a strong source of additional revenues given the broad platform of products we have and the growing volumes and complexity of enterprise data that they have.

We ended the third quarter with approximately 6,350 customers. As of September 30, 2018, 72% of our customers purchased two or more product families up from 68% as of September 30, 2017. 39% of our customers purchased three or more product families compared with 34% in Q3 of 2017.

These percentages which have continued to grow over the last few quarters are evidence there are strategy of ongoing investments in R&D is working as we are seeing customers buy more licenses than ever. As we innovate and expand our product offering. We expect to have an even broader suite of products to offer our customers, further driving our land and expand strategy.

Before moving onto the profit and loss items, I would like to point out that I'll be discussing non-GAAP results going forward unless otherwise stated, which for the third quarter of 2018 excluded a total of $8.4 million in stock-based compensation expense and $430,000 of payroll tax expense related to stock-based compensation. We report non-GAAP results in addition to, and not as a substitute for financial measures calculated in accordance with GAAP.

A detailed GAAP to non-GAAP reconciliation can be found in the tables of our press release which is available on our website. Gross profit for the third quarter was $60.5 million, representing a gross margin of 90.2%, in line with our gross margin in the third quarter of 2017. I want to remind everyone that embedded in our 2018 financial guidance was our desire to continue to grow revenues while improving our non-GAAP operating margin, excluding the 300 basis points headwind related to FX.

We continue to execute against our plan. Operating expenses in the third quarter totaled $65.1 million compared to $51.4 million in the third quarter of 2017. As a result, our operating income was $2 million or an operating margin of 3% for the third quarter, compared to operating income of $1.9 million or an operating margin of 3.6% in the same period last year.

During the quarter, we had financial income of $99,000, primarily from interest income, compared to financial income of $622,000 in the third quarter of 2017, primarily due to foreign exchange gains. As you know, foreign exchange gains and losses can fluctuate. Our guidance does not consider any additional potential impact to financial and other income and expense associated with foreign exchange gains or losses as we do not estimate movement in foreign currency rates.

Our net income was $1.5 million for the third quarter of 2018 or an income of $0.05 per diluted share compared to net income of $1.8 million or $0.06 per diluted share for the third quarter of 2017. This is based on 32.5 million and 30.8 million diluted shares outstanding for Q3 2018 and Q3 2017, respectively.

Turning to the balance sheet, we ended the quarter with approximately $158.1 million in cash, cash equivalents and short-term investments. During the first nine months of 2018, we generated operating cash flow of $16.3 million compared to cash flow generated from operations of $10.8 million in the first nine months of 2017.

This year-over-year improvement is keeping with our strategy to scale our business, improving our non-GAAP operating margins while delivering increased levels of cash flow from operations. We ended the quarter with 1,386 employees, 16% increase from 1,199 at the end of the third quarter of 2017.

Moving now to guidance. For the fourth quarter of 2018, we expect total revenues of $86.5 million to $88 million, representing year-over-year growth of approximately 18% to 21%. We expect our non-GAAP operating profit to range between $11 million and $12 million and non-GAAP net income per diluted share in the range of $0.32 to $0.34. This assumes a tax provision of $600,000 to $800,000 and 32.6 million diluted shares outstanding.

For the full year 2018, we are raising both our revenue and profit guidance. We now expect total revenues in the range of $269.5 million to $271 million, representing year-over-year growth of approximately 25% to 26%. We now expect our non-GAAP operating income to be in the range of $5.5 million to $6.5 million, and non-GAAP net income per diluted share in the $0.11 to $0.13. This assumes a tax provision of $2.3 million to $2.5 million and 32.4 million diluted shares outstanding.

We also expect our cash flows from operations for the full 2018 year to be greater than full year 2017. In summary, the need for companies to monitor and protect critical data has never been more important and the continued demand for our solutions confirms that our strategy is working. We are selling more licenses to both new and existing customers and renewal rates are increasing.

At the same time, we continue to scale our business, improving non-GAAP operating margins, while delivering increasing levels of cash flow from operation. We look forward to continued financial and operational success in the fourth quarter as we build towards $1 billion business.

With that, we’d happy to take questions you have. Operator?

Operator

Thank you. At this time, we’ll be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question will be coming from the line of Saket Kalia with Barclays. Please proceed with your question.

S
Saket Kalia
Barclays

Hi, guys. Thanks for taking my questions here and nice bounce back. First, maybe for you, Yaki, you touched on this in your prepared remarks. But now that we have another quarter under our belt on the West Coast performance from last quarter, did the team learn anything new about what’s contributed to the result last quarter, sort of a postmortem sort of analysis?

Y
Yaki Faitelson
Chief Executive Officer

No, not really, it was unexpected. We just – in our playbook, we have little bit with the company for many years, we just came in and made sure that we are doing just the fundamentals that both of us here in terms of pipeline development, closing, enablement, time management and it works exactly as we expected.

S
Saket Kalia
Barclays

Got it, got it. May be for my follow-up for you Guy, obviously the quarter is very clear and it’s still early to talk about, specifically about 2019. But of course we’re all in the planning process. So I guess the question is with the hiccup that we had in the West Coast last quarter, and with may be the different views that the market has on the overall macro, going into next year, the question is how do you balance some of those things with the secular growth that you have in your market, again as you start plan for next year?

Y
Yaki Faitelson
Chief Executive Officer

Hi, Saket. So first all we have Q4 ahead of us. So we'll talk about 2019 after Q4, but we do feel very strong about the market. I think the West Coast performed very well and we were very happy and we weren't surprised with that. And we're just more customers want to buy more and more licenses and we see that all the time.

S
Saket Kalia
Barclays

Got it. Very helpful. That's it for me. Thanks very much.

Y
Yaki Faitelson
Chief Executive Officer

Thanks.

G
Guy Melamed

Thanks.

Operator

The next question is from the line of Matt Hedberg with RBC. Please proceed you’re your question.

M
Matt Hedberg
RBC

Hey thanks guys. Yaki congrats on getting the West Coast back on track. I wanted to dig down into that market a little bit more. I guess the U.S. in particular. Can you talk about how the federal vertical did this quarter and just kind of how the overall momentum feels? I know it's still kind of early for you guys. But just a little more commentary there would be helpful.

Y
Yaki Faitelson
Chief Executive Officer

Yes so federal could have done better and the growth driver was a regular commercial business. In terms of the long-term expectations from the federal market is unchanged, we just started investing the market two years ago and built a pipeline, built on the programs, do the certification. So it's just the early innings, but just a commercial business in North America worked very well and I'm just telling you what I what I'm saying for years, is this business you need to take a multi-quarter view.

M
Matt Hedberg
RBC

That's great. And then it’s great to see the number of customers, or two or actually three or more products, I think they were in an all-time high. You mentioned up sales are strong. I guess digging into that a little bit more specifically, are you guys doing anything to improve the overall sales motion? And I think I’ve asked in the past but are you getting more customers asking for more ELA type contracts they want to consume even more Varonis?

Y
Yaki Faitelson
Chief Executive Officer

Yes, good. This point not ELAs but we really see that what we are doing in data protection works extremely well and also on the cybersecurity definitely 365 in the cloud as you compute works extremely well for us. So they are very, very strong building blocks and very deepened broad value proposition. We can spend more time with our customers and we can really take them for this journey of values. So the way that they are using the products, the way that they are getting the value, effort economy, if you will, how much time we spend with them and what is the results becoming with time more predictable? And it makes sense to spend more time with the larger customer.

M
Matt Hedberg
RBC

Great. Congrats again.

Y
Yaki Faitelson
Chief Executive Officer

Thank you.

Operator

The next question comes from the line of Alex Henderson with Needham & Company. Please proceed with your question.

A
Alex Henderson
Needham & Company

Thanks. Just a quick one. Can you give us the headcount? And I guess as you started to see the number of accounts buying two or more getting close to 100% or approaching it, are you going to start to add four more or something of that sort to the list? My primary question though was really on the Canadian – I mean the European business obviously slowed down quite a bit from the 60% growth rate last quarter. I assume that that's primarily a reflection of a strong 2Q and be the summer pattern of vacations in Europe. But could you talk a little bit about what transpired there because I expected that to be a little bit on the other side?

Y
Yaki Faitelson
Chief Executive Officer

Hi Alex it is exactly as you said. We always need a multi quarter view and with a very strong Q2 and the summer that can make the European business a bit unpredictable. We saw these growth rates but for the year it’s 25% growth, in New York the business is very strong, we have good teams, good coverage. We see good demand across the Board. And we believe we can do very well in this market analysis – sorry go ahead.

A
Alex Henderson
Needham & Company

Is the 45% kind of the rate that you would expect as we’re looking into the fourth quarter?

Y
Yaki Faitelson
Chief Executive Officer

No the guidance is the way that we guided. I just said that we are at 45% year-to-date and you always need to take multi quarter view. You can't analyze the business on a quarter-by-quarter basis. And we just feel comfortable overall about the European business and believe that it will do well.

G
Guy Melamed

And Alex just to answer your first two questions, we ended the quarter with 1,386 employees. And in regards to the number of customers buying two or more products and three or more products, this is the first year we actually added the three or more products. So we have provided more color because not only the change with data alert and the edge, but we have provided more color to investors and analysts in providing – and basically showing how customers are buying more and more products from us. So the fact that we've gone up to 72% from 68% last year on the two or more products; and 39% from 34% in the three or more products is a great indication that we really see customers buying more and more products from us and we're very happy with that.

A
Alex Henderson
Needham & Company

Great, thank you.

G
Guy Melamed

Thank you.

Y
Yaki Faitelson
Chief Executive Officer

Thank you.

Operator

Next question is from the line of Gur Talpaz with Stifel. Please proceed with your questions. Gur please go ahead with your question.

G
Gur Talpaz
Stifel

Apologies I was on mute, so sorry about that. You talked about a pipeline for a broader suite of products heading into 2019. With that in mind, can you give us some high level indication about where you plan on taking the portfolio? Should we expect more in the way of cybersecurity products like Varonis Edge? Or how are you thinking about the evolution of the business and suite of solutions heading into next year?

Y
Yaki Faitelson
Chief Executive Officer

We’re just constantly expanding on the building blocks of the value proposition. Cybersecurity is one of them. And I think that we are doing things that are extremely innovative and very, very unique in everything that's related to inside of – APT and also the way that we are doing in rich conclusive forensics. This is something that works very well for us and we can add a lot of strings there. On the data protection, automation and reporting a lot of effective mediation and obviously the cloud. So there is a lot to do. And we see a lot of pipeline. And we believe that there is in terms of innovation more ahead of us than behind us.

G
Gur Talpaz
Stifel

So that's helpful. And then Guy you talked about selling more licenses and improving renewal rates. How much of this would you attribute to sort of the push upstream into customers with more than 1,000 employees versus just better understanding of your value proposition general across the installed base?

G
Guy Melamed

Hi, Gur. I think we see customers across all sizes buying more licenses. I think it's really an indication of the market and how there's a problem that we are there to solve. So we really are focused on customers with more than a 1,000 employees has helped us with not only generating large initial commitments, but also on the customer lifetime value. And that's been working very well. But we see more licenses across the Board.

Y
Yaki Faitelson
Chief Executive Officer

And Gur in terms of the overall economics of the deal in the customer lifetime value just makes more sense to spend more time with them. As we spend more time in this solution becoming more mainstream, and budgeted and board level problem, we know that if we're doing the right things, we have a higher probability that budget will come towards us. And then we can also have the right coverage model that will support the sales motion. But again, for us large customers is 1,000 users and above. In terms of number of customers, we’re talking about tremendous development.

G
Gur Talpaz
Stifel

Okay. Thank you. Congrats on the bounce back.

Y
Yaki Faitelson
Chief Executive Officer

Thank you.

Operator

The next question is from the line of John DiFucci with Jefferies. Please proceed with your question.

J
John DiFucci
Jefferies

Thank you. I have a question for Yaki and then maybe a follow up for Guy. Yaki, you talked about the cloud more recently. And I know you're agnostic to where Varonis is deployed. But can you talk about what you're seeing out there as far as your deployments in cloud-based environments or in hybrid cloud environments. Are you seeing any shifting happening in your customer base? Is there any change at all right now?

Y
Yaki Faitelson
Chief Executive Officer

Hi, John. No, we see – definitely, we see more adoption for the cloud 365 in Azure that works very well for us. If you see we have now Box approach, you see these repositories, unstructured data still primarily is growing and reside on-premises but with active directory and Azure AD and everything that you are doing now with DNS and proxies and VPN and geo-location. The cloud is extremely relevant for us.

In terms of customers, we are agnostic. We see some customers running the main servers, their IDU in AWS, I mean Azure and someone on-prem. It's just more data repositories, more workloads, more infrastructure and more complexity with regular use of the tax income everywhere and dev ops just creating a bit of opportunity for Varonis.

J
John DiFucci
Jefferies

Okay. Okay great. So that's good to hear, you don't care where it is. You're going to be there. I guess for Guy, listen, these results. It is nice to see a nice bounce back here. And they're strong across the board and I don't want to nitpick too much but looking at cash flow because that's going to drive your valuation over the long-term. It was a bit below our expectations. And I guess when I look at it and I see a big uptick, usually you get an uptick in accounts receivables but as a real big uptick in accounts receivables. Can you talk a little bit about that? And I guess I would assume that we'll see that benefit cash flow next quarter because you'll collect those receivables.

G
Guy Melamed

Hi, John. So I'll get those two points, from a DSO perspective, our DSO was lower in Q3 2017. And when you look at the cash flow from operations over the last nine months and the numbers that we have for 2018 are greater. And we've seen a nice improvement compared to last year. There obviously is some timing issues from one quarter to the other. But the overall trend and if you take the multi-quarter view, we've seen great improvement on the cash flow and we continue – and we plan to continue to show improvements on the cash flow as we continue to grow the business and show the non-GAAP operating margin leverage.

J
John DiFucci
Jefferies

Okay. Well, and we do look at it over time but is it accurate for me to think about collecting those receivables, that bigger jump this quarter, within the next quarter or so?

G
Guy Melamed

Well, just to give you some color if you remember, our strongest collection quarter for the year is Q1. And the analogy is that Q4 is still a good collection quarter. So we expect to continue to show improved cash flow from operations for the year, should be at better levels from 2017. And again there is some timing from one quarter to the other.

J
John DiFucci
Jefferies

Okay. Okay, great. Thanks a lot guys. Nice job.

G
Guy Melamed

Thank you.

Operator

The next comes from the line of Melissa Franchi with Morgan Stanley. Please proceed with your question.

M
Melissa Franchi
Morgan Stanley

Okay, thank you. Thanks for taking my question. I just wanted to follow-up on EMEA. So I appreciate the lumpiness and a difficult comparable but I want to know to what extent GDPR is driving conversations obviously that something that is probably material in that region but just wondering if there was a change in the quarter, if it's becoming more relevant in the conversations over the past few quarters. And then if you're comfortable with the level of investment that you've put in that region or do you feel like you need to ramp up investment?

Y
Yaki Faitelson
Chief Executive Officer

Hi, Melissa. No, we feel comfortable with – overall with the level of investment, GDPR is definitely front and center in terms of the conversation, and the criticality of data protection and the cyber security and incident response. It's definitely driving a lot of awareness. But for us it's like a very effective marketing – very effective marketing campaign. I think overall in EMEA, there is a good awareness for data protection, for cybersecurity, for privacy and the overall conditions for a solution like ours are very good and we believe that it will be the situation for a long time.

M
Melissa Franchi
Morgan Stanley

Okay. That's helpful. Thanks. And then I just wanted to follow up on the sales force deficiency. So naturally you're going to get some leverage as more of the business comes through the existing base. But I'm wondering if you're seeing better leverage in new customer acquisition, just as you're getting greater scale and you're becoming more well-known in the marketplace.

Y
Yaki Faitelson
Chief Executive Officer

Definitely, we have more apps in the productivity curve, the brand is known, the problem is known. So gradually as you can see, we get a nice productivity gains but it's just I think, it did exactly the way that we explained that we are investing in the business. And we believe that it will go and gradually they will improve overall margins.

So this is what we are doing and the company becomes bigger and more reps are in the productivity cycles. And we have more customers that willing to buy more, we see gradual productivity improvement in the sales.

M
Melissa Franchi
Morgan Stanley

Okay. Great, thank you.

Y
Yaki Faitelson
Chief Executive Officer

Thank you.

Operator

The next question is from the line of Shaul Eyal with Oppenheimer. Please proceed with your question.

S
Shaul Eyal
Oppenheimer

Thank you. Hi good afternoon, Yaki, Guy and Jamie. Congrats on the quarter.

Y
Yaki Faitelson
Chief Executive Officer

Thank you.

S
Shaul Eyal
Oppenheimer

Yaki, we all understand the focus on a company with a greater than 1,000 employees. Thank you for this incremental color and example in your prepared remarks. Can you also share with us? Talk to us about the high end enterprise and dynamic surrounding this segment and as it relates specifically to Varonis?

Y
Yaki Faitelson
Chief Executive Officer

It's definitely, a segment that we are attacking, outstanding very large enterprises. But it's still – it's a relatively high volume business. We just want to make sure that we are benefiting from a market size in terms of periods of economics. And we can do a very nice deals and very impressive customer lifetime value. With these customers within 1,000 to 10,000 customers and so the focus is all over, the salesforce slowly but surely becoming bigger and we have the right coverage.

So we just want to make sure that we are covering all the segments of the market in the right way. But we don't want to put too much resources on part of – because we can sell it to everybody, on parts of the market that the economics doesn't make sense. So we just want to make sure that we'll have enough volume, we can cater to the customer, give them enough attention, take them through what we call the journey of value and make sure that they will use the product in the right way that we’ll go with them to the cloud, that will address all the regulation compliance needs that they have.

And cater as well to very large enterprises and also to 1000 plus. But we are doing a lot of our revenues in the 1000 to 15,000 users shop. This is overall, when we are talking about multi-quarter view, what makes this business over the several quarters, very, very, very predictable and very doable.

S
Shaul Eyal
Oppenheimer

Understood. Understood. And anything new to up the data, on the boring – yes, I got to the competitive landscape. Any newcomers, privates, start-ups, some of the big guys attempting to take a step at the market that you guys are addressing and products that are…

Y
Yaki Faitelson
Chief Executive Officer

Just on the competitive situation is the same. David and team analyzing diligently all the competitive situation and where we see them and from overall evaluations we see, even less competition than ever. And if we are selling well over the 90% of our deals, we are seeing an evaluation and we are evolving on a lot of data. We are almost always alone. So in terms of the competitive landscape its better than ever in the presence of other competitors, or ankle biters in the – in any of our sales campaign.

S
Shaul Eyal
Oppenheimer

Thank you for that. Good luck.

Y
Yaki Faitelson
Chief Executive Officer

Thank you.

Operator

Next question is from the line of Chad Bennett with Craig-Hallum. Please proceed with question.

C
Chad Bennett
Craig-Hallum

Great. Thanks for taking my question. So maybe for Yaki, so if you think about the strategy towards 1000 plus employee enterprises. And in conjunction with that kind of growing products per enterprise or per customer, if we think about those two metrics and the customers that fit in that bucket, when you look at the customers that are at three plus, four plus, five plus products and maybe their 2,000 plus employee type customers.

Are you being asked to be part of a broader security solution at that point? And I guess what I mean are you integrating with other security vendors. And maybe in particular, are you asked to particularly the data that you guys get and gather which I think is really valuable or you asking to kind of feed that into any other systems. Thanks.

Y
Yaki Faitelson
Chief Executive Officer

Yes, we are definitely integrating with many solutions, as many as we can. And we see there are alerts to think systems and we are working with identity in the access management, working with the discovery solutions. There is just a lot that is going on in terms of our integration with other security solution and we want to make sure that for our customers one plus one will equals three.

So any time that we get there, one of the things that works very well for us, is that we are coming in and with the cybersecurity and the classification and data protection we make some of the previous investments and some times investments that it is hard for them to realize so much more productive. So yes it's definitely one of the things that we're doing, we want to make sure that our customer will utilize their other solutions better and that the whole ecosystem all together grow.

C
Chad Bennett
Craig-Hallum

Okay great. And then maybe a quick follow up for Guy. Guy if you look at the December quarter updated guidance that you gave, I wouldn’t believe this was the case. But are you thinking about the seasonality into the end of the year any differently heading into this year versus last year. And maybe talk about any drivers or incremental drivers this year that you didn't have last year. Thanks

G
Guy Melamed

Thanks for the question. Our philosophy on guidance hasn't changed and when you look at the guidance that we provided, the fact that we not only beat but also raised for the full year is an indication of how strong we feel going into the quarter. But in terms of the philosophy, we're kind of guiding in the same way, the same manner. I think we feel very strong about the business and the results and the guidance is an indication of that.

C
Chad Bennett
Craig-Hallum

Thanks guys.

G
Guy Melamed

Thank you.

Operator

The next question is from the line of Daniel Ives with Wedbush Securities. Please state your question.

D
Daniel Ives
Wedbush Securities

Yeah thanks. Congrats again on this bounce back West Coast. My question is in regards to sales force, and just the industry partners, how are you looking about ramping those especially in Europe just given some of the strengths you've seen in the GDPR

Y
Yaki Faitelson
Chief Executive Officer

Can you repeat the question.

D
Daniel Ives
Wedbush Securities

Yeah in terms of increasing your feet on The Street as well as partnerships in Europe just given the strength that you're seeing there how are you thinking about that over the next six to 12 months.

Y
Yaki Faitelson
Chief Executive Officer

The market is so big and virtually, we can sell to everybody. The key for us is, it's a proprietary sales force, we really work almost from first principles and we have a unique sales motion and you need to understand how to explain and demonstrate our value proposition.

So, the way that we are increasing the sales capacity is just in the right way that we can digest the people, we can really cater enable them and give them the right management with the right account.

The market is so big, we can have a large sales force but we really need to make sure that we are doing it in the right way. So for us if not – if not the market demand or the market size is not the problem in the way that we are bringing people in. We just want to bring them responsibly that we can enable them make sure that they will be successful and make sure that we are serving our customers in the right way. And also gradually improving our margins. So this is the leading indicator not market conditions or market size.

D
Daniel Ives
Wedbush Securities

Gotcha and just a follow-up, just given the West Coast bounce back. Is there any thing that you’ve done now differently looking ahead to make sure in your pipeline process, sales process that the least thing that you can control is that there's not, maybe no speed bump on horizon. Anything that you’ve instituted on this just impressive sort of bounce back.

Y
Yaki Faitelson
Chief Executive Officer

It's a business, you will always have some kind of speed bumps but this is why we say that you always need to have a multi-quarter view. If you have a multi-quarter view everything worked very well. So we have very strong sales leaders in the company and many that are with us for a long time, and for us it wasn't a surprise. There was a problem, we are coming with a playbook. We have a lot of management capacity, we can inject the right people, right people in place they will give air cover. And also when needed we’ll be in the trenches and make sure that the team will be successful.

The business is very doable, if you look from the time when, probably you see that the business is very doable. There is any issues usually we are bouncing back fast. I really think that we are good operator and we know how to tackle problems and solve them systematically and this is what you still need. Sometimes we’ll have problem just business is living organism but we have very good immune system most times and we know how to tackle it fast. And this is why we are saying always have a multi-quarter view. In a multi-quarter view I don't think that we had a problem.

D
Daniel Ives
Wedbush Securities

Yeah great job. Thanks.

Operator

The next question is from the line of Erik Suppiger with JMP Securities. Please proceed with your question.

E
Erik Suppiger
JMP Securities

Yeah thanks for taking the question. So your new customer license revenue was under 50%. I presume that's because you're targeting larger customers. Can you comment on what that shift is doing in terms of your sales cycle. And do you expect the new customer licensing revenue to remain below 50%.

Y
Yaki Faitelson
Chief Executive Officer

I think that it will move from time to time, it so much depend, customers are buying and then deploying, then if they are bigger there is different level of usage for cybersecurity, for remediation, for classification.

Thankfully the platform is doing very well and we just did – the new customers are very important for us and the upsell is very important for us and we just that balance and this is also can fluctuate from quarter to quarter but the two way growth drivers are very important for us.

G
Guy Melamed

Just to add on that though the license from existing customers over time we expect that percentage to continue an increase. I think last quarter one of the questions that we got was why is the license and first year maintenance from new customers – why did that kind of go up and we said take a multi-quarter view. And as you can see in this quarter license and first year maintenance from existing customers continue the trend like Yaki said we're very focused on both the new customers and the existing. And I think we're doing a very good job on both.

E
Erik Suppiger
JMP Securities

Well then can you just comment exclusive of the new versus existing customers? Can you comment on how the focus on larger accounts is affecting sales cycle has that made any difference in terms of the length of the sales cycle.

G
Guy Melamed

We haven't seen any change on the sales cycle and our focus on companies with more than a thousand employees the strategy has been working very well.

E
Erik Suppiger
JMP Securities

Very good. Thank you.

G
Guy Melamed

Thank you.

Operator

The next question is from the line of Mark Schappel with The Benchmark Company. Please state your question.

M
Mark Schappel
The Benchmark Company

Hi, thank you for taking my question. Just one question Yaki to you. With respect to your earlier comments on your federal business that it could have done better, could you just go in to some of the challenges that you're seeing in your federal sector. I know it's relatively new but still is it more or less an educational sale still in the federal sector unlike the commercial sector.

Y
Yaki Faitelson
Chief Executive Officer

No, it's not education and we definitely had several wins that validated that they need a product, they need all the product and we can have very nice deal. We just to make sure that we have no more maturity and we are in the programs and moving the business along. But just at this point it's small and it's not like a material growth driver for us. But we believe that we've timed all day, all the indicators that it should be a very good business for us.

M
Mark Schappel
The Benchmark Company

Thank you.

Operator

Next question is from the line of Rishi Jaluria with D. A. Davidson. Please state your question.

R
Rishi Jaluria
D. A. Davidson

Hey guys thank you for taking my questions. Yaki I wanted to touch on the integration, that’s upcoming that you had bounced with Box. I just wanted to dive a little bit more into that is that something that you've got feedback from customers as a functionality that they wanted. And what is the sort of customer overlap between you and Box tend to look like and then I’ve got a follow-up.

Y
Yaki Faitelson
Chief Executive Officer

It's added repository that some of our customers use and the time will go by, we wanted anything that's starting to be commercially viable and we see that enterprise is putting data there. We want to make sure that we are protecting it. We want to make sure that we taking a security telemetry and we can classify the data. This is just another repository.

So we know, we saw definitely, we saw enough customers saying that there is a need and we are catering to this need.

R
Rishi Jaluria
D. A. Davidson

Okay, great that was helpful. And then Yaki again for you. You mentioned a ramping up or increasing spending in research and development. And you mentioned cloud was one area, I was just wondering if you can expand specifically is that just having it building, having more integration like the Box one and having more like I said with cloud infrastructure and cloud applications or is it something else? What's the right way to think about where the priority in product development on the cloud side looks like?

Y
Yaki Faitelson
Chief Executive Officer

Rishi I can provide all the details but it is everything. The cloud is here, the cloud is real, there are a lot of data repositories definitely a infrastructure. The world is completely hybrid and data protection, cybersecurity and classification, big pain point for these new brave world. And we believe that we can capitalize on.

R
Rishi Jaluria
D. A. Davidson

Wonderful. Thank you.

G
Guy Melamed

Thank you.

Operator

We’ve reached the end of our question-and-answer session. I will now turn the floor back to management for closing remarks.

Y
Yaki Faitelson
Chief Executive Officer

Before we end the call I would like to thank all of our employees and for their hard work contribution to our success this quarter. I also like to thank all of our customers and partners for their continued support. Thank you all for joining us today and we are looking forward to speaking with you again soon.

Operator

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.