Good day, and welcome to the Varonis Systems, Inc. First Quarter 2014 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Staci Mortenson, Investor Relations. Please go ahead. .

Thank you. Good afternoon. Thank you for joining us today to review Varonis' first quarter 2014 financial results. With me on the call today are Yaki Faitelson, Chief Executive Officer; and Gili Iohan, Chief Financial 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 quarter ended June 30, 2014, and our fiscal year ending December 31, 2014.

Actual results may differ materially from those set forth in such statements.

Important factors such as risks associated with 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 engineers and sales personnel; our ability to build and expand our direct sales efforts and reseller distribution channels, general economic and industry conditions, including expenditure trends for data governance and data security software; new product introductions and Varonis' ability to develop and deliver innovative products; risks associated with international operations; Varonis' ability to provide high-quality service and support offerings; and macroeconomic conditions could cause actual results to differ materially from those contained in forward-looking statements.

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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 the documents filed with the Securities and Exchange Commission, including the final prospectus from our initial public offering and will be discussed in our reports filed with the Securities and Exchange Commission going forward.

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 of the most directly comparable GAAP financial measures is also available in our first quarter 2014 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'd like to turn the call over to our Chief Executive Officer, Yaki Faitelson.

Yaki?.

Thanks, Staci, and good afternoon, everyone. I would like to start by thanking all of you for joining us today in our first conference call as a public company.

We are very excited to have [indiscernible] our IPO on February, we believe the IPO is an important milestone for Varonis and one that further enhances our brand awareness and increases the resources we have available to execute the company's long-term strategy. We are also very pleased with our strong first quarter financial results.

The success of our business is driven by multiple factors, including our industry-leading solution, our Metadata technology framework, our large under-penetrated available market and our highly effective and scalable go-to-market model. .

Turning to the financial highlights of the first quarter. We reported total revenues of $17.5 million, representing a 39% increase over the Q1 last year and a non-GAAP loss per basic share of $0.30.

These very strong results are directly related to the investments we have made in the last 2 years to grow our sales teams as well as expand product offerings to address ever growing set of new [ph] features. .

Gili will walk you through the financial details in a moment, but as this is our first quarter as a public company and some of you may be relatively new to our story, I wanted to provide a brief overview of the Varonis value proposition, our market opportunities and our business model. .

As I think, you all know, the relentless growth of data gives [ph] big opportunities for organization of all sizes, however, it also creates serious challenges and threats. We believe Varonis is unique among Big Data players because we thrive at the intersection of the opportunity and the challenges.

Today's organization spends a fortune on managing, protecting and extracting value from the critical data assets, using various processes and technologies you know well, like data classification, enterprise search, and identity and access management. .

We tap into these multiple substantial IT budgets that amount to tens of billions of annual spend. Our customers span virtually all industries in the range from the largest enterprises to small and medium-sized businesses. If you have more than 25 users and a file server, you are a potential Varonis customer. .

Varonis is specialized in human-generated data, a type of unstructured data that includes spreadsheets, word documents, presentations, audio, video files, and e-mails. This data set is an essential part of every business and every enterprise.

We provide an innovative software platform that allows enterprises to map, analyze, manage, migrate and, now, search the unstructured data. .

Despite all the processes and technologies in place today, there are still many questions that most organizations cannot currently answer about the human-generated data like who has access to which files, folder and mailboxes.

If you take a random employee and ask IT where he has access, in most enterprises, it will take days or weeks for them to answer. Who is accessing, modifying, moving and deleting files and e-mails, in most enterprises, if you took a thousand files and delete them, no one would know who did it or when it happened. .

Which files contain critical information? Companies from every vertical store massive volumes of data that belongs to customers, business partners and employees. Much of this information is sensitive, critical to the business and some is regulated. .

Which data is exposed to too many people? Almost every enterprise that installs the Varonis software seen that approximately 70% of the data people can access is not relevant for them, and this is a huge risk. .

Another question that we realize employees have everyday is, where are the files they need and which are the most relevant. It's a huge productivity gain when users can easily find the files they need and access them from their devices.

The reason IT departments and businesses are not able to answer these questions is that none of the existing technologies map the connection between users and data. Without this connection, there are many operational and business failures.

Our ability to map the connections has enabled us to create the most critical building block needed to realize value from human-generated data and protect it effectively. .

We work with our customers to demonstrate ROI based on automating manual processes, realizing efficiency gains across the enterprise and reducing storage costs. With our products, our customers increase productivity and lower risk and cost. The core of our technology is how we can intelligently extract and analyze metadata, or data about data.

From an enterprise's vast distributed data storage, our Metadata Framework creates advanced searchable data structure and provides real-time intelligence about an enterprises' massive volume of human-generated content, making human-generated data more accessible, manageable and secure. .

We now have 11 licenses and 6 products that are used by IT and lines of business professionals for a variety of use cases, including data governance, data security, archiving integration, file synchronization and mobile access.

We're very excited about the introduction of our new product, DatAnswers which, as we just announced, will be released to beta at the end of May and will be available generally later this year. .

One of the most frustrating problems employees face is not being able to easily find the files they are looking for when they need them. We also spent hours recreating content over and over again, that their colleagues or predecessors have already created because they cannot effectively find it or do not know who to ask.

DatAnswers provides secure, efficient search functionality for human-generated data content residing in file shares, and SharePoint, leveraging DatAdvantage, [indiscernible] classification framework and our underlying Metadata Framework, DatAnswers uses our Metadata analytics to deliver highly relevant search results at scale to the people, and only the people who should have access to them.

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As with most of our product introductions, it usually takes at least a year until we see any significant revenue contrition as the products move from beta to general availability and through the sales cycle.

However, we are confident that this product positions us well in the adjacent space of enterprise search, enabling us to capture another set of budget dollars owned by the office of the CIO, leverages our platform and expands the value we deliver to the business user. .

Our product suite is really a standardization play. If you have one of our products, you're a likely candidate for more of them is the same data you have in file shares, you have in Internets and e-mail systems and the need to access data from anywhere and any device.

This is very powerful and is driving our customer expansion, which I will discuss now is a run through how we go-to-market. .

We have built a predictable model that is based on high-volume, low-average sales price as well as lending and then expanding across our customers. We have inside sales, outside sales, channel partners and marketing teams, which together drive our high-volume sales model. .

The heart of the sales process is to ensure that prospect's trial products, as the correlation between those who evaluate our products from those who ultimately buy them is high and has been consistent over time. .

Our sales process begins with our marketing and inside sales teams working with our channel partners to reach as many potential customers as possible and encourage them to try our solution. Next, customer evaluations are installed quickly and easily.

It usually takes less than 1 hour to install our products on existing customer infrastructure and our solutions demonstrate value immediately. .

The result is that we have seen rapid growth in new customers. We added 158 new customers in the first quarter, a 31% increase compared to Q1 last year. We ended the first quarter with approximately 2,550 customers.

For example, Babcock, a large engineering and services company bought DatAdvantage about 2 years ago to enhance their control around their unstructured data and identify data owners. .

DatAdvantage, Data Transport Engine and DatAnywhere. They bought DatAdvantage to align their data with the core departments and research projects and to make sure the use of clinical data was tracked.

They purchased Data Transport Engine to automate and aid data migration and consolidation for upcoming organizational changes and data center restructuring.

And lastly, they purchased DataAnywhere to enable employees to access and share data from anywhere on their i [ph] devices and to ensure that the remote employees files were mirrored with their in-house storage. .

The second example I just mentioned, reinforced our ability to successfully bring new products to market. And customers who bought 2 or more products increases to 40% as of the end of the first quarter. The more we expand our presence with customers, the more sticky our products become.

Further, the global nature of our market opportunity is evidenced by the fact that international operations already represent 48% of our revenues, which is significant for a company of our size.

Given the large market opportunity and our product leadership position, we believe there are multiple long-term drivers for our business, and we expect to continue to invest in sales and marketing and product development to capture the meaningful growth opportunity in front of us. .

As you can tell, we are very excited to be operating as a public company and are focused on building our organization for the long-term success. .

Now, I will turn it over to Gili Iohan, our CFO, for some more details on the financials and key operating metrics.

Gili?.

Thank you, Yaki. Our first quarter results came in above expectations, and we continued to see strong momentum and demand in the marketplace. Total revenues increased 39% to $17.5 million.

Growth was driven by solid new customer acquisitions, increasing penetration within our installed base, a large range of deals and consistently high maintenance renewal rates at over 90%. We delivered license revenues of $8.1 million or an increase of 37% from the first quarter of 2013.

Our maintenance and services revenues were $9.4 million and also continue to grow at a rapid pace, increasing 40% compared to the first quarter of 2013. .

Looking at the business geographically, we saw booked broad-based growth. U.S. revenues increased 39% to $9.1 million or 52% of total revenues. EMEA increased 42% to $6.9 million or 40% of total revenues. And rest of the world increased 26% to $1.5 million or 8% of total revenues. .

For the first quarter, existing customer, license and first-year maintenance revenue contribution increased to 33% versus 24% in the first quarter of 2013. As Yaki mentioned, we have a land and expand model. We are making investments to increase new customer additions, as well as broaden our relationship with existing customers. .

Before moving onto the profit and loss items, I would like to point out that I will be discussing non-GAAP results going forward, unless otherwise stated, which for the first quarter of 2014, excluded a total of $646,000 in stock-based compensation expense.

Please note that a detailed GAAP to non-GAAP reconciliation can be found in the table of our press release, which is available on our website. .

Gross profit for the first quarter was $15.4 million, representing a gross margin of 88.4% compared to an 89.3% gross margin in the first quarter of 2013.

In 2012 and 2013, we began to increase investments in the business in order to capitalize on our market opportunity and preserve earnings for the public market, and these investments continued in the first quarter of 2014. .

Sales and marketing expenses increased to $13.9 million or 80% of revenues for the first quarter of 2014 compared to $9.1 million or 73% of revenues in the first quarter of 2013.

R&D dollars in the first quarter increased by 40% year-over-year to $6.2 million as we continue to enhance our existing products and prepare new products to be launched in 2014 and beyond. This is an important part of expanding our value, our TAM and our competitive position. .

G&A expenses were $2.6 million or 15% of revenues, up from $1.5 million or 12% of revenues in the first quarter of 2013, primarily due to expenses related to becoming a public company, in addition to the global expansion of our business. Operating expenses totaled $22.7 million in the first quarter compared to $15.1 million last year.

As a result, our operating loss was $7.3 million for the first quarter compared to an operating loss of $3.8 million in the same period last year.

During the quarter, we had financial expenses of $38,000, primarily due to foreign exchange loss, compared to a loss of $679,000, due primarily to foreign exchange losses and reevaluation of ForEx [ph] in the same period last year. .

As you know, foreign exchange gains and losses can fluctuate. Our guidance does not consider any additional -- any potential impact to financial and other income and expense associated with foreign exchange gains or losses, as we do not estimate movements in foreign currency rates.

Our net loss was $7.4 million for the first quarter of 2014 or a loss of $0.30 per basic common share, compared to a net loss of $4.2 million or a loss of $0.23 per basic common share for the first quarter of 2013. .

This is based on 24.4 million and 18.7 million basic common shares outstanding for Q1 '14 and Q1 '13, respectively. If we look at the balance sheet, we ended the quarter with approximately $125.9 million in cash, cash equivalents and short-term deposits, inclusive of $108.4 million in cash raised during our IPO.

During the first 3 months of 2014, we generated $4.3 million in cash flow from operations compared to $3.3 million in the first quarter of 2013. We ended the quarter with 630 employees, a 42% increase from 443 at the end of the first quarter of 2013.

This reflects the increased investments in our business to support additional innovation, new products and expanded distribution capacity in order to drive significant growth on a sustained basis. .

Moving to guidance. For the second quarter of 2014, we expect total revenues of $22.9 million to $23.4 million, which represents growth of approximately 28% to 31%. We expect our non-GAAP operating loss to range between $4.1 million and $3.8 million and non-GAAP loss per basic share of $0.18 to $0.16.

This assumes a tax provision of $200,000 to $300,000 and 24.5 million basic shares outstanding. For the full year 2014, we expect total revenues in the range of $96.5 million to $98 million or a growth of approximately 29% to 31%.

We expect non-GAAP operating loss to be in the range of 14.3% to $13.3 million and non-GAAP loss per basic share of $0.63 to $0.57. This assumes stock provision of $700,000 to $1 million and 24.4 million basic shares outstanding. .

To summarize, it was a very good start to 2014, and we are very excited about the company's outlook for the remainder of 2014 and beyond. .

With that, we'll be happy to take questions you have.

Operator?.

[Operator Instructions] We'll take our first question from Keith Weiss with Morgan Stanley. .

It seems like you guys put up this nice quarter in what was an uneven operating environment for a lot of infrastructure software vendors. Maybe just start out with you could tell us a little bit of that sort of selling environment in particular in the U.S., do you have any trouble with large deals.

But overall, sort of how do you find the demand environment to be overall -- out there overall?.

Hi, Keith. We didn't have any concentration with a large deal in the first quarter. It was a fairly regular Q1 for us. It was a strong quarter, and it was -- mainly because of several drivers. The first one is really the relentless growth of data. It carries a big opportunity, but a lot of challenges and risk.

And today, we are the only company that can really answer the data access usage and control questions regarding human-generated data.

The other thing that we saw is that we really expanded the market opportunity with new product and use-case sales like data migration, restructuring and file sharing and customers are buying more -- to more use-cases and the sales one was really realizing the benefits of the investments that we were making in sales and marketing and R&D in the last 2 years.

And I think that Q1 validated our strategy, and we didn't see any particular challenges in any of the markets. .

Got it. And then in terms of those investments in sales and marketing, particularly on the sort of the partner enablement and adding new partners with -- I know this is an important part of the distribution strategy.

Can you talk to us a little bit about what you're looking to do in 2014 in terms of the pace of investments and perhaps any targets you have in terms of how many new partners you want to get onboard or is there any sort of metrics or sort of milestones you could lay out for us, too, what you're trying to do on the distribution investments in 2014?.

There is not any particular metrics that we can share. But the key is to bring this partner, which -- these infrastructure partners on board, and we are doing it every quarter and the second aspect is to get them more and more productive.

And we are getting a lot of our leads from the channel distribution, and this is what we will keep doing by adding more partners, but also we have several hundreds of channel partners and we also make sure to make them more productive and make sure that most sales people within our partners will participate in selling Varonis. .

I can add that almost all our business is to channel partners, and we expect them to stay at the same trend. We are not dependent on any one partner. We are several hundreds like Yaki said. This is a significant portion of the sales that is done by Varonis. .

Got it, got it. And maybe just one last, wrap-up question.

As you guys get more well-known in the market as sort of the partner base builds out, any shortening of the sales cycle that you're seeing, or is it still very much sort of those long sales cycles as you evangelize what is essentially a new platform out there in the marketplace?.

It stays fairly the same. I think not just for Varonis, I think the problem is becoming more known, just customers are now struggling with enormous an amount of data and they have more and more budgeted projects to solve these kinds of problems. .

We'll take our next question from Raimo Lenschow with Barclays. .

First one, Yaki, can you talk a little bit about on the up-sell, cross-sell opportunity. How does it work in terms of the different buying centers that you are touching here.

I would assume like some of them are kind of going to the same people, but especially thinking about DatAnywhere, is that kind of the same buying center and hence, is that kind of a straightforward up-sell, or how does it work for you there?.

So for all of our products, we usually -- there is a same buyer that owns the budget is CTO, the person that owns the infrastructure. But with DatAnywhere, it extends really the total available market because the use case we cater to the business. And this is also something that we are doing now with DatAnswers.

You'll see that we are going also to give more and more value to the business people.

So it's the same buyer that needs to install it and deliver the value to the business, but more business people are touching our products and what we see there, we had good volumes with DatAnywhere and the Data Transport Engine really brings us into these migration and restructuring projects.

We just see that it really expanded the overall use cases and because of them, customers are buying more and more products. .

Yes. And so DatAnywhere, as a product, hasn't been in the market for that long.

So how do you see -- what do you see in terms of customer reception and how customers are using it and is that kind of a standalone mobile solution or do they have still have other guys like in use as well, and you guys just used this for the legacy data that are on premise?.

What we see with it is that most of these human-generated data files are just on file shares, and customers are starting to understand that in order to make sure that employees can access the data from anywhere and any device, they need to take this enormous complexity to further the permissions, the massive data volumes and cloud-enable them, make sure that people can access them from anywhere and any device.

So they will not stop in using them and what we see with DatAnywhere is that sometimes, they're starting with a small portion of the organization, and then they expand, but we definitely see that there is a lot of interest, the mobile access is driving it and we believe that it's a product that will do very well for us, but sometimes we are starting department by department with limited number of users.

So we didn't see that budgets for initial purchase is a big challenge. .

Yes. And last question from me. If you look at -- and obviously, you had a very healthy run rate in Q1 and then we saw the guidance for the full year.

How do you think about like investment into growth versus kind of delivering EPS numbers? How do you think about that dynamic in terms of what's the trigger for you to say, look, I need to invest more or the guidance is the guidance.

How do you -- I mean, I'm just kind of thinking since this is the first quarter for all of us with you, just how do you think about that dynamic?.

We have very high gross margins, and we have a very strong earning power in our model. We run the company close to breakeven and generated cash for several years. We have a management that know how to manage a profitable business.

But now we strive to profitability at much greater scale, and for us now, it's just to capture a market share and invest in the business, obviously, in a sensible way to make sure that the new hires that we will bring are productive, it's a capacity play to bring the right people, but you can do margin extrapolation fairly easily and understand the earning power that this business has in scale and this is what we are starting to do.

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We'll take our next question from Aaron Schwartz with Jefferies. .

Just a question, sort of a follow-up there, but you mentioned a couple of times that the strong results here show the benefit of the sales reinvestments you've made over the last 2 years or so.

Can you talk about sort of where that capacity play is from your -- maybe the sales or investments in 2013, where that productivity level is? Is there still sort of way to go in terms of seeing the contribution from some of the hires over the last 12 months, or maybe can you just kind of walk through how you see some recent investments playing out this year?.

I think that all of our investments came to fruition in sales capacity and in R&D. And we see it in new customer growth and in the expansion with our customers. We have good programs to on-board a new hire in sales/marketing, a seasoned and an inside sales, and all of them are trending well for us. .

Okay. And second question, if I could. If we look at the reinvestments in 2014, I believe some of your plan was to maybe front-end load the year a little bit and you wanted to sort of -- you're going to take some of the hiring in the first half.

Can you talk about how you think about current hires you're making today on the land, I guess, versus the expand, especially with the expanding product set.

Will there be any more specialization in order to drive penetration or a standardization on your broader product set or should we expect a -- the similar sort of sales model that you've had over the last year or so?.

It will be a fairly similar sales model for most of our products because there is really a logical correlation between all of them. You have the same people usually in the organization with 5,000, sometimes 10,000 employees, the same people that are on the file share, also the Internet and the e-mail systems.

So it's really a standardization play there. What we'll do, we also build a small team of overlays [ph] that will help us push DatAnywhere because we believe -- we call it the routing framework, another big platform for us, and we can execute it well.

In few years, we think, we can do this -- in terms of the platform play, similar things that we are doing with DatAdvantage to attract more use cases and bring more value to our customers. So most of it is we are not going at this point to say, there are reps that are running after new business, and other salespeople that are going to up-sell.

And they're doing both, also running after new customers and up-sell to the current base. .

We'll take our next question from Matt Hedberg with RBC Capital Markets. .

I wanted to dig into DatAnswers a little bit more, which at first glance seems like a great new product.

I know it's still early, but could you give us a sense for the value of that product and perhaps what the competitive environment looks like for that product?.

What happened to us that was a bit mind-boggling is that we have more than 2,500 customers, and we just saw that almost all of them don't have Search on their filesystems. And then we started to dig in why because if you look at the Internet, everybody going to Google or Bing several times a day.

And we just understood that current technology is having a hard time to be very effective on flat filesystems or they cost too much or they're having a hard time to scale or they are not secure. And we just understood that on top of our Metadata Framework, we can deliver a search engine that is secure, scalable and affordable.

And even though enterprise search market is an established market, we believe that we are approaching it in a different way, and we are not going to experience a lot of competition. .

And then maybe one more on the competitive side. DatAnywhere, again, a newer product. That's another crowded space as well. Can you help us with -- it's been out there a little longer now.

What's its traction this quarter in terms of up-sells?.

Both up-sells and new customers, the product did very well for us. I think that it's a crowded place, but the ability, we are among the very few companies that can come and cloud-enable the massive amount of data shares that the organization of every size has today.

So people are using these file shares, enormous amount of data, they have to map drives, very complex permissions and folder structure, and we just come and we build -- well call it a user-mode file system with proxy, you can publish it to all the people that consume the data without changing the infrastructure and without changing permissions and really capitalizing on the investment that they have in place.

So it's a crowded market, but also here, we don't see a lot of competition in the way that we are approaching it. .

And then maybe one last one. You guys just put up great growth, 39%. I'm wondering what level of conservatism is embedded in your full year guide? I think it calls for about 30% at the midpoint. .

No. We did a very thorough analysis of our business. And we have an experienced management team. We are many years together, and we have a good track record against setting goals and delivering against them. .

[Operator Instructions] We will take our next question from Scott Zeller with Needham & Company. .

I wanted to ask about the typical most common use cases, Yaki. And if you saw any shift amongst those, maybe the -- how common each was, like you mentioned the migration projects, for instance.

Did you notice a shift at all? And if there was a shift, does that change deal sizes at all?.

No. We didn't see a shift, and we didn't see a change in deal sizes. It is important to understand that visibility to who can access data and auditing is the first building block of everything that you will do. If you want to classify the data, if you want to do -- and if you want to do data migrations.

And usually, our customers are buying one of the licenses of DatAdvantage. So regardless if -- and on top of this, they can buy the DCF, and they can buy the Data Transport Engine, and it can be an up-sell -- an up-sell or cross-sell. So we didn't see any change in the core use cases.

What we saw is an expansion of use cases and sometimes we want to be a Big Data migration and restructuring, but first unit DatAdvantage to have visibility to understand who can access the data, who owns the data. And on top of it, you build Data Transport Engine to do the actual migration.

So just really, it's a very logical buildup from the base products in the platform to the additional products. .

Okay. I wanted to ask about the pipeline. I think you talked about your visibility a number of times.

But when we look at the coverage you have, the ratio for coverage in the pipeline, could you just comment on how that has been to start off the year versus other periods?.

We did just a thorough analysis of the business, and we looked at the pipeline. And according to that, we gave the guidance. .

And it appears we have no further questions at this time. I'd like to turn the conference back over to Yaki for any additional or closing remarks. .

Thank you. Before we end the call, I would like to thank all of our employees for their hard work and amazing dedication. I would particularly like to express my gratitude to Gili and her team for all their hard work on our successful IPO. Thank you for joining us today. I look forward to speaking with you again soon. .

Thank you. And again, this does conclude today's Varonis Systems Incorporated First Quarter 2014 Earnings Conference Call. We thank you, again, for your participation, and you may now disconnect..