Greetings. Welcome to the Varonis Systems, Inc. First Quarter 2021 Earnings Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded.

I will now turn the conference over to your host, James Arestia, Director of Investor Relations. You may begin..

Thank you, operator. Good afternoon. Thank you for joining us today to review Varonis' first quarter 2021 financial results. With me on the call today are Yaki Faitelson, Chief Executive Officer; and Guy Melamed, Chief Financial Officer and Chief Operating Officer of Varonis.

After preliminary remarks, we will open 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 second quarter and full year ending December 31, 2021.

Due to a number of factors, actual results may differ materially from those set forth in such statements. These factors are set forth 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 first quarter 2021 earnings press release, which can be found at www.varonis.com in the Investor Relations section.

Also, please note that an all common stock and per share data have been retroactively adjusted for the impact of the 3-for-1 stock split effective March 15, 2021. Lastly please note that an updated investor presentation as well as a webcast of today's call are 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, Jamie, and good afternoon everyone. Thank you for joining us to discuss the first quarter 2021 results. Our Q1 performance was strong, continuing the positive trajectory of 2020 and highlighting the ongoing critical need for companies around the globe to protect the sensitive data.

You have heard me say many times before that our platform is relevant now more than ever. This quarter demonstrates that the momentum in our business is a result of a significant value we provide our customers. Our subscription offering allows us to deliver on the immediate requirements and long-term needs.

And when taken together the results is substantially higher customer lifetime value. Let me take a step back and talk about the trends we have been seeing.

Over the last few years and especially in 2020 several trends have accelerated and converged, putting the focus on complex data security challenges, which have been our mission to solve since inception.

Whether companies are reacting to breaches, complying with regulation, or simply being responsible, our approach protecting sensitive data from the inside out resonate with new prospects and existing customers more than ever.

As the digital transformation gains traction across almost all industries around the globe, it changes the way we live and walk and impacts how data is stored, manage and access.

This transformation has fueled and we expect will continue to fuel the secular trends that drive demand for our products, including the shift to the cloud, which highlights the need for zero trust approach protecting sensitive data.

Cybercrime where hackers and insiders targeting sensitive data are most sophisticated than ever in compliance with data driven regulation, which is a serious challenge that creates enormous risks to companies all over the world. We've always believed that perimeter defense is not enough and limited.

The recent breaches in the news yet again bypass the perimeter and endpoint protection by design. With attack surface larger and more open than ever before, we believe in a way to address these risks and protect sensitive data is through the data related insights and automation that our platform is uniquely positioned to provide.

Our subscription model makes it easier for customers to see greater automated value by making larger initial purchases were leaving room for meaningful expansion over the time. As a result, our customers' lifetime value has increased significantly.

Looking ahead, we expect that continued expansion with our customers as well as ongoing innovation will further extend our reach and increase our addressable market. Let me provide a few examples of some key customer wins from the first quarter. One example of a new customer is allowed U.S.

financial company within hours of our risk assessment; we detected the brute-force attack in progress and found sensitive data open to a large percentage of employees. After showing them how they were at risk both on-prem and in the cloud, they purchased data advantage, data classification engine licenses, data alert, automation engine, and more.

While we've seen meaningful increases in adoption rates by new customers, our existing customer base continue to represent a substantial growth opportunity for the company.

The prime example is a nationwide professional services company is over 5,000 users that first purchase to perpetual licenses in 2019 – in 2019 the added subscriptions for data classification engine and support for SharePoint Online.

In Q1 of this year, they again expanded their deployment through the focus on privacy and compliance, adding policy pack for GDPR and CCPA, automation engine to find and fix broken access controls and data transport engine to enforce their data governance policies.

In total, this customer now has nine licenses and like many of our customers that goes through similar route of purchasing over time. We are already discussing with this customer, the additional Varonis licenses that will further strengthen their data protection and take them to the next level of the operational journey.

These are just a few examples of our every day we are helping our customers solve some of their biggest data protection problems, which will only continue to become more urgent. In summary, we are extremely well positioned to continue our momentum and further expand our market leadership.

And we believe we are just scratching the surface of a very large growing opportunity. With that, let me turn the call over to Guy.

Guy?.

Thanks, Yaki. Good afternoon everyone. Thank you for joining us today. We're extremely pleased with our first quarter results. Our continued execution on our go-to market strategy powers our ability to capitalize on both the short and longer-term opportunities available to us.

First quarter highlights include 38% total revenue growth, 120% subscription revenue growth, ARR growing 39% and record operating cash flow generation of $20.4 million. Demand for our platform continues to be driven by both new customer acquisition and existing customers, expanding their licenses, spanning diverse industry.

We are seeing meaningful customer engagement as new customers continue to purchase on average more than five licenses. These larger upfront commitments in turn lead to greater license adoption over time and increased customer lifetime value.

As of March 31, 2021, 66% of our total customers with 500 or more employees purchased four or more licenses, up from 55% a year ago. At the same time, 32% of these customers purchased six or more licenses up from 21% a year ago. This rapid increase validates that we are delivering on the growing demand to consume more of our platform.

We also see this reflected in ARR growth of 39% year-over-year to $306.9 million at the end of Q1. Turning now to our first quarter results in more detail.

Total revenues grew 38% to $74.8 million, subscription revenues grew 120% to $44.8 million, maintenance and services revenues were $29.7 million driven by strong renewal rates, which once again exceeded 90%. Looking at the business geographically, we again saw strong performance across North America and EMEA.

In North America, revenues grew 39% to $52.8 million or 71% of total revenue. In EMEA, revenues grew 38% to $20.2 million or 27% of total revenues. Rest of world revenues were $1.7 million or 2% of total revenues. Turning back to the income statement, I'll be discussing non-GAAP results going forward.

Gross profit for the first quarter was $63.8 million representing a gross margin of 85.4% compared to 83.2% in the first quarter of 2020. Operating expenses in the first quarter totaled $70.1 million. As a result operating loss was $6.3 million for the first quarter or an operating margin of negative 8.4%.

This compares to an operating loss of $17.4 million or an operating margin of negative 32.2% in the same period last year as our strong execution and subscription model continues to drive operating margin leverage. During the quarter, we had financial expense of approximately $897,000, primarily due to interest expense on our convertible notes.

Net loss for the first quarter of 2021 was $7.7 million or a loss of $0.08 per basic and diluted share compared to a net loss of $17.4 million or a loss of $0.19 per basic and diluted share for the first quarter of 2020. This is based on 100.2 million and 92.7 million basic and diluted shares outstanding for Q1 2021 and Q1 2020 respectively.

We ended Q1 with $824 million in cash and cash equivalent, marketable securities and short-term deposits. Our cash balance reflects the successful $500 million follow-on offering that we closed in February.

For the three months ended March 31, 2021, we generated a record $20.4 million of cash from operation compared to $3.9 million in the same period last year. We ended the quarter with 1,794 employees, a 12% increase from a year ago and an increase of 75 net new employees from the fourth quarter of 2020.

With the opportunities we see in the market, we plan to continue hiring mostly in sales and R&D to develop both mature and underpenetrated territories and to fuel continued innovation. Moving to our guidance. For the second quarter of 2021, we expect total revenues of $82.5 million to $84 million representing growth of 24% to 26%.

We expect non-GAAP operating loss to range between $2.5 million to $1.5 million and non-GAAP net loss per basic and diluted share in the range of $0.04 to $0.03. This assumes $106.4 million basic and diluted shares outstanding.

For the full year, we're raising our guidance and now expect total revenues of $365 million to $370 million representing growth of 25% to 26%. We expect non-GAAP operating income to range between $4.5 million to $8.5 million and non-GAAP net loss per basic and diluted share in the range of $0.01 to non-GAAP net income per diluted share of $0.02.

This assumes 105.3 million basic and diluted shares outstanding and the 116.5 million diluted shares outstanding respectively. In summary, as we continue to execute on our go-to market strategy, we see a clear path to revenue growth, margin expansion and cash flow generation capitalizing on the longer term opportunity available to us.

Thanks for joining us today. And with that, we would be happy to take questions.

Operator?.

And at this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question is from Sterling Auty with J.P. Morgan. Please proceed with your question..

Yes, thanks. Hi, guys. Yaki, I'm kind of curious in terms of a number of security companies have announced new products, acquisitions, et cetera.

So I'm wondering if anything is changing in the competitive landscape and if you're seeing any other vendors that are starting to move towards the Varonis solution set at this point?.

Melamed?.

No, at this point, we don't see any change. We are uniquely positioned in the marketplace. The only change that we really see is that the marketplace and organizations from really every industry and the vector under – starting to understand very well this data first and inside out approach.

I think that they understand that we are extremely relevant to all the contemporary risks of cybersecurity and insiders. And without a solution like ours, it's something that it's very hard to protect. But at this point, we don't see any change in the competitive landscape. And we just feel that slowly but surely, the market is coming to us.

And once we land the customer, just buying more and more. .

All right, makes sense. And then Guy one follow-up for you. It might be helpful for us for you to put into context the maintenance renewal rate is still above 90%.

But seeing the maintenance revenue, maintenance and services revenue down sequentially and down year-over-year, how much of that might be customers that are maybe converting fully to subscription versus some other factors that would drive that dynamic?.

Thanks for that question. So, the renewal rates are strong and very much in line with what we've seen. Our renewal rate has been greater than 90%, and that really hasn't changed. What we have been talking about for a pretty long time now is the professional services.

And I just want to remind everyone, professional services, we've been pushing many of those to be done by channel partners. And our newer licenses are providing more value through automation. So, PS, professional services is not a large component of our business.

It's low single digits out of total revenue, but we've still seen kind of a significant decline in the quarter, and that's really as planned. So that was no surprise to us. We're not really converting customers from maintenance of perpetual to subscription.

We're seeing existing customers buying more and more licenses and expanding through the subscription. So that's really what you're seeing there. .

Excellent. Thank you. .

Thank you..

Our next question is from Matt Hedberg with RBC Capital Markets. Please proceed with your questions..

Hey guys. Great, thanks for taking my questions. Obviously, it was really good to see ARR accelerate versus what was with this very strong Q4 and still off difficult compares. I guess, Guy, my question is on the 2021 outlook. You're raising the full year by about the Q1 beat, which it might look a little conservative given really how strong Q1 was.

I'm wondering if you could talk a little bit about the macro expectations that you're building into your 2021 revenue outlook?.

When we look at the philosophy of guidance that really hasn't changed. I think we – the results of Q1, we're very pleased with them. And I think the kind of the reflection of our Q2 guidance shows kind of how good we feel about the business. We raised, like you said, we raised the full year guidance to 25% to 26%.

We increased the low end by kind of more than the beat and kind of move that beat – $6 million beat to that midpoint. So, I think when we look at that 2021 outlook, one thing to remember is that Q1 is still, from a seasonality perspective, kind of the lowest quarter in dollar terms for the full year.

So, I think that was also taken into consideration in the guidance. But overall, we've never felt so strong and positive about the business as we do now. .

That’s really good to hear. And then Yaki, Guy noted that you guys are investing heavily in sales and marketing. I'm wondering if you reflect back on the business.

How have you altered where you're targeting that spend today versus maybe pre-COVID? Are you looking at security partners, maybe partners that are associated with the Microsoft ecosystem? Because you seem to be having a lot of success there. Just kind of curious on the philosophy on sales and marketing investments..

So, it's really everything. It's from our inside sales to the field reps. Obviously, we are going to 1,000 and mainly 2,000-plus organizations. I think two things that are very interesting, if you look at the overall ARR growth that we are going up-market and the big customers are buying more and more.

But also, the smaller customers that are big enough becoming very significant for us. It's primarily the security partners. And with the move to subscription, it's – we're becoming much more important to them. But the mission is very simple.

It's just to make sure we cover more of these critical platforms, and then we are doing the whole Varonis play from data protection, the detection and response and compliance. Customers understand very well that they need everything from just one platform.

And in order to do that, we're creating products that are very usable and our customers thankfully are just buying. We're seeing here in Varonis but more is more. You buy more, you get more automated value and then you buy additional products.

And then we just need to make sure that we have coverage in the market because potentially everybody with this digital asset is a potential customer. But you still need to cultivate and to build the self-source in the right way.

So, I want to make sure that we have the management in place, and we are enabling our sellers and SCs, but just expanding the organization to keep innovating, supporting customers and make sure that we have good coverage in the marketplace, which this is just a big market. .

Thanks a lot. Congrats on the continued success..

Thank you..

Our next question is from Brent Thill with Jefferies. Please proceed with your question..

Hey guys, this is Joe on for Brent. Really appreciate the question. I have two follow-ups to Sterling's question.

Yaki, can you talk about the competitive differentiation, particularly in the cloud? And given you guys have $750 million in cash, are there any tangential areas you need to build out there?.

I think that what we are doing, if you're really looking at the data itself, we are the only vendor at this point when you're talking about the 365 support that can go to this massive amount of data that in terms of the emission structure because of collaboration and the way that it's worked, the problem is much bigger in the cloud than on-prem, just to visualize it and to be able to remediate the problem and then to understand any abnormal behavior regarding the data.

It's just a very difficult undertaking that we are doing very well. We invested in Polyrize. We believe that the big success that we saw with 365, we can see with several other critical SaaS application and this is something that technologically, it's very hard to do. And we believe that there is massive, massive opportunity there.

And in terms of our cash, we have a very clear, broadened wide road map. And if we see something that can accelerate the time to market, we will consider to buy primarily tuck-in acquisitions. But we know very well where we want to go. We believe that there is so much more ahead of us than behind us.

We think that the digital transformation and everything that is happening in the cloud, primarily with SaaS platforms. If Varonis can just keep expanding and adding a lot of value and with a lot of these platforms, we can really do what we have done with 365, in Windows, in Unix, just to build the whole suite around it.

And as I said before, I think that this is where you have most of risk. And if you really take a step back and looking at old security solutions, the old security vectors are in order to protect data. And they are essential, but they are limited in protecting the data.

They are very, very important, but limited many times in protecting the data, and we believe that our platform and our approach are critical to every organization that has unstructured data in the business application, and this is really our vision that it's very clear, and this is how we execute. .

Thanks. Very helpful. And then, Guy, I appreciate the color on the renewal rates for maintenance and that you're not converting. But I think last quarter; you said it would be down low single digits this year. It was down 11% that line. I know it includes professional services in the first quarter.

Just kind of curious if you can give some guardrails on how to think about it for 2021?.

Absolutely. I think the delta when you look at kind of the actual decline, is coming from the professional services. Like I said before, it's not a large component of the business. Its low single digit percentages out of total revenue. But we've still seen, as we plan, really, kind of the push to partners to perform many of those days.

And also, the fact that the license that we come out with are geared towards automation, really allow us to do less of those professional service days compared to what we had to do in the past.

So, when you look at kind of the renewal rates overall, we're not getting any new maintenance revenue because we're – because of the move to subscription, and that happened so quickly. So, there's really no fuel coming in. And the delta is really coming from the professional services. .

Okay.

Is it fair that that line would go down a little bit more than low single digits this year?.

We expect it to go down single digits, yes..

Okay. Thanks. I appreciate the color..

Thank you..

Our next question is from Saket Kalia with Barclays. Please proceed with your question..

Hey guys, thanks for taking my questions here.

Yaki, maybe for you, just to start off, can you just talk about what products in the platform you feel like are seeing the most incremental demand as the pandemic starts to abate? I mean there was a great example that you gave of a professional services firm and all the products that eventually got them to, I nine.

But if you look broadly across the customer base, what's the – what are those one or two incremental products that are taking a customer from, say, five, up to six or seven on average?.

Hi, Saket. Thankfully, almost everything is working in terms of the way that our customers are consuming the platform. What I told you before that more is more, it's something that is very consistent. If you get to five licenses, there is much higher predictability that in a reliable way, you are going to get to 15%.

And this is something that we're very excited about. But in general, we see a lot of success with 365. We had tremendous value there. And when you put a lot of data in 1 drive SharePoint and on top of it, you have Teams; the data protection problem is just growing exponentially.

And because customers getting to this critical mass of data, we see a lot of growth there. But it's very interesting also to see in the customer base, while you see this very strong adoption in the cloud. And with 365, the on-prem data is not going anyway.

The data on-prem is still growing and going and everything is interconnected, which is really expanding the attack surface that our customers and prospects have. But everything is working. And it's also very interesting to see how data protection and cybersecurity collides.

And there is also a very strong understanding that you need to comply with all the regulations that are related to data. So, there is a very just organic understanding within the customer base that they really need to expand the platform for these three use cases. .

Got it. That’s very helpful. Guy may be for my follow-up for you. Nice acceleration in ARR this quarter. I think the growth was 39%, up from about 37% last quarter. Is there anything that you would call out as a driver beyond, clearly, good execution and strong demand, whether that's timing or FX or just anything very open ended.

Anything we need to keep in mind around what drove that ARR acceleration? And maybe related to this, how should we sort of be thinking about ARR going forward broadly? Does that make sense?.

Absolutely. I think there was nothing really abnormal in Q1 apart from the execution, and apart from the market really coming to us. We talked a lot about the three pillars. New customers buying more licenses and you see that the number of licenses almost doubled in number of licenses compared to what they buy under perpetual.

We've talked about the second pillar being existing customers. They're expanding. And not only are they expanding, but the fact that we're selling more licenses to new customers allow us to sell even more in the following years and kind of the path to double-digit licenses on average per customer has never been clear to us.

So that's kind of the second pillar. And the third pillar is the renewals, and they're very strong. So, there was really nothing that wasn't any FX or anything abnormal there. It was really kind of the strength of the business and the market really coming to us.

As we look at ARR for the year, we really don't guide on ARR, but we talked a lot about the fact that this year, is kind of the first year that we're apples-to-apples in terms of the percentage of subscription and therefore, ARR should be somewhat converged in the percentages to the top line growth. .

Very helpful guys. Thanks a lot..

Thank you..

Thanks..

And our next question is from Fatima Boolani with UBS. Please proceed with your question..

Good afternoon. Thank you for taking my questions. Yaki, I'll start with you. I wanted to double-click into the competitive environment and maybe ask you more specifically there's been some consolidation in your end market with some specific vendors. So I'm curious if that's opened up incremental opportunities for you to become more visible.

And then secondarily, as it relates to competition, certainly, other vendors in the cybersecurity umbrella, whether they are identity providers or perhaps endpoint or device security providers.

You're starting to talk a lot more about contextual data access so I'm wondering where some of your capabilities start and stop? And if you can compare and contrast what your platform abilities can do relative to some of these other players who are talking about sort of these adjacencies in contextual data access? And then I have a follow-up for Guy..

I think that sometimes what happened in the security market is that as many things sound the same and actuality that fundamentally different. And with that, as I said, it's – we don't see any change to the competitive landscape.

What is happening in reality with Varonis is that we are the only vendor that can take a lot of data and really digest it and visualize the potential of access in this and do it in an ever-changing environment. This is a massive amount of data. Then have this automated remediation and understanding abnormal behavior to data.

So we are starting with the data. And then we are going more to what we call edge telemetries like DNS and proxy and VPN. We're also doing a lot with Active Directory in the Azure Ad and other repositories. But everything for us, it's starting from the data. And then we also see abnormal behavior like we have with user, we see it with devices.

We're just in a situation that all the cybersecurity vendor and the identity vendor we coexist with them. So we, together with them, usually months plus one equals three. But in the core competency of what we are doing in terms of data protection, so detection response to all data, classifying the data in an actionable way. We are usually alone.

The only thing that you see is just confusion. And in terms of consolidation, when you have these small players that have the same messaging times, so they are not creating the market and when they are consolidating and they are moving, they are also not creating a lot of opportunity.

At this point, it's just the market understand much better what we are doing. There is a very – as you said, there is just a very good understanding that everything we are doing is protecting data. When data is going to the cloud, and many times, traditional security is not really working there.

So just making sure that the right people can access the right data, you understand what is important. You can have these high fidelity alerts on any abnormal behavior with the right signal-to-noise ratio if something happen, any CISO can dive in and immediately understand what happened, and this is what Varonis is doing.

So we have this gradual process of just a market that is shaping and this problem that every business needs to solve. So I hope that I was clear. But this is what we see in the marketplace and this really, I think, these are really the dynamics of the market as shaping. And with it, also, you see more and more budgets. .

I appreciate that detail. Thank you. And Guy, maybe for you. I want to drill in on the subscription growth performance in the quarter as well as the ARR performance.

So if I take a step back, the magnitude of acceleration we saw in the subscription business from the fourth quarter that magnitude of acceleration is quite a bit healthier than the acceleration we saw in the ARR metric. So I'm wondering if there's any observations or any items that we should be mindful of.

Because I'd imagine that the subscription revenue growth performance would have directionally in terms of magnitude of the upside would have tracked the subscription line item. But if there's anything there to help us better understand some of that divergence that would be helpful. Thank you..

Absolutely. Well, ARR is really comprised of the subscription, the ACV annual amount of the subscription, plus the maintenance portion of the perpetual.

So obviously, when you kind of combine those together, that's part of the reason that we talked about the fact that as we move through the transition and get to this 2021, where it's truly apples-to-apples, ARR should match much closer to the revenue top line growth. And that's actually what we've seen this quarter..

Very helpful. Thank you..

Our next question is from Rob Owens with Piper Sandler. Please proceed with your question..

Great. And thank you guys for taking my question. I think you've spoken around it. But if we look at the ARR outperformance and the acceleration, can you give us some color whether that was driven more by lands or expands? And any comments around pipeline would be appreciated. Thanks..

So I think when you look at kind of the ARR and our kind of performance this quarter, obviously, there's the land, which we've seen customers consume more of the platform, and that's been very, very helpful for us and obviously, helpful for the customers as well because they're consuming the platform.

And therefore, the ability for them to get value and come back and buy more increases significantly. Now obviously, we have a large base of customers, and we've talked a lot about the fact that we are underpenetrated.

So existing customers should contribute more, and that's obviously better for us because it costs less to generate revenue from our existing customers. So they kind of drive but we were happy with both new customers and the existing customers consuming and buying more of the platform..

And maybe a little bit around your confidence in the use case of Polyrize and how that's evolving as we come out of the pandemic and see digital transformation and cloud acceleration?.

We are happy with the way that the development is progressing. But we believe that everything we experienced with 365, we translate into the platforms that Polyrize support. And we believe there is tremendous opportunity there.

If you think about a lot of SaaS applications, from Salesforce to G-Drive and others and Box and GitHub, these are the platforms that you on your organization on and access control is very hard, understanding of normal behavior, what data is important. Just to demonstrate compliance, these things are very challenging.

And we just believe that we can add tremendous value there and to be uniquely positioned the way we are positioned on the on-prem data and everything that we are doing for all the 365 platform. So we are very excited about it.

And as we are moving forward with the development and talking more with customers, we just think that this is just a tremendous opportunity to add a lot of value to our customers and to increase ARR drastically for Varonis customer..

Thank you..

Our next question is from Alex Henderson with Needham & Company. Please proceed with your question..

Thank you. Mike Cikos on the line here for Alex Anderson. Congratulations on the strong quarter and the strong subscription and ARR growth. I was curious, could you comment on this growth in the context of this greater market awareness from this collision of data collection and cybersecurity, you're talking to.

Just because it really sounds like the market is increasingly aware of these issues and the value prop you're delivering.

And then building on that, can you also talk to whether you're seeing any uptick in spending or demand where maybe budget is finally coming to the market following the solar winds or Microsoft Exchange server hacks we were talking about earlier this year?.

I think that if you really going to set the anatomy of a lot of attacks. So when you have just this sophisticated malware or APT, it's using the user credential and time to go after data. And you see this more and more. So customers understand that something like that can happen. They really need to think about how they are protecting the data.

And once you have this kind of conversation and realization, you understand that you need a platform like ours. Regarding the awareness, it's hack-by-hack, and a lot of it is just the insider.

If you want to go all the way back to Snowden and WikiLeaks, the biggest damage happen when you have an insider that is decided to do – you have a rogue employee, they are deciding to do something that is malicious. And in this kind of situation, we are uniquely positioned to help the customers. So it's everything.

Just every day something is happening and you see the digital transformation and CISOs becoming very strong in the organization. And they also get the responsibility to protect data, both and management departments, legal departments, understand that they need to protect the data.

And when you really evaluate your digital assets, you understand that you need to protect your data and critical information in a way that you can really – in a way that the organization can digest.

And what's happening today in the world is that organization's capacity to create a share – critical information is significantly increasing their capacity to protect it. And I just think that in order to be able to protect this data, you need something like Varonis. So just every day, we're just inching forward.

And what is happening is that you have this big market, and we have a lot of technological moat and massive feature set on top of our platform, is just benefiting our customers. So it's everything. You have the breach, you have a problem with insider, regulation is coming. You have another platform; you get to critical mass of data.

So this is really what you see with Varonis. So it's a very gradual process, but every three, four months, you're just raising your head and you are working – you are usually in a much favorable market..

Thank you. That’s very helpful. And then for my follow-up question, I did want to touch on the investments that you guys are making. So I understand we called out about 1,800 employees was the headcount figure exiting the quarter, up 12% year-on-year.

But to the extent you can, with these investments, how are you guys planning on exiting calendar 2021 from a headcount perspective? And for those investments you're making in both R&D and sales and marketing, can you provide any additional detail for the split within those different investment line items? Thank you very much..

So we don't really guide on headcount, and we don't really kind of guide on the breakdown of the different departments. But I'll give you some color that we'll show how strong we feel about the business and kind of how we're thinking about this and acting really.

When you look at kind of the growth of the headcount, most of it has been in the R&D and sales and marketing department. Sales really to develop kind of the mature and underpenetrated territories. In R&D really to continue to fuel the innovation.

Nothing has changed apart from the fact that we also – we talked a lot about the fact that we want to continue to put the foot on the gas when we feel good about the business. So when you look at kind of the net new growth in headcount, we grew 75 net new in Q1, and we grew 90 in Q4.

So 165 net new employees in the last six months, and that's really an indication of what we've seen from a market perspective, and our desire to capitalize on the long-term opportunity. So we always try to tie the level of expenses to the level of revenues we plan to achieve, and that philosophy hasn't changed..

That makes a lot of sense. Terrific. Thank you guys..

Thank you..

[Operator Instructions] And our next question comes from Hamza Fodderwala with Morgan Stanley. Please proceed with your question..

Hey guys. Thank you for taking my question. And for Yaki, I had a question around sort of the investments in pipeline that you're seeing on the federal side of the business going to the back half. I know that you had some announcements recently, particularly on sort of Microsoft's government community cloud.

I'm curious if you can give us some more color there and what the pipeline looks like going to the back half as we go into the federal budget flush? Thank you..

Overall, we feel that for the company, overall, we feel that the pipeline is very healthy. For the federal, specifically, there is a lot of need for a solution like ours. And we feel comfortable with the pipeline. But overall for federal and for the company, we feel good with the pipeline.

We feel very good with the conversion rates and we also feel that if we spend the right time with the customer, there is very high probability that they will buy.

This is another thing that's really changed in a significant way because of we getting a lot of value and they're buying more, they're getting more automated value, and then they buy additional licenses. And we have such a deep and wide platform; it makes it for us, and makes sense for our partners to spend a lot of time with our customers.

It's not just the pipeline in terms of opportunities, it's just the way that converting the pipeline. So this is something that we also feel that gradually is getting better and better..

Thank you..

And our next question is from Nick Mattiacci with Craig-Hallum. Please proceed with your question..

Hi. This is Nick Mattiacci. Thanks for taking my question. I'm just curious if there are any other third-party cloud applications that are driving cost growth currently in the pipeline, specifically outside of the Microsoft ecosystem? Thanks..

Can you repeat the question, please, we just couldn’t hear..

Yes.

Are there any other third-party cloud applications outside of the Microsoft ecosystem that are growing in terms of pipeline?.

Today in the cloud, we – with Microsoft, we have a lot and from as we will be to exchange and SharePoint, OneDrive and Teams. But as you know, we both Polyrize in order to expand our footprint for mainly SaaS applications. So we have a very good clarity of the critical SaaS applications for organizations in the way that they are interconnect.

And we are going to release in the second half of the year, our support to many additional SaaS applications and we believe it can be a very good opportunity for the company..

Thank you..

Our next question is from Jason Ader with William Blair. Please proceed with your question..

Yes. Thank you. Hey, guys.

Do you expect reopening to be a catalyst for the business and that when people are back in the office; it will reduce friction in the selling process and maybe allow you to meet more new customers?.

Definitely, opening will help enterprise – selling enterprise software is a full contact sport. It's always – we were able to be very productive, working remotely. But we always believe that relight human interaction can benefit in many ways. But we also feel that if we will need to function remotely for a while, we're still positioned to do well..

And has there been any disparity across geographies where there has been some economic reopening in the sense of those that have had more reopening have performed better?.

No, it's a bit hard to test the COVID situation. You need to take it every day, it comes. But overall, thankfully, we were able to do very well, and there were some things in COVID with all this digital transformation, clearly benefiting Varonis and we also believe that for us, these are stationary trends.

So this is the only thing I can say in the way that it's going to develop it's hard to say. But we believe that either way we're going to open very fast or prober going to have more delays for the overall world in the economy. We will be able to do very well.

And also, we see that also organizations that got hit by COVID and they have critical information. They are buying bonds and buying bonds in big way. So we have high level of confidence, and we really believe that we can do well even if the situation will stay like that for a while..

Thank you..

And our next question is from Shebly Seyrafi with FBN Securities. Please proceed with your question.

Thank you very much. So I believe that you said that the professional services line within maintenance and services was the big driver of the year-to-year decline. So my question is, if you exclude professional services, did that segment grow? And secondly, I think you said that segment is going to decline this year.

Do you think it will grow starting next year?.

So maintenance and services line item is really comprised of maintenance of perpetual and the professional services. Because we move to subscription so quickly, and we're not going back to our existing customers and trying to convert the maintenance of perpetual to subscription licenses.

We're just selling additional licenses with those existing customers on top; we're really not getting any new fuel on that maintenance line item.

And as I said before, the professional services was really kind of the biggest impact there because of that decline in the – significant decline in professional services that is coming from us letting partners do more of the professional services and also the fact that the licenses are geared towards automation.

So we really don't expect that line item to increase, and there'll be obviously some fluctuations with the professional services..

To be clear, even next year, you don't think it will increase, right?.

Correct. We are not selling any new for perpetual licenses..

Okay. Thank you..

Thank you..

Our next question is from Erik Suppiger with JMP. Please proceed with your question..

Yes. Thanks for taking my question. I wanted to come back to Office 365. Can you talk a little bit about how much of your business is associated with Office 365? And did the exchange hack.

Did that create a catalyst for your products related to it? Or was that an impediment to your products that provide additional security there?.

Our offering is mainly associated with data. We have a lot of critical data in 365 applications and servers that are residing in AGU. Regarding the change bridge, what is happening with exchange in solar winds and many others, every week you have something, suggest that organizations understand that you have this very sophisticated skills.

And today we script currency in other means the ability to very easily monetize cybercrime. And if you have critical data, someone wants it, and even a big company that's protecting its intellectual property can get hacked, and the consequences are really bad.

So I just think that what happens now is that almost every organization is starting to realize that this is something that they need to do. They need to protect their data. They need to protect their data in a very effective way and the perimeter security is essential, but at the same time….

So it sounds as though the exchange hack was somewhat of a catalyst.

Can you comment in terms of how much of your business with Office 365 is customers expanding the modules associated with the different applications within Office 365 versus how much of it is customers that are just migrating to Office 365?.

So we talked a lot when we announced the transition to subscription that a lot of it was driven by the fact that customers are consuming more of the platform, and many of them buying Office 365 licenses. That was really kind of the driver, because as you remember when we went public, we had 10 licenses.

And between 2015 to 2018 we came out with significantly more licenses and many of them geared towards automation. And really, the Office 365 licenses have been a driver for us in the last couple of years. We're seeing customers that are buying many of those licenses.

Its still – when you look at kind of the attach rates, the data advantage and the data alert, and the data classification are really kind of the top three. But Office 365 has been a significant component, and we're very pleased with that.

Just in terms of the breaches, we also talked a lot about the fact that a breach doesn't necessarily generate a spike in our revenues immediately after that breach. We're much more of that thoughtful process where customers try and understand how they can better protect their data.

So I wouldn't say that any of the breaches is driving in the short-term any of our revenue, but it's definitely part of that longer-term discussion that we can benefit from..

Very good. Thank you..

And our next question is from Shaul Eyal with Cowen. Please proceed with your question..

Thank you. Good afternoon, guys. Congrats on the healthy performance. Yaki, your vision these Varonis is a $1 billion revenue company, ARR company actually in a number of years. And maybe ARR further accelerating, we can run some assumptions that would get us to $1 billion, probably anywhere between five to seven years.

Now, I know you've never committed to a specific time frame.

But does that five to seven years time frame, does that make sense?.

I don't – with your permission, Shaul, I don't want to comment about just to talk about the time line. But what I want to talk about is just platform market fit and the probability together. They are how to think to get to lofty goals with products that you don't have customers you never met and people that you haven't had a chance to hire.

And if you really see we can grow so much within our customer base. We have a substantial sales force and you just see what's going on with all the SaaS application that we can really run the Varonis playbook and all of them are interconnected. And as I said before, this is what – this is where contemporary cybersecurity risk resides.

And this is where we believe that the risk will grow. And if you want to protect your digital assets, you need something like Varonis. From where we sit, we strongly believe that it's inevitable. So – and the customer is buying more. I think that there is one thing that I hope that folks can understand that with us more is more.

When you get critical mass of licenses, you get this automated value in the free use cases and customers are buying more. So we believe that the vision to get to $1 billion ARR is materializing.

And we also believe that every day that goes by that we have more licenses, bring additional customers, expanding the base, it's increased our probability together. A lot of the investments to get to this $1 billion number and beyond are already in place..

Got it. Thank you so much..

Thank you.

Thank you..

And we have reached the end of the question-and-answer session. And I'll now turn the call over to James Arestia for closing remarks..

So thank you everyone for joining today. We appreciate the interest and we look forward to speaking to you this quarter. Thank you..

And this concludes today’s conference, and you may disconnect your line at this time. Thank you for your participation..