Greetings. Welcome to the Varonis Systems, Inc. Fourth 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. Thank you. You may begin..

Thank you, operator. Good afternoon. Thank you for joining us today to review Varonis fourth quarter and full year 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 first quarter and full year ending December 31, 2022.

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 fourth quarter and full year 2021 earnings press release which can be found at www.varonis.com in the Investor Relations section.

Also, please note that 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 our Q4 2021 performance, the results of a steady, consistent and well executed year by our team. Looking ahead, we are excited to capitalize on the countless opportunities we see for 2022 and beyond and are focused on positioning Varonis for durable long-term growth.

Before I discuss these opportunities, I want to start by reviewing the key themes for 2021. Guy will then review our Q4 results and our financial guidance for 2022. So let's jump in.

As we think about the market for data security in the last 12 months, it is important to ask what has stayed the same and what is changing? Starting with what has stayed the same. For many years, we have bet on secular trends. To name a few, explosive data growth, the sophistication of threat actors and increasing regulation.

We now see another trend which is serving as a strong tailwind for our growth and that is a global scarcity of in-house technical expertise. This presents a significant need for added automated protection for all organizations. Let's spend a moment on this trend which continued to accelerate in 2021, driving demand for our platform.

The first is data growth which we have talked about since we founded Varonis. This showed no signs of slowing during 2021, whether on-prem or in the cloud which only opens companies around the world to greater risk. The second is the threat environment, giving the growing dependence on critical data which makes every company highly vulnerable.

It is not surprising that threat actors continue to refine and sharpen their strategies. Cybercrime gets worse by the day and it has become more profitable than ever before. The third trend is regulation. A natural byproduct of these attacks, all of these regulations have sharp teeth.

And as we have seen in the past year, noncompliance results in substantial fines. The last trend that I mentioned earlier is technical scarcity. We constantly hear from customers and prospects that their IT and security experts are stretched too thin and that they need automated platform solution that allow them to do more with less.

This is exactly what Varonis provides at scale across the diverse and complex environments. Our technology has never been a better fit than for today's market. As a result, our data-first approach continues to resonate with customers regardless of size, industry or region.

Now let's turn to what is changing, starting with the digital transformation which has drastically impacted how companies must approach data security. As we have said, with work-from-anywhere, the perimeter is hard to define and even harder to protect.

There has been an explosion of endpoints which primarily serve as access points to enterprise data stores, both on-prem and in the cloud. And sensitive data now lives in the sanctioned data stores which makes collaboration easier and security much harder. As we all know, when solutions to problems are found, new problems often emerge.

We believe the biggest problem for data-driven organization over the next decade will be managing the tension between productivity and security. The digital transformation has made collaboration so easy that the average employee has access to 17 million files on the first day, most of which are not necessary for their job.

As a result, the potential for widespread damage from just one compromised user which we call the blast radius, is enormous. On top of that, attackers have so many vectors to get sensitive data. It can be through an endpoint, a vulnerable gateway or a misconfiguration and it only takes this one.

For every company, the scale of the problem can be massive and it is impossible to solve without automation. This is exactly what we are laser-focused on going into 2022 and beyond and how we are positioning the company for durable long-term growth.

We intend to go both wider and deeper as we expand our platform, with a distinct focus on SaaS data stores. DatAdvantage Cloud meaningfully expand our market opportunity as we can now provide coverage for Google Drive, Salesforce, AWS and many more SaaS data stores and applications.

We can also go deeper on many of these as we already have with classification for Google Drive and Box and there is so much more we plan to do on learning and integration. The one common theme across these efforts is automation which is truly transformational for our customers and addresses the data protection challenges they face.

And we believe that we are just scratching the surface of an enormous market opportunity. Before I turn the call to Guy, I want to briefly discuss some key customer wins in Q4. The U.S. healthcare service organization with 30,000 employees became a new Varonis customer this quarter. It viewed Microsoft 365 as a significant risk and brought us in.

Not only did our risk assessments validate their concern, but it also expanded the initial use case to address ransomware open access issues and permissions mapping. They purchased a double-digit number of licenses and we are now already discussing how they can expand with DA Cloud licenses for additional protection.

At the same time, our existing customer base continued to serve as a strong source of incremental revenues. And the team had another outstanding quarter, closing a number of significant expansion deals.

One of the world's largest auto manufacturers, originally a perpetual customer with only two licenses, significantly expanded their Varonis deployment in Q4. Prompted by the need to comply with regulation and take more strategic approach to securing those sensitive data, they now have a double-digit number of licenses.

These are just two examples of how the trend impacting organizations today, fueled by the digital transformation, provides Varonis a long-term opportunity to fulfill its mission of protecting sensitive data for its customers, coupled with our platform innovation and continued investments across the business.

We believe we have a clear path to our $1 billion ARR target. I want to thank our team for their great effort and hard work last year and I know I speak for them when I say how excited I am for 2022. With that, let me turn the call over to Guy.

Guy?.

Thanks, Yaki. Good afternoon, everyone. Thank you for joining us today. We are extremely pleased with our fourth quarter results. Our continued execution resulted in impressive performance across all key metrics, highlighted by 35% ARR growth to $387.1 million.

We also achieved total revenue growth of 33% and non-GAAP operating margin of 17.7%, both ahead of our guidance. Similar to previous years, we showed greater operating leverage in the second half of the year, bringing almost all of our Q4 top line beat down to the bottom line.

As we look at the market, we continue to see broad-based demand for our platform coming from new and existing customers, all of whom recognize the growing and pressing need to secure their sensitive data.

Our experience confirms our belief that more is more and that it's easier to get a customer from six to double-digit licenses than from one license to five. Why? Because the more licenses our customers buy, the greater value they realize, the higher the likelihood that they expand with additional licenses.

And we're seeing this over and over again as our customers increasingly take a more strategic and longer view to securing their data. As of December 31, 2021, 73% of our customers with 500 or more employees purchased four or more licenses, up from 63% a year ago and 54% two years ago.

And even more powerful is that 41% of those customers purchased six or more licenses, up from 30% a year ago and more than double the 20% in Q4 2019, setting the stage for the further expansion I just described. Lastly, our dollar-based net retention rate for subscription customers was above 120% at the end of the 2021 year.

Turning now to our fourth quarter results in more detail; total revenues grew 33% to $126.6 million. This included subscription revenues of $96 million which grew 53%. Maintenance and services revenues were $29.6 million as our renewal rates, again, were over 90%.

Lastly, our Q4 results included several hundred thousand dollars in ARR from DatAdvantage Cloud. Looking at the business geographically; we saw strong performance across all regions. In North America, revenues grew 34% to $89.1 million or 70% of total revenues. In EMEA, revenues grew 32% to $34.2 million or 27% of total revenues.

Rest of World revenues grew 27% to $3.3 million or 3% of total revenues. Turning back to the income statement; I'll be discussing non-GAAP results going forward. Gross profit for the fourth quarter was $113.4 million, representing a gross margin of 89.6% compared to 88.7% in the fourth quarter of 2020.

Operating expenses in the fourth quarter totaled $91 million. As a result, fourth quarter operating income was $22.4 million or an operating margin of 17.7%.

This compares to operating income of $13.9 million or an operating margin of 14.6% in the same period last year as we continue to maintain our focus on balancing margin expansion with top line growth. During the quarter, we had financial expense of approximately $850,000, primarily due to interest expense on our convertible notes.

Net income for the fourth quarter of 2021 was $18.5 million or income of $0.16 per diluted share compared to net income of $12.3 million or income of $0.11 per diluted share for the fourth quarter of 2020. This is based on 118.6 million and 108.4 million diluted shares outstanding for Q4 2021 and Q4 2020, respectively.

As of December 31, 2021, we had $807.6 million in cash, cash equivalents and short-term deposits. For the 12 months ended December 31, 2021, we generated $7.2 million of cash from operations compared to negative $5.8 million used in the same period last year.

We ended the year with 2,065 employees, an increase of 96 net new employees from the third quarter and an increase of 346 employees in the last 12 months. I will now briefly recap our full year 2021 results. Total revenues grew 33% to $390.1 million, well above the high end of our guidance. Subscription revenues grew 67% to $268.9 million.

Our full year operating margin was 6.5% compared to negative 1.5% for 2020. The 800 basis point improvement validates the leverage in our model that we have talked about throughout the transition.

We continue to be thoughtful with our ongoing investments that capitalize on the long-term opportunity generated by the trends that Yaki discussed and accelerated by the digital transformation.

Before I move to guidance, I want to note that as our SaaS offering continues to increase in the years ahead, ARR will become even more important as a leading indicator for our business, given the ratable revenue recognition of SaaS. Additionally, some color on our 2022 guidance.

I want to remind everyone that our 2022 full year operating margin guidance reflects a 200 basis point headwind related to our hedging program for our FX exposure to the new Israeli shekel. On a constant currency basis, the midpoint of our guidance shows expansion of approximately 120 basis points year-over-year.

In the first quarter of 2022, the impact is more pronounced with a 350 basis point headwind. And on a constant currency basis, the midpoint shows expansion of approximately 140 basis points year-over-year. These rates were in retrospect as good as we could get for 2022.

And just to remind you, these headwinds follow the 100 basis points of tailwind we benefited from in 2021 as we took advantage of COVID-related volatility in early 2020 to lock favorable rates for the year. In general, we try to minimize volatility through our hedging program with our larger focus on margin improvements where we have control.

Lastly, we expect that CapEx for 2022 will be in the range of $12 million to $14 million. Moving to our guidance; for the first quarter of 2022, we expect total revenues of $94.5 million to $96.5 million, representing growth of 26% to 29%.

Non-GAAP operating loss of negative $10.5 million to negative $9.5 million and non-GAAP net loss per basic and diluted share in the range of $0.11 to $0.10. This assumes 108.4 million basic and diluted shares outstanding. For the full year 2022, we expect ARR of $484 million to $489 million, representing year-over-year growth of 25% to 26%.

This assumes approximately $5 million of ARR from DA Cloud. Total revenues of $485 million to $490 million, representing growth of 24% to 26%. And this assumes approximately $2.5 million of revenue from DA Cloud. Non-GAAP operating income of $26 million to $29 million and non-GAAP net income per diluted share in the range of $0.16 to $0.17.

This assumes 128.5 million diluted shares outstanding.

As I look back at the recent challenges posed by the pandemic, it is clear to me that not only have we overcome them but we have generated significant growth, margin expansion and improved cash flow during the last two years while positioning ourselves to take full advantage and capitalize on the longer-term opportunity that lies ahead.

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

Operator?.

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Matt Hedberg with RBC Capital. Please proceed with your question..

Great, guys. Thanks for taking my question. Congrats really on a strong end of year. I think we all appreciate the ARR guide this year. When we think about the algorithm for that, how should we think about the new customer adds versus expansion of your base? Obviously, you highlighted DA Cloud which seems super-exciting.

But just wondering, with the added investments, what is the right way to think about new customers versus expansion?.

I think that we definitely see that the strategy is working. And there is this underlying architecture that is forming with the digital transformation that data is concentrated in the sanctioned data repository that with DA Cloud we are covering and with all the efforts that we have done.

So customers see the value and we really have a path that many of our customers will have between 15 to 20 licenses. Having said that, new customer adds are also very important for us, but it's also extremely important for us to cover the market in the right places. And before that, it was 1,000 plus.

Now the focus is even 2,000 users and above and then really to take them to 15-plus licenses. So overall, it's working. We just need to make sure that we are focusing on the right places. And sometimes, it's very important to decide what not to do. But definitely, it's still early innings for DA Cloud.

And as you know, with 365 and automation engine, it always really takes a year that the stationary trends will form, but we believe that there is just a huge opportunity. We see tremendous opportunity with 365.

We also see an explosion of the data on-prem and more and more just realization of organizations all over the world the efforts of cybersecurity and data protections are in order to protect digital assets and this is where Varonis shines. So the short version of the answer is it's both, but we need to focus on the right size of customers..

Thank you. Our next question comes from the line of Sterling Auty with JPMorgan. Please proceed with your question..

Yeah. Thanks. Hi, guys. Thanks again for the ARR guidance, I appreciate it. I'm just wondering if DA Cloud turned out to be $15 million instead of $5 million. So in other words, if you added $10 million more, how does that impact ARR? Obviously, you get $10 million from the DA Cloud.

But what I'm asking is, given the ARR treatment of traditional on-prem subscription licenses, what's kind of that mechanism? So for every $10 million of DA Cloud, what's the net impact to ARR?.

So Sterling, thanks for the question. I think it's a great one. And I want to give some color before I touch on that specific question on the mechanics of ARR and revenue because I think it's important for the context. So obviously, we're providing the ARR guidance for three main reasons.

One is we want to provide more transparency and ARR is becoming the leading indicator of the business and eventually will be even more important as we sell more DA Cloud, especially with the ratable revenue recognition that comes with that. But when you look at 2020 and 2021, I think the mechanics of ARR and revenue are important.

So in the last two years, revenue was higher than ARR because of that nonrecurring component, mostly the professional services. So in 2020, revenue was higher than ARR by $5.5 million. In 2021, revenue was higher than ARR by $3 million. And again, it was mostly that professional service component, that nonrecurring component.

As we're looking ahead, in 2022, the gap between revenue and ARR is narrowing because of that DA Cloud component. And we're assuming that $5 million ARR contribution, approximately half of that recognized as revenue. And that's really what's closing previous year's gaps.

And as we kind of look ahead, we expect in the years ahead, as we sell more and more DA Cloud licenses, that ARR will overtake revenue and become the bigger number, the larger number in dollar terms. That's the way we're thinking about it and that's the way we expect it to kind of perform. Now, digging deeper into your specific question.

I think there's a bit of a confusion out there and I want to put things in perspective. DA Cloud, we're assuming $5 million of ARR for the year, where obviously, as Yaki mentioned, we're pleased with the momentum of that -- of the licenses that we have there in terms of offering but it takes time.

That $5 million is roughly 1% of our full year ARR expectation, only 1%. So this isn't 2019 where we're transitioning the entire company from perpetual to subscription in five quarters. But we are responding to that feedback from investors looking for that leading indicator and that's why we are guiding for ARR.

But we're not giving revenue guidance with the expectation that we'll lower it throughout the year. So it's not the 2019 transition, this is very different..

Thank you. Our next question comes from the line of Brent Thill with Jefferies. Please proceed with your question..

Hey, guys. You have Joe on for Brent. I appreciate the question. Guy, maybe for you, can you just parse out the different components of op margin in 2022? I appreciate the 120 basis points of constant currency expansion.

But shouldn't this be the year you finally see a massive uplift from 2019 renewals? And maybe just a little more color around the investments on the hiring side? Thanks..

So I think that's a great question. And when you look at kind of the expansion that we showed in 2021, we had 800 basis points of margin expansion. And obviously, that was part of the -- and that was happening even while we were making meaningful investments.

So I think the philosophy that we have put in place for many years now is continuing, where we're focused on the long-term opportunity. We want to capitalize on that and make the necessary investments and, at the same time, bring some of it to the bottom line.

So when you look at Q4, the -- almost the entire beat came down to the bottom line and that 800 margin expansion from the beginning of the year, from last year's results, was -- because we're very prudent with the way we're making those investments. But at the same time, we don't want to leave anything on the table.

So that philosophy will continue in 2022. And obviously, on a constant currency basis, we're showing operating margin improvement of about 120 basis points which is in line with our strategy..

Thank you. Our next question comes from the line of Rob Owens with Piper Sandler. Please proceed with your question..

Great, thanks for taking my question. This is one of the strongest quarters of net new ARR growth that you guys have seen. Can you speak to sales cycles right now and what you've seen -- how they've progressed throughout the year? And maybe on top of that, what pipes look like as we head into '22? Thanks..

Sales cycles relatively stay the same. I think what is happening is that organizations are gradually understanding that most of the efforts that they have in cybersecurity and data protection are in order to protect digital assets.

And the digital assets today, by and large, are concentrated in the platforms that we are protecting and also the infrastructure that is the closest to them.

And what is happening, we just did -- this gradual -- there is this gradual process of realization that there is tremendous return on investment and efficiencies when you invest in our platform and then they are overall expanding.

So, I think what you see is just a lot of demand in the market and an architecture, the way that what happened after the pandemic and these are stationary trends, is that you saw a lot of adoption of SaaS applications and data on-prem and just a lot of endpoints that are acting as access points and data that is concentrated in the center.

And this is just -- and what we are doing, just have a lot of need. And once customers are buying, they're just expanding. So this is what we saw in the fourth quarter. And we believe that over time, there will be a strong realization that this is the best way to protect data..

Our next question comes from the line of Joel Fishbein with Truist. Please proceed with your question..

Good evening and great results. I just have a question for you, Guy, regarding the number of licenses sold. Would you consider giving us the number of customers that were taking 10 or more licenses, considering you're moving upstream? And it seems like you're having some really good success..

You're absolutely right. We are seeing a lot of success which is kind of -- the numbers are showing everything that we're talking about that more is more. I think we've been very transparent with kind of the metrics that we're providing.

And I think we want to stick for now with the 4-or-more licenses and the 6-or-more licenses because we don't want to generate too much confusion and generate too many metrics or too many numbers out there.

But I think as you have seen us in the past, we provide kind of the metrics when the right time comes and we're very, very focused on being transparent with investors and analysts..

Our next question comes from the line of Fatima Boolani with Citi. Please proceed with your question..

Hey. Good afternoon. Thank you for taking my questions. Guy, the question is for you with respect to the ARR guidance. So you're looking at $100 million of implied net new ARR in calendar '22 which is relatively flat, I guess, what you experienced in calendar '21.

So maybe can you help us walk through some of the puts and takes into that ARR guidance? And maybe specifically, what is embedded from a maintenance ARR decay standpoint in that guidance, particularly in the context of, I think, what you said with a 90%-plus renewal rate for maintenance? So any color there would be really helpful. Thank you..

Absolutely. I think that's a great question. And really, the philosophy about guidance hasn't changed. We want to be responsible the way we've guided in the past.

And when you think about kind of the revenue and the ARR mechanics and I walked through kind of that relationship just a couple of minutes ago, we are starting in terms of revenue at the highest point for full year. Our full year revenue number is the highest we've had in years.

Now, when you think about kind of the ARR, the KPI ARR may be new in terms of providing the guidance but kind of the person giving that guidance is the same old one. So we just want to make sure that we're responsible in the way we guide. And I think we -- this is a good starting point for us..

Our next question comes from the line of Roger Boyd with UBS. Please proceed with your question..

Hi. Thank you very much for taking my question. Congrats on the nice results. A question on the operating margin, Guy.

Can you just talk about the impact on gross margins from DA Cloud, recognizing that's coming in at about 1% of ARR? But as you build up the cloud infrastructure, what sort of impact should we expect to see on the gross margin line in calendar '22?.

Definitely. So as I mentioned before, the expectation for ARR incremental coming from DA Cloud is about $5 million. And the revenue expectation is about half of that. Therefore, the margin impact shouldn't be significant in 2022. But as we continue to sell that and that becomes a larger part of the business, we'll provide more color.

But as of 2022, that's not an impactful impact for us..

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

Thank you very much. So I was hoping you could talk a little bit about the DA Cloud in terms of whether that's just a single subscription. I mean there's a lot of functionality in that, whether it's privilege, whether it's stale identity removables, shadow identity discovery.

Is there more than one subscription in there? Or is that just a single subscription? It's a lot packaged in if it's just one..

It's like there are several licenses there and we also realize a lot of synergy with our Classification Engine. And the way that we work with it, we have bundles for DA Cloud. And usually, customers are buying several licenses. But it's still early.

So as we are progressing with it, we are going to provide more color and more details of how it is moving forward. We are very encouraged from the first quarter. We believe that it's a huge opportunity but it's still the beginning..

Our next question comes from the line of Hamza Fodderwala with Morgan Stanley. Please proceed with your question..

Hey, guys. Thanks for taking my question and thanks a lot for all the color around the ARR guide. Maybe a question for either Yaki or Guy.

The SaaS ARR guide, how much of that is the $5 million that you've guided to based on pipeline that you're seeing today, perhaps from existing customers, versus pipeline that you're going to generate in 2022? Is that ARR $5 million more back-end-loaded in '22 versus front-end? Thank you..

Usually, we have a lot of experience how we're introducing new product to our customers and to the sales force. We have good initial indicators and we feel comfortable -- with everything that we see, we feel comfortable with the $5 million of ARR.

Overall, when you're looking in the next -- for the next few years, not now, we see that our customers have very strong SaaS footprint. And a lot of these licenses can be relevant for our customers. And we think that this success that we experienced with all the 365 suite and Azure, we can experience with DA Cloud.

But as I said before, it's just the beginning. Operator Our next question comes from the line of Nick Mattiacci with Craig-Hallum. Please proceed with your question..

Hi, this is Nick on for Chad Bennett. Thanks for taking our questions. So gross margins looked really strong again in the quarter.

Can you just help me to understand what is driving the gross margin improvements? And should we think about this being a 90% gross margin business going forward? Or is there anything else to consider when thinking about gross margins this year?.

So I think, obviously, 2021 was a very strong year for us and we ended it on a very, very positive note. Gross margins were roughly the same and definitely a number we're very pleased with.

As you look at 2022, we don't expect a major change on the gross margin front, especially because of that ARR incremental addition of DA Cloud, as I mentioned before, being around that $5 million and only half of it being recognized. So I think kind of in our view for 2022, we expect those numbers to continue in the same range..

Our next question comes from the line of Jason Ader with William Blair. Please proceed with your question..

Yeah. Thank you. Yaki, kind of a high-level question for you.

What are your top priorities as CEO for 2022 for the company?.

Yes. My top Priority is to add value to our customers. And in order to do that, we need to create the right product, hire and retain the right talent and make sure the right people are in the right places and to make sure that the company is focusing on the right opportunity. But when I see, I see tremendous opportunity.

I see tremendous opportunity in terms of coverage, so where the data repository are growing and tremendous opportunity with automation. And when I'm looking to the future, I see that there is just so much innovation ahead of us than behind us. And I see the challenges in the customer base.

And I believe that with coverage in automation, we can build a very strong, important company that can serve as the foundation for the trust that is needed to function in this digital universe. And I think that organization's capacity to share and create information is far exceeding the capacity to protect it.

And just to manage this constant tension between productivity and security is going to be the biggest problem for organizations moving forward. And I believe that we can solve it and we can solve it completely..

Our next question comes from the line of Saket Kalia with Barclays. Please proceed with your question..

Okay, great. Hey guys, thanks for taking my question here. Yaki, maybe just as an extension to that last question, maybe more specifically, can you just talk about any changes to sales comp or strategy in 2022? You've talked a lot about still being early in customer module adoption.

Is there anything that you've thought about maybe doing with your existing base in 2022 to help accelerate that, just given all the value that they get with more licenses versus less?.

No, there is no -- in terms of comp and stuff like that, there is no real changes. The only change is that as a company, we are going to be more focused on customers that are 2,000 users and above because we can just -- now we just see a path that customers will have 15 and then 20 licenses.

And really, the whole model that more is more is working extremely well for us. When customers -- one of the things that we see within organizations is that they have scarcity of just security talent. There are very few people that need to solve a lot of big problems.

And with us, once you have more licenses, you have just better alerting, better remediation, you are classifying on many repositories and you just have tremendous productivity gain in terms of automation and a solution that is much more complete.

So it's really to go 2,000 and above and to make sure that our customers have enough licenses to gain a lot of automation value. And then they are just buying more. So this is how we see the changes. The change is just a bit more about coverage but it's gradual changes overall, it's same thing..

Our next question comes from the line of Shaul Eyal with Cowen. Please proceed with your question..

Thank you. Good afternoon, guys. Congrats on the quarter and outlook for 2022. Guy, very, very quick and simple question.

Have you met your hiring targets for 2021? And what's the headcount you plan on adding during fiscal '22?.

R&D with the ROI that it's generated for us over the years; and in the sales department, not just in quota-carrying reps but also in the supporting functions that help customers see value. So I think overall, our strategy is working and we're able to hire people at the right places..

Thank you. Our next question comes from the line of Andrew Nowinski with Wells Fargo. Please proceed with your question..

All right, thank you. You've talked in the past about how it's easier to get customers to go from 6 to 10 licenses than it was to get them to go from two to five licenses. And if you look at the percentage of customers that have now purchased six or more licenses, it looks like that increase has been pretty linear each quarter.

So, I'm wondering will we ever see any sort of step function increase in that percentage of customers that are buying six or more licenses? And if not, where do we see evidence that it is in fact easier to get customers to double the number of licenses they're purchasing? Where would that show up?.

So I think, obviously, as we have a platform that has today over 35 licenses, our offering has increased. And we're seeing, from all the feedback and all the conversations, that our ability to get to double-digit licenses on average per customer has been significant. You're absolutely right.

When you look at the six or more licenses, that the increase there has been significant, 20% two years ago, 30% last year, 41% at the end of this year. But you're also right in the fact that, that number also shows the opportunity we have.

If you look at it in reverse order, it basically means that we have approximately 60% of our customers that have five licenses or less. And that just talks about the opportunity that we have ahead and how much meat on the bone we have within our existing customer base to continue to grow.

So obviously, we'll provide more color in the quarters ahead and in the years ahead as we find fit and without causing confusion. But I think that overall, from all the indications that we have seen, the path to double-digit licenses on average per customer has never been clearer..

Our next question comes from the line of Shebly Seyrafi with FBN Securities. Please proceed with your question..

Yes, thank you very much. So I think you've guided for about 120 bps of operating margin improvement in '22 on a constant currency basis. I assume you're assuming the world is going to go more -- or you're going to move more to a post-COVID environment with higher travel and related expenses.

So I want to see what that operating margin improvement on a constant currency basis would be when you normalize for increased travel in '22?.

I think that's a great question. And our assumption for travel is that it will pick up in 2020, gradually increasing quarter-over-quarter. But in total, it still will be below the pre-pandemic levels.

But you're absolutely right that as we kind of guide and bake in the expense level related to travel, we're assuming a gradual return to a more normal world..

Our next question comes from the line of Erik Suppiger with JMP Securities. Please proceed with your question..

Yeah. Thanks for taking my question. On the OpEx, talk a little bit about how you see the increased spending between R&D and sales and marketing.

Is this going to be driven more on the sales and marketing side? Then what opportunity is there to drive productivity on the sales and marketing side? Where are you from a productivity perspective versus your targets?.

So I'll start, with your permission, with the second part of the question. I think when you look at our model, there's a lot of leverage coming out of the model.

And you can see in the 2021 results, that, that 800 basis points of margin improvement are coming over the year with significant investments, meaningful investments that we have had kind of throughout the year.

When you look at kind of the sales and marketing department on a non-GAAP basis, you can see that a significant portion of that came from the sales and marketing department. And that's mostly because of the renewals that are obviously cheaper and our expansion within our existing customer base that allows us to generate that leverage.

But we want to make sure that we still make the necessary investments to capitalize on that longer-term opportunity. So I think as you look at our investments, they would be focused mostly on the R&D and the sales and marketing front..

Our next question comes from the line of Jonathan Ruykhaver with Baird. Please proceed with your question..

Yeah. Thank you and good evening. Yaki, I was wondering if you could drill down just a bit more on this automation opportunity that you've been highlighting this evening. Maybe touch on where you see this automation from a product standpoint benefiting the company the most.

And just from an innovation perspective, does this suggest that we could see more response and remediation type solutions across the platform over time?.

Yes. Overall, you will see that what we call our operational plan that there is an opportunity to do a lot of -- just to accelerate the automation of all the phases. And the automation is automation in remediation, automation in classification, automation in time to resolution.

So this is a key for us and we see that there is just too many opportunities there..

Our next question comes from the line of Joshua Tilton with Wolfe Research. Please proceed with your question..

Hey, guys. Thanks for taking my question. I just want to actually follow up on Sterling's question from earlier, from a different perspective.

If you sell more DA Cloud this year, is that going to detract your sales from selling your traditional licenses? Or should we think of it as purely incremental to the current term business?.

You can think about it primarily as incremental. Obviously, when you sell licenses to customers, there is sometimes a limit to how much they can buy but overall, it's going to be incremental..

Ladies and gentlemen, we have reached the end of the question-and-answer session. I will now turn the call over to James Arestia for closing remarks..

So thank you, everyone, for joining. Please don't hesitate to reach out in the coming days if we can be helpful and we look forward to speaking with you this quarter. Thanks and have a good night..

This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation and have a wonderful day..