Yaki Faitelson - Chief Executive Officer Guy Melamed - Chief Financial Officer, Chief Operating Officer James Arestia - Vice President of Investor Relations.

Greetings! And welcome to the Varonis Systems Incorporated, First Quarter 2022 Earnings Conference Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, James Arestia, Vice President of Investor Relations. Thank you, James. You may begin..

Thank you, operator. Good afternoon! Thank you for joining us today to review Varonis' First Quarter 2022 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, 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 revision 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 2022 earnings press release, which can be found at www.varonis.com, in the Investor Relations section.

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?.

Data protection; Threat detection and response; and Privacy and compliance. Given the current threat landscape, I want to focus today on our threat detection capabilities. Data growth, the dependence on critical data, and the increased profitability of stolen data has led to threat activists continuing to refine and sharpen their strategies.

And as cyber-attacks continue to increase in frequency, sophistication and severity, the need for companies around the world to protect their sensitive data only becomes more urgent. Between state active and commercial groups, cyber-attacks are in the headlines on a constant basis, and the target is always sensitive data.

As a result, our data-first approach continues to resonate, validating both our strategy and what we have been saying for many years, that the perimeter is essential, but isn’t enough.

Our risk assessments show that once perimeter defenses are bypassed, critical data stores are wide open to attackers and insiders, and insiders can be the biggest threat of all. In short, any system, account or person can be potential attack vector, and all it takes is one.

Companies need to assume attackers will breach at least one vector, if they haven't done so already, and one, the attackers will go straight for critical data stores to maximize their profits.

Specifically, we see them establish remote control, exploit any weakness they can find, go after accounts with higher-level access, and use these accounts to steal data. Unfortunately, unless Varonis is in place, attackers rarely counter any resistance once they are inside.

This is why we say that every cyber-security leader and company should assume breach. It’s not a question of if, but when they will be compromised. When you assume breach, the first step is to assess the blast radius. All the data that an attacker could steal if one employee or vector is compromised and then make the blast radius as small as possible.

A smaller blast radius makes the attackers’ job harder, and gives our detective controls more chances to catch them as they work to overcome stiffer resistance.

Our unparalleled ability to reduce the blast radius, to take inventory of sensitive data, to ensure that only the right people have access, and to put go-forward detective and corrective controls in place to keep it locked down is why customers continue to describe our platform as a must have.

Before I turn the call to Guy, I want to briefly discuss some key customer wins in the first quarter. A multinational media conglomerate with 35,000 employees became a new Varonis customer in Q1.

They had massive amounts of sensitive information in Microsoft 365 and no way to accurately classify it, see where it was at risk, and understand who was using it.

After proving that we could provide visibility for their data in Microsoft 365 and help remediate critical open access issues, they purchased 7 Varonis licenses, and we are already discussing additional licenses to further protect their data on-prem and in AWS.

At the same time, the opportunity to get our existing customers to double-digit number of licenses is clear, and the team had another strong quarter closing significant expansion deals. One of the largest toy companies in the world significantly broadened their Varonis deployment in Q1.

Originally a perpetual customer with a more tactical view of data protection, they needed classification and alerting across multiple on-prem and cloud environments, the ability to clean up stale and risky data from acquisitions, and automation to help them maintain a secure state.

Today, they utilize more than 20 Varonis licenses and we are discussing how our newer DA Cloud offering can address risks stemming from this data in AWS. These are just two examples of how we are helping our customers solve their biggest data protection challenges, which has been our mission since we founded Varonis in 2004.

We are focused on continued execution and capitalizing on the enormous market opportunity before us, and we are excited for another strong year. With that, let me turn the call over to Guy.

Guy?.

Total revenues of $110.5 million to $112.0 million, representing growth of 25% to 27%. I would point out this excludes approximately $1 million dollars of revenues from Russia, which we previously expected; non-GAAP operating income of breakeven to $1 million dollars; and non-GAAP net loss per basic and diluted share in the range of $0.02 to $0.01.

This assumes 109.7 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%; total revenues of $485 million to $490 million, representing growth of 24% to 26%; non-GAAP operating income of $27 million to $30 million dollars; and non-GAAP net income per diluted share in the range of $0.16 to $0.18.

This assumes 127.3 million diluted shares outstanding. In summary, we intend to capitalize on the strong demand environment we see, which will enable us to further expand our market leadership as we execute on our long-term strategy to drive topline growth, margin expansion and cash flow generation.

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

Thank you. [Operator Instructions]. Thank you, our first question comes from Matt Hedberg with RBC Capital Markets. Please proceed with your question. .

Hi guys! Thanks for taking my questions. So I appreciate the color on Russia. I just wanted to ask, just maybe just to double click on that little bit. It sounds like Europe overall is strong. I just wanted to make sure that excluding Russia there was no other sort of Eastern Europe exposure that you thought was also at risk.

And then if I could just squeeze in, just a quick follow-up. You didn’t really talk about DA Cloud this quarter and I know there are some early traction in 4Q. Curious if that had any positive uplift on 1Q results? Thanks guys. .

Hi Matt! Overall we see you know a strong pipeline in Europe with strong customers and prospect engagement. We have very good teams, very good partners there and just overall we believe that the long term market opportunity is big.

Yes, everything is related to Russia you know, but in general we all can generate some uncertainty, but also in our case it also can be a catalyst to elevated cyber-security crimes. Very hard to predict how it is going to play out, but for the long term we don't see just any changes there in the opportunity and we see very healthy pipeline.

Regarding DA Cloud, we are very happy with what we see and primarily extremely excited with the version that we just released on Salesforce.com.

So we think that all the DA Cloud licenses can be very successful, but if you look at just sales force, think about just the magnitude of this business, all the data that is critical and you have so many applications that’s connected to it. It’s a lot of collaboration in this platform and a very, very complex permission structure.

So we believe what we have done with 365 and the on-prem data is very relevant there and the cadence of us using a new product is working according to plan. And we see just a major release. We just believe that over time the DA Cloud can be a big, very important business for us. .

Thank you. Our next question comes from Joseph Gallo with Jefferies. Please proceed with your question. .

Hey guys! I really appreciate the question. Has there been any change in the competitive landscape, especially now that you're selling cloud.

And then just any sense of discounting in the quarter and then, can you just speak to the familiarity of your sales force and the channel with cloud?.

Yes, so in terms of the competitive landscape nothing changed and regarding DA Cloud, it’s just the same things like the other Varonis platform. When you are talking about big data sets and the infrastructure that is the closer proximity to the datasets, you know we – really the only complete solution in the marketplace.

It’s the – you know the way that the folks believe our functionality, which is very similar to everything that Varonis is doing, this was really part of our road map and we showed in our time to market with the purchase of – with the acquisition of Polyrize. So you need – it’s like 365. It’s a business that is exploding for us.

The teams need to understand the platform that we support; Salesforce is big, S3 in the Cloud is big, Okta is big, but it has a lot of similarity and then the overall Varonis functionality are relatively the same. But we always have cadence. You know they need to learn how to sell it.

We are always doing everything we a POC, but we are very bullish, we are very excited about the opportunity. .

And regarding kind of the discount levels, our discount levels have been holding very nicely, especially when you look at the number of license, additional number of licenses we've been selling with the move to subscription. The amount of additional licenses we have been selling is significant.

We recently introduced bundles that are in an attempt to simplify the selling process and we have a Silver, Gold and Platinum bundles that are part of our offering now. There are basically seven licenses, 13 licenses and 15 licenses, and they appear as one line item.

As I said, we recently introduced them and we hope that this will provide some simplicity in as part of the failing process, but overall as we look at the discounts right now, they've been holding very firm. .

Thank you. Our next question comes from Fatima Boolani with Citi. Please proceed with your question. .

Hey! Good afternoon! Thank you for taking my questions. Guy, this one’s for you on Russia. I really appreciate the quantification of the impact there as you wind down that business. But I was hoping you could help me with some math.

So you talked about an aggregate $4 million to $5 million headwind on the top line, but $3 million of that was basically realized as a headwind in the first quarter.

So I guess my question is, why so front-end loaded for that write-down, and how should we think about that, I guess linearity being affected on a full year basis for the remainder of the year, for both ARR, as well as total revenue. Thank you. .

So just like I said in the prepared remarks, Russia has an immaterial impact, but it still has an impact on our KPIs. So if you think about it in a simplistic way, the impact is 1% to both our revenue and ARR.

Like I said, there is approximately $3 million of headwind to ARR, but when you think about the full year in 2022, we expect approximately $4 million to $5 million headwind for both ARR and revenue, as we are really assuming zero contribution from that region going forward.

So when you think about kind of the impact, the majority of the impact is happening in Q1, but obviously when you look at the compatible numbers in Q2 throughout Q4, you'll have that impact as well. .

Thank you. Our next question comes from Joel Fishbein with Truist. Please proceed with your question. .

Hi! Thank you. Can you just comment Guy on hiring plans going into ’22? I know in Q1 it looks you were on plan. But love to hear what the plans are going into the remainder of the year and where most of those resources will be allocated? Thanks..

So very similar to what we've done last year, the majority of our hires are coming in both the sales and marketing department and the R&D department; very balanced in our plans to increase both our footprints of additional engineers there and sales capacity.

We are very focused on both, managing top line growth and profitability, so we want to do it at the right pace, and so far we are very focused on executing according to plan. .

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

Alright, thank you. I just had a question on, as it really relates to the new logo growth. So I was wondering if could talk about just what you saw in terms of the year-over-year growth in new logo's in Q1 and then if you look at your net new ARR in Q1, it looks like it was down year-over-year and if add back that $3 million it was basically flat.

So I’m wondering if you can just provide more color on the net new ARR as it relates to new logos as well. Thanks..

So, I’ll start kind of with the second question.

When you factor in that $3 million headwind coming from Russia, that really changes the picture in terms of that net new ARR contribution and that has to be taken into consideration, and can you just remind me of what was the first question?.

I'm just wondering if you could provide any color on your new logo growth. I know a lot of customers are adding – existing customers are adding more licenses, so I'm wondering how your new logo growth faired in Q1..

Absolutely! So you're right in the fact that the majority of our revenue still comes from the base. We have a lot to sell to the base and you can see that in terms of the number of licenses and that we have both, the four or more licenses and the six or more licenses, we definitely have a lot more to sell.

But when you look at the new logo contribution, we had positive growth of new customers. But even more importantly, it’s the size of those customers that we are bringing in. We are focusing on the larger enterprises.

We have done very well on focusing on those and we continue to focus on customers that can generate significantly higher customer lifetime value..

It's also important to understand, it’s just a big platform and most of the product development, all of the customers, and this is just the evolution of the business. It’s a complete platform play.

This is a real lend and expand with key you cases and thankfully when customers are buying, over the time they are buying more and more and this is just – this is how it rolls. .

Thank you. Our next question comes from Matt Saltzman with Morgan Stanley. Please proceed with your question..

Hey guys! This is Matt Saltzman from Morgan Stanley. I’m subbing in for Hamza Fodderwala tonight. So thanks for taking the question. As you mentioned, this year is a difficult year for a pursuing margin expansion. You got a number of external factors, whether it be FX, competitive hiring environment, wage inflation, really you name it.

Yet you're operating income guide is going up. So I'm just curious, kind of how you're thinking about balancing profitability inflection from that operating leverage and that's online with the growth opportunities that you're seeing on the DA Cloud side and just net new customer adds. Thanks..

So, you're absolutely right. In terms of our focus on profitability and that really hasn’t changed comparative, the way we run the business over the last many years. We're very focused on growing top line growth, but we are very conscious and focused on bringing some of it to the bottom line.

If you look at the things that we can control on a constant currency basis, the fact that we ended Q1 with basically 370 basis points of margin improvement, kind of shows you that we are able to manage through the wage inflation and through the other factors that are part of what we need to deal with.

But I think there's a lot of leverage in our model, especially with our ability to expand within our existing customer base and the fact that we can continue to sell more and more licenses, the fact that we're keeping our discount levels at a very firm way.

And when you look at that expansion and when you look at the expansion in the past, you know exiting the transition moving from perpetual to subscription, and the way we’ve managed the business to-date and the way we plan to continue to manage the business, is focusing on the top line and the bottom line with those margin expansions. .

Thank you. Our next question is from Chad Bennett with Craig-Hallum. Please proceed with your question..

Great! Thanks for taking my question.

So Guy, could you provide, you know in the $4 million to $5 million headwind from the Russia exposure in ARR, if we were to look at that from a revenue standpoint, can you provide a rough estimate of maintenance versus subscription?.

So maintenance is about half. .

And then just circling back on and the EMEA question before, you know and I understand though obviously the Russia impact there, but I mean by my math you know your EMEA business showed a pretty decent growth deceleration. I think it was probably the weakest growth quarter in five.

So I guess I want a little more detail into you know – I don't care if it's Eastern Europe, Western Europe, you know your confidence level that that business performed to expectation from a bookings and billing standpoint in the quarter and that you're going to see some growth acceleration from here in EMEA throughout the year. .

Chad, you're absolutely right. When you look at EMEA and just for clarity purposes, Russia is part of EMEA and when you look at those numbers, EMEA grew at 20% in Q1, but on top of the Russia impact we had close to 400 basis points of currency headwind versus last year.

So when we look at the pipeline and when we look at the conversations and when we look at the activity, we feel very good about our ability to continue to grow kind of the European business. And when you put all of this together, both the Russia and the currency headwinds, it paints a very different picture. .

Thank you. Our next question comes from Jason Ader with William Blair. Please proceed with your question. .

Hey guys! This is Billy Fitzsimmons on for Jason Ader. Yaki, for you first. Any anecdotes from customers as you roll out the A Cloud or any feedback from customers given your features for the salesforce you announced in the quarter.

And then I’d also – sorry, then I'd also ask, any feedback on kind of the effectiveness of you know the free risk assessment?.

It’s the same thing as the – a lot of the platform, it’s the same features, but now definitely with just the release of the new functions for salesforce, we see a lot of momentum in the pipeline and customer are just getting a lot of value. You know it’s much more than just the platform themselves.

I think that one of the more stationary trends after COVID is that the endpoints are like access points and so to amend this adoption of SaaS applications, that really the sanctioned data is very positive, because this is where you have the digital information for organization and the data on-prem is not going anywhere.

So the combination between the on-prem data and the SaaS application is very strong and some of the SaaS applications are just norms, you know like salesforce. It’s just so much critical data in the build towards collaborations.

So when you give visibility and data oriented [inaudible], it’s just a massive, massive value and this is the biggest blind spot for most organizations.

Just think about you know salesforce, the issue size of the revenues and the installed base and take even a fraction of it and think that this is – this, there can be a security business, this can be a massive business.

So for each and every platform from open repositories and D-Tab [ph] and data that is open to do all of the G drive and Box and just the vast misconfiguration in Okta that opened the whole SaaS state to the whole world, we believe that it’s just increased the term massively, and most of all customer base are using this SaaS platform, which is so much just meat on the bone, there is so much innovation ahead of us that we can really be this feature set, a lot of clarity based on everything we have done in on prem and 365.

So we just believe that it's a massive opportunity and we are in the right direction..

Thank you. Our next question comes from Saket Kalia with Barclays. Please proceed with your question..

Awesome! Hey guys! Thanks for taking my question here. Guy, I'd love to dig into the bundles that you talked about a little bit more. So maybe just a couple of parts to this question, all on bundles.

You know maybe the first one is, what are some of the most differentiated products when you compare gold to silver and then compare gold to platinum, right, you gave a number of products. I’m curious kind of what the products are that differentiate those. And then, can you just remind us you know when those bundles were made generally available.

Anything that you think is particularly compelling on pricing, just any more on the bundles, because that's interesting. .

So, first of all, when we thought about the bundles, it really came from the fact that we have so much to offer to our customers, and we're seeing customers wanting to purchase more of the platform upfront, we've seen that throughout the transition.

So when you go back to kind of our selling perpetual, we used to sell data advantage, data classification engine. That was kind of the security sale.

And with the office 365 licenses and the automation engine, and the fact that we have so many more licenses geared towards automation, we just realized that there's more that the customers want to consume and it really depends on their platform.

So when you think about the different bundles, and who uses them and how they fit within the customer needs, they would include some sort of Office 365 if that customer has it, they want to protect those platforms, it includes the automation engine. There's just more licenses that have – we can offer.

And when you think about the exact date that we introduced it, we started that process a couple of quarters ago, but I can tell you that really only last quarter it was like the first real quarter that we were making sure that they are fully available for reps and making sure that they are fully in the know of having them available.

So only recently we started pushing that. I think it's for the benefit of our customers and also can simplify the selling process in terms of selling the platform and not selling additional functionality within the platform. .

Thank you. Our next question comes from Shaul Eyal with Cowen and Company. Please proceed with your question. .

Thank you. Good afternoon guys! Yaki, I think it was last quarter or the quarter before that I’ve asked about potential supply chain constraints and standard business model. I see how well you've done this quarter. I think all-in-all the guidance for the year is absolutely encouraging in light of out of Russia.

But again, I just want to revisit this question, given that it is a hot topic in tech and software land and I know you guys are not specifically an appliance based name. But I want to get some more color or maybe even a similar definitive no response, like with as was the case the last quarter or the quarter before last.

So what's the thinking along these lines?.

Yeah, hi Shaul! We don’t see direct impact, because if you want to install our on-prem, it can be virtual machines or you can install it in AWS, Azure or Google. So these machines are available to our customers and everything that’s related to DA Could is our sub-solution, so we don't see a direct impact at this point. .

Thank you. Our next question comes from Shebly Seyrafi with FBN Securities. Please proceed with your question. .

Yeah, so thank you very much. So, I want to – my question is on the gross margin line. It declined by 400 basis points sequentially, which is a little bit steeper than last year.

And just to talk to the factors which drove that decline and whether you expect, in the last three quarters of this year the gross margin metric to decline year-to-year or to stabilize?.

First of all I think when you look on a non-GAAP basis, operating margins are basically flat year-over-year. When we look at kind of the leverage we have in the model, and I talked about that in one of my previous answers, we see a lot of leverage in the model and obviously there is the regular seasonality within the year.

So when you think about Q1, historically Q1 has been the lowest quarter of the year from a revenue perspective and Q4 historically has been the highest quarter of the year in terms of topline, where our expenses are relatively flat.

Therefore you have that seasonality on a sequential basis, but when you look year-over-year, the non-GAAP operating margin is relatively flat. .

Thank you. Our next question is from Joshua Tilton with Wolfe Research. Please proceed with your question. .

Yeah, hi guys! Thanks for taking my question. Your new subscription dollars were essentially flat on a year-over-year basis. So I'm just wondering is there anything from a bookings perspective outside of Russia worth highlighting in the quarter.

And how do we expect the new subscription dollars to sort of trend for the remainder of the year?.

So there is, when you look at the new subscription one thing to the point out is that we added the perpetual line item, because it's immaterial this year. We added it as part of the subscription line item and that when you look at the year-over-year numbers, you just need to factor that in. The subscription overall has been strong.

We feel very good about our pipeline and our ability to grow, and overall feel very good about the business. .

Thank you. There are no further questions at this time. I would like to turn the floor back over to James Arestia for any closing comments. .

So thank you everyone for joining. We look forward to speaking with you this quarter and please don't hesitate to reach out if we can be helpful.

Thanks and have a good night!.

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