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Edited Transcript of VRNS.OQ earnings conference call or presentation 8-Feb-21 9:30pm GMT

·55 min read

Q4 2020 Varonis Systems Inc Earnings Call New York Feb 8, 2021 (Thomson StreetEvents) -- Edited Transcript of Varonis Systems Inc earnings conference call or presentation Monday, February 8, 2021 at 9:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Guy Melamed Varonis Systems, Inc. - CFO & COO * James Arestia Varonis Systems, Inc. - Director of IR * Yakov Faitelson Varonis Systems, Inc. - Co-Founder, Chairman, CEO & President ================================================================================ Conference Call Participants ================================================================================ * Alexander Henderson Needham & Company, LLC, Research Division - Senior Analyst * Brent John Thill Jefferies LLC, Research Division - Equity Analyst * Chad Michael Bennett Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst * Erik Loren Suppiger JMP Securities LLC, Research Division - MD & Equity Research Analyst * Hamza Fodderwala Morgan Stanley, Research Division - Equity Analyst * Jason Noah Ader William Blair & Company L.L.C., Research Division - Partner & Co-Group Head of Technology, Media and Communications * Joshua Alexander Tilton Joh. Berenberg, Gossler & Co. KG, Research Division - Associate Analyst * Mark William Schappel The Benchmark Company, LLC, Research Division - Director of Research & Equity Research Analyst * Matthew George Hedberg RBC Capital Markets, Research Division - Analyst * Rishi Nitya Jaluria D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst * Robbie David Owens Piper Sandler & Co., Research Division - MD & Senior Research Analyst * Saket Kalia Barclays Bank PLC, Research Division - Senior Analyst * Shaul Eyal Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst * Sterling Auty JPMorgan Chase & Co, Research Division - Senior Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Greetings, and welcome to the Varonis Systems, Inc. Fourth Quarter 2020 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, James Arestia, Director of Investor Relations. Thank you. -------------------------------------------------------------------------------- James Arestia, Varonis Systems, Inc. - Director of IR [2] -------------------------------------------------------------------------------- Thank you, operator. Good afternoon. Thank you for joining us today to review Varonis' fourth quarter and full year 2020 financial results. With me on the call today are Yaki Faitelson, Chief Executive Officer; and Guy Melamed, Chief Financial Officer and Chief Operating Officer. After preliminary remarks, we will open 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, 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, which excludes stock-based compensation expense, payroll tax expense related to stock-based compensation, amortization of acquired intangible assets, acquisition-related expenses, foreign exchange gains and losses, amortization of debt discount and issuance costs related to our convertible notes issued in May 2020 and acquisition-related taxes. A reconciliation for the most directly comparable GAAP financial measures is also available in our fourth quarter and full year 2020 earnings press release, which can be found at www.varonis.com in the Investor Relations section. Also, 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? -------------------------------------------------------------------------------- Yakov Faitelson, Varonis Systems, Inc. - Co-Founder, Chairman, CEO & President [3] -------------------------------------------------------------------------------- Thanks, Jamie, and good afternoon, everyone. Thank you for joining us to discuss our first quarter 2020 results, which exceeded all expectations on both the top and bottom line. Our performance is a testament to the demand for the Varonis data security platform, the team's continued execution, especially during these challenging times and the power of our subscription model, we are well positioned to capitalize on the acceleration we are witnessing in global digital transformation, and we believe it will make for an exciting 2021. I want to begin today by recapping our 2020 performance. And then discuss how the secular trends that organizations are experiencing today and that many are predicting to continue provide Varonis a long-term opportunity to fulfill its mission of protecting sensitive data for our customers. I will then turn the call to Guy to discuss our results and guidance in more detail. Let's start by looking back on our performance over the last 12 months. When I spoke to you a year ago, we were completing what we believe was one of the fastest transition to subscription in the history of software. But our momentum was interrupted in mid-March as COVID hit. Companies had to enable their employees to work from home almost over night. However, once they had addressed employee safety and business continuity, companies quickly realized their remote workforce was more dependent than ever on access to sensitive data on-prem and in the cloud, exposing them to heightened risks. These risks don't only relate to working from home, but also to the reality of greater digital collaboration, which is here to stay. As a result, we started to see a significant uptick in the use of our platform by customers and our pipeline became stronger. From that point on, business improved each quarter. Our Q2 results were solid. Q3 further improved, and our Q4 results were outstanding. With this upswing, we gained the momentum needed to exceed the high end of the full year 2020 revenue guidance we provided pre COVID. I would like to now discuss how secular trends have accelerated, impacting our customers and creating strong demand to our product and the engine that is fueling this strength is digital transformation. Let's start there. Employees in every organization have been collaborating across multiple platforms for years, leading to more complexity and more exposed data. This is a given and will only continue. Increasing data risks and potentially disrupting business globally, we have all seen the expansion accelerated on cloud application like Microsoft 365 and Teams. The shift to the cloud highlights the need for a zero trust approach, which Varonis has always subscribed to. Specifically, we believe that perimeter security by itself is insufficient, that users should only have access to the data they require and that companies should continually monitor for abuse and violation. So digital transformation is the engine and the trend coming from that are accelerating, bringing with them a significant escalation of risk. One trend is cybercrime and it's collision with data protection. Cryptocurrency has made solid data easier to monetize, and those who want to steal it are more sophisticated than ever before. This year alone, companies around the world saw COVID-related phishing e-mails specifically targeting unstructured data, advanced persistent threats or APTs like Maze Emotet and Ryuk, vulnerabilities in perimeter devices, remote access servers and in active directory itself and continued strength from rogue insiders that many times is the biggest risk of all. The target of these hacks is almost always critical data, which is our mission to protect. As a result, customers increasingly tell us our platform is a must have. Another trend is regulation. Digital transformation and increased cyber attacks have made compliance with data-centric regulation like GDPR and CCPA a serious challenge. This creates substantial operational and reputational risks that companies can no longer ignore. And it's another reason for customers continue to tell us Varonis is a must-have platform, which brings me to the overriding need and growing demand to streamline processes through automation. For every CISO, companies often have thousands of employees creating data-generating risks. The security team cannot keep pace to secure this data, mitigate cyber threat and ensure compliance. Automation is the answer, and it's another must have which has built in into our integrated platform. With our subscription model, our customers find it seamless and efficient to initially purchase more licenses and continue consume more over time, realizing and benefiting from the power and flexibility of our offering. Let me provide few examples from Q4. One example of a large initial commitment by a new customer in a U.S. healthcare company that had data retention and PHI reporting issues. During a risk assessment, we found that 90% of their data was being shared externally, allowing attackers to easily sidestep their endpoint tools. We also demonstrated how automation engine could fix global access issues in days where doing so manually would have taken several years. This new customer purchase data advantage and data classification licenses for multiple on-prem and cloud platform as well as data alert and automation engine. In addition to the new wins like this, we remain significantly underpenetrated within our customer base. And in Q4, the team was again successful in closing expansion opportunities with a number of existing customers. A prime example is the local government agency in France with more than 3,000 employees, which has relied on Varonis for more than 2 years to protect their data on-prem. Like many Varonis customer, this agency was planning to move data to the cloud. During a risk assessment for the Microsoft Cloud data stores, we alerted them to ransomware attacks, which convinced them to add licenses for their advantage for Azure Exchange online, SharePoint online, OneDrive as well as Edge. In total, we now provide them with 12 subscription licenses. This example further demonstrates that our path to double-digit license with other customers has never been clearer. With our acquisition of Polyrize, which closed in Q4, our capacity to provide more licenses will significantly increase. We'll be well positioned to address our customer needs as they move sensitive data to additional cloud application and infrastructure, delivering data protection through the necessary visibility inside and control. To date, Varonis is stronger than we have ever been. And as I said, going into 2021, we are more than ready to take advantage of the digital transformation and execute on the market opportunity we see. We remain focused on the long-term opportunity as we move closer to our $1 billion target and beyond. With that, let me turn the call over to Guy. Guy? -------------------------------------------------------------------------------- Guy Melamed, Varonis Systems, Inc. - CFO & COO [4] -------------------------------------------------------------------------------- Thanks, Yaki. Good afternoon, everyone. Thank you for joining us today. We're pleased with our outstanding fourth quarter results, which helped us close a strong year despite the challenges. Last quarter, I said that the demand for our platform, combined with the power of our subscription model, is accelerating revenue growth and driving operating leverage. Q4 continued and validated both of these trends, with total revenues growing 31% and non-GAAP operating margins at 14.6%, both ahead of our expectations. To drill down into our top line performance, we continue to execute across the 3 pillars that drive our business. First, landing new enterprise customers; second, expanding within existing customers; and finally, strong renewals. On the new customer front, our strategy of focusing on larger enterprises continues to be successful. We know our customers realize greater incremental value by purchasing multiple licenses, and the ease of the subscription model allows us to deliver on that demand. New customers purchased on average more than 5 licenses or about 2x what was previously purchased under the former perpetual model. This trend increases our customer lifetime value through healthy renewals and future license upsell opportunities. As of December 31, 2020, 63% of our customers with 500 employees or more purchased 4 or more licenses, up from 54% a year ago. At the same time, 30% of our customers purchased 6 or more licenses, up from 20% a year ago. The rapid growth of these metrics confirm that we are successfully unleashing the potential of our platform. This is also reflected in ARR of $287.3 million, which grew 37% year-over-year as of the end of Q4. More than 98% of our total fourth quarter revenues were recurring, which helps provide visibility into future revenues. Our dollar-based net retention rate, or NRR, which accounts for the growth in ARR from all active customers was 116% at the end of Q4. Turning now to the fourth quarter results in more detail. Total revenues grew 31% to $95.2 million and included a 99% subscription mix compared to 82% a year ago. Subscription revenues came in at almost 100% growth year-over-year at $62.7 million. Maintenance and services revenues were $32.1 million, driven by renewal rates, which once again exceeded 90%. Looking at the business geographically, North America revenues grew 35% to $66.7 million or 70% of total revenues. In EMEA, revenues grew 33% to $25.9 million or 27% of total revenues. And we are pleased that the subscription flywheel is now kicking in after a slower start in early 2019. The rest of world revenues were $2.6 million or 3% of total revenues. Turning back to the income statement. I'd like to point out that I'll be discussing non-GAAP results going forward. Gross profit for the fourth quarter was $84.4 million, representing a gross margin of 88.7% compared to 87.5% in the fourth quarter of 2019. Operating expenses in the fourth quarter totaled $70.5 million. As a result, operating income was $13.9 million or an impressive operating margin of 14.6% for the fourth quarter compared to an operating loss of $2.4 million or an operating margin of negative 3.3% in the same period last year. This continues to validate the strength of our model and our execution capabilities, which we anticipate will drive operating margin leverage going forward. In Q4, we again benefited from meaningful outperformance on the top line; ongoing prudent expense management; and like everyone else, COVID-related cost savings. During the quarter, we had financial expense of approximately $846,000 primarily due to interest expense on our convertible notes. Net income was $12.3 million for the fourth quarter of 2020 or earnings of $0.34 per diluted share compared to a net loss of $2.8 million or a loss of $0.09 per basic and diluted share for the fourth quarter of 2019. This is based on 36.1 million diluted shares outstanding for Q4 2020 and 30.5 million basic and diluted shares outstanding for Q4 2019. We ended the year with $298.3 million in cash and cash equivalent, marketable securities and short term deposits. For the 3 months ended December 31, 2020, we generated $7.7 million of cash from operations compared to an insignificant amount used in the same period last year. We ended the year with 1,719 employees, a 9% increase from the fourth quarter of 2019 and an increase of 19 net new employees from the third quarter of 2020 as we continue hiring to support the growth of the business and take advantage of the opportunities we see in the market with a particular focus on sales and R&D. I will now briefly recap our full year 2020 results. Total revenues grew 15% to $292.7 million, exceeding the high end of the original guidance we issued a year ago pre COVID. Our subscription mix was 99% compared to 65% subscription mix in 2019. In 2020, 97% of our revenues were recurring. Our operating margin was negative 1.5% compared to negative 10.7% for 2019, again, demonstrating the strength of our business. Before I turn to guidance, I would like to go over ARR one more time. As I have said in the past, we are not converting perpetual customers to subscriptions, and so ARR growth is primarily driven by ACV from new customers as well as net new subscription licenses to existing customers. As a result, 2021 should normalize closer to an apples-to-apples comparison with ARR tracking more closely to revenue growth. I also want to take a moment to discuss a few housekeeping items. We have historically provided the percentage of customers purchasing 2 or more and 3 or more product families. And while these metrics continue to trend positively, they are less relevant given our success selling more licenses to customers across the same product families. As such, we will stop providing this metric in the future. We expect that CapEx in 2021 will be in the range of $10 million to $13 million. Lastly, we are announcing today a 3-for-1 split of our common stock to make it more accessible to employees and investors. Each stockholder of record on March 12, 2021, will receive 2 additional shares of common stock for each then held share. Trading will begin on a split-adjusted basis on March 15, 2021. Our results and guidance have not been adjusted for the impact of the stock split. Moving to our guidance for 2021. For the first quarter, we expect total revenues of $68 million to $69.5 million, representing growth of 26% to 28%. We expect non-GAAP operating loss to range between $12 million to $11 million, and non-GAAP net loss per basic and diluted share in the range of $0.41 to $0.39. This assumes 32.1 million basic and diluted shares outstanding. For the full year, we expect total revenues of $357 million to $366 million, representing growth of 22% to 25%. We expect non-GAAP operating income to range between breakeven to $7.5 million, a non-GAAP net loss per basic and diluted share in the range of negative $0.16 to non-GAAP net income per diluted share of $0.03. This assumes 32.8 million basic and diluted shares outstanding and 36.9 million diluted shares outstanding, respectively. In summary, we are proud of our Q4 and full year results as we continue to execute on our strategy and capitalize on the long-term opportunity ahead of us. I want to thank all of the Varonis employees for their outstanding contributions this year and I know I speak on their behalf when I say we are excited going into 2021. Thanks for joining us today. And with that, we will be happy to take questions. Operator? ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) And our first question comes from Sterling Auty with JPMorgan. -------------------------------------------------------------------------------- Sterling Auty, JPMorgan Chase & Co, Research Division - Senior Analyst [2] -------------------------------------------------------------------------------- So I'm curious, what gives you confidence when you look at your business that the growth that you're experiencing now will continue post pandemic? In other words, is there a concern that there was a massive pull forward of demand just on that shift to work from home that you outlined, Yaki, in your prepared remarks? -------------------------------------------------------------------------------- Yakov Faitelson, Varonis Systems, Inc. - Co-Founder, Chairman, CEO & President [3] -------------------------------------------------------------------------------- Sterling, no, we don't think that it's happened, the -- from work from home. I think what happened is that we have acceleration of this -- the overall digital revolution, and you have a lot of critical data in just many repository. And what happens is that data protection problem is something that humans can't manage, and this is the biggest problem. When you're talking about zero trust is only the right people can access the data that they should access. And this is where the world is going. So there are stationary trends. There are some staff in pandemic who work from home that maybe are not here to stay, but there are stationary very strong stationary trends and one of them is just the overall digital transformation. More things becoming digital, more data is being generated, and there are more repository. 365 was very strong growth engine for us. And then just the way that we sell the platform, we always envision that some -- that what's happening now will happen, that data protection, cyber crime and regulation will collide. So for us, at the beginning of the pandemic, when everybody dealt with business continuity and set up for remote work, we saw an uptick in the usability of the platform. But it was not as easy to close business. And just every month that went by, what happened is that we had this new configuration, a new workload and access to data. Yes, the risk just increased leaps and bound. And I guess it's just from where we sit, we strongly believe that it's inevitable. This is where things will go. And attacks will become much more sophisticated, and you will have many clouds and data on-prem and a lot of infrastructure and data repository in applications. And we are well capitalized on protecting this digital universe and digital economy. -------------------------------------------------------------------------------- Sterling Auty, JPMorgan Chase & Co, Research Division - Senior Analyst [4] -------------------------------------------------------------------------------- That makes sense. And one housekeeping, Guy, for you. Now that we're at the end of the year, would you be willing to give us a total customer count update? -------------------------------------------------------------------------------- Guy Melamed, Varonis Systems, Inc. - CFO & COO [5] -------------------------------------------------------------------------------- Well, one of the things that we talked about in terms of the customer count is that we're not focusing so much on the number. We're focusing on the type of customers that we can acquire. A couple of years ago, we started focusing more on the larger-type customers. And it's much more the quality of the customers that we can bring in. And that really helps us in getting customer -- increase the customer lifetime value. So we think that, that metric is less -- the number is less important for investors, and we're focused on increasing the customer lifetime value by getting in the right number, the right size. -------------------------------------------------------------------------------- Yakov Faitelson, Varonis Systems, Inc. - Co-Founder, Chairman, CEO & President [6] -------------------------------------------------------------------------------- Sterling, for us, the focus as a company on its thousand users and above. And the business really changes. It's not just that the subscription change, the company changed in terms of the value that customers are getting, the licenses that they are buying, the time that it makes sense to spend with customers, the conversion of the pipeline, just a completely different business than 2 years ago. -------------------------------------------------------------------------------- Operator [7] -------------------------------------------------------------------------------- And our next question comes from Matt Hedberg with RBC. -------------------------------------------------------------------------------- Matthew George Hedberg, RBC Capital Markets, Research Division - Analyst [8] -------------------------------------------------------------------------------- Congrats on a really strong year. I guess, obviously, you're seeing some really nice acceleration in trends and multiproduct attach. I'm curious, how do you think the SolarWind breach? Potentially, is that an accelerant to your business? I would think the importance of data governance, broad data security is even more important in a post SUNBURST world. -------------------------------------------------------------------------------- Yakov Faitelson, Varonis Systems, Inc. - Co-Founder, Chairman, CEO & President [9] -------------------------------------------------------------------------------- Matt, this following definitely increased pipeline in the fourth quarter but didn't affect deals. I think that from where we sit, what happened with SolarWind is inevitable. What is really happening, and this is something that is very important to understand, that you have a lot of state actors that are extremely sophisticated because this is where cyber war is happening, this skill is spilling to the commercial space. The other thing that happens is with cryptocurrency, it's very easy to monetize cyber crime. And if you have critical data, you are a target. And when you are a target and you have these forces that are very sophisticated and a lot of these automated tools, they will be able to get to you. And traditional security products are critical but really insufficient. And you need something like Varonis. And you need to go from the critical digital asset back, this is the critical data asset. This is the critical infrastructure. And this is what you need to protect. And you have a lot of problems from service accounts and just so many ways to get in. And I think that, unfortunately, what happened with SolarWinds is just the canary in the coal mine. This is just the beginning. This is something that we will see. If you have critical data, someone wants it. And I -- we believe that you will see a shift in what's happening in security in order to be protected. And there is also this constant tension between security and productivity. You want to develop, you want to develop faster. There's a lot of agility, data is available all over. You can collaborate and extract more value from the data, but much bigger diminishing returns. And this is really where we play. And what really happened with COVID, that the market faster understand it, and we just have these secular trends that are driving the business. And in the midst of everything that is happening, we also saw really uptick in the usability of the product, our ability to bring the customer to a very strategic value target. And what's stemming from that is just a big increase in the product adoption and the overall customer lifetime value. -------------------------------------------------------------------------------- Matthew George Hedberg, RBC Capital Markets, Research Division - Analyst [10] -------------------------------------------------------------------------------- That's great. And then maybe one for Guy. Obviously -- I mean, Yaki just got done talking about pipelines expanding and great profitability this quarter. You're guiding the Street a little bit lower on margins next year. Can you talk about how you're thinking about that investment vis-à-vis sales and marketing perhaps accelerating quota-bearing sales reps, R&D? Just trying to get a sense of the OpEx side of the equation as you look to 2021. -------------------------------------------------------------------------------- Guy Melamed, Varonis Systems, Inc. - CFO & COO [11] -------------------------------------------------------------------------------- Absolutely. So first of all, the -- our philosophy hasn't changed. We want to balance both profitability and top line growth. And we want to continue to invest in a responsible way, but there's a huge opportunity in front of us. And when you look at the margin improvement year-over-year, you can see that in 2019, we were at minus 10.7% non-GAAP operating margin, and that was obviously impacted by kind of the transition and the headwind on the revenue front. In 2020, we finished at minus 1.5% non-GAAP operating margin, and we're guiding now for the full year 2021 with a 1% positive on a non-GAAP basis as our midpoint. So we're moving in the right direction, but we always try to match kind of the expenses with the revenues we plan to achieve. And the strong top line growth really provides the opportunity for us to invest kind of in the longer term in a responsible way. The 2 areas where we want to kind of put the majority of the investments is in sales and marketing and R&D. -------------------------------------------------------------------------------- Operator [12] -------------------------------------------------------------------------------- And our next question comes from Brent Thill with Jefferies. -------------------------------------------------------------------------------- Brent John Thill, Jefferies LLC, Research Division - Equity Analyst [13] -------------------------------------------------------------------------------- Yaki, just when you look at the growth of a lot of these new cloud-based systems, whether it's Teams or Slack or some of the other solutions. Can you talk to -- many investors are asking how you're providing kind of the next level of protection as these assets are exploding in usage in the corporate environment, what you're doing there and what you're seeing in terms of uptake? And maybe for Guy. As you come into this year, when you look at quota-carrying capacity, are you going to be on an increase, kind of take last year's group and make them more productive? How do you think about the shape of the sales hiring for 2021? -------------------------------------------------------------------------------- Yakov Faitelson, Varonis Systems, Inc. - Co-Founder, Chairman, CEO & President [14] -------------------------------------------------------------------------------- Thanks for the question. So first, we believe that there is tremendous opportunity. And for all these cloud data stores and the cloud applications. And everything we have done to our technology to regular on-prem data store active director in 365, we can replicate there. And this is why we acquired Polyrize. So we just believe that with the same technology, we can then -- the same playbook with the same technological can moat, we can do for all of these cloud repositories and all of them are going to be very critical for our customers. So we believe that it is tremendous for us, what's going on now. It's just accelerating. And the other thing that is tremendous that also data on-prem is not slowing down. It just -- it's a very interesting phenomena that you have this data [support] all over the place and it's humans can't manage it anymore. You need a lot of automation and a lot of intelligence and very complex visibility and very effective ability to alert on problems and to do forensics. And this is where we are playing. And we believe that we are going to be the standard for SaaS and data repositories in the cloud for data protection, forensics and user behavior analytics. -------------------------------------------------------------------------------- Guy Melamed, Varonis Systems, Inc. - CFO & COO [15] -------------------------------------------------------------------------------- And to touch on the quota-carrying reps question. I think the answer very much relates to our philosophy and the way we looked at 2020. Yaki talked about this, and we talked about this throughout the year, where COVID didn't generate a short-term tailwind. It was a bit of a short-term headwind. But in Q2, we still wanted to continue hiring quota-carrying reps. And every quarter thereafter gave us more and more confidence to continue hiring. You can see in Q4, we actually grew net new 90 employees in the quarter, which is part of the philosophy of taking advantage of the long-term opportunity. When we look at the quota-carrying reps, we're increasing it and we have a larger component of them that are more matured, so we expect productivity gains. And I think all of that kind of sets us up for the 2021, and that's reflected in the guidance and the confidence we have in the business and in the pipeline. -------------------------------------------------------------------------------- Operator [16] -------------------------------------------------------------------------------- And our next question is from Saket Kalia with Barclays. -------------------------------------------------------------------------------- Saket Kalia, Barclays Bank PLC, Research Division - Senior Analyst [17] -------------------------------------------------------------------------------- Maybe first for you, Yaki. A little bit related to the last 1 that was asked about cloud stores, but can you just talk a little bit about your initial impressions around Polyrize? And looking out into the future, how you sort of envision the product portfolio once that's been fully integrated? -------------------------------------------------------------------------------- Yakov Faitelson, Varonis Systems, Inc. - Co-Founder, Chairman, CEO & President [18] -------------------------------------------------------------------------------- Yes. So far, we are very happy with the acquisition, very happy from the team, the technology, the culture of fit. We believe that it was a great move. And we are very focused on the integration and happy with the progress. There is still work to do. But as I said before, there's just massive potential. It's accelerated drastically, the time to market in everything that we want to do in the cloud eventually, we are going to have full integration. But this was a quality acquisition with a great team, and we are in the right direction. And next year, we are already going to see revenues from all DFOs. -------------------------------------------------------------------------------- Saket Kalia, Barclays Bank PLC, Research Division - Senior Analyst [19] -------------------------------------------------------------------------------- Got it. Got it. Guy, for my follow-up for you. You touched on this on the prepared remarks, but I just want to make sure we ask about it. You clearly aren't guiding to ARR for next year. But how would you kind of have us think about ARR growth conceptually versus revenue growth, which we clearly have through the revenue guide? And what some of the puts and takes might be between the 2? Does that make sense? -------------------------------------------------------------------------------- Guy Melamed, Varonis Systems, Inc. - CFO & COO [20] -------------------------------------------------------------------------------- Absolutely. I'll give some color on ARR. We expect ARR in 2021 to track closer to revenue growth. And the way to think about it, when we introduced the metric, it was when we announced the transition. And it provided visibility really into the strength of the business. And I've mentioned this many times, but I'll say it again. ARR growth is really primarily driven by ACV from new customers but also from net new subscription license to existing customers. We're not going to the base and converting our perpetual customers to subscription, which is why, when you look at the apples-to-apples having the 99% subscription mix, it should track much closer in 2021 to the revenue growth. -------------------------------------------------------------------------------- Operator [21] -------------------------------------------------------------------------------- And the next question is from Rob Owens with Piper Sandler. -------------------------------------------------------------------------------- Robbie David Owens, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [22] -------------------------------------------------------------------------------- First, could you possibly talk about the integration road map with Polyrize and where you're at, where you might hope to be in terms of deliverables over the near term? -------------------------------------------------------------------------------- Yakov Faitelson, Varonis Systems, Inc. - Co-Founder, Chairman, CEO & President [23] -------------------------------------------------------------------------------- I'm sorry, I couldn't hear. Can you please repeat? -------------------------------------------------------------------------------- Robbie David Owens, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [24] -------------------------------------------------------------------------------- Yes. Could you just talk a little bit about the integration road map with Polyrize and where you're at right now? Any incremental deliverables that you would hope to deliver on over the near term? -------------------------------------------------------------------------------- Yakov Faitelson, Varonis Systems, Inc. - Co-Founder, Chairman, CEO & President [25] -------------------------------------------------------------------------------- Yes. So the integration is working very well. We have internal milestones that we needed to hit, and we strongly believe that we are going to hit them. As I said, we will see revenue next year. There are a lot of internal stuff that we need to do, but the way that it will work at the beginning, it will be stand-alone with minimal integration. Then just small integration. And within few cycles, it will be completely integrated to the Varonis [plan]. -------------------------------------------------------------------------------- Guy Melamed, Varonis Systems, Inc. - CFO & COO [26] -------------------------------------------------------------------------------- And just to emphasize, the revenue that we expect is in 2022. We don't expect any material revenue in 2021. -------------------------------------------------------------------------------- Robbie David Owens, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [27] -------------------------------------------------------------------------------- Great. And then, Guy, as you look at the growing pipeline, and you talked about the pillars, is that more related to land expand at this point? Can you give us a little more color how things are shaping up? Is it velocity or scale or both? -------------------------------------------------------------------------------- Yakov Faitelson, Varonis Systems, Inc. - Co-Founder, Chairman, CEO & President [28] -------------------------------------------------------------------------------- It's both. It's both in the customer base and just new customers. But I think what is very exciting is that we are doing it with the right customers. In this segment of 1,000 users and above, 2,000 and above, really enterprise sales, and we increased drastically the overall customer lifetime value. But the other thing is the conversion rate of the pipeline. We're just getting high in the organization, it's a top priority. It's coming from CECL. It's coming from boards. There is just a huge uptick in the usability of the platform. We feel comfortable where the pipeline is and how customers are using it. And the overall effort economy, where we spend our time with customers, how we bring them value. And the results that we can expect that are becoming more and more predictable. -------------------------------------------------------------------------------- Operator [29] -------------------------------------------------------------------------------- And our next question is with Alex Henderson with Needham & Company. -------------------------------------------------------------------------------- Alexander Henderson, Needham & Company, LLC, Research Division - Senior Analyst [30] -------------------------------------------------------------------------------- I was hoping we could talk a little bit about what you're hearing as you're talking to CEOs, CFOs, CSO types, post the SolarWind hack and announcement. There's been a lot of discussion that there's been an increase and spending intentions for not just IT, but security specifically. And the budgets are going up. Have you had conversations with people that support that viewpoint? And if so, how much do you think the Varonis segment of the market is being tapped on as part of that solution set? -------------------------------------------------------------------------------- Yakov Faitelson, Varonis Systems, Inc. - Co-Founder, Chairman, CEO & President [31] -------------------------------------------------------------------------------- Alex, this is what we do. We constantly talk with our customers, and I can represent mainly the view of Varonis. So first, regarding SolarWind. In general, from where we see it, it was inevitable that something like that will happen and things like that will increase. It just -- the cybercrime space becoming so big, and also insiders. And I said in the prepared remarks, they are the biggest risk of all many, many times. And what we see in budget that related to us, we just see that people are mapping the digital assets and the problem and the risks and understand how they are going to mitigate it because there is another huge problem, which is shortage of people to do it, like humans can't manage it. You have so much data all over the place, you need automation. It's very hard to have actionable visibility to what's going on in the business side understanding. So sitting today, I can tell you the data protection, threat detection and response, and to be incompliant with this ever complex data-driven organizations, it's something that is very hard to do and a top business priority for organizations. So then you're starting to see this big, big budget of buckets for insider threats and data protection and regulation that we are benefiting from them. So we believe that you don't see it immediately, but people see it today and understand so many organizations got hit, people understand it can happen to me. So this is not science fiction. It can happen to me. And when it happens, it's a huge problem. You can lose your organization. And then how are we putting the right controls in place in organizations that are so data-driven and becoming more and more digital, and it generates a lot of chaos. There is a lot of tension there. And in this kind of environment, Varonis shines. So we believe that we'll see deeper budgets and more budgets allocating to us. And more senior people within the organizations want to understand how to protect the digital assets, how to protect the critical infrastructure, how to protect data that is going to the cloud, how to be in compliance with regulation, and we are going to benefit from it. And I just think that what will happen that things like that will increase, will become more productive, more digital and the risk will increase. And organization that will not be able to manage this tension will be -- it will be very hard to be in business. We have a trust foundation that need to enable the digital transformation that Varonis -- we believe that Varonis is going to play a critical part in this transformation and the ability to make sure that we can enjoy all the productivity gains without the diminishing returns. -------------------------------------------------------------------------------- Alexander Henderson, Needham & Company, LLC, Research Division - Senior Analyst [32] -------------------------------------------------------------------------------- Just to be clear. You did not have any impact directly on your operations from being hacked. And you don't have any suppliers or anybody else that's been hacked that represent a threat to your operations, you're clear? -------------------------------------------------------------------------------- Yakov Faitelson, Varonis Systems, Inc. - Co-Founder, Chairman, CEO & President [33] -------------------------------------------------------------------------------- Yes. Nothing happened to us. -------------------------------------------------------------------------------- Operator [34] -------------------------------------------------------------------------------- And our next question is from Shaul Eyal with Oppenheimer. -------------------------------------------------------------------------------- Shaul Eyal, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [35] -------------------------------------------------------------------------------- Congrats on a strong performance and outlook. Another SolarWinds-related question but from a different direction. So post breach, plenty of discussion of what potential solutions might have been able to flag the breach ahead of its impact. Do you think, Yaki, do you view Varonis platform as potentially being able to prevent at least a portion of this massive attack? And I have a follow-up. -------------------------------------------------------------------------------- Yakov Faitelson, Varonis Systems, Inc. - Co-Founder, Chairman, CEO & President [36] -------------------------------------------------------------------------------- Yes, without a doubt, our ability to understand automatically what service accounts are doing and even a service account like SolarWind that is very sophisticated and doing million things and using different APIs. We can map it and understand any abnormal behavior. And we can also prevent it. But customers understand that you need more, offer licenses in order to do it. So definitely a core player in solving this kind of attack. -------------------------------------------------------------------------------- Shaul Eyal, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [37] -------------------------------------------------------------------------------- Understood. Understood. And Yaki or Guy, are you beginning to see companies with bigger headcount, say, greater than 5,000, 7,500, adopting or at least showing elevated interest in the Varonis platform? -------------------------------------------------------------------------------- Yakov Faitelson, Varonis Systems, Inc. - Co-Founder, Chairman, CEO & President [38] -------------------------------------------------------------------------------- Yes, without a doubt. Yes. Many of them, definitely. -------------------------------------------------------------------------------- Guy Melamed, Varonis Systems, Inc. - CFO & COO [39] -------------------------------------------------------------------------------- Just to add on that, we have customers that have hundreds of thousands of employees. So we -- this product works at scale. We have -- we're targeting the larger enterprise organizations, and that's been working very well. But we already have customers that are on the larger scale. -------------------------------------------------------------------------------- Operator [40] -------------------------------------------------------------------------------- And our next question is from Hamza Fodderwala with Morgan Stanley. -------------------------------------------------------------------------------- Hamza Fodderwala, Morgan Stanley, Research Division - Equity Analyst [41] -------------------------------------------------------------------------------- I want to talk a little bit about your goal to get to $1 billion in revenue. I'm wondering, have you guys -- now that you're lapping your subscription transition, have you given any thought around the time line for that? And do you feel like you have the product portfolio in place to get there? -------------------------------------------------------------------------------- Yakov Faitelson, Varonis Systems, Inc. - Co-Founder, Chairman, CEO & President [42] -------------------------------------------------------------------------------- I'm not giving time lines, but yes, we are -- we have the product, we believe that we have the product portfolio together. We also believe that we have done most of the investments together. When you have lofty goals, the hardest thing is you need to -- in terms of the goal, if you need to do too many investments in order to get there and have too many unknowns or it will take you too long of a time, you have less probability to get there. We believe that we have all the building blocks in place to get the incremental investments. We already have the product portfolio, we believe that we have very high chances to get. -------------------------------------------------------------------------------- Hamza Fodderwala, Morgan Stanley, Research Division - Equity Analyst [43] -------------------------------------------------------------------------------- Got it. And then follow-up question for Guy. Just I know you mentioned Polyrize not a material contributor to 2021. I believe it closed in Q4, but was there any impact at all to ARR billings like even less than 1 point? -------------------------------------------------------------------------------- Guy Melamed, Varonis Systems, Inc. - CFO & COO [44] -------------------------------------------------------------------------------- No, there was no material impact in Q4. And when we build the guidance, we didn't bake in any material impact from Polyrize in this year. -------------------------------------------------------------------------------- Operator [45] -------------------------------------------------------------------------------- And our next question is from Chad Bennett with Craig-Hallum. -------------------------------------------------------------------------------- Chad Michael Bennett, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [46] -------------------------------------------------------------------------------- Nice job on the quarter, guys. So just maybe for Guy, possibly Yaki, just in terms of the guide for the year. Could you provide just any type of color or directional movement just on the maintenance segment of the business? It sounds like retention rates are still best-in-class, high. You're not planning on converting any maintenance, so no real kind of transition risks there. What are your expectations for that line item? Just kind of up, down, flat, so to speak? -------------------------------------------------------------------------------- Guy Melamed, Varonis Systems, Inc. - CFO & COO [47] -------------------------------------------------------------------------------- So it's important to remember that the maintenance portion of the perpetual license isn't getting new fuel because we're basically not selling any material perpetual licenses, and you can see that in the 2020 numbers. So we look at maintenance of perpetual in 2021 actually decreasing low single-digit percentages. We still have high renewal rates, but just because it's not getting any new addition, we expect that to be kind of the normal course. -------------------------------------------------------------------------------- Chad Michael Bennett, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [48] -------------------------------------------------------------------------------- Okay. So with that, that implies, I think, kind of an upper 40%, possibly 50% growth on the subscription line, which is phenomenal, relative to any software company out there. I guess when you look at the business from a new logo or net expansion standpoint, how would you -- if I'm right on kind of backing into that type of growth rate subscription, how would you think about the relative mix of new logo versus net expansion as you can see today looking into this year? -------------------------------------------------------------------------------- Guy Melamed, Varonis Systems, Inc. - CFO & COO [49] -------------------------------------------------------------------------------- So I think when we look at kind of the pillars that can drive the growth, we're very focused on acquiring new customers. That's always been kind of the focus for us, and that's part of the reason that from a commission perspective, if a rep wants to achieve 100% of their targets, they have to bring new customers. And not only do they need to bring new customers, they have to be at the right size. And for most of the reps, it's over 1,000 employees. So we're very focused on that aspect because we know that, that drives the customer lifetime value. But we also know that we're underpenetrated within our existing customer base. And you can see that with some of the metrics that we provide. If you look at the 500-plus we provide the 4 or more licenses and 6 or more licenses. And as nice as that growth has been over the last year, it's still underpenetrated. We have 30% in the 6 or more. So there's so much more to sell to our base. And going to that subscription model really allows us to unleash the potential. It really allows us to sell the platform. Customers see more value, and that allows -- it's really a win-win. So I would say that it's really a balance of those 2. I think that the existing customer portion should be kind of the majority just because we have such a large base, but we're very much focused on bringing new customers as well at the right side. -------------------------------------------------------------------------------- Chad Michael Bennett, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [50] -------------------------------------------------------------------------------- Maybe just one real quick last one for me, just on the net expansion. The NRR number of -- I think you said, Guy, 116. I assume, again, because of that low penetration, I mean when you think about net expansion kind of best-in-class of being kind of mid-120s, 130 for top, top. Do you expect that net expansion to continue to accelerate throughout the year from a growth rate standpoint? -------------------------------------------------------------------------------- Guy Melamed, Varonis Systems, Inc. - CFO & COO [51] -------------------------------------------------------------------------------- Absolutely. The -- first of all, the average NRR for the year was 119%. And we've been a subscription company for only a year. So there's timing kind of involved in this metric. And with that fluctuation of timing, we kind of discussed this in the past that we will provide the metric on an annual basis. But we -- like I said before, we have a tremendous long-term opportunity and one of that growth drivers is expansion within the base. So overall, we're pleased with an average NRR for the year of 119%. -------------------------------------------------------------------------------- Operator [52] -------------------------------------------------------------------------------- And our next question is from Jason Ader with William Blair. -------------------------------------------------------------------------------- Jason Noah Ader, William Blair & Company L.L.C., Research Division - Partner & Co-Group Head of Technology, Media and Communications [53] -------------------------------------------------------------------------------- First question for Yaki. Given your growth in the secular tailwinds in the space, are you expecting to see more competition and where do you expect that competition to come from? -------------------------------------------------------------------------------- Yakov Faitelson, Varonis Systems, Inc. - Co-Founder, Chairman, CEO & President [54] -------------------------------------------------------------------------------- At this point, if you're looking at all of sales campaigns that coming through POC, we see less competition. It's something that is very complex to do. We're always making sure that we are increasing our competitive edge. And -- but I'm just worried about my customer and the business and the road map, I make sure that we can add value and constantly innovate and execute on our plans. So at this point, we see less competition. Where it will come from, I don't know. But we're stronger than ever, and we and I doing everything we can to keep this competitive advantage. -------------------------------------------------------------------------------- Jason Noah Ader, William Blair & Company L.L.C., Research Division - Partner & Co-Group Head of Technology, Media and Communications [55] -------------------------------------------------------------------------------- Do you think it would come more from the security players or from the repository platforms that integrate more data access governance? -------------------------------------------------------------------------------- Yakov Faitelson, Varonis Systems, Inc. - Co-Founder, Chairman, CEO & President [56] -------------------------------------------------------------------------------- From the repositor, it's something that is very hard to do. And from access and governance, they are not dealing with data. This is just -- there is no one company that I can tell you that they have technology or natural or per domain expertise within their engineering that they can organically and naturally extend to our space, which is something that is hard to do. We believe that we can maintain for a long time this competitive edge. -------------------------------------------------------------------------------- Jason Noah Ader, William Blair & Company L.L.C., Research Division - Partner & Co-Group Head of Technology, Media and Communications [57] -------------------------------------------------------------------------------- Okay. And then a follow-up for Guy. Guy, on Polyrize, could you quantify the dilution in 2021 or at least maybe how much OpEx you're expecting to spend for the year on the integration and just the added spend, the added OpEx? -------------------------------------------------------------------------------- Guy Melamed, Varonis Systems, Inc. - CFO & COO [58] -------------------------------------------------------------------------------- So when we acquired Polyrize, the OpEx portion was very small compared to the Varonis expense side. We obviously are hiring more people to kind of build that integration. That's already baked into the guidance, and we don't expect any kind of fluctuation. Everything is now part of kind of the Varonis OpEx. Big expense number, but there's nothing there that is too material. -------------------------------------------------------------------------------- Jason Noah Ader, William Blair & Company L.L.C., Research Division - Partner & Co-Group Head of Technology, Media and Communications [59] -------------------------------------------------------------------------------- But it's fair to say that kind of all in with what you're doing on the integration? I mean, it's fair to say it is creating some dilution to the earnings in 2021, correct? -------------------------------------------------------------------------------- Guy Melamed, Varonis Systems, Inc. - CFO & COO [60] -------------------------------------------------------------------------------- But it's also creating the opportunity. So I would say it's a small -- it's a very small dilution on the operating side. We're hiring more people now to kind of build the integration. But it's not something that would change materially the numbers for us. -------------------------------------------------------------------------------- Operator [61] -------------------------------------------------------------------------------- And our next question is from Erik Suppiger with JMP Securities. -------------------------------------------------------------------------------- Erik Loren Suppiger, JMP Securities LLC, Research Division - MD & Equity Research Analyst [62] -------------------------------------------------------------------------------- Congrats on a good quarter. Can you comment a little bit on average deal size? You're clearly doing very well in terms of expanding the number of licenses, the customers are buying. But can you translate that to either ARR per customer or what your deal size has done over the course of the last year? And then I've got a follow-up from that. -------------------------------------------------------------------------------- Guy Melamed, Varonis Systems, Inc. - CFO & COO [63] -------------------------------------------------------------------------------- So one of the things that we have seen with our customers and our strategic decision to kind of go up scale is that with the move to subscription, customers are happy to consume more of the licenses. We've seen customers buy on average, close to double the amount of licenses that they were used to buy under the perpetual model. We've seen that number go and is now kind of more than 5 licenses under the subscription model, and that really allows us to provide more value to those customers upfront and also increase the customer lifetime value because the other thing that we have learned is that the more licenses the customers own, the more value they see and the higher the likelihood of them coming back and buying more. And that's part of the reason that we talk a lot about the commentary of the path to double-digit licenses on average per customer has never been clearer to us. So from an ASP perspective, obviously, that's impacted by the fact that they're consuming more of the licenses. And that really allows us to generate productivity gains and increase the customer lifetime. -------------------------------------------------------------------------------- Erik Loren Suppiger, JMP Securities LLC, Research Division - MD & Equity Research Analyst [64] -------------------------------------------------------------------------------- Well, can you comment -- if you double the number of licenses that a new customer buys from the time they were a perpetual customer to a new customer, has that lifetime -- does that translate into a 2x in the lifetime value? Is that the way we can think about that? -------------------------------------------------------------------------------- Guy Melamed, Varonis Systems, Inc. - CFO & COO [65] -------------------------------------------------------------------------------- Well, don't forget that the actual price of subscription is lower than the price of perpetual. So obviously, there's that impact. Our subscription price list is kind of at 45% of the perpetual price list on a same license-to-license comparison. So obviously, I wouldn't say that it's double the customer lifetime value, but it's definitely increasing the customer lifetime value. -------------------------------------------------------------------------------- Yakov Faitelson, Varonis Systems, Inc. - Co-Founder, Chairman, CEO & President [66] -------------------------------------------------------------------------------- The way to think about it, what happened is that the market and the world has came to us, and this became the top priority for organizations. And the ability to consume it in perpetual, it was impossible. So then what happened, we just reduced friction and make sure that they can buy it in subscription and they can really consume the platform. Because we have such a tremendous growth in new licenses that's adding more value in automation and what's happening from that, they are buying more licenses and just the customer lifetime value increasing leaps and bounds. So the ability just to say in perpetual, they would have this amount and in subscription, the same amount and how it looks from the customer lifetime value is not the right way to look at it. The right way to look at it that we enable the customers with the subscription to buy more licenses to get more automation, then they are buying more. And we have just drastically bigger coverage in terms of licenses and value. -------------------------------------------------------------------------------- Erik Loren Suppiger, JMP Securities LLC, Research Division - MD & Equity Research Analyst [67] -------------------------------------------------------------------------------- Okay, very good. Second question is given the leverage that you did see, the margin expansion that you did see in 2020, you're guiding for a marginal -- a relatively slight margin expansion, operating margin expansion in 2021. Is there anything that would change that would cause the leverage that you're getting to slow? Do you anticipate an acceleration in hiring? Or do you anticipate any type of cost change that would slow the leverage that you've been driving over the course of the last year? -------------------------------------------------------------------------------- Yakov Faitelson, Varonis Systems, Inc. - Co-Founder, Chairman, CEO & President [68] -------------------------------------------------------------------------------- Our philosophy, as Guy said before, is always to balance profitability and the investment in the business. Exceeding today, we look at the cloud, we look at the cloud on the SaaS level, on the highest level, we see just tremendous opportunity. In everything that we have done in the platform, we just see just so much opportunity in our ability to build new innovations and to replicate the technology that we have done to the digital -- to the overall digital transformation. And it's very easy to do extrapolation for the business in terms of unit economics. If you take a customer and you can double the amount of licenses and they are buying more and more when you can scale faster, eventually becoming much more profitable. And we just -- the eye of the tiger, as we always said, is just on the opportunity. We are here to build a big company. And it was a lot of heavy lifting and hard work to get to this situation. So we have done this record transition to subscription and how we get to very good growth rates. And we want to make sure that we are building something big. And in terms of the value and the overall, the long-term value of the company, we are not leaving anything on the table. We want to fulfill the potential of the opportunity. And this is exactly what we are doing. So in terms of the inherited, the profitability power of the business and the platform, it's very easy to do. We just want to get there gradually. -------------------------------------------------------------------------------- Operator [69] -------------------------------------------------------------------------------- And our next question is from Mark Schappel with Benchmark Capital. -------------------------------------------------------------------------------- Mark William Schappel, The Benchmark Company, LLC, Research Division - Director of Research & Equity Research Analyst [70] -------------------------------------------------------------------------------- Nice job on the quarter. Guy, just one question, one for you. It was nice to see Europe rebound so strongly in the quarter. And I was wondering if there's particular countries that are driving those good results in Europe? And also two, if you could just remind us of some of the changes you made in Europe, to your European operations over the last year or so. -------------------------------------------------------------------------------- Guy Melamed, Varonis Systems, Inc. - CFO & COO [71] -------------------------------------------------------------------------------- So I think the story of -- and we talked about it over the last year was the fact that the European team adopted the transition to subscription slightly slower than the North American team. And that's part of the reason that we expected the flywheel effect to take place later this -- in 2020 as opposed to kind of the growth that we saw from North America. We have presence -- we have good presence in France and in the U.K., and we obviously are kind of around the rest of the countries in Europe, and we see that as a great opportunity. We still have territories that are underpenetrated in Europe that we see as the growth drivers for us in the upcoming years. But overall, I think that the team that we have in place, the teams that we have in place are strong, and we can see that in the results this quarter. -------------------------------------------------------------------------------- Yakov Faitelson, Varonis Systems, Inc. - Co-Founder, Chairman, CEO & President [72] -------------------------------------------------------------------------------- We have very strong teams in Europe, great customers. Very good channel distribution. We didn't -- when we decided that we moved to subscription, we moved to subscription. We needed to do some changes, they worked. And they were 2 quarters after North America. So everything that happened in the fourth quarter and everything that happened in EMEA, we were happy, but not surprised. -------------------------------------------------------------------------------- Operator [73] -------------------------------------------------------------------------------- Our next question Comes from Joshua Tilton with Berenberg Capital Markets. -------------------------------------------------------------------------------- Joshua Alexander Tilton, Joh. Berenberg, Gossler & Co. KG, Research Division - Associate Analyst [74] -------------------------------------------------------------------------------- The commentary around the secular trends and the strength in the business suggests that this shouldn't be the case, but I just wanted to confirm, are you seeing any meaningful change in the momentum of new or incremental subscription bookings growth going into 2021? -------------------------------------------------------------------------------- Yakov Faitelson, Varonis Systems, Inc. - Co-Founder, Chairman, CEO & President [75] -------------------------------------------------------------------------------- Now at this point, we see healthy pipeline, very strong usability. The 365 and Azure and all the move to the cloud is a tremendous growth engine for us. We feel that, as we said, the world is slowly but surely coming to us. -------------------------------------------------------------------------------- Joshua Alexander Tilton, Joh. Berenberg, Gossler & Co. KG, Research Division - Associate Analyst [76] -------------------------------------------------------------------------------- Okay. And then just a quick follow-up. Microsoft announced the data governance product called Purview. It does seem a little incomplete today, but how do you guys think about that given that the Varonis platform is very geared towards Microsoft data stores? -------------------------------------------------------------------------------- Yakov Faitelson, Varonis Systems, Inc. - Co-Founder, Chairman, CEO & President [77] -------------------------------------------------------------------------------- We have a silver technological partnership with Microsoft. Strong relationship. We have very good security products, but they are very different from what we are doing. At this point, Microsoft is just an enabler for us. We are very complementary, and they are an enabler. They -- so far, what they are doing is mainly pushing the business. -------------------------------------------------------------------------------- Operator [78] -------------------------------------------------------------------------------- And our next and final question is from Rishi Jaluria with D.A. Davidson. . -------------------------------------------------------------------------------- Rishi Nitya Jaluria, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [79] -------------------------------------------------------------------------------- Great to see continued strong execution. I've got 2 questions just as it pertains to the outlook and guidance for next year. The first might be a little bit of a follow-up to an earlier question. But as we think about the margins for next year, Guy, you had mentioned in your prepared remarks that you have some COVID-related cost savings. How are you thinking about the sustainability of those cost savings, especially as we head into the back half of the year, where, let's say, optimistically, some level of business travel and T&E can come back? How should we be thinking about that? And I've got a follow-up. -------------------------------------------------------------------------------- Guy Melamed, Varonis Systems, Inc. - CFO & COO [80] -------------------------------------------------------------------------------- So when we built the guidance, obviously, we took into consideration what we know, but also kind of tried to bake in what we don't know. And we don't know when things come back to normal in terms of full flights and the way we've done a lot of marketing events that were physical in the past. We try to address and bake some of kind of going back to normal in the second part of the year. And that's already baked in our guidance. When you think about kind of the expense as a whole, and I talked a little bit about it before, kind of the Polyrize acquisition isn't material. It adds, I'd say, roughly about 1% on the operating margin. Bake that in with kind of the investments that we're doing in increasing the headcount there. When we acquired Polyrize, there were less than 20 employees, and now we're increasing that and putting more heads in R&D as a whole and also in sales and marketing. We try to make sure that the overall expenses would be balanced and kind of committing to that year-over-year margin improvement, but also trying to take advantage of the longer-term opportunity. So it's a bit of a -- kind of the philosophy hasn't changed, and we're trying to continue to do the same in 2021. -------------------------------------------------------------------------------- Rishi Nitya Jaluria, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [81] -------------------------------------------------------------------------------- All right. Got it. That's helpful. And then just wanted to ask about seasonality. As we look out from here, it looks like your seasonality has been relatively consistent now versus what it was pre transition, I get ASC 606 means it's not super clean and completely ratable. But I would have expected maybe some -- maybe a little less seasonality than we would have seen under the perpetual license model. Can you, I guess, quickly explain why we haven't seen that big reduction in seasonality? And then how should we be thinking about seasonality going forward? -------------------------------------------------------------------------------- Guy Melamed, Varonis Systems, Inc. - CFO & COO [82] -------------------------------------------------------------------------------- Of course. So with 606, and the way we have to recognize the license for subscription is that the license portion of the subscription is recognized upfront. And then the maintenance portion is recognized ratably over the term of the year. Because of that, the seasonality basically stays the same and very similar to the way we sold perpetual licenses, where Q1, from a dollar-based revenue number, is the lowest of the year and Q4 historically has been the largest revenue number for the year, and we expect that trend to continue. And that's really kind of the 606 contributing to that. -------------------------------------------------------------------------------- Operator [83] -------------------------------------------------------------------------------- Ladies and gentlemen, we have reached the end of question-and-answer session. And I would now like to turn the call back over to James Arestia for closing remarks. -------------------------------------------------------------------------------- James Arestia, Varonis Systems, Inc. - Director of IR [84] -------------------------------------------------------------------------------- So thank you, everyone, for joining and for your interest today, and we look forward to speaking with everyone more this quarter. Thanks, and have a good night. -------------------------------------------------------------------------------- Operator [85] -------------------------------------------------------------------------------- Thank you. This concludes tonight's conference. You may disconnect your lines at this time. Again, thank you for your participation, and have a great evening.