Varonis Systems, Inc.

Greetings. Welcome to the Verona Systems, Inc. first quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, James Restia, Director of Investor Relations. You may begin.

Thank you, Operator. Good afternoon. Thank you for joining us today to review Varonis' first quarter 2021 financial results. With me on the call today are Yaki Fidelson, 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 31st, 2021. Due to a number of factors, actual results may differ materially from those set forth in such statements. These factors are set forth in the earnings press release that we issued today under the section captioned forward-looking statements. And these and other important risk factors are described more fully in our reports filed with the Securities and Exchange Commission. We encourage all investors to read our SEC filings. These statements reflect our views only as of today and should not be relied upon as representing our views as of any subsequent date. Varonis expressly disclaims any application or undertaking to release publicly any updates or revisions to any forward-looking statements made herein. Additionally, non-GAAP financial measures will be discussed on this conference call. A reconciliation for the most directly comparable GAAP financial measures is also available in our first quarter 2021 earnings press release, which can be found at www.Veronis.com in the investor relations section. Also, please note that all common stock and per share data have been retroactively adjusted for the impact of the three-for-one stock split effective March 15th, 2021. Lastly, please note that an updated investor presentation, as well as a webcast of today's call, are available on our website in the investor relations section. With that, I'd like to turn the call over to our Chief Executive Officer, Yaki Feidelson.

Yaki? Thanks, Jamie, and good afternoon, everyone. Thank you for joining us to discuss our first quarter 2021 results. Our Q1 performance was strong, continuing the positive trajectory of 2020 and highlighting the ongoing critical need for companies around the globe to protect their sensitive data. You have heard me say many times before that our platform is relevant now more than ever. This quarter demonstrates that the momentum in our business is a result of a significant value we provide our customers. Our subscription offering allows us to deliver on their immediate requirements and long-term needs. And when taken together, the result is substantially higher customer lifetime value. Let me take a step back and talk about the trends we have been seeing. Over the last few years, and especially in 2020, several trends have accelerated and converged. putting the focus on complex data security challenges, which have been our mission to solve since inception. Whether companies are reacting to breaches, complying with regulation, or simply being responsible, our approach protecting sensitive data from the inside out resonates with new prospects and existing customers more than ever. As the digital transformation gains traction across almost all industries around the globe, It changes the way we live and work and impacts how data is stored, managed, and accessed. This transformation has fueled, and we expect will continue to fuel, the secular trends that drive demand for our products, including the shift to the cloud, which highlights the need for a zero-trust approach protecting sensitive data. Cybercrime, where hackers and insiders targeting sensitive data are more sophisticated than ever, and compliance with data-driven regulation, which is a serious challenge that creates enormous risk to companies all over the world. We have always believed that perimeter defense is not enough and limited. Recent breaches in the news yet again bypass the perimeter and endpoint protection by design. With attack surface larger and more open than ever before, We believe the way to address these risks and protect sensitive data is through the data-related insights and automation that our platform is uniquely positioned to provide. Our subscription model makes it easier for customers to see greater automated value by making larger initial purchases while leaving room for meaningful expansion over time. As a result, our customer lifetime value has increased significantly. Looking ahead, we expect that continued expansion with our customers as well as ongoing innovation will further extend our reach and increase our addressable market. Let me provide a few examples of some key customer wins from the first quarter. One example of a new customer is a large U.S. financial company Within hours of our risk assessment, we detected a brute force attack in progress and found sensitive data open to a large percentage of employees. After showing them how they were at risk both on-prem and in the cloud, they purchased data advantage, data classification engine licenses, data alert, automation engine, and more. While we've seen meaningful increases in adoption rates by new customers, our existing customer base continue to represent a substantial growth opportunity for the company. A prime example is a nationwide professional services company with over 5,000 users that first purchased two perpetual licenses in 2018. In 2019, they added subscriptions for data classification engine and support for SharePoint Online. In Q1 of this year, they again expanded their deployment with a focus on privacy and compliance, adding policy pack for GDPR and CCPA, automation engine to find and fix broken access controls, and data transport engine to enforce their data governance policies. In total, this customer now has nine licenses, and like many of our customers that go through similar route of purchasing over time, we are already discussing with this customer the additional Varonis licenses that will further strengthen their data protection and take them to the next level of the operational journey. These are just a few examples of how every day we are helping our customers solve some of the biggest data protection problems, which will only continue to become more urgent. In summary, we are extremely well positioned to continue our momentum and further expand our market leadership. And we believe we are just scratching the surface of a very large growing opportunity. With that, let me turn the call over to Guy. Guy.

Thanks, Yaki. Good afternoon, everyone. Thank you for joining us today. We're extremely pleased with our first quarter results. Our continued execution on our go-to-market strategy powers our ability to capitalize on both the short and longer-term opportunities available to us. First quarter highlights include 38% total revenue growth, 120% subscription revenue growth, ARR growing 39%, and record operating cash flow generation of $20.4 million. Demand for our platform continues to be driven by both new customer acquisition and existing customers expanding their licenses, spanning diverse industries. we are seeing meaningful customer engagement as new customers continue to purchase on average more than five licenses. These larger upfront commitments in turn lead to greater license adoption over time and increased customer lifetime value. As of March 31st, 2021, 66% of our total customers with 500 or more employees purchased four or more licenses up from 55% a year ago. At the same time, 32% of these customers purchased six or more licenses, up from 21% a year ago. This rapid increase validates that we are delivering on the growing demand to consume more of our platform. We also see this reflected in ARR growth of 39% year over year to $306.9 million at the end of Q1. Turning now to our first quarter results in more detail. Total revenues grew 38% to $74.8 million. Subscription revenues grew 120% to $44.8 million. Maintenance and services revenues were $29.7 million, driven by strong renewal rates, which once again exceeded 90%. Looking at the business geographically, we again saw strong performance across North America and EMEA. In North America, revenues grew 39% to $52.8 million, or 71% of total revenue. In EMEA, revenues grew 38% to $20.2 million, or 27% of total revenue. Rest of world revenues were $1.7 million, or 2% of total revenue. Turning back to the income statement, I'll be discussing non-GAAP results going forward. Gross profit for the first quarter was $63.8 million, representing a gross margin of 85.4% compared to 83.2% in the first quarter of 2020. Operating expenses in the first quarter totaled $70.1 million. As a result, operating loss was $6.3 million for the first quarter, or an operating margin of negative 8.4%. This compares to an operating loss of $17.4 million, or an operating margin of negative 32.2% in the same period last year, as our strong execution and subscription model continues to drive operating margin leverage. During the quarter, we had financial expense of approximately $897,000, primarily due to interest expense on our convertible notes. Net loss for the first quarter of 2021 was $7.7 million, or a loss of 8 cents per basic and diluted share compared to a net loss of $17.4 million, or a loss of 19 cents per basic and diluted share for the first quarter of 2020. This is based on 100.2 million and 92.7 million basic and diluted shares outstanding for Q1 2021 and Q1 2020, respectively. We ended Q1 with $824 million in cash and cash equivalent marketable securities, and short-term deposits. Our cash balance reflects the successful $500 million follow-on offering that we closed in February. For the three months ended March 31, 2021, we generated a record $20.4 million of cash flow operations compared to $3.9 million in the same period last year. We ended the quarter with 1,794 employees a 12% increase from a year ago, and an increase of 75 net new employees from the fourth quarter of 2020. With the opportunities we see in the market, we plan to continue hiring, mostly in sales and R&D, to develop both mature and underpenetrated territories and to fuel continued innovation. Moving to our guidance. For the second quarter of 2021, we expect total revenues of $82.5 million to $84 million, representing growth of 24% to 26%. We expect non-GAAP operating loss to range between $2.5 million to $1.5 million and non-GAAP net loss per basic and diluted share in the range of $0.04 to $0.03. This assumes 106.4 million basic and diluted shares outstanding. For the full year, we're raising our guidance and now expect total revenues of $365 million to $370 million, representing growth of 25% to 26%. We expect non-GAAP operating income to range between $4.5 million to $8.5 million and non-GAAP net loss per basic and diluted share in the range of one cent to non-GAAP net income per diluted share of two cents. This assumes 105.3 million basic and diluted shares outstanding and 116.5 million diluted shares outstanding, respectively. In summary, as we continue to execute on our go-to-market strategy, we see a clear path to revenue growth, margin expansion, and cash flow generation, capitalizing on the longer-term opportunity available to us. Thanks for joining us today, and with that, we would be happy to take questions. Operator?

And at this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question is from Sterling Audi with JP Morgan. Please proceed with your question.

Yeah, thanks. Hi, guys. Yaki, I'm kind of curious in terms of a number of security companies have announced new products, acquisitions, et cetera. So I'm wondering if anything's changing in the competitive landscape and if you're seeing any other vendors that are starting to move towards the Verona solution set at this point.

I haven't. No, at this point, we don't see any change. We are uniquely positioned in the marketplace. The only change that we really see is that the marketplace and organizations from really every industry and the vector understand, starting to understand very well this data first and the inside out approach. I think that they understand that we are extremely relevant to all the contemporary risk of cyber security and insiders and without a solution like ours it's something that it's very hard to protect but at this point we don't see any change in the competitive landscape and we just feel that slowly but surely the market is coming to us and once we land the customer just buying more and more all right makes sense and then guy one follow-up for for you uh it might be helpful for us

for you to put into context, the maintenance renewal rates still above 90%, but seeing the maintenance revenue, maintenance and services revenue down sequentially and down year over year, how much of that might be customers that are maybe converting fully to subscription versus some other factors that would drive that dynamic?

Thanks for the question. So the renewal rates are strong and very much in line with what we've seen. Our renewal rate has been greater than 90%, and that really hasn't changed. What we have been talking about for a pretty long time now is the professional services. And I just want to remind everyone, you know, professional services, we've been pushing many of those to be done by channel partners, and our newer licenses are providing more value through automation. So PS, professional services, is not a large component of our business. low single digits out of total revenue, but we've still seen kind of a significant decline in the quarter, and that's really as planned. So that was no surprise to us. We're not really converting customers from maintenance of perpetual to subscription. We're seeing existing customers buying more and more licenses and expanding through the subscription. So that's really what you're seeing there.

Excellent. Thank you. Thank you.

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

Oh, hey, guys. Great. Thanks for taking my questions. Obviously, it was really good to see ARR accelerate versus what was a very strong Q4 and still have difficult compares. I guess, Guy, my question is on the 2021 outlook. You're raising the full year by about the Q1 beat, which it might look a little conservative given really how strong Q1 was. I'm wondering if you could talk a little bit about the macro expectations that you're building into your 2021 revenue outlook.

Well, when we look at the philosophy of guidance, that really hasn't changed. I think the results of Q1, we're very pleased with them. And I think the kind of the reflection of our Q2 guidance shows kind of how good we feel about the business. We raised, like you said, we raised the full year guidance to 25% to 26%. We increased the low end by kind of more than the beat and kind of moved that beat, $6 million beat to that midpoint. So I think when we look at that 2021 outlook, one thing to remember is that Q1 is still, from a seasonality perspective, kind of the lowest quarter in dollar terms for the full year. So I think that was also taken into consideration in the guidance. But overall, we've never felt so strong and positive about the business as we do now.

That's really good to hear. And then, Yaki, Guy noted that you guys are investing heavily in sales and marketing. I'm wondering if you reflect back on the business, how have you altered where you're targeting that spend today versus maybe pre-COVID? Are you looking at security partners, maybe partners that are associated with the Microsoft ecosystem because you seem to be having a lot of success there. Just kind of curious on the philosophy on sales and marketing investments.

It's really everything. It's from our inside sales to the field reps. Obviously, we are going to 1,000 and mainly 2,000 plus organizations. I think two things that are very interesting if you look at the overall ARR growth that we are growing market and the big customers are buying more and more but also the smaller customers are big enough becoming very significant for us it's primarily the security partner and you know with the move to subscription it's a we becoming much more important to them but it's you know the mission is very simple it's just to make sure we are cover more of these critical platforms and then we are doing the overall display and from data protection, threat detection and response, and compliance. Customers understand very well that they need everything from just one platform. And in order to do that, we just, you know, we're creating products that are very usable and our customers, thankfully, are just buying. You know, we say it here in Voronis that more is more. You know, you buy more, you get more automated value, and then you buy additional products. And then we just need to make sure that we have coverage in the market because, you know, you know, potentially everybody with these digital assets is a potential customer, but you still need to cultivate and to build the self-source in the right way. So we want to make sure that we have, you know, the management in place and we are enabling our sellers and SEs, but, you know, just expanding the organization to keep innovating, supporting customers and make sure that we have good coverage in the marketplace, which, you know, this is just a big marketplace.

Thanks a lot. Congrats on the continued success. Thank you.

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

Hey, guys. This is Joe on for Brent. Really appreciate the question. I have two follow-ups to Sterling's question. Yaki, can you talk about the competitive differentiation, particularly in the cloud, and given you guys have $750 million in cash, are there any tangential areas you need to build out there?

I think that what we are doing, if you're really looking at the data itself, we are the only vendor at this point when you're talking about the 365 support that can go to this massive amount of data that in terms of the mission structure, because of collaboration and the way that it's worked, the problem is much bigger in the cloud than on-prem. Just to visualize it and to be able to remediate the problem and then to understand any abnormal behavior regarding the data is just a very difficult undertaking that we are doing very well. You know, we invested in PoliRise. We believe that the big success that we saw with 365, we can see with several other critical stuff application, and this is something that technologically is very hard to do. And we believe that there is massive, massive opportunity there. And in terms of our cache, you know, we have a very clear, broad, and wide roadmap. And if we see something that can accelerate the time to market, we will consider to buy, primarily stocking acquisitions. But we know very well where we want to go. We believe that there is so much more ahead of us than behind us. We think that the digital transformation and everything that is happening in the cloud, primarily with SaaS platforms, uh it's a veronis can just keep expanding and adding a lot of value and with a lot of this platform you can really do what we have done with you know 365 and windows and unix just to to build the whole suite around it and as i said before i think that this is where where you have most of most of risk and if you really take a step back and looking at all security solutions the all security vectors are in order to protect data. And they are essential, but they are limited in protecting the data. They are very, very important, but limited many times in protecting the data. And we believe that our platform and our approach are critical to every organization that has unstructured data and business application. And this is really our vision, but it's very clear, and this is how we execute.

Thanks, that's very helpful. And then, Guy, appreciate the color on the renewal rates for maintenance and that you're not converting, but I think last quarter you said it would be down low single digits this year. It was down 11%, that line. I know it includes professional services in the first quarter. Just kind of curious if you can give some guardrails on how to think about it for 21.

Absolutely. I think the delta, when you look at kind of the actual declines, is coming from the professional services. Like I said before, it's not a large component of the business. It's low single-digit percentages out of total revenue. But we've still seen, as we planned really, kind of the push to partners to perform many of those days and also the fact that the license that we come out with are geared towards automation really allow us to do less of those professional service days compared to what we had to do in the past. When you look at kind of the renewal rates overall, we're not getting any new maintenance revenue because of the move to subscription, and that happened so quickly. So there's really no fuel coming in, and the delta is really coming from the professional services.

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

We expect it to go down single digits, yes.

Okay. Thanks. Appreciate the color.

Thank you.

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

Hey, guys. Thanks for taking my questions here. Yaki, maybe for you, just to start off, can you just talk about what products in the platform you feel like are seeing the most incremental demand as the pandemic starts to abate? There was a great example that you gave of a professional services firm and all the products that eventually got them to, I think, nine. But if you look broadly across the customer base, what are those one or two incremental products that are taking a customer from, say, five up to six or seven on average?

Thankfully, almost everything is working. in terms of the way that our customers are consuming the platform. What I told before, that more is more. It's something that is very consistent. If you get to five licenses, there is much higher predictability that in a reliable way, you are going to get to 15. And this is something that we are very excited about. But in general, we see a lot of success with 365. We add tremendous value there. And when you put a lot of data in there, OneDrive, SharePoint, and on top of it, you have Teams. The data protection problem is just going exponentially. And because customers are getting to this critical mass of data, you know, we see a lot of growth there. But it's very interesting also to see in the customer base, while you see this very strong adoption in the cloud and with 365, the on-prem data is not going anywhere. The data on-prem is still going and going and everything is interconnected. which is really, you know, expanding the attack surface that our customers and prospects have. But, you know, everything is working. And it's also very interesting to see how, you know, data protection and cybersecurity collide. And there is also a very strong understanding that you need to comply with all the regulations that are related to data. So there is a very, you know, just organic understanding within the customer base that they really need to expand the platform for these three use cases.

Got it. That's very helpful. Guy, maybe for my follow-up for you, nice acceleration in ARR this quarter. I think the growth was 39% up from about 37% last quarter. Is there anything that you would call out as... as a driver beyond, you know, clearly good execution and strong demand, you know, whether that's timing or FX or just anything very open-ended, anything we need to keep in mind around what drove that ARR acceleration and maybe related to this, how should we sort of be thinking about ARR going forward broadly? Does that make sense?

Absolutely. I think there was nothing really abnormal in Q1 apart from the executions. and apart from the market really coming to us, we talked a lot about the three pillars, new customers buying more licenses. And you see that the number of licenses almost doubled in number of licenses compared to what they buy under perpetual. We've talked about the second pillar being existing customers. They're expanding. And not only are they expanding, but the fact that we're selling more licenses to new customers allow us to sell even more in the following years. and kind of the path to double-digit licenses on average per customer has never been clearer to us. So that's kind of the second pillar. And the third pillar is the renewals, and they're very strong. So there was really nothing. There wasn't any effects or anything abnormal there. It was really kind of the strength of the business and the market really coming to us. As we look at ARR for the year, we really don't guide on ARR, but we talked a lot about the fact that this year ARR It's kind of the first year that we're apples to apples in terms of the percentage of subscription, and therefore ARR should be somewhat converged in the percentages to the top-line growth.

Very helpful, guys. Thanks a lot.

Thanks a lot. Thank you. Thanks.

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

Good afternoon. Thank you for taking my questions. Yaki, I'll start with you. I wanted to double click into the competitive environment and maybe ask you more specifically, there's been some consolidation in your end market with some specific vendors. So I'm curious if that's opened up incremental opportunities for you to become more visible. And then secondarily, as it relates to competition, certainly other vendors in the cybersecurity umbrella, whether there are identity providers or perhaps endpoint or device security providers, they're starting to talk a lot more about contextual data access. So I'm wondering where some of your capabilities start and stop and if you can compare and contrast what your platform abilities can do relative to some of these other players who are talking about sort of these adjacencies in contextual data access. And then I have a follow up for Guy.

I think that sometimes what happens in the security market is that many things sound the same and in actuality they are fundamentally different. And with that, as I said, we don't see any change to the competitive landscape. What is happening in reality with Voronis is that we are the only vendor that can take a lot of data and really digest it and visualize the potential of access and do it in an ever-changing environment. This is massive amount of data. Then have this automated remediation and understanding abnormal behavior to data. So we are starting with the data. And then we are going more to what we call edge telemetries, like DNS and proxy. And VPN, we're also doing a lot with Active Directory and the Azure AD and other LDAP repositories. But everything for us, it's starting from the data. And then we also see abnormal behavior like you have with users. We see it with devices. You know, we're just in a situation that all the cybersecurity vendors and the identity vendors, we coexist with them. So, you know, we're together with them. Usually it's one plus one equals three. But in... in the core competency of what we are doing in terms of data protection, threat detection response to all data, classifying the data in an actionable way, you know, we are usually alone. The only thing that you see is just confusion. And in terms of consolidation, when you have these small players that have the same messaging at times, so you know, they are not creating the market and when they are consolidating and they are moving, they are also, you know, also not creating a lot of, a lot of opportunity. You know, at this point is just the market understand much better what we are doing. There is a very, as you said, there is just a very good understanding that everything we are doing is protecting data. When data is going to the cloud and, you know, many times traditional security is not really working there. So just making sure that the right people can access the right data, understand what is important. You can have these high fidelity alerts on any abnormal behavior with the right signal to noise ratio. If something happens, any CISO can dive in and immediately understand what happened. And this is what Veronica is doing. So we have this, you know, gradual process. of just the market that is shaping and this problem that every business needs to solve. So I hope that I was clear, but this is what we see in the marketplace. And this really, I think, these are really the dynamics of the market, the way it's shaping. And with it also, you see more and more budget.

I appreciate that detail. Thank you. And Guy, maybe for you, I want to drill in on the subscription growth performance in the quarter as well as the ARR performance. So if I take a step back, the magnitude of acceleration we saw in the subscription business from the fourth quarter, that magnitude of acceleration is quite a bit healthier than the acceleration we saw in the ARR metric. So I'm wondering if there's any observations or any items that we should be mindful of because I'd imagine that the subscription revenue growth performance would have directionally, in terms of magnitude of the upside, would have tracked the subscription line item. But if there's anything there to help us better understand some of that divergence, that would be helpful. Thank you.

Absolutely. Well, ARR is really comprised of the subscription, the ACV, annual amount of the subscription, plus the maintenance portion of the perpetual. So obviously, when you kind of combine those together, That's part of the reason that we talked about the fact that as we move through the transition and get to this, to 2021, where it's truly apples to apples, ARR should match much closer to the revenue top line growth.

And that's actually what we've seen this quarter. Very helpful. Thank you. And our next question is from Rob Owens with Piper Sandler.

Please proceed with your question.

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

So I think when you look at kind of the ARR and our kind of performance this quarter, obviously there's the land, which we've seen customers consume more of the platform. that's been very very helpful for us and obviously helpful for the customers as well because they're they're consuming the platform and therefore the ability for them to get to get value and come back and buy more increases significantly now obviously we have a large base of customers and we've talked a lot about the fact that we are under penetrated so existing customers should contribute more and And that's obviously better for us because it costs less to generate revenue from our existing customers. So they kind of drive. But we were happy with both new customers and the existing customers consuming and buying more of the platform.

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

You know, we... We are happy with the way that the development is progressing. But, you know, we believe that everything we experience with 365, you know, we translate into the platforms that Polarize support. And we believe there is tremendous opportunity there. You know, if you think about a lot of the SaaS applications from Salesforce to, you know, G Drive and others and, you know, books and GitHub, these are the platforms that you want your organization on. And access control is very hard, understanding of normal behavior, what data is important, you know, just to demonstrate compliance, these things are very challenging. And we just believe that we can add tremendous value there and to be uniquely positioned the way we are positioned on the on-prem data and everything that we are doing for all the 365 platforms. So, you know, we are very excited about it. And as we are moving, you know, forward with the development and talking more with customers, we just think that this is just a tremendous opportunity to add a lot of value to our customers and to increase ARR drastically to everyone's customers.

Thank you. And our next question is from Alex Henderson with Needham and Company.

Please proceed with your question.

Hi, Tim. You have Mike Sikos on the line here for Alex Henderson. Congratulations on the strong quarter and the strong subscription and ARR growth. I was curious, can you comment on this growth in the context of this greater market awareness from this collision of data collection and cybersecurity you're talking to? Just because it really sounds like the market is increasingly aware of these issues and the value prop you're delivering. And then building on that, can you also talk to whether you're seeing any uptick in spending or demand where maybe budget is finally coming to the market following the solar winds or Microsoft Exchange server hacks we were talking about earlier this year?

You know, I think that if you're really going to dissect the anatomy of a lot of attacks, so when you have just this sophisticated malware or APT, it's using the user credential and trying to go after data. And you see these more and more, so customers understand that something like that can happen. They really need to think about how they are protecting the data, and once you have this kind of conversation and realization, you understand that you need a platform like ours. Regarding the awareness, it's hack by hack and a lot of it is just the insiders. If you want to go all the way back to Snowden and Wikileaks, the biggest damage happens when you have an insider that is deciding to do, you have a wrong employee that is deciding to do something that is malicious. And in this kind of situation, we are uniquely positioned to help the customers. So it's everything, just every day something is happening and you see the digital transformation. and CISOs becoming very strong in the organization and they also get the responsibility to protect data both in management departments, legal departments understand that they need to protect the data and when you really evaluate your digital assets, you understand that you need to protect your data and critical information in a way that you can really in a way that the organization can digest. And what's happening today in the world is that organizations' capacity to create and share critical information is significantly increasing their capacity to protect it. And I just think that in order to be able to protect this data, you need something like Voronis. So just every day, you know, we're just inching forward And what is happening is that you have this, you know, big market, and we have a lot of technological moat and massive features set on top of our platform, just benefiting our customers. So it's everything. You know, you have the breach, you have a problem with insider, regulation is coming, you have another platform, you get a critical mass of data. So this is really what you see with Voron. So it's a very gradual process, but, you know, every three, four months, you're just raising your head. and you are usually in a much favorable market.

Thank you. That's very helpful. And then for my follow-up question, I did want to touch on the investments that you guys are making. So I understand we called out about 1,800 employees with the headcount figure exiting the quarter, up 12% year-on-year. But to the extent you can with these investments, how are you guys planning on exiting calendar 21 from a headcount perspective, and for those investments you're making in both R&D and sales and marketing, can you provide any additional detail for the split within those different investment line items? Thank you very much.

So we don't really guide on headcount, and we don't really kind of guide on the breakdown of the different departments, but I'll give you some color that will show how strong we feel about the business and kind of how we're thinking about this and acting, really. When you look at kind of the growth of the headcount, most of it has been in the R&D and sales and marketing department, sales really to develop kind of the mature and underpenetrated territories, and R&D really to continue to fuel the innovation. Nothing has changed apart from the fact that we also, we talked a lot about the fact that we want to continue to put the foot on the gas when we feel good about the business. So when you look at kind of the net new growth in headcount, we grew 75 net new in Q1 and we grew 90 in Q4. So 165 net new employees in the last six months. And that's really an indication of what we've seen from a market perspective and our desire to capitalize on the long-term opportunity. So we always try to tie the level of expenses to the level of revenues we plan to achieve. And that philosophy hasn't changed.

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

And just in the interest of time, we do ask that everyone who has asked a question to only ask and limit themselves to only one question. Again, please limit yourself to one question. And our next question comes from with Morgan Stanley. Please proceed with your question.

Hey, guys. Thank you for taking my question. For Yaki, I had a question around sort of the investments and pipeline that you're seeing on the federal side of the business going to the back half. I know that you had some announcements recently, particularly on sort of Microsoft's government community cloud. I'm curious if you can give us some more color there and what the pipeline looks like going to the back half as we go into the federal budget flush. Thank you.

Overall, we feel that for the company, overall, we feel that the pipeline is very healthy. For the federal specifically, there is a lot of need for a solution like ours, and we feel comfortable with the pipeline. But overall, for federal and for the company, We feel good with the pipeline. We feel very good with the conversion rate. And we also, you know, feel that if we spend the right time with the customer, there is very high probability that they will buy. This is another thing that's really changing in a significant way because of, you know, they're getting a lot of value and they are buying more. They're getting more automated value and then they buy, you know, additional licenses. And we have... such a deep and wide platform, it makes sense for us and makes sense for our partners to spend a lot of time with our customers. It's not just the pipeline in terms of opportunity, it's just the way that they are converting the pipeline. So this is something that we also feel that gradually it's getting better and better.

Thank you.

And our next question is from Nick Matiachi with Craig Hamlin. Please proceed with your question.

Hi, this is Nick Matiachi on for Chad Bennett. Thanks for taking our question. I'm just curious if there are any other third party cloud applications that are driving most growth currently in the pipeline, specifically outside of the Microsoft ecosystem? Thanks.

Can you repeat the question, please? We just couldn't hear.

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

You know, today in the cloud with Microsoft, you know, we have a lot. And, you know, from Azure AD to Exchange and SharePoint, OneDrive, and Teams. But as you know, we both polarized in order to expand our footprint for mainly SaaS applications. So, you know, we have a very good clarity of the critical SaaS application for organizations and the way that they interconnect. And we are going to release in the second half of the year our support to many additional SaaS applications. And we believe it can be a very good opportunity for the company.

Thank you.

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

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

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

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

No, it's a bit hard to tell, you know, this whole COVID situation. You need to take it, you know, every day as it comes. But, you know, overall, thankfully, we were able to do very well, and there were some things in COVID that with all this digital transformation that really benefiting Varonis. And we also believe that for us, these are stationary trends. So this is, you know, the only thing that I can say, the way that it's going to develop, you know, it's hard to say, but we believe that either way, if we're going to open very fast or, you know, God forbid, we are going to have more delays, you know, for the overall world and the economy, we will be able to do very well. And also we see that also organizations that got hit by COVID and they have critical information, they are buying bonds and buying bonds in a big way. So, you know, we have a high level of confidence and we really believe that we can do well even if the situation will stay like that for a while.

Thank you.

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

Yes, thank you very much. So I believe that you said that the professional services line within maintenance and services was the big driver of the year-to-year decline. So my question is, if you exclude professional services, did that segment grow? And secondly, I think you said that segment's going to decline this year. Do you think it will grow starting next year?

So maintenance and services line item is really comprised of maintenance of perpetual and the professional services. Because we moved to subscription so quickly and we're not going back to our existing customers and trying to convert the maintenance of perpetual to subscription licenses, we're just selling additional licenses with those existing customers on top. we're really not getting any new fuel on that maintenance line item. And as I said before, the professional services was really kind of the biggest impact there because of that decline in the significant decline in professional services that is coming from us letting partners do more of the professional services and also the fact that the licenses are geared towards automation. So we really don't expect that line item to increase, and there'll be obviously some punctuations with the professional services.

To be clear, even next year, you don't think it'll increase, right? Correct. We're not selling any new perpetual licenses. Okay, thank you. Thank you.

Our next question is from Eric Suppinger with JMP. Please proceed with your question.

Yeah, thanks for taking the question. I want to come back to Office 365. Can you talk a little bit about how much of your business is associated with Office 365 and did the exchange hack, did that create a catalyst for your products related to it or was that an impediment for your products that provide additional security there?

Our offering is mainly associated with data. We have a lot of critical data in 365 applications and servers that are residing in Azure. Regarding the Exchange Bridge, what is happening with Exchange and SolarWinds and many others, every week you have something. It's just that organizations understand that you have these very sophisticated skills and today with cryptocurrency and other means, the ability to very easily monetize cybercrime. And if you have critical data, someone wants it. And even a big company that's protecting its intellectual property can get hacked, and the consequences are really bad. So I just think that what happens now is that almost every organization is starting to realize that this is something that they need to do. They need to protect their data. They need to protect their data in a very effective way. And the perimeter security is essential, but at the same time, very limited.

So it sounds as though the exchange hack was somewhat of a catalyst. Can you comment in terms of How much of your business with Office 365 is customers expanding the modules associated with the different applications within Office 365 versus how much of it is customers that are just migrating to Office 365?

So we talked a lot when we announced the transition to subscription that a lot of it was driven by the fact that customers are consuming more of the platform and many of them buying Office 365 licenses. That was really kind of the driver, because as you remember, when we went public, we had 10 licenses, and between 2015 to 2018, we came out with significantly more licenses, and many of them geared towards automation. And really, the Office 365 licenses have been a driver for us in the last couple of years. We're seeing customers that are buying many of those licenses It's still, when you look at kind of the attach rates, the data advantage and the data alert and the data classification are really kind of the top three. But Office 365 has been a significant component, and we're very pleased with that. Just in terms of the breaches, we also talked a lot about the fact that a breach doesn't necessarily generate a spike in our revenues immediately after that breach. We're much more of that thoughtful process where customers try and understand how they can better protect their data. So I wouldn't say that any of the breaches is driving, in the short term, any of our revenue, but it's definitely part of that longer-term discussion that we can benefit from.

Very good. Thank you. Our next question is from Shaul Eo with Powin.

How do you proceed with your question?

Thank you. Good afternoon, guys. Congrats on the healthy performance. Yaki, your vision views Varonis as a $1 billion revenue company, ARR company, actually, in a number of years. And with the ARR further accelerating, we can run some assumptions that would get us to $1 billion probably anywhere between five to seven years. I know you've never committed to a specific timeframe, but does that five to seven years timeframe, does that make sense?

I don't, with your permission, Charles, I don't want to comment about just to talk about the timeline, but what I want to talk about is just platform market fit and the the probability to get there you know the hardest thing to get to you know lofty uh goals is with products that you don't have customers you never met and people that that you haven't had the chance to hire and if you really see with you know we can grow so much within our customer base we have we have a substantial sales force and you just see what's going on with the all these SaaS applications that we can really run the Voronis playbook and all of them are interconnected. And as I said before, this is where contemporary cybersecurity risk resides. And this is where we believe that the risk will grow. And if you want to protect your digital assets, you need something like Voronis. From where we sit, we strongly believe that it's inevitable. And the customers buy more. I think that You know, there is one thing that I hope that folks can understand that with us, more is more. When you get to critical mass of licenses, you get this automated value for use cases and customers are buying more. So, you know, we believe that the vision to get to billion dollars ARR is materializing. And we also believe that every day that goes by that we, you know, have more licenses, bring additional customers, expanding the base, it's increased our probability A lot of the investments to get to this billion-dollar number and beyond are already in place.

Got it. Thank you so much. Thank you. Thank you.

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

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

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