This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk05: Greetings and welcome to the Verona Systems Incorporated Third Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host. James Arrestia, Director of Investor Relations. Thank you, James. You may begin.
spk20: James Arrestia Thank you, operator. Good afternoon. Thank you for joining us today to review Varonis' third quarter 2021 financial results. With me on the call today are Yaki Feidelson, 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 fourth quarter and full year ending December 31, 2021. Due to a number of factors, actual results may differ materially from those set forth in such statements. These factors are set forth in the earnings press release that we issued today under the section captioned Forward-Looking Statements, and these and other important risk factors are described more fully in our reports filed with the Securities and Exchange Commission. We encourage all investors to read our SEC filings. These statements reflect our views only as of today and should not be relied upon as representing our views as of any subsequent date. Varonis expressly disclaims any application or undertaking to release publicly any updates or revisions to any forward-looking statements made herein. Additionally, non-GAAP financial measures will be discussed on this conference call. A reconciliation for the most directly comparable GAAP financial measures is also available in our third quarter 2021 earnings press release, which can be found at www.feronis.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 affected March 15, 2021. Lastly, please note that an updated investor presentation, as well as a webcast of today's call, are available on our website in the Investor Relations section. With that, I'd like to turn the call over to our Chief Executive Officer, Yaki Fajolson. Yaki?
spk03: Thanks, Jamie, and good afternoon, everyone. Thank you for joining us to discuss our strong Q3, which was a major milestone for Voronis. Our first quarter to surpass 100 million in revenues. As companies around the world became more aware of the need to protect sensitive data, we see this achievement as just scratching the surface of the enormous opportunity ahead of us. I want to thank the entire Voronis team for their efforts, which led to this success. With that, let's jump in as I provide an update on our business. I want to focus on the security problem facing all organizations and why our data-first approach continues to resonate with new and existing customers. I will then turn the call to Guy to discuss our Q3 results and updated financial guidance. Let's start with the current operating environment, where our world is more reliant on data than ever before, and the ultimate objective of security efforts is to protect it. The global digital transformation has led to many collaboration benefits, but it has also fundamentally changed how companies must approach security, as we have said. Sensitive data is now stored and accessed for more places. The perimeter is hard to define and even harder to monitor and protect, and endpoints now serve mostly as access points to large data stores on-prem and in the cloud. Organizations using these sanctioned data stores and critical business applications so that their employees can more easily collaborate and extract more value from data. However, The ease and speed of collaboration has made securing data far more challenging, and we continue to see that without the right protection, it is getting harder and harder for enterprises to manage security without impacting productivity. As the sprawl of data continues, the attack surface grows, and behind it, critical digital assets are woefully unprotected. The potential for damage from just a single compromised user, which we defined as the blast radius, is tremendous. And this doesn't need to be the case. We see this with our customers on a daily basis, especially with ransomware. With Varonis, CISOs have better visibility into risks that are growing by the day. In addition to these fundamental data protection concerns, we see misconfigurations exposing sensitive data to many people, and the interconnectivity of SaaS applications increasing the risk that attackers can utilize these connections to move laterally in the cloud. The sophistication of today's hackers cannot be overstated, as state actors lead the efforts and their techniques spill over into the commercial world. At the same time, we see how cryptocurrency makes it easy to monetize crime without any trace. Nearly every organization faces these problems, and the need to solve these align perfectly with the primary use cases we are addressing, data protection, threat detection, and privacy and compliance. We have discussed the data protection and threat detection in companies can no longer ignore regulations like GDPR and CCPA when we are beginning to see enormous fines for non-compliance. In short, we are unleashing the potential of our platform as companies think more strategically about data-centric security, and we do not expect this momentum to slow down. Let me provide a few examples of some key customer wins for this quarter. One of Europe's most recognized international organizations with nearly 20,000 employees became a Voronis customer in the third quarter. In addition to other threat detection needs, they sought to secure active directory, prepare the data for migration to the cloud, and ensure compliance with GDPR. After we revealed where they were at risk, and showed our ability to remediate overexposure to sensitive data, they purchased multiple licenses, and we are currently discussing additional licenses that will broaden the coverage we provide. As we have said, we believe all Varonis customers should be a double-digit number of licenses based on the current and growing threat landscape. The higher upfront value we provide through our subscription offering consistently leads to healthy expansion and absence. A strong example is a utility company serving a major U.S. city, which first became a Voronis customer several years ago under our perpetual model, purchasing three licenses. In 2020, they took advantage of our subscription offering to secure data in the cloud, as well as monitor the perimeter and remediate open access issues. In Q3 of this year, they further expanded their deployment to cover additional data stores and easily migrate data across platforms. In less than three years, this company went from three Voronis licenses to 20, and this does not include a recently introduced cloud licenses, which leave room for additional expansion in the future. These examples illustrate the continuation of strong adoption and engagement trends we are seeing, coupled with healthy pipeline. We are well positioned to close the year strong. As we have said, we believe our position in the market is unmatched, and the team is relentlessly focused on continued execution and capitalizing on the enormous opportunity before us. With that, let me turn the call over to Guy. Guy.
spk15: Thanks, Yaki. Good afternoon, everyone. Thank you for joining us today. We are pleased with our third quarter results, which demonstrates the power of our platform and continued need of our customers to secure their sensitive data. Financial highlights in Q3 include 31% total revenue growth year over year to surpass $100 million of revenue for the first time in our history. This was driven by 36% growth in ARR to $354.2 million. Our continued execution against our targets resulted in another strong quarter of growth. The confidence we have in our business is reflected in our Q4 guidance, which is the highest growth we have guided to since 2014. That year, our total revenues for the year were approximately $100 million, which is the revenues we delivered this quarter alone. Looking at our results, We continue to see a healthy balance of new customers making substantial upfront commitments and existing customers expanding their Varonis deployment after we demonstrate the value of our platform. We are pleased that the number of licenses purchased by new customers has increased over time as this reflects a meaningful increase in customer lifetime value. As of September 30th, 2021, 70% of our total customers with 500 or more employees purchased four or more licenses, up from 60% a year ago and 50% two years ago. At the same time, 37% of our total customers with 500 or more employees purchased six or more licenses, up from 26% a year ago and more than double the 17% in Q3 2019. The rapid growth in these metrics demonstrate the strong customer engagement we see and also illustrate the ongoing opportunity we have to get all Varonis customers to a double-digit number of licenses. Turning now to our third quarter results in more detail. Total revenues grew 31% to $100.4 million. Subscription revenues grew 59% to $70 million, and maintenance and services revenues were $30 million, as our renewal rates remained strong at over 90%. Looking at the business geographically, revenues in North America grew 32% to $75.6 million, or 75% of total revenues. In EMEA, revenues grew 28% to $22.8 million, or 23% of total revenues. Rest of world revenues were $1.9 million, or 2% of total revenues. Turning back to the income statement, I'll be discussing non-GAAP results going forward. Gross profit for the third quarter, was $88.3 million, representing a gross margin of 88%, compared to 87.2% in the third quarter of 2020. Operating expenses in the third quarter totaled $80.2 million. As a result, third quarter operating income was $8.1 million, or an operating margin of 8.1%. This compares the operating income of $3.1 million or an operating margin of 4% in the same period last year as we continue to drive operating margin leverage. During the quarter, we had financial expense of approximately $908,000, primarily due to interest expense on our convertible notes. Net income for the third quarter of 2021 was $5.7 million or income of 5 cents per diluted chair compared to net income of $2.1 million or income of $0.02 per diluted share for the third quarter of 2020. This is based on 119.1 million and 106.1 million diluted shares outstanding for Q3 2021 and Q3 2020, respectively. We ended Q3 with $813.4 million in cash, cash equivalent, marketable securities, and short-term deposits. So the nine months ended September 30th, 2021, we generated $6.8 million of cash from operations compared to negative $13.5 million used in the same period last year. We ended the third quarter with 1,969 employees, an increase of 99 net new employees from the second quarter of this year. We continue to invest across departments and geographies as we believe these investments in innovation and capacity will allow us to capture the opportunities we see in the market. Moving to our guidance. We believe the strength of our Q4 financial guidance, especially against our outstanding performance in Q4 2020, reflects our ability to continue capitalizing on the growing demand for our platform. For the fourth quarter of 2021, we expect total revenues of $120 million to $123 million, representing growth of 26% to 29%. We expect non-GAAP operating income of $16.5 million to $18.5 million and non-GAAP net income per diluted share in the range of 12 cents to 13 cents. This assumes 119.8 million diluted shares outstanding. For the full year, We are again meaningfully raising our guidance and now expect total revenues of $383.5 million to $386.5 million, representing growth of 31% to 32%. We now expect non-GAAP operating income of $19.5 million to $21.5 million and non-GAAP net income per diluted share in the range of 10 cents to 11 cents. This assumes 118 million diluted shares outstanding. In summary, we are pleased with our third quarter results as the ongoing execution of our go-to-market strategy continues to drive top-line growth, operating margin expansion, and cash flow generation, while also resulting in our first quarter with $100 million in revenue. We are proud of this milestone, and we know that continued outperformance and investment in the business positions us for a strong close to the year and the next milestones to come. Thanks for joining us today, and with that, we would be happy to take questions. Operator?
spk05: Thank you. We will now 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 that 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. In the interest of time, we ask that participants limit themselves to one question and one follow-up. One moment, please, while we poll for questions.
spk04: Thank you.
spk05: Our first question comes from Sterling Audie with JP Morgan. Please proceed with your question.
spk13: Yeah, thanks. Hi, guys. So, Guy, I think you had alluded to the idea of stronger or bigger initial commitments from customers. I guess I interpret that as larger initial deal sizes. Can you give us maybe a quantitative, you know, look at how much have they grown and maybe a qualitative explanation as to, you know, what do you think is driving it and what do you think the trend from here will look like?
spk15: It's a great question. The answer is very much the platform consumption of our customers. They are buying way more licenses. They're buying approximately double the number of licenses that we had when we sold perpetual licenses. And what we've also seen is that the more licenses they acquire, the higher the likelihood that they see value in the product and they will come back and buy more. When we priced the subscription price list, it was at 45% of perpetual and first-year maintenance. When you think about the fact that they're acquiring double the number of licenses, you can see how that ASP is much higher than what we initially thought would be when we just initiated the transition. And this consumption of that technology is what's driving the growth and the customer lifetime value.
spk13: That makes sense. And one follow-up would be, as you look at your sales hiring and sales capacity, what are you doing in terms of current hiring to set you up to capture that, what you mentioned as durable demand moving forward?
spk03: We keep hiring. There's just tremendous market opportunity in front of us. And as Guy said, you know, there is, a very strong understanding from our customers that they need to protect data, and data is really concentrated in the assumption data repository on-prem and in the cloud, and we are benefiting from it tremendously. But we need to enable them, and, you know, we need to make sure that we give them the right sense of the council, the total available market in terms of what we can, how we can grow in the base, and just the market opportunities we can capture is huge, and we're just going to grow the Salesforce, but we're just going to do it in the right way to make sure that we can support them, we have enough management in place, you know, we have very diligent enablement programs, and we need to make sure that when people come here, we support them and they are very successful.
spk04: Makes sense. Thank you, guys. Thank you.
spk05: Thank you. Our next question comes from Matt Hedberg with RBC. Please proceed with your question.
spk09: All right, guys, thanks for taking my questions. Congrats on the results. Yaki, I want to start with you. You know, I guess I'm curious, what is Varonis' stance right now on sort of return to work or return to travel? And I guess, you know, as the world opens up a bit here in the next year, do you think, you know, if there is more travel by your team, you know, could that actually help in pipeline generation?
spk03: Hi, Matt. You know, first and foremost, you just said you found employees, customers, and thousands. So we are just diligently following the rules of the health facilities and our HR team in the local offices and markets we operate. But yes, you know, we definitely benefited from remote work in terms of 365 and everything we are doing with Data Advantage Cloud. So the digital transformation has, as you know very well, Enterprise sales is a full-contact sport in the sense of that it makes sense to be with the customers and also with our team. So we are gradually moving to just a hybrid working environment and in places that we can meet customers and we can meet partners, we are doing it with just Delta.
spk09: Got it. Thank you. And then maybe this is a follow-up for Guy. Okay. You know, as ARR decelerates here off of more difficult comparisons, you know, as we start to think about the model next year, obviously you're not guiding to next year yet, but how is the right way that we should think about sort of revenue and growth rates converging? I mean, are we to the point where next year, you know, we might see more of a convergence between the two?
spk15: Matt, I think there's a lot of confusion out there on kind of the convergence of ARR and revenue, and I'll start by saying that we're very happy with ARR growing at 36% and revenue growing at 31%. And as part of kind of the expectation that we have and when we analyze the ARR and the revenue, obviously one metric is an annual metric, the ARR, and the revenue is a quarterly one. So there could be some sort of discrepancy. But when you look at the recurring revenue, the subscription and maintenance on a 12-month trailing basis, and analyze that growth, you see how the revenue and ARR have actually converged. They're both at 36% growth. And it really doesn't matter how you look at it. On a quarterly metric or an annual metric, I think those results are very strong and an indication of the strength of the business. And as you mentioned, as we enter next quarter in the next earning call, we'll provide more color for 2022. Got it. Thanks, guys.
spk05: Thank you. Our next question is from Brent Thill with Jefferies. Please proceed with your question.
spk10: Great. Just AR grew nicely, 36%, but only 2% sequentially. So I think there are many questions just trying to understand kind of the trajectory and what's driving this going forward. And maybe if you could also just comment a little bit about from a federal perspective, versus commercial perspective, any color to add to the federal vertical and what you saw this quarter?
spk15: So I think when we look at the overall growth, the ARR being at 36%, and like I said, the revenue being at 31%, very strong numbers. Most of the growth was driven by the enterprise business. We feel very good about the pipeline. I think it's a great indication when you look at kind of the Q4 pipeline guidance and the guidance providing being at 26 to 29% is kind of an indication of how strong we feel about the business because it's against an outstanding Q4 of 2020. So we definitely feel very good about the business and closing the year strong.
spk04: And sorry, Guy, was there any color on federal in terms of what you're seeing?
spk03: As Guy mentioned, you know, the growth driver was the overall enterprise business. We saw in Federal that there was a lot of focus on remote work and collaboration in Office 365. So we saw just a lot of opportunities, but it was just a bit hard to allocate the budget. But what we do see is that in 365 and the exploring of data is tremendous opportunity for us. So we see just many opportunities for the next few years. And there are a lot of projects related to Zero Trust. And we are front and center for the Zero Trust initiative to many of the federal customers and prospects. So we believe that they can do very well in the next year. But the growth was primarily driven by the enterprise.
spk04: Great. Thanks.
spk05: Thank you. Our next question comes from Saket Kalia with Barclays. Please proceed with your question.
spk07: Okay, great. Hey, guys, thanks for taking my questions here. Maybe for you first, Iaki, you know, the multi-product adoption here continues to grow. I mean, I think the adoption numbers speak for themselves, as well as your focus on larger customers. I was curious, I mean, as the base sort of gets to a point where
spk03: so many more of them have multiple products have you ever thought about enterprise license agreements with with with customers in the future and and what are some of the puts and takes as you sort of think about that we do so what we say definitely is that customers understand that they need to protect data the perimeters are very hard to define you know you saw this explosion with endpoint they're more like access points most of the data is in what we call functional repositories on-prem and in the cloud. So when customers are already investing in us, the term of investment many times is tremendous. And if you're wise, if you have security efforts in order to protect your digital assets, Varonis is one of the top, it's not the top platform that you have. Definitely the other thing that we see is that more is more. When you have more licenses, there is much higher probability that you will consume much more licenses over time, and customers want to have the most efficient way to do it. So it's still early stages, but we definitely think about it, and we constantly think about what is the right way to make sure that it will be easy for our customers to consume more products, and that they will benefit from it, and we will benefit from it. But this is something that is in the works, and we see how it will play out, but we definitely think about it.
spk07: Got it. That's really helpful. Guy, maybe for you, I mean, the question was asked about sort of the convergence of ARR and revenue growth. Maybe I'll ask about ARR slightly differently. I mean, it's been pretty nice sort of mid to high 30% ARR growth here for the last few quarters, several quarters. Is there anything to think about on the glide path of that ARR growth going forward? I mean, the transition is done. You know, we've had, you know, several high-profile breaches. Of course, we have had COVID last year. Understanding that you don't guide to ARR, what are some of the puts and takes that we should think about when modeling ARR, let's say, for the next couple years?
spk15: Second, I think when we look at kind of the numbers of ARR out there and some of the talking points that we have heard about ARR, we feel that there's some confusion in how to model those numbers. And one of the things that we have thought of is providing more color on ARR as we enter a next earning call towards 2022. So I think the right metric, the leading metric for us right now for this year is revenue. But as we sell more DA cloud licenses, and because we will recognize DA cloud on a radical way, ARR will become kind of the leading indicator for us. and therefore we feel that we should provide more color to that as well.
spk03: Saqib, and one thing from my end, there are these high-level breaches, but the way that usually demand builds for us is that there is high-level breaches, emergency spending, you know, organizations are doing a lot of reactionary stuff, but then they'll start a very thoughtful process. Where are my assets? What do I need to do? I'm drowning in alerts. What is the best solution? how I'm going to protect my enterprise with, you know, just the scarcity of stuff. And this is what we are benefiting from. So I just think what happens is that when the data is settling, this is where we are benefiting more and more and just becoming more mainstream and the customers are standardizing around us and really looking for solutions as well.
spk08: Got it. Very helpful, guys. Thank you. Thank you. Thanks, Elliot.
spk05: Thank you. Our next question comes from Rob Owens with Piper Sandler. Please proceed with your question.
spk00: Yeah, thanks for taking my question. That was a nice lead-in to DA Cloud, realizing it's still relatively early. But any customer feedback you can give, where it's being attached, any types of rates, or if it's actually providing the tip of the spear in terms of your selling motion? Thanks.
spk03: We're not seeing material contribution this year, but the customer conversations are very positive. We started to build pipeline. We believe that it's a massive opportunity and really we're contemplating the risks we're going to decide. These are the business applications that are running your business. So we believe that 365 is a good indicator of what we can do with DA Cloud and the initial The initial indication is that it can be very strong.
spk00: Yeah. And second, I don't know if you've given this metric before. I apologize if you have. But you've talked about getting to double-digit license adoption. And can you give us an idea of what share of customers or how much of the base have actually reached it or gotten there?
spk15: So the metric we started providing last year was number of customers with more than 500 employees that have four or more licenses and six or more licenses. And the numbers there are actually supporting exactly what we're talking about, about customers consuming the platform. We have seen the four or more licenses go from 50% two years ago to 50% last year and 70% this year. And on the six or more licenses, We're at 37% this year, actually more than doubling what we had two years ago. So very strong indication of the customers consuming the platform and the fact that we are very much in believing that we can get to double-digit licenses on average per customer.
spk03: Well, you need to understand that the basis is automation. Once they have more customers, they get much more automated value. So this is what you see, 31 plus 1 equals 5. the sheer progress in information when they have more licenses is dramatic, between, you know, 3 and 10 or 10 and 15.
spk00: All right. Thanks for the color, and it almost seems like it's time for another license category, given the success you're seeing in the 4 and the 6. So thanks, guys. Thank you.
spk05: Thank you. In the interest of time, we ask that participants limit themselves to one question. Thank you. Our next question comes from Roger Boyd with UBS. Please proceed with your question.
spk16: Hey, thank you very much and congrats on the results. Just thinking about one of these tailwind drivers, Office 365, wondering if you could provide a little more color about what you're seeing in terms of the strength of this tailwind over the past couple quarters and how you're thinking about it into 4Q and calendar 22.
spk03: You know, 365, which is the whole suite is geared towards collaboration. What we see is that customer capacity to create and share data far exceeded their capacity to protect. And it's just, it's designed to collaborate and not to protect. And this is just, it exposes a lot of risk to every organization that it's using. And with COVID, we see a lot of adoption there and a lot of adoption with teams and our ability to protect this data and show the risk is just very effective. So once a customer gets to a critical mass in 365, they almost always see a lot of value in what we are doing. This is a tremendous growth area for us. But in the same token, we also believe that the other that also are designed more towards collaboration and very hard to do data protection. And it's constantly, you have this tension between productivity and security is just presenting a tremendous opportunity for us. And we are just uniquely positioned to solve this challenge. It's very hard. You need a framework and just a lot of very efficient visibility and remediation
spk04: Okay. Thank you.
spk05: Thank you. Our next question comes from Andrew Nowinski with Wells Fargo. Please proceed with your question.
spk14: Great. Thank you for taking the question. So I want to ask about maintenance revenue. You know, if you look at the subscription revenue in isolation, you had amazing growth. However, the maintenance continues to weigh on your overall growth rate. I guess, why isn't maintenance revenue declining faster, and when should we expect more existing customers to convert over to subscription?
spk15: So, the percentage that you see in a decline is an indication of the strong renewal rates that we have. Maintenance of Perpetual has had renewal rates that have been consistently over 90%. We have said all along that we don't go back to our existing customers and try and convert them to subscription. but rather just sell them additional licenses under the subscription. So they keep their maintenance of perpetual and they buy additional licenses. We have so many more licenses to sell to our customers that we can provide more value with that recurring component. And for them, it's one line item as an OpEx line item. So if we see customers wanting to convert, we'll be happy to address it, but we haven't seen it so far and we're not pushing it.
spk14: So those customers that are buying more licenses, are they buying on a subscription basis, or are they just because your perpetual license is going up?
spk15: We're not selling perpetual. That's the minimus number, the perpetual licenses.
spk04: We're selling additional licenses as subscription.
spk05: Thank you. Our next question comes from Mike Sikos with Needham & Company. Please proceed with your questions.
spk22: Hey, guys. Thanks for taking the question here. Just trying to get more familiar with the sales cycle. And what I'm trying to do is if I'm thinking about the overall environment, the sense of urgency and the heightened threat environment we're currently in, I'd imagine that that has some impact maybe in compressing your current sales cycles. But on the other hand, are you seeing sales cycles, in fact, elongate as as customers are being more thoughtful in their approach and taking on more licenses up front. We'd just be curious if you could help me think about those two differences when I'm putting that all into one bucket for sales cycles. Thank you.
spk03: Overall, if you look at the overall, these sales cycles stay the same. Obviously, on a case-by-case basis, there is a bridge that can accelerate somewhat the closing process. But what we see mainly is that Our sales motion is becoming much more strategic, so with the CISO and the simpler, and the customers are just buying more licenses, and over time, buying additional licenses. This is really what we see. We see a better conversion rate on the pipeline. We see that the sales process is much more predictable. We see that we can go to larger accounts and sometimes have access only to the CISO and have a larger build and that our overall relationship with our customers is becoming more and more strategic.
spk05: Thank you. Our next question is from Hamza Farwala with Morgan Stanley. Please proceed with your question.
spk19: Hey, guys. Thanks for taking my question. I wanted to follow up on some of the New York Cloud products that you have rolled out earlier this year. I know they're not material to sales today, but just as the materiality of pipeline, are you seeing more interest in the cloud solutions as you look at your pipeline going forward into Q4 and to next year? Maybe a question for Yaki on that one.
spk03: Yeah, we definitely see a lot of interest. Just think about how many customers with critical data, Salesforce, Google, and Vox, github how many customers are using a stuff like octa and fs3 aws this is huge part of the world information is there and contemporary risk this is where they are going they don't have a lot of data on endpoints when you compromise an endpoint in order to get to the central the central repository the business application 365 file shell take data and this is exactly what you see. The other thing that all these SaaS applications are interconnected. It's very easy to do lateral movements. So once you are in, the ability to inflict massive damage on the organization, it's huge. And today, what we are doing, the way that we are solving this data protection problem with these applications, we are uniquely positioned to do it. We are the only one that at this point that can do this so we believe that what we saw in 365 is just that we can add a lot of value and this is a big part of our business can be with data advantage cloud but as we said this year we're going to see material contribution but definitely we believe that with that we can be the company that will protect your data and the foundation for the digital transformation
spk19: Maybe just to follow up for Guy, not to beat a dead horse on the ARR question, but I think one of the ways that people look at ARR just on a quarterly basis is just looking at net new ARR additions. And the net new ARR additions grew quite strongly in the first half, in Q1 and Q2. In Q3, it was somewhat flattish. I'm just curious, as we think about the seasonality in ARR, how should we think about that metric into Q4, just generally relative to Q3?
spk15: When you look at the seasonality for the subscription and you compare the seasonality to what we used to see under the perpetual model, we don't see much change. So the expectation for Q4 was always that it's the largest dollar quarter of the year, and so is that expectation under the subscription model. So seasonality, as we see it,
spk04: stays the same.
spk05: Thank you. Our next question comes from Chad Bennett with Craig Hallam. Please proceed with your question.
spk11: Great. Thanks for taking my question. So just in terms of with the introduction of your new cloud products and the cloud data store coverage you have with Polarize and now that's been rebranded, Do you have any indication, you know, whether it's, I guess, split in two different ways, whether it's, you know, kind of Microsoft-based cloud products penetration or coverage within your base, or it's non-Microsoft cloud applications or data stores, kind of where your penetration is, or maybe ask differently kind of what the opportunity is there in your base now that you've rolled out these new data stores and cloud data products?
spk03: Most of the cloud platforms that we protect with DA Cloud, with polarized acquisition, coexist with 365 and Microsoft and others. This is the beauty with the cloud, and I also think that this is one of the trends moving forward. Everything going to SaaS, and always you get to a lot of these SaaS applications. Once they hit critical mass, a lot of them becoming... and you need to protect them. And as I said before, there are much more collaboration, API connectivity than security, which is a massive opportunity for us. We see huge opportunity in the base to be the standard for data protection, credit protection, response and privacy and compliance for all of the critical systems.
spk04: Got it. Thanks for taking my question.
spk05: Thank you. Our next question is from Shebly Sarasi with FBN Securities. Please proceed with your question.
spk01: Yes, thank you very much. Can you talk about the strength of your pipeline currently? And now that the month of October is behind us, can you just talk about how it went? Did it beat your expectations?
spk15: I think when we look at the pipeline, a good indication is to see how we think about it, is the guidance that we provided for Q4. Q4 guidance is the highest guidance we've provided since 2014. And it's against an outstanding Q4, as I said before, Q4 of 2020. So I think when you look at kind of the indication of where we are going in the end of the year, we're kind of putting guidance out there and we're still guiding in the same responsible way. I think we feel good about the opportunity that we have. We feel good about our ability to continue to sell to our existing customers and acquire new customers. And we've done that throughout the year, and we intend to do that in Q4 as well.
spk04: Thank you.
spk05: Our next question is from Shaul Eyal with Cowan & Company. Please proceed with your question.
spk18: Thank you. Hi, good afternoon, Ken. Congrats on the quarterly results and any guidance. Guy Oryaki, supply chain constraints, it would appear as if you're seeing none right now, also when looking at your gross margins. But any commentary, any color on your end on this topic, which has been on investors' minds greatly?
spk03: I think, Paul Charles, it's not relevant for us.
spk04: We don't have anything enlightened to say about it. Thank you.
spk05: Thank you. Our next question comes from Jonathan Rookavere with Baird. Please proceed with your question.
spk02: Hey, guys. So, I'm wondering if you could talk about the threat detection and response use case. I understand it's mostly driven by automation, but just trying to get a sense for How material that is to the overall business. And then just strategically, how you're looking at that area going forward. Just because we see a growing number of security companies focused on more effective detection, faster remediation. And it's not only about malware, but you see companies moving into user behavior, so activity around file systems. So just kind of curious how you look at that area. Yeah. and what you're doing from a product development standpoint to maybe add more capabilities over time.
spk03: Yeah, we have very strong capabilities that we are constantly adding. The way that we are looking, really looking at the world is from the data outside. So everybody are looking, you know, the endpoints and then the network, and they are trying to, and all of these, all of these efforts are in order to protect data. We are coming from the data itself. We have the most reliable, a stream of data which is to analyze which is access to the data store itself and from there we are building a profile user profile that we can understand very well when when you have deviation really classifying the users regular user service account vip in the organization and enrich it with classification of data and the infrastructure that is the closest to the data itself and from there we are able to generate very, very accurate alerts if there is any problem. Not only that, we can really generate it where the attack is increasing damage in the organization and you are accessing data in the wrong way, trying to expropriate data. And this works extremely well. And in this part of the prediction and response, we are almost there.
spk04: That's helpful. Thank you.
spk05: Thank you. Our next question comes from Andrew Smith with Barenberg Capital Markets. Please proceed with your question.
spk17: Hi, guys. Thanks for taking my question. Just a question on competition for me. As you move into securing more cloud data stores with Data Advantage Cloud, do you expect to potentially run into competition from CASB products? I understand that organizations are likely not 100% in the cloud, so is having the ability to holistically cover both data on-prem and in the cloud an important advantage for you?
spk03: Yes, the hybrid world is definitely a big advantage, but the other advantage is just the focus on data. So, cat wheels here and there generate confusion. They are not real competition because when you take just a large data set and you want to visualize you can access it from a critical understanding of normal behavior and not just be with the mentally active broker, just completely different offers. So once, you know, we just install the product and we just show you the risk, the mediated risk, classify the data at scale, just visually, it's a very visual sale, the customer immediately understands that it's completely different offers. So just the amount of competition or confusion that we see so far with Data Advantage Cloud is the same that we see with our enterprise Data Advantage offering, which is very... Thank you.
spk05: Thank you. Our next question is from Joshua Tilton with Wolf Research. Please proceed with your question.
spk06: Hi, thanks, guys. Given last year's COVID impact to the business, are there any guardrails you can provide us to help us think about normal Q4 subscription revenue seasonality, aside from it should be the biggest quarter? Maybe anything unusual from last year's Q4 to call out? Thanks.
spk15: Well, I think when we built the guidance, we took into consideration slightly higher travel. I'm talking about the expense side. Slightly higher travel, but still below pre-pandemic levels. From a revenue perspective, the guidance kind of speaks for itself and is indicating how we feel going into the quarter. If you think about 2020, We obviously had, in Q1, we had the hiccup just because when COVID hit, and then Q2 was a better quarter. Q3 was even better than that, and then Q4 was an outstanding quarter, and we're providing kind of a strong guidance against that outstanding number. So we feel good about kind of how we're entering the end of the year, and we feel that we can execute on all cylinders.
spk04: Thank you.
spk05: Thank you. There are no further questions at this time. I would like to turn the floor back over to James Orestia for any closing comments.
spk21: So thank you, everyone, for your interest and for joining tonight. And we look forward to speaking with you this quarter. Please don't hesitate to reach out if we can be helpful. Have a good night.
spk05: This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Have a wonderful evening.
Disclaimer