Q4 2019 Earnings Call

A question, that's especially will follow the former presentation. If any what's required operators. This is turned the conference piece for stars or on your telephone keypad. Please note. This conference is being recorded I would now let's turn the conference over to your host James arrested director of Investor Relations. Thank you you may begin.

Thank you operator good afternoon. Thank you for joining us today to review Varonis is fourth quarter and full year 2019 financial results with me on the call today or Yaki, Faitelson, Chief Executive Officer, and Guy militiamen, Chief Financial Officer, and Chief operating Officer.

After a preliminary remarks, we'll open up the call to a question and answer session.

During this call we may make statements related to our business that would be considered forward looking statements under federal securities laws, including projections of future operating results for our first quarter in fiscal year, ending December 30, Onest 2020.

Actual results may differ materially from those set forth in such statements important factors such as risk associated with anticipated growth in our addressable market competitive factors, including increased sales cycle time changes in the competitive environment pricing changes transition in sales from perpetual licenses to a subscription based model and increased competition.

And the risks that we may not be able to attract and retain employees, including sales personnel and engineers general economic and industry conditions, including expenditure trends for data in cyber security solutions risks associated with the current closing a large transactions, including our ability to close large transactions consistently on a quarterly basis.

Our ability to build and expand our direct sales efforts and reseller distribution channels, new product introductions, and our ability to develop and deliver innovative products risks associated with international operations and our ability to provide high quality service and support offerings could cause actual results to differ materially from those contained in for it.

Certain statements.

These factors are addressed in the earnings press release that we issue 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 STC filings. These statements reflect our views only as of today and should not be relied upon as representing our views.

Any subsequent date Varonis expressly disclaims any application are undertaking to release publicly any updates or revisions to any forward looking statements made herein.

Additionally, non-GAAP financial measures will be discussed on this conference call a reconciliation for the most directly comparable GAAP financial measures is also available in our fourth quarter 2019 earnings press release, which can be found at www Dot Varonis dot com and the Investor Relations section.

Also please note that an updated investor presentation as well as a webcast of today's call are available on our website in the Investor Relations section with that I'd like to turn the call over to our Chief Executive Officer, Yaki Faitelson Yaki.

Thanks, Jamie and good afternoon, everyone I'm sitting to speak with you today, It's really view of 2019 performance and discuss our expectations for Twentytwenty just talking my team was truly a monumental your full blown is for many reasons not big ever been the based will fall transition to a subscription modem.

Going into the transition, we believe that customers, who purchased five or more licenses will more likely to but even more licenses you go to devalue. They receive what we didn't know was how you get to existing customers would beat the purchase additional licenses to subscription.

Also did he know how well set of schools would take through the new more than you.

He sees an understatement to say the determination is well suited much faster than we expected.

We believe it do you decide if this was the fastest transition he still we but in any case I'm extremely proud of the team's strong execution and what they had to accomplish this year.

We just said, though twentytwenty says kick off I'm always excited to spend time with colleagues from around the world. She doesn't through the argument here about the differentiated body, we delivered to customers. The stories in the <unk>. Just always this you maybe crystal clear that the powerful platform has never been stronger and the need for.

Platform, there's never been great.

Although the last few we have 20 tons fall building the foundation for would doable inscrutable subscription business. You said she meant speaks to how you get cost to move out to adopt though platforms to subscription.

And did urgency to reduce risk the pick in response to spreads in response to see and regulatory compliance in both on brand in college styles.

Let's go over all these thoughts for the first quarter total revenues were $72.6 million was 82% of license revenues from subscriptions exceeding guidance of 75% for the for you.

Revenues for $254.2 million, 65% of license revenues from subscription.

So very pleased to have achieved 65% for your subscription mix compared to our expectations simple said at the beginning of the.

If you look at Gossage in North America. It has very strong you is it seems immediately embraced oh subscription transition and quick time to body. It creates for customers. After a slow start any me I do think thing do you have completely embraced the new subscription model and we feel good about the twentytwenty pipeline in that region.

Before I discuss if I'm not sure what he's always in great detail I want to talk today about at least what Judy topics first the secular trends that continued to benefit voice second the opportunity we see to continue to provide substantial body door customer and finally.

Turning to subscription business and how this will accelerate the flywheel in for the business full.

First let me Scott the secular trends well everything starts and ends data.

We must seems data goes both on women in the cloud data, but the <unk> is not.

Hi project, we the finish line, but then ongoing charge for C. So is that the quiet data centric solutions. The number one problem data protection is overly exposed sensitive data.

We have spoken many times, how many expose photos and five would be fine you wouldn't go risk assessment.

2019, we looked at all the solvent organizations and phone the de created on average over 1.2 million exposed for those in a single quarter.

For the open to every employee why they the goals data migration human Els and middle doing acquisitions.

Organization out can you do use automation to remediate lease exposure or they can accept potential extension of is it. The same time. This threat landscape is becoming increasingly sophisticated buffalo cyber weapons created by X built it even government agencies Oh now in the hands of common cyber thieves.

We see them every day.

Organization detecting investigate my willing in the system.

Before we get there we see that organization easily thick very little Odell drowning in alone.

All of this is happening what companies face and evolving regulatory environment on data and privacy.

He sees the day to day reality for customers, who are limited by scarcity of security talking.

Resorts company increasingly turning to barneys for the automation platform. The leeville they get actionable insights into the hybrid data meaningfully fishing detection in the <unk> ongoing remediation.

Our objective is to be department, even though fall into place to put their data why do we started in 2005 was one license, but only state a security platform has evolved over the last 15, you just 26 licenses the cost six product families and today it.

And today they said.

Let me use cases data protection privacy and compliance and threat detection and response.

The 2016 release of building seven was the quantum leap forward for barneys and for customers.

We think that's meant like <unk> dashboard to office 365, Arctic Directory, and GDP out sort of fall dramatically faster investigation and automated data subject axis of course.

Oh gosh, the metals and clearly visualize the risk, but from our data classification at scale you take in response to spread in an immediate data exposures automotive.

60 me and efficiently the it'll be full and we installed Belgium, seven do you want your risk assessment and show them, well, though sensitive data stones.

Oh exposed on blame it on cloud data stones, when we show them, how they can rapidly detect and investigate doxil inside those moderate and Apds and when we show them a plan for getting things under control without much money if <unk> operational journey. It is very powerful setting too.

This is why the if you know on these two a subscription company made sense and why Im just four quarters over 80% of for license revenues are coming from subscriptions subscriptions that out customers to invest MAU platform upon what leaving room for meaningful expansion overtime.

<unk> Macleod you then you should fall just says she good the automated value.

But then we bought more products from us.

In the used to comp extending the platform of relationships have become.

That's most strategic and real spending much more time, we've got customers as we uncover them open points and involve additional stakeholders within the customer we cannot this small you said in his them reach their bodies targets.

For example, don't get risk assessment of what would you just I'm not sure institution Vone edge flux suspicious metal could PBT for me to college belonging.

To a form of employee.

No CIO and VBL feisty, we're convinced you will blind when it came to those sensitive data and needed for only used to secure wheat and money thoughtful suspicious activity. In Q4. This company became and you customer purchasing subscription for six products, including did I love edge automation engine.

No, they're able to multi dose threats from drilling at the end result of global data exposures, reducing the risk in days not months or years.

Another example.

The recent strategic win for the U.S. County, but decided to take.

Steps to avoid becoming the knicks on some of the victim at least assessment revealed nearly 25004 they'll get over 11000 sensitive five open to it in blue eating the organization.

All of these five would be at risk if you've been a secret endpoint was infected was on somewhat in Q4 discount the purchase subscription so five only spartacus no. It would be allowed it to suspicious events that could be early indications for in a thought and automatically locked down compromise loss before these too late.

These are just too many great examples of customers, who can now investing they've only spots foam and more quickly deliver value because if all the transition to subscription modem.

When we made the decision to transition we knew that the rapid evolution of our business model requires discipline and focus that.

We needed to money change of cost allowed organization, where to put new compensation plan Im convinced the pipeline of hundreds of millions of dollars is quickly as possible.

I want to stanko team for doing multiple joint therefore in 2019 in transitioning to Vone smelled good.

It's such a rapid pace.

So what does all this means simply put we are focused on selling though platform and delivering value to customers.

Other transition.

Make it easier to do so its customers are adopting a great about of the platform more quickly can boast being nisha land into falling expansion. These secular trends in tailwind you know focused on innovation has resulted in an integrated an automated platform to customers who is highly complex acuity.

Challenges, we're extremely pleased with 2019, and we know that execution in Twentytwenty n. beyond will accelerate the flywheel and propel us too old, though billions autologous, we stopped let me turn the call over to Guy Guy.

Thanks, Yaki good afternoon, everyone.

Fourth quarter results capped an outstanding year of subscription transition with 82% of license revenues coming from subscription compared to our guidance of 75%.

And 62% year over year growth in a are the $210.5 million.

Throughout the year, you've heard me discuss the fourth quarter well, we have the highest number of renewals as the final test in our subscription transition would existing customers adopt subscription on a large scale.

The Great news is that we passed with flying colors with the highest contribution from existing customers. This year at 57%.

Not only did our existing customers renew the maintenance of their perpetual licenses they added to their varonis deployment with additional licenses under the subscription model far exceeding our expectations heading into the quarter.

While this dynamic generated a modest revenue headwind this quarter compared to the Q3 contribution from existing customers of 50%.

It underscores that we are a subscription company and the opportunity that we see ahead.

Now, let's turn to result.

Total revenues for Q4 were $72.6 million in the upper end of our guidance range, despite the higher than guided subscription mix.

Fourth quarter license revenues were $38.4 million, which included 31.6 million of subscription revenues.

New subscription customers continue to buy on average between four and five licenses in the initial deal compared to purchasing between two and three licensees under the perpetual model.

Lastly, maintenance and services revenues were $34.2 million.

Maintenance renewal rates on perpetual licenses once again exceeded 90% in the fourth quarter.

As mentioned, a our was $210.5 million as of the end of Q4 and grew 62% compared to last year.

This significant increase correlates with a much greater contribution we are seeing from subscription revenues more predictable and recurring revenue stream and reflects the underlying health of our business.

Looking at the business geographically North America revenues were $49.4 million or 68% of total revenues in EMEA revenues were $19.5 million, representing 27% of total revenues rest of world revenues were $3.7 million were 5%.

Of total revenue.

We added 229, new customers during the fourth quarter and we ended 2019 with approximately 7100 customers.

Much like the previous few quarters the difference in year over year Q4, new customer adds was again associated with the smallest user group companies with fewer than 500 employees.

As of December 31st 76% of our customers had purchased two or more product families up from 73% at the same time last year.

45% of our customers purchased three or more product families compared with 40% in Q4 2018.

Turning back to the income statement I'd like to point out that we'll be discussing non-GAAP results going forward.

Gross profit for the fourth quarter was $63.5 million, representing a gross margin of 87.5 per cent compared to 91.7% in the fourth quarter of 2018.

This reflects the higher mix of subscription revenues and our continued investment in our customer success teams to support the transition.

Operating expenses in the fourth quarter totaled $65.9 million.

As a result, our operating loss was $2.4 million or an operating margin of negative 3.3% for the fourth quarter compared to operating income of $15.5 million when operating margin of 17.7% in the same period last year.

While the transition continues to have a short term impact on our financial results. We are committed to profitability and expect to show progressively improving operating leverage as we move through 2020, even with our continued investments to grow the business and capitalize on the market opportunity.

During the quarter, we had financial income of approximately $339000, primarily due to interest income.

Our guidance does not consider any potential impact to the financial and other income and expense associated with interest income or any impact related to foreign exchange gains or losses, as we don't estimate movements in foreign currency rates.

Our net loss was $2.8 million for the fourth quarter of 2019 or a loss of nine cents per basic and diluted share compared to net income of $17.3 million or income of 53 cents per diluted share for the fourth quarter of 2018.

This is based on 30.5 million basic and diluted shares outstanding for Q4, 2019, and 32.5 million diluted shares outstanding for Q4 2018.

Turning to the balance sheet, we ended the year with $120.5 million in cash and cash equivalents marketable securities and short term deposits.

For the year, we use $10.7 million of cash from operations compared to generating $23.5 million of cash from operations in 2018.

As a reminder, we are collecting on annual contract value amounts in this transition and therefore, we continue to see a short term impact on cash flows.

We ended the year with 1574 employees and 8% increase from the end of 2018.

Moving to guidance.

As mentioned in the previous earnings call I want to reiterate that 2020 is a year to have in the first half of the year. The subscription makes will be significantly higher than it was in the first half of 2019. When we were at the beginning of the transition as a result, we will continue to face material revenue headwind.

In the first and second quarter at the same time, our expenses are relatively fixed as a result, there will be short term pressure on our operating margins in the first half of the year, which we expect to alleviate in the second part of the year.

Taken together, we expect that revenue growth and margin expansion will sequentially improved each quarter as we progressed throughout the year.

But the first quarter of 2020, we expect total revenues of 59 million to $60 million representing growth of 5% to 6%.

We expect our non-GAAP operating loss to range between negative $17.3 million, the negative $16.5 million and non-GAAP net loss per basic and diluted share in the range of 57 cents to 55 cents. This.

This assumes a tax provision of 400000 to $600000 and 30.9 million basic and diluted shares outstanding.

For the full year, we expect total revenues in the range of $286 million to $292 million representing growth of 13% the 15%.

We expect our full year non-GAAP operating loss to be in the range of negative $27 million to negative $24.8 million and non-GAAP net loss per basic and diluted share in the range of 93 cents. The 89 cents. This.

This assumes a tax provision of $2.2 million to $3.2 million and 31.4 million basic and diluted shares outstanding.

Here are some additional points to consider as you think about 2020.

First we handle foreign exchange rates by entering into hedging contract in 2020. Those contracts result in an approximate 100 basis points headwind to operating margins compared to 2019, which is reflected in our guidance.

Second on a quarterly basis, we will be providing total customer counts only starting with the first quarter of 2020.

Third we expect that Capex in 2020 will be in the range of 10 million to $14 million and finally, we expect that the subscription mix in 2020 and going forward, we'll be in the 90 plus percent range.

In summary, this was an outstanding year for girl and it is our rapid transition to subscription has transformed the company and strengthened our fundamentals we feel good about the business and we will continue to invest while balancing growth and profitability, which has been our philosophy for many years.

I want to thank the team for their contributions in 2019, and we are excited to continue our momentum in 2020 with that we would be happy to take questions operator.

Thank you at this time, we will be conducted a question answer session. We as such we limit yourself to one main question and one follow up if you like test question. Please press star one on your telephone keypad a confirmation till indicate your line is in the question Q you may prestart to fuel at your move your question from the Q for participants using speaker equipment, it may be necessary to pick up your.

That said before person the Sarkies one more pieces, we pull for questions.

Our first question comes a lot of Brent, though with Jefferies. Please proceed with your question.

Hey, guys. Thanks. This is a howard on for Brian I've a question for Guy I was hoping I was hoping you could help me reconcile to potentially conflicting data points. So the the 57% of license in first year maintenance.

Sure be able to existing customers, but that was a significant uptick as you pointed out but at the same time the number of new customer ads. So the 20 to 29 this quarter, that's been declining about 20% over the last four quarters or so so within the framework of a blended expands it might seem that more of the new business growth is coming from the expand portion.

<unk> is that a fair statement and is that consistent with your internal plans.

Let me try and break that into the two components of it when we look at the new additions the new customer ads.

In the last couple of years, we've been focused not only on the number of new customers, we bring in but on the on the quality of those customers and we've been focused on the customers with a lower a user count the ones that are over a thousand employees and that's been working very well for us. So when you think about the delta between the new customer adds that we.

We've had in the last couple of quarters compared to the previous here the delta it really relates to the lowest user group the companies with less than 500 employees and that's been very consistent with our strategy and that's been working very well in terms of the existing customer.

The license coming from existing customers, yes, as you point out that was very healthy. This quarter. We always said the Q4 was a test for US we wanted to make sure that customers not only renewing their maintenance of perpetual license, but add additional licenses with the subscription model and that worked very well for us.

In Q4, we passed that test with flying colors. So.

The 57% of license from existing customers did generate minor revenue headwind compared to the guidance, but really shows how strong the businesses and the reason we raised our 2020 subscription subscription mix to be 90 plus percent.

Thanks, guys. Thanks, guys and that that's really helpful. On the you know your color on moving up market and if I just may have a follow up for yaki. It on a related question on a just just on the renewal rates are given now that you fully lapped the transition to the subscription model.

Any insights that you have to to changes to renewal rates for the you know for that the legacy on Prem base. It has now subscription that that'd be helpful. Thank you.

<unk>.

At this point you know we haven't seen.

Any change so philosophy, it's the same trends.

Let me, let me add some color there when we look at the renewal rate for a perpetual license maintenance coming from perpetual license that's been over 90% and we're very happy with that we don't see any change there.

In terms of the renewals coming from the subscription renewals there we've seen in the past renewals as an opportunity to up sell to existing customers. We've actually seen that in the second part of 2018 is when we had the pilot and we saw that that came as an opportunity for us to actually up sell to two customers in the south.

Second part of 2019 as well, it's still small sample, but we're very happy with that.

Okay. Thank you guys.

Thank you thanks Howard.

Our next question comes a lot of Melissa Gorham Frankie with Morgan Stanley. Please see with your question.

Great. Thanks for taking my question, maybe I'll start with Europe, and just trying to understand what's going on there it looks like the declines accelerated this quarter, but it's hard to on to it I understand if it's the subscription transition or if it's something fundamentally yeah. Yeah can you just maybe talk about what you're seeing in Europe, and how the Salesforce has been adopting such.

Options in that region.

Yes, you know we as you know we started the always some friction and you opened we need to make some leadership changes and really took US you know close to five months to make sure that we've rolled out a duck CFO and the top priority for the year was to move to it to be subscription company. So we didn't really in one year, what what takes two most companies are managed to do the transition.

Four to five years and the Q4 mixing yeah. It was better than the 82% mix for the company. So we believe that we already know good place. We're feeling good about the pipeline and the team uses the well position to do willing twentytwenty.

Okay, that's very helpful and a follow up for Guy and I know you're not guiding two aircrafts next year, but wondering if you could just help us and put maybe some parameters around what we should expect next year, particularly as were getting into more difficult comps in the second half of the air and how to think about that relative.

Robin you got sick.

Absolutely. So we talked about 2020 being the year of two half and when you think about the first part of the year, we still have some revenue headwind because the subscription mix in the first part of 2020 will be a higher than the subscription mix. We had in the first part of 2019. So the revenue headwind will actually have.

Kind of the reverse relationship in terms of Aon <unk> or we should see a our grow.

At a higher number there and then in the second part of the year, where it's much more apples to apples on a revenue basis, the A.R.R. should be closer to the revenue growth and that's kind of the way to think about it throughout 2020.

Got it thank you very much.

Thank you.

Our next question comes a lot of Matt Hedberg with RBC capital markets. Please proceed with your question.

Oh, Hey, guys. Thanks for taking my questions I'm.

Obviously, the air our growth was impressive well above where I think a lot of us we're thinking this quarter and I guess to follow up on my list Melissa's question, you thinking even a little bit longer term yeah. So not just 2020, but longer term you know now that we're through the effectively the end of the transition that at that mix is now 90% plus you sort of way that we should think about a framework.

For sort of like sustainable air our growth or maybe set differently just underlying market growth I think is kind of help them, we think about even even longer term than not just 2020.

Yeah, Hi, Mike do I see that the overall the underlying market goes you know what what we've seen empirically that anybody who is on structured data and critical infrastructure need vacone. So what is really changed significantly is our ability to go up market in a very predictable way and also the custom.

Those are buying much moldy, although customer lifetime value when we engage with the customers in the lightweight really increasing leaps and bounds just to understand real doing extremely well, we said we seem to get into the cloud roughly 65, we have six licenses Bill you know, we advise you will be and.

Hey, one drive one line and show went online in exchange in the two D.C. So when we engage with customers. We can take so much more went head so much more value for the last one day transition will kicking so when the flywheel will kick in the higher mix subscription.

Let's start to kick in later quarters of this you. We believed that we can do it can start to show overall very healthy goes then we can even when we believe that we can maintain 20 plus percent goes for a long time.

Super Helpful. And then I know Yaki you talked about one of the byproducts of this transition to spend a reduce friction in sales processes.

And considering how quickly you moved through this transition when you think about 2020 are there additional steps you're taking from a go to market perspective to sweep even further reinforced the value proposition that you know that you guys to liberty.

No change would change so many things you have this the way that we go to market. We have what we call. This value QB all the way that we are not being how we're taking the customers to value and we also see that products really well can you know, we really sell everything in the platform and the big change My talk.

That customers are willing to spend a lot of time with us we see more.

11 people, we have a dashboard is being used by and daily both by businesspeople and what we want to make sure that will must still be skill you know that from being very opportunistic can you know starting small in going we need to stop being can go because you know we see that many customers though.

Accordingly, six licenses then we just see a pass through his many many many customers and prospects to go to 12, 15 and more licenses that he's just to clear path and in one you I can tell you that it's a completely different business completely different says motion and completely different way that the customers Oh getting the valley.

I would just becoming so much most strategic reseller customer base and really was you know they how the platform is fitting to their overall market condition and our ability to spend more time, we see a customer going then they'll bringing the like people and we are able to show them you never really couldn't be five were way how well it providing.

Business value immediately and ongoing.

Super helpful. Thanks.

That's not.

Our next question comes on line of Alex Henderson with Needham. Please state your question.

Great. Thanks, very much great job I said I really impressive.

I was hoping you could talk love about a deal process time, a and deal sizes and what the pipeline looks like a clearly.

Selling a subscription is a little bit harder exercise and selling perpetual you had a very tight pattern a around perpetual has that lengthened the process time to get deals done and obviously, a you're selling a lot more subscriptions I would assume that's also in turn increasing deal sizes can you give us any sense of those two.

Dynamics and you know what the pipeline of a of leads looks like.

Thanks.

Yes. Thank you so in terms of they sell cycles, though relatively de relatively stay the same but in terms of our time to spend with customers, we spend more time with them they and.

There are willing to spend much more time with us and we'll able to write off the but just to sell them.

To sell them more licenses sewing and so this is really what do we see the ability.

Selling most of the platform upfront.

And then in the end overall ongoing.

One of the things that we see now that most of our pipeline now we subscription pipeline.

I still you know, we almost forcefully well really transitioning from perpetual to subscription and Q4 was a huge test Alex you know getting into Q4 that it scopic savvy and.

Do this 82% you know we so part of the team. It was just in unbelievable achievement and now that everybody knows the customer knows and it's in and then if Oh salespeople that this is this is done really subscription business and all the pipeline in most of the quotes is a subscription.

Pipeline, it's welding is really good position just to sell the platform and the ins significantly.

Switching this way to get the subscription deals.

And Alex is tied on that when when we when we sold a perpetual licenses, we usually had in the initial sell between two to three licenses we saw under the subscription model that new customers by between four to five licenses. We saw that in the first three quarters of 2019 and that was consistent in two and in the fourth.

Corridor, so were very happy.

And the increase in number of licenses hasn't changed our sales cycle.

One last question, if I could Oh I'm there to the extent that you're selling now a lot more license getting a lot more automation upfront I assume that the installation happens faster.

As well as result of that and time to time to value happens faster. So.

Is there also now that you've got a years' experience under your belt. Some evidence to suggest that the time to the next to up sell is also faster.

Thank you in terms.

Thanks, I can tell is actually installation. It's it's the same but when they are buying more licenses they get it extremely fast they automated value in this works very well and there. We still have you know just initial indeed indicated so we can say the diesel stationary trends once we understand it small.

We are going to communicate to you what exactly we see but we just want to make sure that these trends I really thought even before we are.

Telling you that this is something that is that it will also pay attention to.

Great. Thanks for the call.

Thank you.

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

Hey, I could hit Guy Guy, how you guys doing.

Good. Thank you yeah, absolutely Hey, guys, maybe first for you maybe thinking about the subscription transition from a slightly different angle from expense perspective actually.

Believed there were a stronger.

Sales incentives this year to to really encouraged that behavior around leading with subscription clearly was very successful Oh program I guess now that we're at the at the tail end of that transition how to sales comp change how high level of course, but qualitatively generally maybe start to drive more leverage in that business.

So let me try and break that question on the commission side, but also take the opportunity to talk a little bit about the expense as a whole for for Q1, and 2020 and I'll start with the comp when we looked at the comp we had to make sure that the sales reps are incentivized to do the right thing.

I think the comp plan was was done very well in a sense that reward in the reps for doing things that were beneficial for the company and we're keeping most of that going forward. There's not there's not any major changes are going into 2020. The only small component is that we're dealing with Oh P. S.

Renewals with subscription renewals.

Which were compensating the reps, but obviously for a at a lower percentage, then, bringing new business and that kind of relates to the comp and in general in terms of the expense side.

Because this is a year of two half and we talked about that I'm in the prepared remarks and in one of the previous questions and the expenses are relatively fixed and that really results in some short term pressure on operating margins in the first half of the year, but that should be alleviated in the second part of the year and we expect to show.

So sequential margin improvement going through the 2020.

[noise] data that's really helpful Guy.

Okay, maybe for my follow up for you you know I I think we mentioned earlier that in the maintenance business. The renewal rates. There I think continue to be pretty strong at 90% plus I guess the higher level question is how do you sort of in envision maintenance customers over time, I mean is there an opportunity to maybe more proactively converts into subscription.

Or is that just going to be more of a natural evolution.

For them to opt in for subscription does that make sense.

Hey, It makes sense about you know philosophy real selling subscription and what is that the maintenance subscription its subscription business and what we want to do and it's just to make sure that everything else no buying is going to be just subscription and what is very important philosophy is that the subscription model.

Yes really unlocked.

Potential of the platform. So what do you think Bogan philosophy is to go to these customers that have a 234 licenses and make sure that was in two three years. They would have 15 licenses and we believe that with many of them. We have clearly Pos so how to do it. So you know we have the store mendis base with so much potential we now have a clear path into.

Films of budgets and their ability to buy it is just to say you know, let's do everything let's make sure that you know on your protected on plan in the cloud and have all the automation and really addressing this for you ski says everything that related to data protection and privacy and compliance and for detection and response and we just believe that we have a clear path.

This is how we also just thinking about they transition in one year, we transition than we also really heating.

It really nice scale and this is because the base sees the bases buying and its Guy said Q4 was the ones that we can make this because you know it's a customer was that though.

But it will.

Usually buying a perpetual and have leases.

Perpetual he knew was they are coming in just buying them over and Mo we subscription. So after the fourth quarter I can tell you that we really have clear visibility and a lot of evidence from the base that we can take this enormous assay that we have with a 7000 customers and really make sure that they will use the.

Platform and increased drastically the overall customer lifetime value.

Very helpful. Thanks, guys.

Thank you.

Our next question comes on line of course help us with Stifel. Please see with your question.

Hi, This is actually Chris Spiros on for Gore and Yaki too just to piggyback on what you just describing the subscription model continues to yield for five licenses upfront versus two or three for the perpetual model with more than a full year of subscription selling and a better understanding of the Sims.

Scripts and renewal process, how should we think about the degree you degree to which the subscription model can enhance potential customer LTV and the long term.

It's you know.

[laughter] drastically and are we just see now that all the products are walking and customer so really.

Trying to buy everything that we have 43, you see says and it just makes sense for wants to spend a lot of a lot of time with them and when they when they are buying more initially it's much easier to two upselling just as we said his campaign, becoming so much more predictable.

That makes a ton of some sense, there and one more in regard to the competitive.

Sure Matt.

Historically, varonis wouldn't counter competitor or while performing a risk assessment minimum one out of every 30 or so.

Segments does this remained case or has your persisting outside outside gross resulted in a more crowded market.

No. We don't we we don't see more competition them if they just competition landscaping for this thing.

[noise] Thanks, Chris.

Our next question comes on line of 10 minute with Craig had them. Please suited question.

Great. Thanks for taking my questions nice job on on a strong your and by Matthew Me a business from an execution standpoint did really well in in the fourth quarter. So congrats on that.

So <unk>.

I guess guy if we look at the guide for a fiscal year 20 in in the implied growth rate on the subscription side. You know, it's it's 90 per cent plus of growth and I think a lot of people are trying to asked us in different ways, but if we're we kind of look at you know when.

Either it's you know net new growth in that 90% number or cross a lot cell in that number kind of how how would you think about you know what.

What's going to drive subscription growth this year and and you know maybe you have targets on you know where are you in in in terms of two plus products and three plus <unk> products and so forth that that you'd care to share. Thanks.

Thanks for the question I think the subscription transition really unleashed the platforms potential. So we saw both new customers buying more licenses as as I discussed in the previous question, but we also saw our existing customers embracing this transition and buying licenses under the new.

So when when we think about what's going to drive 2020, and the reason, we kind of upped up that subscription mix to be 90, plus percent goes back to how will we felt Q.Q. for what you know Q4 as as we talked into prepared remarks was was really a test to make sure that customers are are buying the existing customers not only renew.

The maintenance of perpetual, but they buy additional licenses under this new model. So when we think about 2020, we think that both new customers will continue to buy subscription we think that we have a tremendous opportunity within our existing customer base for them to buy additional licenses under the subscription model and also like I said before the renewed.

<unk> of subscription is an opportunity to up sell to those customers. So all of those components together give us kind of the confidence to to the 90 plus per cent number we guided for.

In in the renewal on on the subscription customers that that your lap singer Annualizing I mean do do we think.

<unk>.

You know that that uplift is is is kind of 20 per cent cagar annually. You know I'm thinking you know in in terms of like a net expansion number maybe it's too early to talk about that but how should we think about that if you. If you care to you know frame it any way thanks.

So the so the the the right way to look at it as is it <unk> <unk> looking at the N.R.R., but the N.R.R. kind of the earliest to have meaningful data is at the end of this year. So we we don't want to jump the gun and and jump to conclusions we feel that the numbers are healthy, but the right way to look at it is at the Earth.

Earliest at the end of this year.

Okay. Thanks, guys nice job.

Thank you.

Our next question comes on line of <unk> did Davidson T.C. with a question.

Hi, guys.

Thank you for taking my questions today.

There you go to mention spending more time with customers.

<unk>.

You could talk about if the role of resellers has changed.

Model.

Great.

Hi.

Didn't change, but we feel that we became significantly more important to the pound new community just because you know the new <unk>. They do you have these you know <unk> very nice these the customer. Although you can you if we use so to make sense for them to support the cost of <unk> They can get.

<unk> much more so overly eating change, but we definitely becoming <unk> much more important to the main <unk>.

Okay, Great and then it might be a little early for this question but.

Anything you can mention about the growth trajectory of what a customer looks like beyond the adoption of initial purchase and if you've noticed any trends more broadly among your customers.

We we can't mention it no like you know just stay.

We can expect from every customer of about just we can tell you that or the border. So selling the cloud of these doing extremely well.

Related to to free 65, and we can see the customers can exponentially <unk> licenses the the the here.

Yep.

Thanks half.

Our next question comes on line of Daniel US would put it put securities T. suited question.

Yeah. Thanks.

So well when you guys getting this when you get into a deal and you actually get an assessment <unk> what percent of those deals from a high level you think you're winning.

Mm.

So we don't actually break down the numbers, but I'll I'll, let me give you some color when we are able to get into the room. The right people high enough within the organization and we can get the c. So in and we show the risk assessment, that's kind of the the the jaw dropping moment when a lot of the companies realize how vulnerable they are and how much sensitive data.

Some time is just sitting there. So it really is a a question of who we get in the room and when we have the right people in the room. The the rates are really good.

Great. Okay, Okay as the last class again guy wins the.

Wednesday, a subscription air are in the quick as time did it and most people I've ever seen seminar.

Did you use where there's no. Thanks I told you. We we signed you up as as the first first participant.

Okay, let us know in two q.. Thanks, [laughter]. Thank you again.

Our next question <unk> with Oppenheimer. Please do to question.

Hi, Hi, good afternoon guys.

Trying to build a on on on some prior questions from an A.R.R. perspective.

And I don't want might have been a little late to the call is there any magic number from a subscription respective.

<unk>.

Needed to sustain the strong <unk>.

I know Yucky, you mentioned before six subscriptions could look the other ships to subscription has really at the rate at models adoption, but you don't you guys have an additional like things like.

20.

Additional models to up so so how should we be thinking about it within this.

Framework.

No. We hi show, we have we have close to ER 25.

Licenses and really believed that the manual focus the males can use a lot of them. So the thing that we just time, we see how <unk>, but due to just initially we <unk>. We saw that you know so many of them are getting more within a modem 10 licenses. So we still can to have just to blog.

In terms of licenses and yellow, but we understand very well how devalue <unk>. The overall customer lifetime volley Wilkes. So you know the main thing that we can tell you that the model is really.

<unk>, Oh customer base to consume the innovation and get much more volume.

Understood and and as we think about the on going to get investments into 2020 angles <unk>. The <unk> to hospital of the year, where is it exactly that you guys are pretty money to work on I think also from Ricchio graphic perspective, how should we be thinking about it.

Yeah.

So the way we're thinking about the investments is is really kinda across the board in terms of the cells Department, we want to invest.

And hire a sales people because it takes us up to 12 months to get a rep in the mature territories to be fully productive and we want to put that investment to work knowing that we have some short term pressure because of the headwind of revenue, but it's still makes a lot of sense to make those investments right now on the sales fun.

We've also had tremendous oral why on investments we had on the R. and D. Department and we want to continue to invest there and on top of that we're investing in customer success than professional services to support the subscription transition. So our philosophy hasn't changed we want to continue to invest in a responsible way.

Because we're focus not just on the growth side of things, but we're focused on profitability and and we've always had that in mind than we're continuing we we are very committed to profitability. We just understand that there's some short term.

I'm kind of wins, because short headwinds because of the revenue side, but we're trying to invest wisely on all fronts in terms of the geography I'd say in terms of investments, mostly in North America because of the potential that we have their an kind of the second in in line is <unk>.

Understood well done.

Oh, thank you.

Ladies and gentlemen, we have reached the end of our question and answer session and I would like to trying to call back over to Mister <unk> pretty close remarks.

So thanks, everyone for joining the call today, just wanted to let everyone know that will be at the J.N.P. Technology conference in San Francisco on February 24th that presentation on the web cast with a link on our industrial Nations website, and we look forward to speaking with everyone throughout the corner. Please don't hesitate to reach out to me with any questions. Thanks again.

This conclusively teleconference human now disconnection lines at this time. Thank you for your participation animal wonderful day.

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