Q3 2020 Varonis Systems Inc Earnings Call

Greetings welcome to Varonis systems third quarter 2020 earnings call at this time, all participants are in a listen only mode.

Question and answer session will follow the formal presentation if.

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Please note this conference is being recorded.

I'll now turn the conference will be a host James <unk> director of Investor Relations. Thank you you may begin.

Thank you operator good afternoon. Thank you for joining us today to review Varonis is third quarter 2020 financial results.

With me on the call today are Yaki, Faitelson, Chief Executive Officer, and Guy Milan, <unk>, Chief Financial Officer, and Chief operating Officer. After preliminary remarks, we'll 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 ending December 31st 2020.

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 how 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 for.

Barone as expressly disclaims any application or undertaking to release publicly any updates or revisions to any forward looking statements made herein.

Additionally, non-GAAP financial measures will be discussed on this conference call, which exclude stock based compensation and associated payroll tax FX gains and losses, and the amortization of debt discount and issuance cost related to our convertible notes issuance in may.

Reconciliation for the most directly comparable GAAP financial measures is also available in our third quarter 2020 earnings press release, which can be found at www dot barone as dot com in the Investor Relations section also please note in an updated investor presentation as well as a webcast of today's call are available on our website in the investor relation.

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. Thank you for joining us to discuss Oh failed quarterly Twentytwenty resorts. We are extremely pleased he's always goes and I want to give you an update on our business and the current operating environment and talking about how we expect the market trends. We are seeing continued to benefit varonis overtime.

I'm also excited to announce the agreement to acquire <unk> and explain how it will expand the voice data security platform for a couple of additional cloud applications and infrastructure. Finally, I was doing the call over to guide to discuss so still a quarterly financial results in more detail.

The team continued to execute well in this field training vitamin with significant customer engagement and inbound interests companies understand the elevated Luis could they face.

A walk from home schooled Oh here to stay.

Since it they've been neglected data using all exposed than ever before as we moved into these used on secure compute those talks clinical data. It seems obviously 65 on principle VPN comps.

Companies face an ever increasing number of advanced persistent threats from extending a brit October in hockey.

See viable targets.

At the same time inside those fleets. So going is a customer we bought a higher number of affiliates warning <unk> accessing sitting sensitive data abnormal ways.

Our ability to address these frisco.

On March.

Oh platform continue to resonate with new customers as well.

Buying more licenses in doing initial purchase that was existing customers of course to more licenses over time.

The Orlando spin.

The data centric approach to secure these kinda because.

And as a result, we continue to take greater share of the available security spend the Pos double digit license to a customer who has never been clear, though and I want to highlight a few important wins in Q3 that demonstrate the enormous opportunity in front of us.

One example.

Well for large initial commitment by new customer he's the U.S. hospital. The purchase then licenses and doing the show de <unk>.

Doing the onset of course, they experience a huge increase in its targeted phishing attacks and all assessment successfully demonstrated our ability to address the risks inherent in the hybrid environment novartis deployment, including Datadvantage and Datalert certification for more people aren't buying a car platforms as well.

His data read out.

We were also pleased with the performance of <unk> Federal business. This quarter. For example, a government agency we solve in suffuses became invoice customer after they discovered sensitive <unk> had been open to every employee four months immaterial amount of ability.

This was a key driver in bill purchase of subscription for 12 licenses. They are deploying into <unk> to identify <unk> intermediate although exposed to emissions and stop expectation sensitive data cost and on plan data Center, obviously 65.

In most instances these new customers were able to quickly realize the value of a platform.

Which results in greater lifetime values through his feeling you was in future license obsolescent courses. We also know that remains significantly underpenetrated, we think the existing customer base and the team. He's just he's focused on closing expansion opportunities with those customers. So they see even more value.

From a profit.

A good example of this in Q3 was the large technology company that initially purchased four licenses in December 2019 to pick the on Prem data stores. They had in mind do you plan to move to office 365, but this was accelerated due to coffee.

Doing de risk assessment did I live also called if we're supposed to talk which was resolved, but oh incident responding.

Vone would meet don't need the purchase subscription.

For seven additional licenses and they now have a total of 11 licenses to protect <unk> a little bit on the spreads obviously 65.

All of these examples illustrate the strong adoption and customer engagement trends that combined with a healthy pipeline leave us well positioned for strong close to 2020 and beyond we.

We know that our continued innovation, we follow that would be French here, though platform and we are very excited about the acquisition of <unk>.

Well <unk> is our first acquisition and we believe the dual technology, which fits nicely now strategy to follow the data will accelerate product development and reduce time to market in the cloud application they support.

No software mops and I like the relationship between users and data.

Number of cloud data stores, including Google Sweet since falls or do you top Soc, all Muslims sleep and others.

We plan to incorporate these capabilities into a platform, thereby allowing us to introduce new licenses, which in turn will expand on expend all double market. We've seen tremendous momentum was obviously 65 in our view and we believe expanding to other data stored in the cloud and the rest is going pain points for customers.

Allowing us to offer a more unified view of the organization's security posture.

<unk> based and easily and we are happy to have them join debone if somebody asked.

As we said last quarter, we believe the current environment has cemented the need for platform. We know that the continued innovation and execution is okay.

And this is where we are focused as we closed 2020 and capitalize on the long term opportunity in front of US we have not let me turn the call over to Guy Guy.

Thanks Jackie.

Good afternoon, everyone. Thank.

Thank you for joining us today I hope you and your families are safe and healthy.

We had a strong third quarter the.

The subscription transition, it's finished and our results demonstrate that the demand for our platform combined with the power of the subscription model is accelerating revenue growth and driving operating leverage with that let's discuss the quarter to remind you our focus as we manage the business is threefold first landing.

Enterprise customer second expanding with existing customers and finally strong renewal of both subscription and maintenance of perpetual license.

On the new customer front, we continue to see the average number of licenses on the initial purchase be more than five compared to the two to three licenses customers bought under the perpetual model.

This trend is resulting in greater lifetime value through healthy renewals in future license Upsells.

Basically as of September Thirtyth, 60% of our customers with 500 employees own more purchased four or more like.

Up from 50% a year ago, while 26% of our customers purchased six or more licenses up from 17% a year.

The rapid growth in these metrics underscores the logic behind our transition and it's another confirmation that we are unleashing the potential about platform, which is also reflected in a are of 261.1 billion a 46% increase as of the end of Q3.

At the same time.

Renewal rates of maintenance of perpetual they just continue to be above 90% as a result more than 98% of our Q3 revenue were recurring in nature, which provides visibility into future revenue.

Turning now to our third quarter results.

Total revenue grew 17% to $76.8 million and included a 99% subscription mix compared to 74% a year ago and was well ahead of the midpoint of our revenue guidance at 6% growth.

Subscription revenue grew 89% year over year and were $44.1 million.

Maintenance and services revenues were $32.3 million and reflect the strong renewal rate I just referenced.

Looking at the business geographically North America revenue grew 21% to $57.1 million or 74% of total revenue in EMEA revenue grew 7% to $17.8 million, representing 23% of total revenue.

Rest of World revenues were $1.8 million or 2% of total revenue.

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

Gross profit for the third quarter was $67 million, representing a gross margin of 87.2% compared to 87.6% in the third quarter of 2019.

Operating expenses in the third quarter totaled $63.9 million.

Operating income was $3.1 million or an operating margin of 4% for the third quarter compared to an operating loss of $4.7 million when operating margin of negative 7.2% in the same period last year.

Our Q3 operating margin was again well ahead of our guidance.

Which was negative 4% at the midpoint.

During the quarter, we benefited from a meaningful outperformance on the top line driven by larger new customer adoption and existing customer expansion Kobe.

Coburn related cost savings, primarily due to travel and marketing activities and continued prudent management of expenses across the business.

Looking ahead, we do expect both employee travel and in person marketing events to gradually resume and we will continue to invest responsibly to support the growth of the bid.

During the quarter, we had financial expense of approximately $733000, primarily due to interest expense on our convertible notes, partially offset by interest income.

Net income was $2.1 million for the third quarter of 2020 or earnings of six cents per diluted share compared to a net loss of $4.8 million or a loss of 16 cents per basic and diluted share for the third quarter of 2019.

This is based on 35.4 million diluted shares outstanding for Q3, 2020, and 30.4 million basic and diluted shares outstanding for Q3 2019.

We ended the quarter with $325.6 million in cash and cash equivalents marketable securities and short term deposits.

For the three months ended September Thirtyth 2020, we used $2.7 million of cash from operations compared to using $13.6 million of cash from operation in the same period last year.

We ended the quarter with 1629 employees, an 8% increase from the third quarter of 2019, and an increase of 55 net new employees from the second quarter of 2020.

As we have said, we expect to continue hiring to support the growth of the business with a particular focus on sales and R&D.

Before I discuss guidance I want to welcome to polarize 18th of Rone. We are excited about the potential that technology and are working to integrate their capabilities into our platform.

In Q4, 2020 and for fiscal 2021, we do not expect the acquisition will contribute revenue a R or any material extent.

Moving to guidance for the fourth quarter of 20 Twond we.

We expect total revenue of 82 million to $85 million, we expect non-GAAP operating income to range between $5 million to $6 million and non-GAAP net income per diluted share in the range of 10 cents to 13 cents.

This assumes 35.4 million diluted shares outstanding.

Let me provide a bit more color on guidance before we open for Q any first similar to last quarter. The low end of our guidance again, considering the possibility of broader macroeconomic volatility for the foreseeable future given the potential direct and indirect effect of coated.

Second we will continue to be thoughtful in the rate and pace of our investment and we'll balance investing for growth with our plan to show non-GAAP operating margin expansion and cash flow generation.

Third I want to remind everyone that the subscription mix in Q4 will be more apples to apples as this was 82% in Q4 2019 as a result, a our percentage growth will naturally be impacted.

In summary.

We're pleased with the third quarter, which further demonstrates the demand for our platform and the power of the subscription model at an increasingly larger scale. Thanks for joining us today, and we hope you and your loved ones remain safe and healthy with that we would be happy to take questions operator.

Thank you if you would like to ask a question. Please press star one on your telephone keypad.

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Our first question as friends Sickie collateral with Barclays. Please proceed.

Okay, Great Hey, guys, it's Saket Kalia from Barclays. Sir how are you doing.

Good.

Awesome Yaki, maybe maybe first for you.

You've talked a lot about multiple licenses per customer as part of both subscription licensing and just the heightened security environment post co. But can you just maybe speak anecdotally about product usage from some of these multi product customers and are you finding that used to just sort of following that greater adoption.

That makes sense.

Yes, its makes complete sense and the.

Great question definitely we see a direct correlation between the amount of it or the customer here and how much value the good and the ability to buy more and it really works really well for us.

I think that's what we see in the market. They see is not you know slowly but surely customers understand that this approach will be to first is the right approach for security and so you ski says that we are really catering you know data protection threat detection response.

And compliance and privacy, we see a lot of automation you know a lot of a commissioning classifying the date out commissioning of the mediation visibility.

Forensics and their ability to.

Identify abnormal behavior and to have these high fidelity OLED. So one thing that he sees that much more usage using the customer what they mean boat usage is automated usage. So they don't need to spend a lot of time and they get their logos. These ongoing value and we'll simply and more and more seamlessly integrated wheezing delay it.

Good day to day, a poor decision they are buying more and this is also worked extremely well for us in the Cognos, We 65 and as you will just a tremendous for the business. We can spend more time with a customer and they are just buying more so there will be a little more do you walking and you know the move to subscription really supported it.

They can buy more and more licenses and just the business become more predictable andy's ability valuing the predictability of customers and the ability for them to buy more.

Really really working very well.

Got it that's really helpful guys, maybe for my follow up for you.

You noted the subscription transition here is largely complete.

<unk>, particularly in the topline could you maybe talk about anything that we should be thinking about the margin trajectory here as as more of the business becomes recurring.

Absolutely. So first of all we're extremely pleased with.

The Q3 results and as you mentioned Q3 has a larger portions of renewals that they get into place and that obviously helps with wisdom would the margins our philosophy really hasn't changed we want to continue to invest there's obviously a significant opportunity ahead of us.

In the market and we want to capitalize on that so we'll keep investing in R&D since we've seen such a tremendous ROI there, but at the same time, we want to show year over year margin margin expansion.

And and we plan to kind of balance between the top line growth and bringing some of it to the bottom line.

Saket, we're going to you know doing God's really trying to do everything that they and we think that everything that we said that but remember we are always following the data.

And when you have more platforms that maybe you ski says that really catering to he's just tremendous opportunity and this is what we see now we as koby Blue is the cloud adoption and all these security threats that we are uniquely a serving fall. So we are going to balance it but you know we believe.

We have very great future and a lot of duties, but very predictable innovation do the same to other platform and we are going to capitalize on the opportunity, but also being very mindful to model.

Got it very helpful. Thanks, guys.

Thank you.

Our next question is from Sterling Auty with JP Morgan. Please proceed.

Yeah. Thanks, Hi, guys. So I think one of the big questions on investors' minds going into this earnings across all software companies is the ability to attract new customers you mentioned your ability to sell more into those new customers, but I'm just kind of curious what you saw in terms of pipeline.

Generation close rates in the typical metrics are around you know, bringing new customers and beyond just being able to sell more to them with each deal you did.

Hi, So don't we saw they see our ability to be too big Pipelining discovery deal environment was very strong all the demand generation schon as a working very well philosophy market is very attentive. We also see that we have really good ability to.

New customers in the life side, you know, we're going up market customers, there I'd customer the customer looking to right size, but also what you see me two boxes, because we have this tremendous customer base. The team on top that mean, so much of our products and we've just a vision to subscription we were able to unlock it.

The potential of the platform in the market place the customers and the prospect need more and more and more customers from Oh product. So it makes sense for us to spend more time customers. So on both ends of just stay acquiring new customers and gain sharing the market, but also making sure that our customers are using the.

Product and buying more because its calling it. It's one to one is they have more licenses. We've only seen 31, plus one equals five so they have more licenses they've more automation, Dave more enrichment for what they are living and they get more value. So both sides of the model well, we'll do it.

No I appreciate that I think that that that definitely hits question, just one follow up on the acquisition.

Can you give us a little bit more color, maybe number of employees and exactly the technology I wasn't 100% clear what it actually brings to the table that brought us doesn't already do within the platform.

I haven't talked about it technology about in about the market you know, we see tremendous momentum we look at least 65, an AWS you only spent mainly related to adoption. So we built the technology and then you know.

Just stay organizations are adopting the cloud and spoke very well too you know these three use cases that we have the catering to and then obviously, we starting to see a lot of the adoption or ideally cloud cloud application infrastructure. So the cloud. These just a massive opportunity for us and part of augment was.

To do everything that we are doing to any place that weve used sales and the data infrastructure elements that need that you need to understand that the emissions and the inactivity and this acquisition is really a accelerating drastically the time the time to market and what this company is doing very well.

You have the ability to go to any cloud platform and infrastructure and they give you the permission modeling and connect very fast intake event. So we can take this technology and go wide and deep into into the cloud. So says, forcing you know Google books that we are all.

He supporting overspend, A.A.W.S. and its three and guitar.

So you know you starting to see these a lot of very many use those with the lot of cubicle data on this data store in what we're doing on premise, we see 65 and as you can work very well there. So we really believe that its increasing drastically. The overall addressable market you know, it's a natural fit for us.

And well really excited.

And just to add on that one things that I mentioned in the prepared remarks.

Apart from being very excited about the technology and the potential. This is a a technological tuck in so we don't expect any.

Any contribution from a revenue perspective in Q4 or 2021, but we are very happy to welcome the polar ice team not to their own his family.

Understood. Thank you.

Thank you.

Our next question is from Brent Thill with Jefferies. Please proceed.

Good afternoon, just on the demand environment I'm curious if you could just help US color you know what Q3 kind of looked like in Q2 and you know there's been some concern that maybe we saw initial surge from the work from home now we're moving to the work from anywhere you know what.

What you're seeing in terms of just overall demand trends in the signs that are leaving you comfortable that this isn't.

Just as a short term burst.

Yeah. So so for US you know we never benefitted from anything that these show tell them and always benefiting from the overall long term thing what happens is that you eat what I said I think that the support you have data first it's something of that organizations understand it.

Extremely well and philosophy in terms of demand the ability to close to close business. It just worked very well you talked a bit even better is the yield progress and we hope that we hope that it will continue we believe that's just slowly and surely it's just states, becoming a standard if you live in one of them.

So Paul you want to protect your data and your core infrastructure and the unit volumes you need launched two full data protection you need to go on he spoke Wednesday extremely Bonnie so very sophisticated the limits to classify the data for privacy and four wheel compliance requirements and we just.

Yeah. We believe that is every day, it's becoming more than most standout in something that every organization understand that they need to so so so I think the overall demand environment is that your progress he just become better.

And just to add some some data points to support that when when we look at the three pillars on the new customer is the fact that new customers are buying now under the subscription model more than five licenses and that's compared to purchasing under the perpetual model between two to three is a great indication that's been a very consistent we're very.

Happy with that when you look at the renewals rate that the very strong and when you look at the existing customers. The fact that we can sell more to our base and just looking at the K P. I have number of licenses for companies with more than 500 employees that have purchased or more licenses.

Going from 50% last year to 60% this year and on the six plus licenses going from 17% to 26%. This year is really an indication of how much more we can sell to the base, but how were truly selling the platform.

That's great and just a quick follow up in the 26% that are buying six or more is there one or two modules that are standing out which ones are are showing kind of the bigger uptick.

It's all of them you know without a doubt they obviously 65 and as you know you know exploding, but everything and you know talking about automation.

Thanks, Dale commissioning. These three you ski says and customizable by more licenses they'll getting more automation and much more value. So just one.

Just wouldn't be buying will be key buying model. So this is the key for no. We know that we get to customers to four or five licenses, usually they will get to many many more.

Thank you.

Our next question is from Matt Hedberg with RBC capital markets. Please proceed.

Hey, Thanks for taking my question guys. Congrats on a really strong quarter. You know Yaki you know, it's really good to hear I think you started off script, saying significant inbound interest and I know you talk a lot about office 365, and Azure, but I'm wondering if you could talk more specifically about teams in particular, you know we continue the thinking here from some channel count.

Next the teams is driving a lot of deals pulling you guys into deals maybe at an accelerating rate. So I'm wondering can talk specifically about teams and then also supportive other collaboration tools like like slack and at last season.

You know so what topic you know at the end of the day to these always be constant tension between productivity and securing two mainly was everything that related to data protection scheme is a cline dope was it.

One dog and shelf one going line you change online music dialogue in the hands of the end you will generate tremendous amount of Capex. So you gave a lot of data I know there was they don't forget that the on Prem also loading. So you have these data all over the place and yes, you know the why we.

DDC acquisition <unk>, because we see adoption will more and more data store open Ben you know collaboration tools and there's a lot of cubicle data and you can add a lot of value in London.

A lot of value in the top massive amount of value is.

Sleep and what we are doing to it to the on brain. They don't wasn't very biden quoting let's talk Jim the cloud like ours. You you can do to many many more platforms. This is lucky in spite of some of.

The data and we just believe that these digital coupons formation for the cloud.

His opening it to a men's doubles during two for ones, but also it's going to change the.

The security landscape you know a lot of just going to be we are we believe that there's going to be much more data first unquote infrastructure first.

And then there are regions that we are going to tremendously benefit.

That's great and then maybe as a follow up you know another thing that I picked up the you mentioned federal good well I know that's been an issue for you guys for here is and you've been making steady progress, but it's really good to hear you guys called that out with the large government agency. This quarter I'm curious can you talk a little bit more about you know, maybe what's driving that that federal interest.

Today is there anything that's changed in that environment, and maybe just any sense on how penetrated you as our from from a federal perspective on a vertical basis. Thanks.

Yeah.

They they had a good quarter of North America overall outstanding auto.

We started to have the.

Very nice fit.

EBITDA with great team more on the federal space, there's a lot of data.

On stock just extremely.

We are extremely relevant but we are in the early innings and believe that we can be there. If we can be a big business and it's just a big opportunity for us no different between the islands.

Thanks Jackie.

Our next question is from Rob Owens with paper, saying there. Please proceed.

Great. Thanks for taking my question I was hoping you could touch a little bit more on.

Polarize believed that fits your your first acquisition and does this change your strategy a little bit where you look for tuck ins moving forward and I. Appreciate the fact that this doesn't accelerate time to market relative to the cloud opportunity. So I guess the question is not cheap.

For what we see be more opportunistic in terms of making small tuck ins moving forward or was this more of a one off type of thing.

Oh, it's depends on the opportunity. So first one and you know we're always looking at opportunities. We you know we always they want to do the right thing for the lights and told the business. It's been before we'll have we'll find the right to put unity that can shorten time to market and bring.

Good time to the company something that we'll do you know we all just very pragmatic people, which won't have any you know it will not religious about it we just want to do what is right for the business side for customers and this was just a natural shape.

And just to add on that when we looked at acquisitions to date that they are they have been technological tuck ins and you're right that this is the first acquisition and we expect that any future acquisition would be again technological tuck in.

Thanks for the color guys and then second I'm, hoping you could touch on Europe, a little bit and I think you mentioned last quarter. How your flag. The transition you were happy with the pipeline. If you look at the growth rate, though it's still down in the single digits. I was just hoping for an update on that front. Thanks.

You know how big the go 7% remember that Europe will it six months I still know somebody kind adapting to a subscription model. So the flywheel is not completely a you know in motion we have a very good team in Europe, great customer.

Just a big market to US Great Channel partners, and we believe that it's a it's an excellent a huge market for us and they will do very well.

Thank you.

Okay.

Our next question is from a shot.

Yeah with Oppenheimer. Please proceed.

Thank you good afternoon, guys congrats on the solid performance.

Okay. Another question on the Polarize acquisition seems to be a nice strategic extension to everything you've been doing in in recent years.

My question is a follow up if you only have 26 licenses under six product families give or take I might be off how many modules its polarized adding to the mix is there a specific family they add a line with or is it a standalone new one.

So it's both but mainly you know we can run the same play of the products that we have to most of the data stores. The Bell supporting you know to Sunday. So you can do classifications to other you can you know when Dixon the lifting you've been before everyone. The data.

Protection will be different but we have a very good very good coverage and it would be a lot of the new content. How we are going to packages for customers will make sure that you know we get the revenue the economics worked really well and it's easy for me or for customers to buy but yes, it's a lot of more comp.

And a lot of Newport just.

Just to emphasize that show up in terms of the additional licenses that are with polarized that we later on plan to sell they cover platforms that we don't cover. So so the licenses are not instead of existing licenses. The grown it has to offer its on top of and that's part of the reason that we see the time expanding with us.

Acquisition.

Got it got it understood. Thanks for that color any archeo, yeah got killed by maybe also going back to the macro so.

Some countries specifically in Europe are heading into another round of locked down have you seen any ramp up in demand or at least elevated interest in recent weeks that could replicate the incremental short cycle thing back in April and May or do you think that sees Sioux city, all feel comfortable with it.

Current security infrastructures they have currently at hand.

So far you know, it's an unknown, but so far what we see is just a very good demand though.

Got it. Thank you good luck congrats.

Thank you.

Our next question is by handset side are left with JP Morgan. Please proceed.

Hi, This is Ah Hum Farwell from Morgan Stanley I think your taking my question.

Yeah.

The first question for you I wanted to see if you could expand on the the prior comment on on longer term demand, especially as we see more cloud and digital transformation. So you spoke a little bit about that but are you having some of those conversations with customers already as they think about their you know security architecture long.

Your term moving to a more decentralized work environment are they starting to think about making those changes and I was grown its sort of fitting into that longer term sheet conversation.

What we see is that customers understand that it's all about the data and the co infrastructure and we see more and more you know C level talking about anything we see that they are not talking EBITDA piece may.

Very strategic really the critical data about users or doing have been high profile usability and then they also concerned that they have these are you basically positively that's usually taking a you know five years to get to certain adoption labeling really accelerating now so.

Just they see that they organizations are very well with the body protection of the digital assets that understand how hard. It is you have these all of these platforms and it's really all the security teams and the compliance teams to get control over the over them they need a lot of automation and when they realize what we are doing just becoming more and more.

Strategic so you know we also almost you know it will only be small get it's it's a big market, but did just realizing you know what a.

How they need to protect the enterprise when they and what what they need to do and we just see that slowly but surely more budget is going to hold us small boards are asking for a solution like ours Csos compliance officer of soap and data privacy offering so I understand that they need a platform.

I'm like Barneys, and it's becoming very strategic and they are willing to spend more money on it and they are a having a multiuse strategic plan, how many times they are going to be deployed.

How they are going to cover all the information states and I believe that we are going to benefit tremendously.

Got it that's it for me thank you.

<unk>.

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

Thank you Hey, guys.

I wanted to ask you about structured data today, you don't support structured data with your platform.

I'm just wondering if that is something.

On the road map do you think it's necessary are important for you to support structure data overtime any comments would be helpful. Thanks.

No. We don't know we're not discussing you know well admit brand, but we believe that.

I'm not sure they're just much more reading the.

It's very exposed bone productions shelbourne can either.

We support a semi structured data, but in the cloud no anything that is exposing a pie we can they do the sleeves ski says that we are doing now to a unstructured data. So you know I don't see in the what our customers need and what are the needs of the platform.

There is a need this is something that we are going to address you always doing what is like all customers using you know and as long as it's part of our diligent focus there now.

Okay. Thanks, and then just a quick follow up or not not related but wanted to ask you about data privacy and some of the new compliance mandates around the world and whether you're seeing an increase and pipeline or interest and using varonis for for that type of use case.

No, we definitely know that definitely see but more than anything else. These regulations and all the compliance demand what they are doing they are just going to do.

To a boards and management teams and tell them in order for you to managing the organization in D.C., a digital world you need to make sure you have been like protections in place, but you don't have them you know the outcome can be just to just to be a disaster. So you just see more business.

Understanding how they need to treat the data how to be a need to protect data in an environment that you need to collaborate in order to maximize the value or the data and we just benefit from it just really benefit from everything that's going on cloud some the explosion of data and the fact the data.

He is on many a systems, then repositories and formulation that saying you know you need to protect the enterprise you need to protect information because without it you know everything can pull ups.

Got it thank you guys.

Thank you.

Our next.

Question is from their Capex, let's stay so please proceed.

Okay, great. Thanks for taking my questions Yucky, we've seen a sharp growth in ransomware over the past several months have you seen this is the driver for the business going to be seen customers looking to push barone isn't there more data stores because of this.

Yes, but but in a much more holistic way I think what's happened with the Samsung well.

He's done it it's really a lot of them are they just very very a very sophisticated apds you know they are coming in are bypassing Yo Yo.

Etiology many times the extra operating data are they take data out and then the other thing you do they'll going to release the data. So just help us with everything you know with anything that we are doing on the data stalls on climate in the cloud with everything Youre doing really active directory and as you will be and we saw h. product and.

Obviously also classification you know you just want to make sure that you're protecting the critical data, but yes without a doubt and what happens is that many times. It was you know you have these ABTS advanced persistent threats customers don't know that they'll do the same design somewhere that its announcing that they are the keys to encrypt as much as they as you can and then ask.

Well answer them. So we can get to a bit of a marketing campaigns and this and the way that it's working now is export trading. The data you know you have these nocs will be say cyber criminals that they have a they support organizations today.

You can talk to them and they they can direct you exactly what to do know, though Ben you pay doing some in <unk> and they.

Get you'll data back so I think that what happened is that customer.

You really enforced picks understand very well the DC is that something that can happen to them and the traditional security solutions are very limited in solving these things and they need to be ahead of the problem and invest in order to solve it and we benefit from.

That's a that's helpful and then building on that a little bit.

Can you talk about the demand environment for Varonis edge, especially to think about customers coming up for renewal and as they kind of think about the risk environment with more uses working from home. Thank you.

No. They do all you all from home use just.

Helping us because people are accessing data through VPN, you know home computer shows you know you need an unsecured networks at home and there is just much most cytokine. So they just underpinned the bid things can happen you have these say cloud workloads in the cloud applications.

Organizations opened de Novo fashion, they don't they will be continuations in place. So you know they need us and many of them realize that they need us badly and we just you know it's it's always it's always like that with US you know something happen and custom those first reacting very fast, but then they really understand why there.

I need to do with the resources that they had one is a priority and we just see that gradually become a higher in high priority for organizations and they understand that this is something that they need to doing although to protect the information products, which you know in this environment the life blood of the business.

Many thanks Jackie.

Thank you.

Our next question is from Chad Bennett with Craig Hallum. Please proceed.

Great. Thanks for taking my questions guided did you.

Speak about a a net expansion or in our number in the call.

So we we mentioned last quarter that we will provide it on an annual basis to remind you that the number that we had last quarter was greater than a 120% and where we're really extremely happy with Q3 numbers. We're.

We're seeing continued expansion within our base and we'll provide more color in the next quarters, earning call. Okay. And then maybe just maybe maybe related to that or a prior question just on on the net new versus expansion I'm. Just you know I I know you haven't broken that out for a while now.

But it is.

Has that mix dramatically changed the last few quarters or the last couple of quarters, even relative to what it has been historically from a a bookings or air our standpoint.

So you know strategically when when you think about the last couple of years, we have a much larger base. So we we wanted to have a much larger impact coming from our existing customers and by the way that cost of of generating revenue from existing customers is is cheaper for us quote unquote. So that's actually in place.

And with our strategy and our new customers as we talked about in the prepared remarks, and as we talked about in some of the other question, where we're going up market. So we're focused on getting the right new customers into play and the fact that they're consuming the platform. The fact that they're buying more than five license is a great indication that they are.

Consuming the platform, but it also also shows us that the path to double digit licenses on average per customer has never been clearer. So everything is kind of working as we planned and ER and we want to continue doing that we need to move to subscription.

The company changed drastically. So you know we had this platform and then market realized that they need the platform we changed the model that they can consume it be started to buy their buying big they're buying more. So we are very focused on getting the right customers seldom the I'd say set of flights and say it makes you realize value then in a very predictable way.

Buying them, all so really a stoppage in the effort the economy. If you read between the Linden expanding the market penetration is walking equally according to the plan and we just need to cater to the just the attention so away it boasts a classified customer.

But you know we just became.

Much more strategic for customers and you know the cone customers and new customers just over the time and he's just changed the date the amount of time that we are spending with them and they just the output of these engagements.

How about just maybe one last one for me just on the on the the license initial deal license expansion you know again, it's playing out exactly like you guys thought it would and maybe even more accelerated than you thought but just going from you know initially two to three to four the now to five how do we compare and contrast.

Rast initial deal size on a dollar basis or a S. P. I don't I don't have exact number just relative to that license expansion.

So as that's a great question when we look at the expansion and getting to more than five that's actually better than what we initially expected when we thought about moving to a subscription model. So that that is extremely encouraging we're very happy with that and that's been kinda consistent over the last couple of quarters, we haven't really talked about.

Sps, but I can tell you that on the new customer front, the discount levels that were providing and actually stayed very consistent which which is show showing us that we're not selling more licenses for a higher discount but staying firm.

And doing well in driving higher initial purchase.

Got it thanks nice job guys. Thank.

Thank you.

Our next question is from Eric.

But there with JMP Securities. Please proceed.

Yeah. Thanks for taking the question congrats on a good quarter.

On polarize.

Can you comment when you would be introducing the products. It sounds like you said revenue there won't be revenue in fiscal 21, but.

Be introducing some new modules in 21 and can you comment how many people were at polarized.

Oh intelligence will introduce you know is a lie.

Licenses in the in 2021, we are walking a tight.

Hi, Leslie on the integration and make sure that it will be very successful acquisition.

And in terms of the head count they have less than 20 people and as you mentioned from a revenue perspective, we don't expect any contribution in Q4 or in 2021, but were extremely excited.

Moving together with them and are introducing additional platforms later on.

Okay, and then you clearly been able to navigate the the pandemic and covert the very effectively but.

But what challenges has the pandemic pose or are you finding that there are logistics issues with working with companies that work from home.

Or what what what are some of the challenges that you faced if there are any.

You know.

We always want to view, Chile customer welding system installations, our remote installation.

No we have a management team that these many you to get it also ability we've shortened the ability to.

Communicate is a really efficient one but just couldn't vitamin D is how you know people are hurting.

Let's start with so you know there is definitely it it's.

Definitely here, but it also has a benefit because you know it's just a really cementing the need for a solution like valon. He's saying is just the data. Although these repositories organizations understand it they need us and the they many times them.

Saying that they need to move faster and all these transformation fall just do modern digital enterprise is just happening very fast enrolling says benefiting form so we always coming from both sides, but there are challenges, but we feel that we are in that we are attacking them hands on and lose a lot of success.

Yes.

Very good thank you.

Our next question is from Josh OLED tail end with pairing Burke. Please proceed.

Hi, guys. Thanks for taking my question.

Just really quick it seems as if the acquisition going to result in more overlapping functionality with sale point is that the right way to think about it and if so do you expect more competition with Dell point in the future, especially as you move up market.

No. It's not there is no cell phones, I don't know maybe to nonexistent, whereas the confusion.

We don't see silicon bigger competitors, just about the relationship you lose those data and making sure that we consider to be the protection that your response, then do Hum.

Clients move the related today tranquil go away infrastructure and that they'll just accelerating the cold, but when it's used to be there.

Through mobile applications and cost structure.

Thank you that was it for me.

Our next question is from Daniel Ives with Wedbush Securities. Please proceed.

Yeah. Thanks.

When you think about hiring on the sales side well quarter over the next six to 12 months without giving numbers moved just talk about your thoughts there queer given how you're doing is there an acceleration there or just strategically hiring given what you're seeing with the success on the field.

So hey.

Hey, Dan when when we thought and we talked about kind of the hiring plans. After Q1, we talked about continuing to hire on the sales front a kinda hold off on in terms of hiring in some of the other departments just because we didn't really see how the market was evolving but when Q2 came we started to see.

Both the pipeline and the results improve and kind of how we go up and the priority of our of our customers and showing good results. We talked about we talked about it last quarter that we want to continue to hire in some of the other departments to take advantage of the opportunity and I think the the results in Q3 that were very high.

The way the you know the 17% topline growth versus a kind of the midpoint guidance of 6% just reemphasize that we want to capitalize on this long term opportunity obviously, we're going to do it in a very measured way balancing both topline and and a bottom line.

But but we want to continue to hire to capitalize on it. So I you should expect a a hiring mostly in sales and marketing and the R&D Department.

The guy when the Webinars for how to successfully move to subscription transition are you going to sense that they [noise].

I see thanks.

I'll send you again.

Okay cool thanks.

Thank you.

We have reached the end of our question and answer session I would like to turn the conference back over to James for closing remarks.

So thank you all very much for your interest today.

We hope everyone stays safe and healthy and we look forward to speaking with everyone. More this quarter have a good night and thank you again.

Thank you. This does conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.