Q4 2020 Varonis Systems Inc Earnings Call
[music].
Greetings and welcome to the Verona Systems, Inc. Fourth quarter 2020 earnings Conference call. At this time all participants are in a listen only mode of question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. As a reminder of this conference is being recorded I would now like to.
Turn the conference over to your host James of Russia Director of Investor Relations. Thank you.
Thank you operator good afternoon. Thank you for joining us today to review Verona since fourth quarter and full year 2020 financial results with me on the call today are Yoki fight Olson, Chief Executive Officer, and Guy Melamed, Chief Financial Officer, and Chief operating Officer. After preliminary remarks, we will open the call to a question and answer session.
During this call we may make statements related to our business that will be considered forward looking statements under federal securities laws, including projections of future operating results for our first quarter and full year ending December 31 2021.
Due to a number of factors actual results may differ materially from those set forth in such statements. These factors are set forth in the earnings press release that we issued today under the section captioned forward looking statements and these and other important risk factors are described more fully in our reports filed with 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.
One of its expressly disclaims any obligation 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 expense payroll tax expense related to stock based compensation amortization of acquired intangible assets acquisition related expenses foreign exchange gains and losses amortization of debt discount and issuance costs related to our convert.
Notes issued in May 2020, and acquisition related taxes.
A reconciliation from the most directly comparable GAAP financial measures is also available in our fourth quarter and full year 2020 earnings press release, which can be found at www Dot Peronist Dot com in the Investor Relations section also please note that an updated investor presentation as well as the webcast of today's call are available on our website in the investor.
Section with that I'd like to turn the call over to our Chief Executive Officer Yoki final thing Yockey.
Thank you Jamie and good afternoon, everyone. Thank you for joining us to discuss the first quarter of 2020 results, which exceeded all expectations on most of the top and bottom line.
Our performance is a testament to the demand for all of these data security platform. The team's continued execution, especially during these challenging times and the power of our subscription model, we are well positioned to capitalize on the acceleration we are witnessing in global digital transformation and we believe it will make for an exciting 2020.
Do you want.
I want to begin today by recapping of 'twenty 'twenty performance, and then discuss how the secular trends that organizations of all experiencing today and that many O predicting to continue.
White varnish and long term opportunity to fulfill its mission of protecting sensitive data flow of customers. I will then turn the call to guy to discuss our results and guidance in more detail.
Let's start by looking back when all of performance over the last 12 months when I spoke to you a year ago well completing what we believe was one of the fastest transition to subscription in the history of software.
But all of momentum was interrupted in mid March and copied companies had to enable their employees to work from home almost overnight. However, however, though once behave addressed employee safety and business continuity companies quickly realize the remote work force was more dependent than ever.
On access to sensitive data on Prem and in the cloud exposing them to heightened risks. These risks don't only relate to working from home, but also to the reality of greater of a digital collaboration which is here to stay as a result, we started to see a significant uptick.
The use of our platform by customers and our pipeline of became stronger.
From that point on business improved each quarter of Q2 result of a solid Q3 father of improved Q4 results were outstanding with.
This upswing, we gained the momentum needed to exceed the high end of the full year 2020 revenue guidance, we provided pre COVID-19.
I would like to now discuss how secular trends have accelerated impacting our customer growth and creating strong demand to of product and the engine that is fueling of these things is digital transformation, let's start there.
Employees.
Organization have been collaborating of course multiple platform for use of <unk>.
Adding two more complexity and more exposed to data. This is of given and will only continue increasing data risks and potentially stopping business globally. We have all seen day expansion accelerated on cloud applications like Microsoft 365, and teams the shift to the cloud highlights day.
Need for Zero Trust approach with volume is always subscribe to.
Specifically, we believe the perimeter of security by itself is insufficient the fuse of shadow already have access to the data they require in the companies should continually monitor for abuse and regulations.
So digital transformation is the engine and the strength coming from that of accelerating book.
And with them a significant escalation of fleet one.
One trend disabled claim.
And it's collision with data protection keep the currency has made solid data easier to monetize and those who want to still it almost sophisticated then it'll be full this year alone companies around the world. So.
Covid related phishing email, specifically targeting unstructured data.
Advanced persistent threats of Apt's like imitate and view.
One of the abilities in perimeter of devices remote access sales lose any active directory itself.
And continued strength from Wogan side of the many times is the biggest risk of ore.
The target of these talks is almost always critical data, which is of a mission to protect is the result of customer increasingly.
Tell us our platform is a must have.
Another trend is regulation digital transformation, an increased cyber attacks have made complying with data centric regulation like G. E. M. C. C. P. A serious challenge this creates substantial operational reputational risks that companies can no longer ignore and it's another reason for customers continue to tell.
Vaughn is ease of must've platform.
Which brings me to the overriding need and growing demand to streamline processes through automation for every C. So companies often have thousands of employees, creating data generating risks the security team cannot keep pace to secure this data.
Mitigates stable slate and ensure compliance automation is the answer and it's another Mustang, which have built team into one integrated platform.
It was all subscription model of customer find it seamless and efficient to initially purchased more licenses and continue to consume more of overtime, but realizing and benefiting from the power and flexibility of our offering.
Let me provide few example.
From Q4.
One example of a large initial commitment but of new customer in the U S. Head of skilled company. That's a data retention M. P. H I reporting issues during the risk assessment, we found that 90% of new data was being shared externally, allowing of tacos to easily sidestepped there and.
Tours, we also demonstrated.
How to mission engine could fix global access issues. These days, where doing so manually who would have taken several years.
This new customer of purchase data advantage and data classification of licenses from multiple on premise cloud platform as well as data alone.
In automation engine.
In addition to the new wins like this we remain significantly underpenetrated within our customer base and in Q4. The team was again successful in closing expansion opportunities with a number of existing customers.
Prime example, ease of local government agencies funds can be more than three thousands of employees, which has relied on voice for more than two years to protect their data on plane the commodity but all of these customers use agency was planning to move data to the cloud doing low risk assessment for the Microsoft cloud data stores.
Net of them to answer them of attacks, which convinced them to add licenses with data advantage for as you exchange Your line Sharepoint online one day as well as edge in total we now provide them with dwell subscription licenses. This example, further demonstrate that our path to double digit lie.
Since with other customers has never been clearer.
What was the acquisition of polarized, which closed in Q4 of capacity to provide more licenses will significantly increase who would be well positioned to address the customer needs is the move sensitive data to additional cloud application and infrastructure delivering data protection through the necessary visibility inside them.
Control.
Today, but one of this is stronger than we have it'll be and as I said going into 2021.
We are more than ready to take advantage of the digital transformation and execute on the market opportunity we see.
We remain focused on the long term opportunity as we move closer to a $1 billion target and beyond with that let me turn the call over to Guy Guy.
Thanks, Jackie and good afternoon, everyone. Thank you for joining US today, we're pleased with our outstanding fourth quarter results, which helped us close a strong year. Despite the challenges.
Last quarter, I said that the demand for our platform combined with the power of our subscription model is accelerating revenue growth and driving operating leverage.
Q4 continued and validated both of these trends with total revenues growing 31% of non-GAAP operating margins at 14, 6% both ahead of our expectations.
To drill down into our topline performance, we continued to execute across the three pillars that drive our business.
Landing, new enterprise customers second expanding within existing customers and finally strong renewals on.
On the new customer from our strategy of focusing on larger enterprises continues to be successful, we know our customers realize greater incremental value by purchasing multiple licenses and the ease of the subscription model allows us to deliver on that day Matt.
New customers purchased on average more than five licenses or about two times what was previously purchased under the former perpetual model.
This trend increases our customer lifetime value through healthy renewals and future license upsell opportunities.
As of December 31st 2000, 2063 per cent of our customers with 500 employees of more purchased four or more of licenses up from 54 per cent a year ago at.
At the same time, 30% of our customers purchased six of them more licenses up from 20 per cent a year ago.
The rapid growth of these metrics confirms that we are successfully unleashing the potential of our platform.
This is also reflected in a R. R of $287 3 million, which grew 37% year over year as of the end of Q4.
More than 98% of our total fourth quarter revenues were recurring which helps provide visibility into future revenues.
Our dollar based net retention rate or an IRR, which accounts for the growth in E. R. R. From all active customers was 116% at the end of Q4.
Turning now to the fourth quarter results in more detail.
Total revenues grew 31% to $95 2 million and included a 19, 9% subscription mix compared to 82% a year ago.
Subscription revenues came in at almost 100 per cent growth year over year at $62 $7 million.
Maintenance and services revenues were $32 $1 million, driven by renewal rates, which once again exceeded 90 per cent.
Looking at the business geographically North America revenues grew 35% to $66 $7 million or 70% of total revenues in EMEA revenues grew 33 per cent to $25 $9 million or 27% of total revenues and we are pleased that the.
Subscription flywheel is now kicking in after a slower start in early 2019.
Rest of World revenues were $2 6 million or three per cent of total revenues.
Turning back to the income statement I'd like to point out that I'll be discussing non-GAAP results going forward.
Gross profit for the fourth quarter was $84.4 million, representing a gross margin of $88 seven per cent compared to 87 five per cent in the fourth quarter of 2019.
Operating expenses in the fourth quarter totaled $75 million as a result, operating income was $13 $9 million or an impressive operating margin of $14 six per cent for the fourth quarter compared to an operating loss of $2.4 million or an operating margin of negative three.
3% in the same period last year.
This continues to validate the strength of our model and our execution capabilities, which we anticipate will drive operating margin leverage going forward.
In Q4, we again benefited from meaningful outperformance on the top line ongoing prudent expense management and like everyone else Covid related cost savings.
During the quarter, we had financial expense of approximately $846000, primarily due to interest expense on our convertible notes.
Net income was $12 $3 million for the fourth quarter of 2020 were earnings of 34 cents per diluted share compared to a net loss of $2 $8 million or a loss of nine cents per basic and diluted share for the fourth quarter of 2019.
This is based on $36 1 million diluted shares outstanding for Q4 of 2020, and 35 million basic and diluted shares outstanding for Q4 2019.
We ended the year with $298 $3 million in cash and cash equivalent marketable securities and short term deposits.
For the three months ended December 31st 2020, we generated $7 $7 million of cash from operations compared to an insignificant amount used in the same period last year.
We ended the year with 1007 hundreds of 19 employees of 9% increase from the fourth quarter of 2019, and an increase of 19 net new employees from the third quarter of 2020, as we continue hiring to support the growth of the business and take advantage of the opportunities we see in the market with of.
Particular focus on sales and R&D.
I will now briefly recap our full year 'twenty 'twenty results total revenues grew 15% to $292 $7 million exceeding the high end of the original guidance, we issued a year ago pre COVID-19.
Our subscription mix was 19, 9% compared to 65% subscription mix in 2019 in.
In 2020, 97% of our revenues were recurring our operating margin was negative 1.5 per cent compared to negative $10 seven per cent for 2019 again, demonstrating the strength of our business.
Before I turn to guidance I would like to go over a R. R. One more time.
As I have said in the past we are not converting perpetual customers to subscriptions and so are our growth is primarily driven by a C V from new customers as well as net new subscription licenses to existing customers.
As a result, 'twenty 'twenty, one should normalize closer to an apples to apples comparison with a or are tracking more closely to revenue growth.
I also want to take a moment to discuss a few housekeeping items.
We have historically provided the percentage of customers purchasing two or more and three or more product families and while these metrics continued to trend positively they are less relevant given our success selling more of licenses to customers across the same product Sam.
As such we will stop providing this metric in the future.
We expect the Capex in 'twenty and 'twenty, one will be in the range of 10 million to $13 million.
Lastly, we are announcing today of three for one split of our common stock to make it more accessible to employees and investors each stockholder of record on March 12, 'twenty 'twenty, one will receive two additional shares of common stock for each then held share.
Trading will begin on a split adjusted basis on March 15th 'twenty 'twenty one.
Our results and guidance have not been adjusted for the impact of the stock split.
Moving to our guidance for 'twenty 'twenty one.
For the first quarter, we expect total revenues of 68 million to $69 $5 million representing growth of 26% to 28% we.
We expect non-GAAP operating loss to range between $12 million to $11 million and non-GAAP net loss per basic and diluted share in the range of 41 cents to 39 states.
This assumes $32 1 million basic and diluted shares outstanding.
For the full year, we expect total revenues of 357 million to $366 million representing.
Representing growth of 22% to 25 per cent.
We expect non-GAAP operating income to range between breakeven to $7.5 million and non-GAAP net loss per basic and diluted share in the range of negative 16 cents and non-GAAP net income per diluted share of three cents. This assumes 32.8 million basic and diluted shares outstanding.
Ending and $36 9 million diluted shares outstanding respectively.
In summary.
We are proud of our Q4 and full year results as we continued to execute on our strategy and capitalize on the long term opportunity ahead of us.
I want to thank all of the rone as employees for their outstanding contributions this year and I know I speak on their behalf. When I say, we are excited going into 'twenty 'twenty. One thanks for joining us today and with that we would be happy to take questions operator.
At this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad of confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to them of your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing of a <unk>.
Darkies one moment, please while we poll for questions.
Yeah.
Eight of our first question comes from Sterling Auty with J P. Morgan. Please state your question.
Yeah. Thanks, Hi, guys. So I'm curious what gives you confidence when you look at your business that the growth that you're experiencing now will continue post pandemic in other words is there a concern that there was a massive pull forward of demand just on that shift to work from home.
AUM that you outlined yoki in your prepared remarks.
Hi, Stephan.
No we don't think that it's happened.
Work from home I think what's happened is that we have acceleration of this new overall.
Digital evolution and you heard of a lot of clinical data in just many repository.
And what happens is of the data protection, Paul Let me something that humans can manage and this is the biggest problem you know when you're talking about zero sources. The only only the right people can access the data that they should access and this is well. This is of all New Orleans going so there are stationary trends there are some staffing pandemic from work from home that day maybe.
Maybe you know all of our not here to stay but there are stationary very strong stationary trends and one of them is just the overall digital transformation most things becoming digital more data is being generated and there are more of a positive excludes 65 was really really strong growth engine for us and then just the day you know the way that we sell of the platform, We always Inc.
Vision, but some of that what's happening now will happen the data protection cyber crime and regulation will collide. So for US you know at the beginning of the pandemic when everybody dealt with business continuity and set up for remote work, we saw an uptick in the usability of the platform.
But you know it was you know it was a non.
Not as easy to close business and just as in months that went by what's happened is that we had this new configuration of new workload and access to data this belief.
This day increased leaps and bounds and I just it just from where we sit we strongly believe that it's inevitable. This is one of those things will go and attack should become much more sophisticated than you would have you know many clouds and data on Prem and a lot of infrastructure and data repository and applications and we are well capitalized.
We're taking these digital universe and digital economy.
That makes sense of one housekeeping Guy for you now that we're at the end of the year.
Would you be willing to give us a total customer count update.
One of the things that we talked about in terms of the customer count is that we're not focusing so much on the number we're focusing on the type of customers that we can acquire a couple of years ago, we started focusing more on the larger type customers and it's it's much more of the quality of the customers that we can we can.
Bring in and that really helps us in getting customer increase the customer lifetime value.
So we think that that metric is less than.
The number is less important for investors and we're focused on increasing the customer lifetime value by getting in the right number the right sized selling force of focus as a company. It's thousands of thousands to users and above and the business really change is not just the day subscription changed the company change in terms of the value that customers are getting the licenses, but they are of buying the time that it.
Makes sense to spend with customers of the conversion of the pipeline just a completely different business from two years ago.
Understood. Thank you.
Thank you.
And our next question comes from Matt Hedberg with RBC.
Yeah.
Hey, guys. Thanks for taking my questions and congrats on a really strong year.
You know I guess, obviously, you're seeing some really nice acceleration of trends in multi product attach I'm curious how do you think of solar winds breach potentially is that an accelerant to your business I would think the importance of data governance broad data security is even more important.
Post <unk> world.
Great Hi, Matt.
Sort of <unk> definitely increased fiber in the fourth quarter, but didnt effect.
I think that from what we see what happened we saw all of it is inevitable what is really happening and this is something that is very important to understand.
But you have a lot of state actors that are extremely sophisticated because this is of a cyber war happening. This skill is spilling into the commercial space. Yeah. I don't think that happens is we stripped of cowen seats, very easy to monetize Ciber com and if you have critical data you have a target and when you are of a target and you have these forces that are very sophisticated.
Takeda and of note of this ultimately to tools that we'll be able to get to you and to additional security products are critical but really insufficient and you need something like Vaughan and you need to go from the critical digital ASIC back you know. This is this is this is the critical data assets. This is of critical infrastructure.
Gotcha and this is what you need to protect and you have a lot of problems from service accounts and just so many ways to getting now you'd think that unfortunately, what happened we saw low in these just a canary in the coal mine. This is just the beginning of this is something that we will see of critical data someone wants it and I I, we believe that.
You will see a shift from what's happening in security in order to be protected and there is also this constant tension between security and productivity you want to develop you went to develop faster because of a lot of agility data is available or will you know you can collaborate and extract more value from the data, but much bigger diminishing returns and this is.
Really where we play and what what really happened with coffee that the market faster understand it and we just have these secular trends that are driving the business and in the midst of everything that is happening. We also so really uptick in the usability of the product our ability to bring the customer to a very strategic.
Value target and what stemmed from that is just the big increase in the product adoption and the overall customer lifetime value.
That's great and then maybe one for guy.
You know I mean, you just got done talking about pipeline is expanding and great profitability. This quarter, you're guiding the street a little bit lower on margin next year can you talk about how you're thinking about that investment.
Piece of the sales and marketing, perhaps accelerating quota bearing sales reps R&D, just just trying to get a sense of the opex side of the equation as you as you looked at 2021.
Absolutely. So first of all of the our philosophy hasn't changed we want of balance both of the profitability and top line growth and we want to continue to invest in a responsible way, but theres a huge opportunity in front of us and when you look at the margin improvement year over year, you can see that in 2019, we were at minus 10 point.
Seven non-GAAP operating margin and that was obviously impacted by kind of the transition and the headwind on the revenue front in 2020, we finished at minus one 5% non-GAAP operating margin and we're guiding now.
For full year 2021, with a 1% positive on a non-GAAP basis as our midpoint. So we're moving in the right direction, but we always try to match kind of the expenses with the revenues we plan to achieve in the strong topline growth really provides the opportunity for us to invest kind of in the longer term in a in a responsible way the two.
Two areas, where we want to kind of put the majority of the investment is in sales and marketing and R&D.
Got it thanks, a lot guys.
Thank you.
And our next question comes from Brent Thill with Jefferies.
Good afternoon Yaqui, just when you look at the growth of a lot of these new cloud based systems, whether it's you know it's teams or slack or some of the other solutions can you talk to many investors are asking how how you're providing kind of the next level of protection of these these assets are exploding in usage and in the corporate environment.
What what Youre doing there and what Youre seeing in terms of uptake and maybe her for Guy as you come into this year when you look at quota carrying capacity.
Are you.
Gonna be on of inquiry and kind of take take last years.
Group in and make them more productive how do you think about the shape of the sales hiring for for 2021. Thank you.
Thanks for the question. So firstly you know we believe that there is tremendous opportunity.
For all of these cloud data stores and the cloud applications and everything we have done for two of our technology to regular on claim data still active directory and 365, we can replicate there and this is why we.
Acquirer of the polling of ice we just believe that you know with the same technology, we can do the same playbook.
With the same technological moat, we can do for all of these.
Repository of all of them are going to be very critical for our customers. So we believe the teachers tremendous for us what's going on you know just accelerating the idling of these tremendous debt also data on Prem is not slowing down it just it's a very interesting phenomenon you have these data support.
All over the place of Nyx humans can't manage it anymore, you need a lot of automation and a lot of intelligence and really complex visibility.
And the very effective ability to a level of and problems and to do forensics and this is where we are playing and we we believe that we are going to be the standard for SaaS.
SaaS and the data repository.
In the cloud for data protection forensics and the user behavior analytics.
And to touch on the quota carrying reps question I think the answer very much relates to our philosophy and the way we looked at it 2020 Jacki talked about this and we talked about this throughout the year, where COVID-19 didn't generate a short term tailwind it was a bit of a short term headwind, but in Q2, we still wanting to.
New hiring quota carrying reps and every quarter thereafter gave us more and more confidence to continue hiring.
You can see in Q4, we actually grew our net new 90 employees in the quarter, which is part of the philosophy of taking advantage of the long term opportunity when we look at the quota carrying reps.
We're increasing it and we have a larger component of them that are more mature. So we expect productivity gains and I think all of that kind of sets us up for a for the <unk> 'twenty 'twenty, one and that's reflected in the guidance and the confidence we have in the business and in the pipeline.
Thank you.
And our next question is from shaken calia with Barclays.
Hey, guys. Thanks for taking my questions here.
Maybe maybe first for you yoki low but related to the last one that was asked about club stores, but can.
Can you just talk a little bit about your initial impressions around polarized and looking out into the future of how you sort of envision the product portfolio. Once that's been fully integrated.
So far we are.
Very happy with the acquisition very happy from the teams of technology. The cultural fit you know we believe that it was a great move and they were very focused on the integration and happy with the Port Augusta is still work to do but as I said before this is just massive potential.
Still weighted drastically the time to market and everything that we want to doing the cloud of eventually we are going to have it.
Full integration, but this was the quality acquisition with a great team and we are in the eye direction and next year, we're already going to see revenues from old vehicles.
Got it got it Guy from my follow up for you.
On the prepared remarks, but I just want make sure our Oh, we asked about it.
You clearly aren't guiding to AOR for next year, but how would you kind of have us think about AOR growth conceptually vs versus revenue growth, which route which we clearly have to the revenue guide and what some of them. Some of the puts and takes might be between the two does it does that makes sense.
Absolutely I'll give some color on a R. R.
We expect a R. R. In 'twenty 'twenty, one to track closer to revenue growth and the way to think about it you know when we introduced the metric it was when we announced the transition and it provided visibility really into the strength of the business and I've mentioned this many times, but I'll say it again, our growth is really primarily driven by.
<unk> from new customers, but also from net new subscription license to existing customers, we're not going to the base and converting our perpetual customers to subscription which is why when you look at the apples to apples, having the 99% subscription mix. It should track much closer in 'twenty 'twenty, one to the revenue growth.
Very helpful. Thanks, guys.
Thank you.
Yeah.
And the next question is from Rob Owens with Piper Sandler.
Yeah.
Great and thanks for taking my questions first could you just maybe talk about the integration road map with all horizon, where you're at where you might want to be in terms of deliverables over the near term.
I'm sorry, it couldn't you can please repeat.
Yeah could you talk with many of them.
The integration roadmap with polarized and where you're at right now.
Incremental deliverables that you include choosing <unk> over the near term.
Yeah. So the integration is the integration is.
Working very well, we have internal milestones that we needed to eat in the.
You know we strongly believe that we are going to hit them. As he said we will see revenue you know next year, though of a lot of internal staff that we need to do but the way that it will walk you know at the beginning it will be standalone with minimal integration than the small integration and you know in the in the within <unk>.
Cycles, it would be completely integrated.
Go on.
And just to emphasize that the revenue that we expect is in 'twenty and 'twenty. Two we don't expect any material revenue in 2021.
Great and then drives you listen to the growing pipeline and you talked about the pillars.
Is that more related to land expand interest.
Can you give us a little more color of how things are shaping up as it velocity or scale of boots.
It's both it's most of in the in the customer base and just new customers, but I think what is very exciting is that we are doing it in with the right customers from this segment of thousands of users and above 2000, and above really enterprise sales and we increased the drastic.
The overall customer lifetime value, but the other thing is the conversion rate of the pipeline. We just getting high in the organization is a top priority it's coming from so it's coming from both of you know there is just a.
Huge uptick in the usability of the platform.
Feel comfortable with.
The pipeline is and how customers are using it and the overall effort economy, where we spend our time with customers, how we bring them value and the results that we can expect that are becoming more and more predictable.
Great. Thank you.
Yes.
And our next question is worth of Alex Henderson with Needham and company.
Great. Thank you I was hoping we could talk a little bit about what you're hearing is you're talking to Ceos cfos and so types of.
Post the sort of wins had kind of announcements, but theres been a lot of discussion that are theres been an increase net.
And spending intentions for not just IP, but security specifically.
The budgets are going up or have you had conversations with people that support that viewpoint and if so how much do you think of the Verona segment of the market.
Is being tapped on.
As part of that solution set.
Hi, Alex.
What we do constantly talk with our customers and I can represent mainly the view of the launch so first regarding solar within general from where we sit it was inevitable that something like that will happen and things like that where we didn't Casey just.
As the cyber crime space, becoming so big and also insiders and he said in the prepared remarks day.
The biggest risk of all of many many times and what we seen budget that related to US. We just see that people of mapping the digital assets and the problem and the risks and understand how they're going to mitigate it because there is another huge problem, which is shortage of people to do it that humans can't manage it you have so much data a lot of the place you need automation, it's really hard to have.
Auction of more visibility to what's going on in the business side understanding sort of sitting today I can tell you the data protection threat detection and response and to be Incompliant of these ever complex data driven organizations and something that is very hard to do any top business priority for organizations. So then you're starting to see these big deep.
But your budget of buckets for insider threats and data protection and regulation that we are benefiting from them. So we believe that you know you don't see it immediately but people see today and understand you know as so many so many organization got he people understand it can happen to me. So this is not you know.
Science fiction it can happen to me and when it happens it's huge problem you can lose your organizations and then how are we putting the right controls in place and organizations that are so data driven and becoming more and more of a digital and it generates a lot of chaos.
A lot of tension there and in this kind of environment volume chunks. So you know, we believe that we'll see depot budgets and more budgets allocating to us than most senior people within the organizations want to understand how to protect their digital assets how to protect the critical infrastructure how to protect the data that is going to the cloud of how to win.
Compliance with regulation and we are going to benefit from it and I just think that what will happen that things like that will increase will become more productive more digital in the risk will increase and organization that will not be able to manage distinction.
It will be it will be very hard to bring business. We have the trust foundation that need to enable the digital transformation that is the only say we believe that the launch is going to play a critical part of this transformation and the ability to.
Make sure that we can enjoy all of the productivity gains resulted diminishing return.
Just just to be clear you did not have any impact.
Directly on your operations from.
Being at and you really don't have any suppliers or anybody else that's been at that represent a threat to your your operations are clearer.
Yes, nothing happened growth.
Perfect. Thank you very much.
And our next question is from Mr. Al Eyal with Oppenheimer.
Thank you good afternoon, gentlemen, congrats on the strong performance and outlook.
Another solid ones related question, but from a different direction. So.
You know post the breach.
Plenty of discussion of of what potential solutions might of been able to flag. The breach head of its impact do you think yoki do you view of a willingness platform of potentially being able to prevent at least a portion of this massive attack and I have a follow up.
Yes, without a doubt our ability to understand automatically what service accounts are doing and even of Zalviso complex. So low in that you know very sophisticated and doing millions of things and you know using different API, we can market and understand any abnormal behavior.
And we can also you know and we can also prevent it but customers understand that you need more of our licenses in order to do so definitely of core player in solving these kind of attacks.
Understood understood and any Yankee or guy or are you beginning to see companies with bigger head counts, yeah say greater than.
5000, 7500, adopting or of showing elevated interest in in the <unk> platform.
It was out of the yes.
Many of them.
Got it.
Got it understood on that.
We have customers that have hundreds of thousands of employees. So we this product works at scale.
We're targeting the larger enterprise organizations and that's been working very well, but we already have customers that are on the larger scale.
Understood. Thank.
Thank you for the color good luck good job.
Okay.
And our next question is from Hamzah <unk> with Morgan Stanley.
Hey, guys.
Thank you for taking my question I wanted to talk a little bit about your goal to get to $1 billion in revenue.
I'm wondering have you guys now that you're lapping your subscription transition have you given any thought around the timeline for that and.
And do you feel like you have the product portfolio in place to get there.
We're not giving timelines, but yes, we will.
You have the product book.
We believe that we of the product portfolio to get there. We also believe that we have done most of the investments to get to when you have lofty goals you know the out of this thing is.
You need to you know in terms of the call. If you need to do too many investment in order to get there and here too many unknowns of would take you.
Too long of a time you know you have a less probability together.
We believe that we have all the building blocks of in place together.
It'll investments one of the of the product portfolio. We believe that we have very high chances to get it.
Got it and then.
One question per Guy just I know you mentioned polarized not a material contributor to 2021 I believe it closed in Q4, but was there any impact at all to air our of billings like even less of a point.
No there was no material impact than in Q4, and then when.
When you when we build the guidance we didn't bake in any any material impact from horizon. This year.
Okay. Thank you.
Thank you.
And our next question is from Chad Bennett with Craig Hallum.
Great. Thanks for taking my questions nice job on the quarter guys. So just maybe for guy, possibly Yoki just in terms of of the guide for the year could.
Could you provide just any type of color or directional movement, just on the maintenance segment of the business.
It sounds like retention rates are still you know best in class high you're not planning on converting any maintenance so no real kind of transition risks there.
What are your expectations for that line item, just kind of up down flat so to speak.
So it's important to remember that the maintenance.
A portion of the perpetual license isn't getting new fuel because we're basically not selling any material perpetual licenses and you can see that in the 2020 numbers. So.
We look at maintenance of perpetual in 'twenty and 'twenty, one actually decreasing low single digit percentages.
We still have high renewal rates, but just because it's not getting any any new addition, we expect that to be kind of the normal course.
Okay. So with that you know that that implies you know I I think you know kind of an upper 40 per cent, possibly 50% growth on the subscription line, which is.
Phenomenal you know relative to any software company out there I guess when you look at the business from a new logo or our net expansion standpoint.
How would you if I'm right on kind of backing into that that type of growth rate subscription how would you.
Think about the relative mix of new logo versus net expansion as you can see today looking into this year.
So I think when we look at kind of of the pillars that can drive the growth. We're very focused on acquiring new customers. That's always been kind of of focus.
For us and that's part of the reason that from a commission perspective, if if a rep wants to achieve 100% of their target they have to bring new.
New customers and not only do they need to bring new customers. They have to be at the right side and from most of the reps. It's over 1000 employees. So we're very focused on on that aspect because we know that that drives the customer lifetime value, but we also know that we're underpenetrated within our existing customer base and you can see that with <unk>.
Of the metrics that we provide you know if you look at the 500 plus.
We provide the oral more of licenses and six of them more licenses and is as nice as that growth has been over the last year. It's still underpenetrated, we have 30% and of six six or more so there's there's so much more to sell to our base and going to that subscription model really allows us to unleash the potential.
<unk> it really allows us to sell the platform customers see more value and that allows its really a win win so I would say that it's really a balance of those two I think that the existing customer portion should should be kind of the majority of it just because we have such a large base, but we're very much focused on bringing new customers as well at the <unk>.
And maybe just maybe just one real quick last one from me just on the net expansion.
Of our number of of I think he said Guy 116.
I assume you know again because of that low penetration.
I mean, when you think about net expansion kind of best in class of being kind of mid 100.
Twenties of 130 for top top do you expect that net expansion can you continue to accelerate throughout the year.
From a growth rate of standpoint.
Absolutely the first of all of the average MLR for the year was 119% and we've been a subscription company for only a year. So theres timing kind of involved in this metric and with that fluctuation of timing, we kind of discussed this in the past that we will provide the metric on an annual basis.
Like I said before we have a tremendous long term opportunity and one of that growth drivers is expansion within the base. So overall, we're pleased with an average of an IRR for the year of 119%.
Got it thanks, so much nice job again.
Thank you.
And our next question is from Jason neighbor with William Blair.
Yeah. Thanks.
First question for Yoki are giving your growth in the secular tailwind in the space are you expecting to see more competition M.
And where do you expect that competition to come from.
You know at this point if you are looking at all of sales campaigns that coming you'll see we see less competition is something that is very complex to do you know, we always making sure that we are increasing our competitive edge in the but you know I'm just.
What was it about my customer in the business and the roadmap I, you know and make sure that we can add value of constantly innovate and execute on our plan. So you know at this point, we see less competition, where it would come from.
I don't know.
<unk> stronger than ever and you know, we and I doing everything we can to keep this competitive advantage.
Do you think it would come more from the security players or from their deposit repository.
The platforms that integrate more data access governance.
Okay.
From the deposit there is something that is very hard to do in the form.
The access and governance Delano dealing with data. This is just the.
D. C. There is no one company that I can tell you that day.
Technology or naturally appeal domain expertise and the engineering that they can.
Organically and naturally extend to all of space, which is something that is hard to do we believe that we can maintain for a long time is competitive.
Okay, and then a follow up for Guy Guy on polarized could you quantify the dilution of 'twenty 'twenty, one or at least maybe how much opex you are expecting to spend for.
For the year on the integration and and just the added spend three out of them.
Opex.
So when we acquired polarize the opec's portion with.
Very small compared to the bonus expense side.
We obviously are hiring.
More people to kind of build that integration that's already baked into the guidance.
And we don't expect any kind of fluctuation of everything is now part of a kind of a bonus.
M.
Opex Big Big Big expense number, but there's nothing there that has to mature.
But it's fair to say that of it.
Kind of all in with with what Youre doing on the integration I mean, it's fair to say it is creating some dilution to the earnings in 2021 correct.
But it's also creating the opportunity so I would say, it's a small it's a very small dilution on the operating side, where we're hiring more people now to kind of build of the integration.
But it's not something that would change materially the numbers of trust.
Understood. Okay. Thank you.
Thank you.
And our next question is from Erik <unk> with JMP Securities.
Yeah. Thanks for taking the question and congrats on a good quarter.
Can you comment a little bit on average deal size.
Nearly doing very well in terms of.
Expanding the number of licenses of the customers are buying but can you translate that to the.
<unk> per customer or what your deal size has done over the course of the last year and then I've got a follow up from that.
So one of the things that we are we have seen with our customers and our strategic decision to kind of go upscale is that with the move to subscription customers are happy to consume more of the licenses we've seen.
M customers buy on average.
Close to double the amount of licenses that they were used to buy under the perpetual model. We've seen that number of go and is now kind of more than five licenses under the subscription model and that really allows us to provide more value to those customers upfront and also increase the customer lifetime value because the other thing that we have learned.
Is that the more of licenses the customers one of more value they see in the higher the likelihood of them coming back and buying more and Thats part of the reason that we talk a lot about the commentary of the path of double digit licenses on average per customer has never been clear to us so from an ASP perspective, obviously thats M.
<unk> by the fact that they're consuming more of the licenses and that really allows us to.
To generate productivity gains and increase the customer lifetime value.
Well can you comment if you've doubled the number of licenses, but of new customer buys from the time. They were of perpetual customer two two of new customer has that lifetime does that translate into a depth of two works in the lifetime value.
Is that the way, we can think about that.
Well don't forget that the actual price of subscription is lower than the price of perpetual. So obviously, there's that impact our subscription price list is.
Kind of at 45% of the perpetual price list on a same license to license comparison.
So obviously I wouldn't say that.
It's double the customer lifetime value, but it's definitely increasing customer lifetime value with the weight to stick, but the way to think about it and what's happened is that the market in the world.
Came to us and this became the top priority for organizations.
The ability to consume it and perpetual it was impossible. So then what happened we just reduce friction and made sure that they can buy the subscription and they can really consume the platform. Because you know we have such a tremendous growth new licenses that adding more value of automation.
And what's happening from that they are buying more of licenses and just the customer lifetime value of increasing leaps and bounds the ability just to St. Perpetual day will would have this amount any subscription the same amount and how it looks from the customer lifetime value is not the right way to look at it either way to look at it that we enabled of customers.
With the subscription to buy more of licenses to get more automation than they'll buy more and we have.
Just drastically bigger coverage in terms of licenses and value.
Okay very good.
The question is.
Given given the leverage that you did see the margin expansion that you did see in 2020.
You're guiding for a marginal.
Of relatively slight margin expansion of operating margin expansion in 2021.
Is there anything that would change that would cause the leverage that you're getting too slow.
Do you anticipate an acceleration in hiring or do you anticipate.
Any type of cost change that would that would slow the.
Leverage that you've been driving over the course of the last year.
Yep.
Our philosophy is guys said before he is always to balance cost stability and in the investment.
Net investment in the business exceeding today, we look at the cloud we look at the cloud and the SaaS level on the highest level, we see just tremendous opportunity in everything that we have done in the platform. We just see so much opportunity and our ability to build new innovations and to replicate the technology that we have done to the digital.
So the overall digital transformation and it's very easy to do extrapolation boy the business in terms of unit economics. If you take of customer and you know you can double the amount of license sales and they are buying more and more when you can scale faster eventually becoming much much more profitable and we just you know the eye of the Tiger as we always said he's just from there.
Opportunity will help to build a big company.
Now in each of its it was a lot of heavy lifting and hard work to get to this situation. So you know we have done this a record transitioned to subscription.
We get two very good day.
The growth rates and we want to make sure that we're building something big and we in terms of the value of the overall the long term value of the company will not leaving anything on the table, we want to fulfill the potential of the opportunity and this is exactly.
Actually what we will do so in terms of.
Inherited book.
Stability power of the business and the platform.
Very easy to do it we just want to get them gradually.
Very good thank you.
Thank you.
And our next question is from Mark Schappell with benchmark capital.
Alright. Thank you for taking my question and nice job on the quarter guys. Just one question and one for you. It was nice to see Europe rebound so strongly in the quarter and I was wondering if there's particular countries that are driving those good results from Europe and also too if you could just remind us of some of the changes you made in Europe to European operation, So over the last year or so.
So I think the story of <unk>.
We talked about it with of last year was the fact that the European team of adopted the transition to subscription is slightly slower than the north American team.
And that's part of the reason that we expected the flywheel effect to.
To take place later this in 2020 as opposed to kind of the growth that we saw from North America.
We have presence we have good presence in France and in the U K and we obviously are kind of around the rest of the countries in Europe, and we see that as a great opportunity.
We still have territories that are underpenetrated in Europe that we see as the growth drivers for us in the upcoming years, but overall I think that the team that we have in place. The teams that we have in place are strong and and we can see that in the results. This quarter and we have very strong teams in Europe, great customers very good.
The channel distribution you know we did it when we decided that we moved to subscription we moved to subscription we know we needed to do some changes the work and they will of it two.
Two quarters after North America, so everything that's happened in the fourth quarter and everything that happened in the in EMEA are you know, we're happy but not supply.
Great. Thank you.
Yeah.
Our next question comes from Joshua Tilton, with the burn Berg of capital markets.
Yeah, Hi, guys. Thanks for taking my question.
The commentary around the secular trends and the strength of the business suggest that this shouldn't be the case, but I. Just wanted to confirm are you seeing any meaningful change in the momentum of new or incremental subscription bookings growth going into 2021.
Not at this point, we see healthy healthy pipeline very strong use of PDP, There's 365, and as you and all of the move to the cloud as a tremendous growth engine for us.
We feel that you know as we said the second do all of these is slowly but surely coming to us.
Okay and then.
Just a quick follow up Microsoft announced the data governance protocols per view.
It does seem a little incomplete today, but how do you guys think about that given that the Verona is platform of very geared towards of Microsoft data stores.
You know, we have a silver of technological.
Technological partnership with Microsoft strong related relays.
Relationship.
It is a very good day security products, but they are very different from what we are doing at this point, Microsoft just an enabler force.
But we are very complementary and they are.
They are an enabler of a day, so far what they'll do any of these mainly pushing new business.
Thank you very much I appreciate it.
Mhm.
And our next and final question is from Rishi Galeria with D. A Davidson.
Yeah.
Hey, guys. Thanks for squeezing me in and Great to see continued strong execution.
Got two questions just as it pertains to the outlook and guidance for next year. The first Mike might be a little bit of a follow up to soups earlier question, but as you think about the margins for next year Guy you had mentioned in your prepared remarks, you have some COVID-19 related cost savings how are you thinking about the sustainability of those types of costs.
Moving to especially as we head into the back half of the year, where let's say optimistically some level of business travel in teeny can come back.
How should we be thinking about that and then I've got a follow up.
So when we built the guidance obviously, we took into consideration what we know, but also kind of tried to baked in what we don't know and we don't know when things come back to normal.
In terms of full flights and the way we've we've done a lot of marketing events that we're physical in the past.
We tried to address it and baked some of kind of going back to normal in the second part of the year and that's already baked in in our guidance. When you think about kind of of the expense as a whole and I talked a little bit about it before and of the polarized acquisition isn't material. It it adds I'd say roughly about <unk>.
1% on the operating margin.
Baked that in with kind of the investments that we're doing in increasing the head count there. We when we acquired polarized there were less than 20 employees and now we're increasing that and putting more heads in R&D as a whole and also in sales and marketing we tried to make sure that the overall expenses would be balanced and kind of committing to that euro.
As of year margin improvement, but also trying to take advantage of the longer term opportunity. So it's a bit of a kind of a philosophy hasn't changed and we're trying to continue to.
To do the same in 'twenty and 'twenty one.
Alright got it that's helpful of that and then just wanted to ask about seasonality.
As we look out from here it looks like your of seasonality has been relatively consistent you know now versus what it was a pretty transition I get you know ASC 606 maintenance not super clean and completely ratable, but I would've expected.
Maybe some maybe a little less seasonality than we would've seen under the perpetual license model can you I guess quickly explain why why are we haven't seen that big reduction of seasonality of that how should we be thinking about seasonality going forward. Thanks.
Of course, so with six of six.
The way we have to recognize.
The license for subscription is that the license portion of the subscription is recognized upfront and then the maintenance portion is recognized ratably over the term of the year.
Because of that the seasonality of basically stays the same and very similar to the way we sold perpetual licenses, where Q1 from a dollar based.
Revenue number is the lowest of the year in Q4, historically has been the largest revenue number for the year and we expect that trend to continue.
And that's really kind of the 606 are contributing to that.
Alright wonderful thank you so much.
Thank you.
Ladies and gentlemen, we have reached the end of question and answer session and I would now like to turn the call back over to James the rest of their for closing remarks.
So thank you everyone for joining and for your interest today, and we look forward to speaking with everyone more of this quarter, thanks and have a good night.
Thank you. This concludes Tonight's conference you may disconnect. Your lines of at this time again. Thank you for your participation and have a great evening.