Q2 2019 Earnings Call
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Carbon centers every name please.
Jason Hormann HR M&A.
H O, our M&A and perfect and you're with points 72.
No.
Oh, I'm, sorry, what company you win.
Yes.
My company's era AI yard.
<unk> and you're dialing in for the Verona systems.
Yes.
Let me join you right there.
Greetings and welcome to the Varonis systems incorporated second quarter 2019 earnings call.
At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
Please note. This conference is being recorded I will now turn the conference over to your host James arrest <unk> director of Investor Relations.
Mr. Russ you you may begin.
Thank you operator good afternoon. Thank you for joining us today to review Varonis is second quarter 2019 financial results with me on the call today are Yaki Faitelson, Chief Executive Officer, and Guy Melamed, Chief Financial Officer, and Chief operating Officer. After preliminary remarks, we will open up the call to a question and answer session.
During this call we may make statements related to our business that would be considered forward looking statements under federal securities laws, including projections of future operating results for our third quarter fiscal year ending December 31 2019.
Actual results may differ materially from those set forth in such statements important factors such as risks associated with anticipated growth in our addressable market competitive factors, including increased sales cycle time changes in the competitive environment pricing changes transition in sales from perpetual licenses to a subscription based model and increased competition. The risk that we may not be able to attract or retain employees, including sales personnel and engineers general economic and industry conditions, including expenditure trends for data and cyber security solutions risks associated with the closing of large transactions, including our ability to close large transactions consistently on a quarterly basis, our ability to build and expand our direct sales efforts and reseller distribution channels, new product introductions, and our ability to develop and deliver innovative products risks associated with international operations and our ability to provide high quality service and support offerings could cause actual results to differ materially from those.
Contained in forward looking statements.
These factors are addressed in the earnings press release that we issued today under the section captioned forward looking statements and these and other important risk factors are described more fully in our reports filed with the Securities and Exchange Commission.
We encourage all investors to read our SEC filings. These statements reflect our views only as of today and should not be relied upon as representing our views as of any subsequent date.
Ronas expressly disclaims any application or undertaking to release publicly any updates or revisions to any forward looking statements made herein.
Additionally, non-GAAP financial measures will be discussed on this conference call a reconciliation for the most directly comparable GAAP financial measures is also available in our second quarter 2019 earnings press release, which can be found at www dot for Ronas Dot com in the Investor Relations section also please note that a webcast of today's call will be available on our website in the Investor Relations section with that I'd like to turn the call over to our Chief Executive Officer, Yaki Faitelson Yaki.
Thanks, Jamie and good afternoon, everyone I'm excited to update you today on the success. We're having we go transition just took their subscription company disciplined feeling better and faster than we could have ever imagined.
For Q2.
Im pleased to we vote, that's 56% of our license revenues were from subscription fees, obviously far exceeded our guidance of 25%.
So we are again, raising our expectations for the three weeks from 25% to 45%.
When we say that 2017 mix to 25% a quarter ago, we said to be split us a year ahead of schedule today, we issued the guidance to 45%. We continued to show them that that additional timeline to complete such a transition and we are building a much stronger business with greater visibility and predictability.
We are also very pleased that the EMEA that is solid quarterly as a result of the changes we made in Q1 in fact this subscription percentage for both North America and EMEA, maybe nine we reported mix. Most importantly, the business overall is very healthy.
As we estimated that normalized license and subscription revenue growth in Q2 was above 25% in show we're going the way we knew we could subscription is unleashing the full potential of our platform.
I will talk more about business goals, shortly but let's quickly touch on our results.
Second quarter total revenues will $69.6 million in Q2 subscription revenues was $14.8 million while Petrobras.
Hi, since revenues rose $11.5 million in just a second quarter of the transition.
We generated most subscription revenues in perpetual license revenue consuming the customer demand to consume the platform on the other new more than.
Maintenance on our perpetual licenses and services revenues rose $33.3 million.
Consistent with Q1 in a larger mix of subscription revenues clearly impacted our reported license.
Revenue this quarter, we estimate that had to subscription mix being in line with the 25% guidance. We provided our Q2 reported revenue would have been approximately $68 million well above the high end of our guidance, let's talk more about the transition the key drivers of growth that we are seeing in some examples of customers who are benefiting from the subscription model in our platform.
Data continues to explode across all data settles most on claiming to cloud, creating an increasingly complex high building.
We've been non metal fytwo breaches that we have seen data centric solution.
Oil at the full c. so.
In the in the face of coolant and pending regulation compliance has never been moving forward and we are starting to see signs for GDPR infections that have reviewed consequences for companys financial results and reputation security and compliance concerns open up many opportunities for thoughtful discussion with customers in which we can demonstrate the full value of our platform.
For example allows investment company Newell, who has relied on vone since 2017, potted GDP output down as well as data on so for Windows and show point.
Pinpoint customer information full data subject DOCSIS request under GDP out with a subscription offering the customer was able to bid on maintain compliance with call integration you also purchase edge to better safe guarding against breaches and when form four licenses to eight.
In other customer.
A major non profit organization, certainly do sleep well towards comply with HIPAA GDPR into California, consumer privacy and boost the threat detection and response capabilities without visibility into a sensitive data reciting the environment and who has access to a blind.
Dana Pesification engine, we GDPR and CCP I, suppose we'll identify regulated and sensitive data throughout the environment.
They will also use data to be dig breaches and of course data advantage and automation engine to reduce risk is our subscription model allow them to buy five licenses in this initial deal.
This final example is the large regional head of school provider that has spanned three years' time to clean up global access groups and look down sensitive data.
Its adjusted partner recommended Vacone data risk assessment found over 750000 phone Bill in 2000 sensitive five open to actively using the entire organization it potential nightmare under the people with our automation engine, we showed how vacone could clean up global access within weeks. These edge, we opened device to the danger of BNS styling at very stealthy weight that a takeaway excellent rate sensitive data our subscription model allow them to purchase six licenses in almost instantly realized benefits in data protection compliance and 30 fiction three premium business concerns.
With a subscription model customers, who buy more we initially came to realize the value of the platform much quicker and we had the large number of licenses. We have we can continue to offset over time.
In other words subscription is leading to both smaller initial deployment and the expansion of existing diploma.
We added 162 customers this quarter and Im added approximately 300 in the first half of this year almost all the delta in new customers odd versus last year is in the zero to 500 customer group. This is in line with our strategy to focus our time and attention on customers, who can make larger initial commitments and expand with us over time.
And we saw that happened this quarter.
Additionally, it is important to remember that half of our revenue comes from our existing customers with whom we will remain underpenetrated. We are spending more time with these customers and becoming much more strategic and efficient coverage. This focused on the light customers, we plot, which weve times led to greater efficiencies in our model as we expect to see significant leverage on the sales force over time as we complete our subscription transition these larger customers and have moved up the adoption curve.
In a greater awareness of the full value we can provide it on data protection.
Compliance and security analytics, we've proven technology and approach and we are confident that the secular trend the industry changes that we see shoot so is a tailwind for years to come.
As we have said moving to subscription is our top priority, which I think we called requires discipline focus and execution. The results. This quarter demonstrate that we are well underway and we want to be a case study in how companies can successfully moved to subscription as rapidly as possible our customers and channel partners, a hobby and I would like to Sanco Salesforce and says leadership, while embracing this transition and doing better than ever.
At the same time, we believed the addressable market is hours the asset is scarce in the transition will allow us to more quickly and efficiently reach our 1 billion cells target.
As you know truly unlocking the potential of our platform. We are building a stronger company with greater long term value for stockholders for stockholders.
And we look forward to a strong second half of 2019 with that let me turn the call over to Guy go.
Thanks, Jackie good afternoon, everyone.
This quarter's highlights include subscription revenues, representing 56% of total license revenues compared to 4% a year ago and subscription and maintenance from perpetual license revenues, representing 78% of total revenues compared to 45% a year ago.
We continue to maintain a three year breakeven period, even with the significant higher dollar amounts of subscription and a continuation of the increased license adoption trends.
The bottom line is this the transition is unleashing the potential of our platform, while delivering greater long term value for our stockholders.
For Q2 total revenues were $59.6 million, a decrease of 4% year over year.
Second quarter license revenues were $26.4 million, which included nearly $15 million of subscription revenue.
In only the second full quarter of this transition our subscription revenues exceeded perpetual license revenue.
The guidance was for 25% and with a continued outperformance we again validate why the move to subscription makes so much sense for our customers and over on it.
To remind you our subscription price list is set between 40% to 45% of the perpetual priceless, including first year maintenance.
This equals a three year breakeven period, which we saw in our Q1 and Q2 results.
Using that three year breakeven period, which yields a 2.2 factor license and subscription revenues growth was 26% on a normalized basis.
Subscription adoption for both existing and new customers remains strong.
With new customers continuing to buy on average between four and five licenses in the initial deal as opposed to two and three licenses under the old perpetual model.
Unlike Q1, we saw existing customers more than happy to purchase Upsells via subscription.
Maintenance and services revenues were $33.3 million, increasing 16% compared to the same period last year.
I'd like to make a few comments about the maintenance and services line first to remind everyone maintenance related to subscription is included in the subscription line in our financial statements.
Second as our subscription mix increases, we expect less maintenance revenues associated with perpetual license revenues.
Maintenance renewal rates on perpetual license once again exceeded 90% and we expect them to stay at these high levels.
Lastly included in the maintenance is a small professional services component that historically has been low single digits as a percentage of total revenues.
We expect this professional service components to become even smaller going forward as we offer licenses that provide greater automation and as our channel partners take on more services work.
Annualized recurring revenues or a RR a key performance indicator for subscription companies is defined as the annualized value of active term based subscription license plus maintenance contracts related to perpetual license in effect at the end of the reported period.
As of June Thirtyth, 2019, a art was $155.2 million compared to $111.9 million at the same time last year representing growth of 39%.
This increase reflects the strength of the business as we transition to a subscription based license model.
Turning back to our results looking at the business geographically North America reserve unused increased 4% to $40 million or 67% of total revenue.
In EMEA revenues decreased 18.3% to $17.6 million, representing 29% of total revenues, but the subscription mix for that region was in line with our reported mix.
Our sales team in EMEA and across the World have now fully embraced the business model transition and the impact is noticeable.
Rest of World revenues were $2.1 million or 4% of total revenue.
For the second quarter existing customer license and first year maintenance revenues contribution was 51% up from 42% in Q2 18.
During the quarter, we added 162, new customers and we ended Q2 with approximately 6800 customers.
As of June Thirtyth 2019, 74% of our customers had purchased two or more product families up from 71% at the same time last year.
42% of our customers purchased three or more product families compared with 38% in Q2 of 2018.
Moving to the income statement I'd like to point out that I'll be discussing non-GAAP results going forward, unless otherwise stated, which for Q2 exclude $14.8 million in stock based compensation expense and $261000 of related payroll tax expense.
Also excluded our foreign exchange losses of $426000 related to FX differences from the revaluation of assets and liabilities denominated in non us dollars.
Gross profit for the second quarter was $52 million, representing a gross margin of 87.3% compared to 90.5% in the second quarter of 2018.
Operating expenses in the second quarter totaled $61 million as a result, our operating loss was $8.9 million or an operating margin of negative 15% for the second quarter compared to an operating loss of $1 million or an operating margin of negative 1.6% in the same period last year.
The move to subscription impacts our short term operating results, but we have been and remain committed to profitability and believe we'll come out of the other side of this transition with a healthy margin profile.
During the quarter, we had financial income of $491000 compared to financial income of $321000 in the second quarter of 2018, both primarily due to interest income.
Our guidance does not consider any potential impact to the financial and other income and expense associated with foreign exchange gains or losses, as we don't estimates movements in foreign currency rates.
Our net loss was $9 million for the second quarter of 2019 or loss of 30 cents per basic and diluted share compared to a net loss of $1.3 million or four cents per basic and diluted share for the second quarter of 2018.
This is based on $30.3 million and 28.9 million basic and diluted shares outstanding for Q2 19 in Q2 18, respectively.
Turning to the balance sheet, we ended the quarter with $146.3 million in cash cash equivalents marketable securities and short term deposits.
For the six months of 2019, we generated operating cash flow of $3 million compared to operating cash flow of $20.4 million in the first six months of 2018.
In this transition we're collecting on HCV amounts and therefore see a short term impact on cash flow.
We ended the quarter with 1448 employees, a 6% increase from the second quarter of 2018.
Before I turn to guidance I would note that we have added a few new new slides to our investor presentation found in the IR section of our website.
To provide additional visibility into the real strength of our business.
Slide seven and eight show the mix that subscription and maintenance from perpetual license revenues represent our total revenues for Q2 in the first half of 2090.
The substantial growth in this mix this year demonstrates how rapidly we are building a stronger and more sustainable business.
The normalized license and subscription revenues I mentioned before is illustrated in slide 10, showing growth of approximately 26% for Q2.
Slide 11 illustrates that 25% subscription revenue mix. We originally expected Q2 revenue would have been comfortably above the high end of our guidance.
Moving to guidance.
Given the impressive results we are seeing with its subscription adoption. We are again significantly increasing our expectation for subscription mix as a percentage of license revenues.
For the third quarter, we expect that mix to be approximately 55% or $15.5 million in subscription revenues.
For the full year, we now expect the subscription mix as a percentage of license revenues to be approximately 45% or $56 million.
This is a substantial increase from our previous guidance of 25%.
For the third quarter of 2019, we expect total revenues of 61 million to $62.5 million, we expect our non-GAAP operating loss to range between negative $10.5 million, the negative $9.5 million and non-GAAP loss per basic and diluted share in the range of 36 cents to 34%.
This assumes a tax provision of 500000 to $700000 and 30.4 million basic and diluted shares outstanding.
I'd like to provide more detail on our updated guidance, we are effectively raising our guidance on a normalized basis for the third quarter versus what was implied in our prior full year guidance.
Our Q3 guidance assumes a 2.2 conversion conversion factor and a three year breakeven and for Q4, we expect the conversion factors to range between 2.2 and 2.5.
Consistent with this we still estimate that for every incremental $1 million of subscription revenues, we generate versus our guidance. We will see a 1.2 to 1.5 million dollar headwind to reported revenue, which we expect to equally impact operating margin.
As a result for the full year 2019, we now expect total revenues in the range of 255.5 million to $259.5 million. We now expect our full year non-GAAP operating loss to be in the range of negative 27 million to negative $25 million and non-GAAP net loss per basic and diluted share in the range of 93 cents to 90 cents.
This assumes a tax provision of $2.2 million to $3.2 million and 30.2 million basic and.
Diluted shares outstanding.
We have summarized our guidance for the remainder of 2019 on slide 16 of our Investor presentations.
In summary, Q2 results greatly exceeded our expectations and we are fully committed to continuing the subscription transition we feel confident about the strength of our business and are excited by the implied raise of the Q3 guidance with that be happy to take questions operator.
At this time, we'll be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.
You may prestart too if you like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star Keith.
Our first question comes the line of John Difucci from Jefferies. Please proceed with your question.
Thank you I have a question for guy in a follow up for Yaki. So thank you for all this information you've given US a lot of information says really helpful. The one thing in this all in all make sense. The one thing that doesn't make sense to me.
Is deferred revenue this quarter like I would have thought with a greater.
Mix of subscription.
And subscription on an annual basis being a higher price than maintenance deferred revenue would have been better than we were looking for sort of a little bit less than we were looking for so can you.
Sort of talk to that.
Absolutely. So our deferred revenue is impacted by our subscription move and don't don't forget that the second and third year auto renewal component in our deals.
I'm not part of our deferred revenue so we only recognize.
The first year maintenance portion that hasn't been recognized not the license portion. So when you look at our long term deferred revenue that actually went down in Q2 2019 compared to Q2 2018, which is kind of in line with his story and when you look at long term deferred revenue, it's single digits and Thats kind of the way it's been.
For a while so it's very consistent and is impacted by the transition.
Okay. So actually just sets up to the healthier so the theres, even with subscription because of NSC six or six accounting youre recognizing an upfront portion of license for most those deals. So that's actually not in deferred is just the maintenance from the subscription that's a deferred so that thank you that that's that's helpful. That's very helpful.
And Jackie so.
Yucky people have been talking a lot and you can chime in on this too a lot of our GDPR over the last I don't know a year and a half and used often says hey, listen you know comes up a lot and.
Whether it's driving revenue certainly drives discussion and Weve just been sort of waiting for the plight of GDPR, meaning that the the finds being like some major fines and this month, we just had and I know it's the smart. So it's really early but we just had two major finds one one to be the BA British Airways and want to marry up.
And I'm, just curious and I know, it's it's really too soon but have you noticed anything has anything come back from your sales force that hey, listen we're getting more inquiries on the on the back end of these major finds being levied anything like that happening that you can detect at this point.
Hi, John .
It's still early but what I can tell you in general that we see that the sales motion and the perceived value becoming significantly significantly most strategic like everything we are doing becoming just more predictable and these are three use cases in the data protection.
In compliance and defer detection, it's just walking.
Extremely well more budgeted.
More budget to the projects and customer with the subscription understand how they can consume the old platform and it's worked very well in other GDPR GDP on our view of the California consumer fiber CEOC and everything that's going on going on around us and you have so many breaches that you know we have this advanced apds that a organizations are losing terabytes available. So on structural beta everything is working.
Working for US is a is a tailwind and a walk through the tailwind and the subscription in the adoption curve really a really integrated extremely well in the timing and it's working very well for us we can spend time with customers. We understand we see more steel C level people more people on the business side seeing the dashboard getting the reports so it's really working very well.
Okay. Thanks, Thanks, guys and so we'll just keep.
This has been a certainly an interesting ride.
It is it's certainly will remain that way so thanks for thanks for everything.
Thank you.
Our next question comes line of Matt Hedberg from RBC Capital. Please proceed with your question.
Hey, guys, thanks, well done on the quarter.
Yaki.
Revenue was a lot better than we were expecting.
You are gaining a lot attraction there as this mix to subscription continues to increase Guy also mentioned, 90% plus renewal rates on maintenance contracts I'm wondering.
Are we going to get to a point here, where we're buying a license and maintenance contract isn't an option and maybe look to convert.
For legacy license contracts just pure subscription.
Yes, Mark.
It's still early definitely the subscription transition is you know is going.
So much better than we anticipated, it's really just going very well and we are intensely focused on the on the execution, but we need you know we have a almost 7000 customers that most of them both perpetual we need to be careful with the customer relationships. So.
You know and every deal now we are trying to make sure that.
That it will be it will be subscriptions from all the indicators that that we have this is the fastest say transition to subscription that will it will but they can come with a bold statement down tell you that we will not sell any more.
Anymore perpetual, but we are definitely underway to be a very strong subscription business and it's definitely shortening the time and increasing the predictability and the probability for us to get $2 billion in selling more.
That's great and then you sort of that dovetails into my follow up which was you know we've been seeing the success and bigger customers you've alluded to on the call, saying deemphasizing zero to 500, which makes a lot of sense I guess could you talk about maybe the success.
Are you in these larger customers are you seeing the new subscription or there are these shorter contract cycles, and maybe maybe talk about the level of investment here are there additional investments needed to sort of even further penetrate the high end of the market.
So sales cycles and cell cycle relatively stayed the same they just can't buy more upfront and over time. So just works very well for us and you know still we barely we barely contested we don't have a lot of competition, but they are just so many budget buckets that you know finding apds everything that related for compliance and data protection that we just sold so much but it's for us and a lot of it is under the sea. So everybody just turn on the call today the compliance the compliance officers with BP also makes a lot of a lot of sense for us to spend time with the customer and they have a clear path how they can get to 10 licenses in more the budget makes sense. The economics makes sense you definitely the move to subscription with all the automation that customers want format makes everything more predictable for us and for the people in for the customers.
Got it well done.
Our next question comes line of socket Kalia from Barclays. Please proceed with your question.
Hi, guys. Thanks for taking my questions here.
Maybe maybe just for for you Yaki first.
Clearly a lot of success in selling subscription and that that reflects the execution.
I guess im curious what the customer feedback has been on subscription meaning are our customers finding that additional benefit and subscription for the higher value of course compared to what you were offering them on perpetual realize that it's.
It's more products and an initial sale, but but talk about the other beneficial points that a customer is getting beyond sort of the pricing in the upfront versus versus subscription.
Yes.
The pricing is definitely the more licenses the by product of the overall value.
At the end in the heart of everything is a lot of automation automation.
Hi, fidelity alerts automation into the mediation automation in classification on one end and beyond but on the other end these visibility to understand what is going on with this massive amount of data and the overall data support and what's going on when we can when customers can buy you know the security package with many more platforms. The body's exponentially bigger and they can have more reports in the don't take too many hall and the auto also can get.
Immediate time to value and ongoing value and when they are going to the cloud and they have different infrastructure. It's clear for them. How they are going to how they are going to expense. So now they you know.
Everybody understand the problems and the form compliance center insider threat and in vans and Vasco system space and we're seeing that just going on around US. We just just benefiting from very strong awareness. So once we are demonstrating the products that you really want to consume the platform and when we sell them enough licenses right off the bat. They have this automation in security remediation and visibility and this is really what you see nbcs, except though a lot of disciplined execution. This is what is driving this a very fast transition to subscription.
Got it got it for my follow up maybe for you guys.
Can you just talk a little bit about the mix of license from from existing customers.
You know, it's generally being embedded in that that same range. We've seen of about 50 50, but I guess just as as subscription becomes even an even bigger part of the business can you just talk about how that higher subscription mix could potentially impact that metric as we think about it going forward.
If at all.
Absolutely so as you remember weve up.
Priced the subscription price list as 40, 45% of the perpetual price list, including that first year maintenance and when you look at the behavior of new customers, we definitely see that new customers are buying between four to five licenses in that first initial purchase compared to what we saw under the perpetual model, where they bought between two to three licenses. So that what we see from a from a our ability of a breakeven period is that 45%, which is that three year breakeven period, we see that breakeven period be lower than than three years, but we're very very happy with the adoption of our existing customers. They're embracing this transition and we saw that during the pilot we saw that in Q1 and this is consistent in Q2.
Existing customers are buying licenses under the subscription model and that breakeven is slightly higher than three years, but that gets us to a very healthy mix of three year breakeven. So we're very happy with the fact that both new customers and existing customers are adopting.
Very helpful. Thanks, guys.
Thank you.
Our next question comes the line of Alex Henderson from Needham. Please proceed with your question.
Thanks.
I actually wanted to ask a question in the back of your slide deck.
Where you talk about the implied fourth quarter.
And in that context, you imply a much lower rate of conversion in that period I was just wondering if you could go.
Just hoping you'd go through the reasons why that's a lower transition to subscription in that quarter versus the other quarters I'm, assuming it's year end budget flush but.
It would be helpful. Thanks.
Absolutely. So as you remember we gave some commentary last quarter.
When we gave guidance on the subscription mix, we expected Q3 last quarter.
To be 27% and then expected Q4 to be in the low twentys. So we're actually.
Approximately doubling the subscription mix for the second part of the year and that's a great indication that that's that we feel very good about this transition thats. The reason were approximately doubling that percentage, but similar to the commentary that we gave last quarter Q4 is more of a capex weighted quarter. So we just don't know and we just want to be very cautious and that's by the way part of the reason that on the conversion factor, we're expecting Q3 to be at that 2.2.
A factor, which is that three year breakeven and for Q4, we're taking the range of 2.2 to 2.5. So we just don't know we feel very good about this transition and very happy to increase our subscription mix for the second part of the year.
It makes good sense, one more question if I could so.
This sales channel.
Approach, so as a percent of sales guy.
Does the transaction say with a three year subscription.
And the customer agrees to say just hypothetically pay.
$300000 on a deal over three years, how does that roll through the compensation.
To the salespeople.
How does that.
Change with respect to what you would have seen otherwise.
So I don't want to bore everyone to death with six of six but to keep it very simple.
You match the commission expense with the revenue recognition. So if you if I take your example of 100000 dollar annual HCV for three years, we will recognize the license portion when we ship the license in year, one which would be about 83000, and then about 17000 is the maintenance maintenance portion, which will be recognized over that first year period and in year. Two we would have that 83 again.
In the quarter, we ship the invoice and the maintenance again and we have the commission in the same ratio so kind of matching principle between the revenue and the commission and Thats. The way six so six requires you to do this so thats six or six acquires it but is that how the sales force is compensated.
In year one.
No. So we have a I don't want to get into too much detail, but the sales rep.
Have a portion that is paid in year, one and a portion that is paid in year. Two after we collect the second year payment.
I see okay. Thank you very much.
Thank you.
Our next question comes line of Shaul Eyal from Oppenheimer. Please proceed with your question.
Thank you good afternoon, gentlemen, congrats on the on results.
Yeah, Ki when when we think about Varonis down the road as as the $1 billion revenue company.
You talk about.
Over the course of the past few quarters and we understand this is without a doubt a longer term vision without committing to a specific timeframe, but what level of profitability.
Should we be anticipating single digit double digit operating margins I would imagine that with a quick ramp up we're seeing in the shift to subscription we should be in probably the double digit Zip code.
Am I looking at it correctly.
I would like CGI answer what ZIP code, we're going to being but from my end I just see that just thinking about the overall about the about the business very fast move to subscription a platform play.
We have a lot of licenses to sell reserve a lot of value in the you know a lot of just the data support our overall on Prem and in the cloud that works very well look at you know a lot of our revenues coming from the customer base.
And then on perpetual on booked on the perpetual business, we have more than 90% renewal rate. We just think that we can be a very very strong and very unique a subscription business and the profitability is very very important for us and we also believe that over time, just with the subscription everything becoming so much more efficient that we can a realized much better efficiencies and always these they know the balancing act between being profitable and growing and we want to make sure that it's constantly aging inching forward. So this philosophy bidding change there everything we are doing now we will give us a much better much better profitability as fast as we can build this flywheel its going to kick in.
So this is really the overall philosophy and we.
Very folks are focused on executing on it.
And so I'll just add on that we said all along that as we exit this transition we feel very comfortable going back to the revenue growth levels that we have seen in the past, which is 20 plus percent I think that this quarter. When you look at a normalized basis and we specifically provided those.
To really compare apples to apples, we wanted to make sure that investors understand.
Kind of how strong the businesses and having a Q2 normalized growth of license and subscription of approximately 26%.
It's very good we're very happy with that and don't forget we're only in kind of the we're starting our third quarter of this transition I know it feels like we've been in subscription mode for years, but we've we've this is only our third quarter.
Got it Okay. That's fair that's fair.
And sticking with the shift to subscription.
Any major bundle.
Lets you are seeing as becoming more preferred by converting customers.
So we that we actually don't go to our existing customers and try and convert their perpetual license.
We what we have seen is that existing customers are willing to buy additional licenses under the subscription model, but we're not going to existing customers and trying to convert them to what they already own.
From perpetual to subscription and Intel moved a lot the license. It makes everything you notes can be.
The Datalert analytics suite.
Agent the Swiss 65, it can be you know all the content classification with automation engine.
Everything is a so much connected and it just depends on what is what what use cases more pressing for the customer and needs a more automation.
Understood. Thank you and good job congrats.
Our next question comes line of Keith Weiss from Morgan Stanley . Please proceed with your question.
Excellent. Thank you guys for taking the question she cholesterol and for most Frankie.
Just wanted to.
Good day, and one on sort of the execution certainly greater than one on the subscription on the execution I was hoping give us an update in terms of kind of how the changes that you guys put into place and the first half of the year in Europe are taking hold how you guys feel about kind of the execution and.
Youre kind of sales capacity and how that's been doing in Europe on the execution side and on the subscription transition side of the equation.
Been a really fast ramp mom and I agree as fast as I've ever seen anything ramp in terms of subscriptions.
But given the fact that you're not pushing existing customers to go over towards.
Subscriptions and the Q4 commentary on that there's likely to be capex intensive how should we think about kind of the longer term dynamic where do you think perpetual versus subscription kind of.
Starts to level out or what would be a normalized rate given what you see in your customer base today.
So I'll start and then I'll, let yaki, Japan from some.
When we look at EMEA.
Looking at the Q2 performance the subscription Wix mix was very very much in line with our reported mix and we're very happy with that mix. We're happy that our sales force has adopted this and we're happy that.
They are allowing customers to really utilize and unleash the potential of this platform. The subs subscription transition is truly about the customers, allowing them to utilize and purchase more licenses upfront and im very happy we're very happy that the European team as kind of done very well in this adoption in the second part of the year.
In terms of.
Where does this go ahead.
Yes, we have existing customers, but as we saw during the pilot and Q1 and Q2 those existing customers are buying or are enjoying.
This subscription offerings. So we we are aiming to be a subscription company. That's what we're targeting that so we're trying to be and we see that working very well.
Hey, guys said the operating the subscription is working extremely well.
The customers are very excited from the platform play that just the budget and the way below the overall budget. So.
Our working but you know we just needed empirical evidence of Q4 Bcf early in that in the transition into working extremely well, but we just do you know is is to as we are moving forward in this transition and have more visibility. We are telling you exactly what we see and we'll do the same with the fourth quarter, we are very.
Prudent management and there we just need to be careful.
Excellent very nice quarter guys.
Thank you. Thank you.
Our next question comes line of Kurt Helpouts from site from Stifel. Please proceed with your question.
Hi, This is actually Chris speros on for.
Yaki noted that Csos are increasingly prioritizing data centric security projects has this trend and as this trend of increased awareness altered the competitive landscape.
20 degree or does the frequency in which you encounter a competitor and a transaction does that silver rich still remain quite low.
Yes, it's a if it's slow it's.
Even less than we so when we saw in the past.
But we definitely see a lot of awareness for data center security approach and it's working very well for us.
And.
Another one for you yaki growth adoption of both dealer and the data classification.
Engine continues to be impressive.
You've noted that new subscription customers are now adopting four to five.
Licenses on average.
Outside of data alert and Derek Classic occasion engine, which switch solutions have most of the have most.
Benefitted from this trend.
Well I think that the cargo on all of them you know the cloud 365 is doing very well for US said, we think that related to.
Active directory and the.
As you weigh D.
So with all the compliance so we see a nice deals we the data on sales edge is doing very well just we really benefiting from all the platform.
Great. Thanks, guys.
Thank you.
Our next question comes line of Dan Ives from Wedbush Securities. Please proceed with your question.
Yes, Thanks look I think many of us seeing trends or pull a transition and I can never remember one this quick from the subscription perspective.
Maybe can you give me where you believe me the one or two key things that have driven the success quarter over the past six months I'll start there.
Your first and foremost is the the innovation and the market conditions, just with innovative below 10 customers understanding and all the investment in automation the way that they can get tremendous value fast works very well for us and our version seven was just.
You know just a monumental engineering achievement in the in India right in the right time. This is first and foremost so the adoption curve for all the licenses. They are understanding that these are three premium.
A you ski says business use cases, so this works extremely well and the second thing is the execution. You know we did we will very focused to make sure that everything is working and that the company is working very well that the way that we are quoting works very well how to move the sales motion to sales motion that is very strategic and also in places that we had believes these things the people who are not 100% on both we made sure that they will not be so we just.
So as I said first and foremost is just the fitness of the platform to the market condition and after that is just intense execution great attention to details.
Great and what do you think it's been the biggest hurdle to overcome and maybe it's something the next call few quarters. If you think about sales cycles or partners or would you think the biggest hurdle that you are seeing.
In terms of the move to subscription.
You know they are now.
There are no further the early success is just to do.
A lot of small many many small things right every single day and this is something that they think we see the partners are happy because you know the unusual it just revenues for them makes a lot of sense and it also makes a lot of sense for salesforce and primarily for customer which is the most important thing we just need to keep doing what we're doing.
Regarding Q4, we just don't know how much it will be capex savvy, but I will tell you that the top priority for all the leadership team here and also every every employee in the company is to move to subscription as fast as possible.
Great job. Thanks.
Thank you.
Our next question comes line of Rishi Jaluria from da Davidson. Please proceed with your question.
Hi, guys. Thanks for taking my question and great to see some continued progress on the subscription transition.
Wanted to start with your guy on the.
Guidance for.
The four year, if we go through the kind of implied Q4 guidance.
You are saying is that suggesting that maintenance and services line will decline year over year in Q4.
Okay I understand there is there.
Maintenance related to subscription deals is on the subscription line.
And then you talked a little bit about there's a headwind from some services itself declining as you offer more the partners and you have more automation out of the box, but since you're not converting existing perpetual maintenance to subscription guess yet can you can you really can you just help us walk I understand why should that maintenance component related to perpetual decline on a year over year basis.
Absolutely so the maintenance and services line as you said is comprised of two components and when you look at the maintenance maintenance portion. It's obviously derived by the perpetual sales that are are sold there and it's very important to remind everyone that the maintenance portion of subscription is part of the subscription line item in the PML. So the in the services and maintenance line item. The only thing you have is whats related to professional services and whats related to maintenance from perpetual license. So thats one reason when when we're selling and moving as quickly as we are obviously the maintenance portion of the perpetual license will be impacted on our renewal rates have been consistently over 90%. So we're very happy with that on the professional services side, yes, it's used to be historically in the low to mid single digits out of total revenue and we've actually seen that percentage slightly go down.
And that's that's for two main reasons one is that our license offerings are becoming much more on the automated site. So that requires less professional services days from our customers and the second reason is that our vars are doing some of those professional services days on their own peos. So that's the reason we're seeing that it's part of our strategy, we're happy with that trend.
And it's kind of normal with this fast transition.
Okay got it thanks.
That's helpful.
And then just you know.
I don't want to get to an overstatement cigarette butts and just kind of thinking about that CCT.
Our opportunity and currently GDPR is then at least from an awareness perspective, I think important for you.
And I'm sure over time, it'll it'll be a major contributor the actual business, but how should we be thinking about CCP as an opportunity given that it's going to take a while to actually take Ken but is this something that could be equivalent to the DPR type opportunity.
Or is there another way of thinking about that.
You know in a very just tangible way, we'll never time to predicted what we can tell you that in the digital world and digital economy, and the overall cyber universe without very strong privacy laws that you can enforce you will have a massive a consequences in the diminished productivity and this is what we see just think about it open.
We added.
Two one newspaper every day and you see privacy and data security and what will happen Weve you know the election and how we can get value from data. This is a big thing and I think that we have in the midst of in order to make sure that productivity and security Ken.
Really a coexist you need the technologies like volumes and this is something that I think we the explosion of information. This is something that you're going to see so I can't tell you. What it was doing to then in the next two three quarters, but I see nothing that I can tell you that this is.
A top of mind. However, we both in every organization hands. It's also makes sense for us to go up market and it became a massive just business driver because if you can protect the data. If you just you can protect the enterprise.
And this is what we believe that more experiments like that will happen more fine then you know as mentioned before we come to a regular companies from all walks of life like Mario like British Airways and this is something that works.
So very very well for loans.
Great Thats helpful. Thanks, Jackie Thanks, guys.
Thank you.
Our next question comes line of Chad Bennett from Craig Hallum. Please proceed with your question.
Great. Thanks for taking my questions a quick question so.
Not not to kind of throw water on the on the pace of the model conversion, but I mean.
A significant part of this is the accounting change right under six or six for second year into that and effectively.
No you are recognizing term license or subscription revenue.
When it's booked in a quarter like a perpetual license right and so.
That's good right because it accelerates the conversion process a lot relative to companies that had to do it under six so five but as we look out a year.
When you know, we're we're kinda on.
I don't even know if will be a normalized subscription run rates back then but is it fair to say when we look out a year or two that.
Quarter to quarter volatility in the subscription line will still be there because of revenue rec.
So there's that let me answer it in several ways.
First of all six so six requires you to recognize the license portion when you shipped a license in the maintenance is recognized over that one year period when we.
Have a three year deal with year two in year, three kind of that auto renewal component. We only recognize the first portion of year. One we don't recognize year, two and year three and when you talk about the them.
Subscription shift being impacted by six so six I think that's slightly misleading the way you presented because when you look at other companies that have transitioned the nave provided their percentage of subscription mix. They did it out of booking when you look at the six so six way you're doing you're basically kind of comparing the same way. So the essence of our transition is basically representing and mimicking the way you would recognize it on a booking perspective, and we don't provide the booking color, but its very similar because we're only recognizing that one year portion so from a from a from a recurring revenue component you will see the shift.
From quarter to quarter because of the maintenance that is recognized ratably, but you have significantly more predictability and visibility because of that year, two and year three.
They come to us.
Right correct no I appreciate the color and then if we think about the subscription performance year to date.
How much of it was from.
Pipeline conversion exiting last year.
That was possibly perpetual license space that converted to subscription versus just net new pipeline that that you guys booked and recognized.
So our sales cycle is between three to nine months and on the larger deals it's up to 12 months. So when you think about the pipeline and the way it's evolved.
Most of the deals during the year have either been socialized with the customer under the perpetual pricing or.
Perpetual quotes have been provided to customers. So.
Our sales force is actually having to go back and change those quotes offerings to customers and as you can see customers are embracing the change because it allows them to buy more licenses and I'm going back to kind of the prepared remarks. The fact that customers are new customers are buying between four to five licenses as opposed to two to three allows them to recognize significant more value than what they would recognize under the perpetual. So so that's been working very well, but it is important to remember that throughout the 2019 year.
We are still going through pipeline that has either been introduced or discuss store or even presented to customers with perpetual pricing.
Got it and then maybe one last one.
Great to see the improvement I mean market improvement out of EMEA sequentially.
I think you guys are alluding to this but I just want to make sure do we feel like EMEA has fully adopted the the model change and we should.
Knock on wood would be kinda.
Up into the right from here so to speak thanks, Yes.
Yes.
Okay. Thanks.
Thank you.
Our next question comes line of Jonathan Ruykhaver from Baird. Please proceed with your question.
Yeah. Congrats on the strong underlying performance I only have one question.
We continue to hear really positive feedback from the channel regarding the significant increase in the amount of data and also the rate at which barone is can respond to events occurring within that data with Virgin as seven Dido and I kind of asked a similar question last quarter, but can you provide an update on where you see the adoption within the install base for seven Dido and then also it might be hard to.
To answer this just because of the changes that are occurring around the subscription pricing, but just the impact it might be having on broader license adoption and ASP.
The the customer bases.
Is it upgrading and fairly fast to version seven it's working you know as you said, it's working very well.
Like all the use cases.
A.
Just reflected very well in the in this version and.
So much easier for them to buy two by over one more licenses.
And maybe you could just speak to some of the improvements you made around.
Automation in incident response, that's the other feature we hear from from the channel that seems to be quite attractive to the end users.
Yes, I think in terms of the user behavior analytics what.
What we've done on the organizational level once you really bypass.
The perimeter security and we added just a lot of the machine learning models based on the very reliable streams that we have you know starting we understanding cuticle content how everybody in the organization is using data classifying users to sell it to service account and then really mixing everything we know a lot of analysis on active directory VPN.
And the VPN and the BNS and boxy and talking with extremely well so our ability to give.
Extremely good the limits that are human readable and after that you know make sure that everybody that there are some very basic knowledge and security will be able to.
Ill catch the most sophisticated attacks and also do very advanced forensics and this is something that works extremely well no the customer a little stunted starting to realize that on the organizational level, what we call. The leaves completely new innovation and user behavior analytics can rewalk, Andy just a really exciting for us and I think that they also slowly maturing vestal starting to understand it because this is a place doesn't put a lot of effort and it's working extremely well flagged. This subscription we had very good surprises. So just strokes extremely well I think that what you know what the team did here on security analytics seats.
Just amazing.
That's helpful. Thank you very much.
Thank you. Thank you.
We have reached the end of the question and answer session and I will now turn the call over to management for closing remarks.
Before we end the call I would like to think also employees for their hard work and contribution to our success. This past quarter. We also would like to same quarter for customers and partners for their continued support. Thank you also joining us today and we're looking forward to speaking with you again soon.
This concludes today's conference and you may disconnect your lines at this time.
Thank you for your participation.