Varonis Systems Inc (VRNS) 2015 Q4 法說會逐字稿

Good day and welcome to the Varonis Systems Incorporated fourth-quarter 2015 earnings conference call. Today's conference is being recorded.

At this time, I'd like to turn the conference over to Lisa Sheldon, Investor Relations. Please go ahead.

Thank you, operator. Thank you for joining us today to review Varonis' fourth-quarter and full-year 2015 financial results.

With me on the call today are Yaki Faitelson, Chief Executive Officer; and Gili Iohan, Chief Financial 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 first quarter and fiscal year ended December 31, 2016. 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 and increased competition; the risk that we may not be able to attract or retain employees, including engineers and sales personnel; our ability to build and expand our direct sales efforts in resell or distribution channels; general economic and industry conditions, including expenditure trends for data governance and data security software, risks associated with the closing of large transactions including our ability to close large transactions consistently on a quarterly basis; new product introductions and Varonis' ability to develop and deliver innovative products; risks associated with international operations and Varonis' ability to provide high-quality services 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 on our reports filed with the Securities and Exchange Commission. We encourage all investors to read our SEC filings.

These statements reflect our views only as of today and should not be relied upon as representing our views as of any subsequent date. Varonis expressly disclaims any application or undertaking to release publicly any updates or revisions to any forward-looking statements made herein.

Additionally, non-GAAP financial measures will be discussed on this conference call. A reconciliation of the most directly comparable GAAP financial measures is also available in our fourth-quarter and full-year earnings press release, which can be found at www.Varonis.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

Thanks, Lisa and good afternoon, everyone.

Q4 was a strong finish to 2015, with growth accelerating throughout the year to 30%. For the full year, we reported total revenues of $127.2 million, an increase of 26% over 2014 and an increase of 29% on a constant currency basis.

As we have discussed with you for some time, managing and protecting our unstructured data is a big and growing problem. But like any new market, it takes time to develop. In the second half of 2016, we saw that companies across the globe could no longer tolerate the risks of not protecting their unstructured data.

Consequences were clear: companies lost customers and money and saw their brand and reputation damaged. As a result, we received more attention from decision-makers higher up in the organizations. Our solutions are now critical components of the well-thought-out, well-funded security spending initiatives.

We believe that we are in front of a much more attentive market and that we are the only company that can serve the massive challenges companies face in managing and protecting their unstructured data and file systems. We see that all of the hard work we have done around the product and go to market initiatives is gaining traction. We are getting more RFPs around how to get unstructured data under control and how to manage risk.

We also see a meaningful uptick in web leads, driven by increased market awareness. This heightened awareness reduces friction in the sales process. Enterprise sales cycles still take six to nine months, but our initial discussions are with more educated prospects. Companies know they have a problem and allocated their budget dollars to solve it.

From a product standpoint, we believe that we remain best in class. We have developed a set of solutions that reduce risk, reduce cost and increase productivity. We see an increasing demand for data protection and data-centric User Behavior Analytics and have found that our DatAlert product is an effective way to get into customer environments and provide immediate value.

DatAdvantage and DatAlert quickly monitor critical assets for insider threats, reveal escalations and abuse, reduce the amount of time it takes to find and assess real issues and recover from security breaches. Our new threat models are well received so far. We work out of the box and provide meaningful alerts about potential threats to data from compromised accounts, rogue employees and administrators and even malware.

The importance of alerting across all file systems and all stores of unstructured data continue to drive interest for more DatAdvantage platforms. We also are seeing an uptick in demand for products like our Data Classification Framework, as it provides more context that makes Varonis' more actionable.

DataPrivilege and our Data Transport Engine as customers move toward automating migration and authorizations to better secure and manage their data. For example, the Kroger Company, a new Varonis customer and one of the world's largest grocery retailers that employs more than 420,000 associates has purchased DatAdvantage for Windows, SharePoint and Exchange.

Another new customer, Kilpatrick Townsend &Stockton, an international law firm headquartered in Atlanta, Georgia, purchased DatAdvantage for Windows and Directory Services, Data Classification Framework, DatAlert, Data Transport Engine and DataPrivilege to help tackle business requirements such as mitigating internal and external risks, effectively managing permissions and identifying and locking down sensitive data.

We believe that we have the product in place to drive our next leg of growth. This does not mean that we won't continue to innovate; innovation is our lifeblood. But with our land and expand strategy, there is meaningful untapped potential to sell more of what we have both through initial sales, as well, to our approximately 4350 customers.

To that end, we are very excited that Eric Mann has joined Varonis as our new Chief Operating Officer, leading field operations and customer success programs. Eric brings depth and scale to our leadership team. He has tremendous experience and a proven track record of growing companies such as NetApp and EMC, building out the enterprise and channels.

We are confident that he is the right person to help us grow our revenues to $500 million and beyond. With his focus on field operations, he will be instrumental in helping is structure our sales team and partner initiatives so Jim O'Boyle and his team can focus on what they do best, selling to new and existing customers.

We enter 2016 with more tenured sales force compromised of more salespeople who can effectively tell the story and sales managers who can help the sales teams close business. While our products drive value to organizations of all sizes, we are strengthening our focus on organizations with more than 1000 users who increasingly have a mandate to protect data and reduce risk.

This represents approximately 40,000 companies, primarily in key territories across North America and Europe where we have an established presence and have identified an opportunity to sell our solutions more broadly. We also see greater opportunity to sell to the base and know that business from existing customers is more predictable.

As we look to 2016, we see meaningful growth drivers for the business, and we are continuing to make investments to support our products, competitive differentiation and go to market initiatives. However, you should also expect us to see incremental leverage in the model as we gain efficiencies in the business.

The demand environment is positive. We are well positioned to capitalize on the very real spend moving in our direction.

With that, I will turn the call over to Gili.

Thank you, Yaki. Total revenues for the fourth quarter were $43.8 million, an increase of 30% year over year and 34% on a constant currency basis. Our strong growth is a direct result of the healthy number of new customer wins, our ability to expand our relationships with our existing customers and our consistently high maintenance renewal rate, which again came in at over 90%.

The movement in foreign currencies when we provided guidance in November negatively impacted our revenues by approximately $1.2 million during the quarter. License revenues were $28.2 million. This represents a 30% increase from the fourth quarter of 2014 and 35% on a constant currency basis. Our maintenance and services revenues were $15.6 million, increasing 30% compared to the fourth quarter of 2014.

Looking at the business geographically, US revenues increased 36% to $24.4 million, or 56% of total revenues. EMEA increased 32% to $16.8 million, or 38% of total revenue, and rest of world was $2.6 million, or 6% of total revenues.

During the quarter, we added 377 customers and ended the year with approximately 4350 customers. For the fourth quarter, existing customer license and first-year maintenance revenue contribution was 36%, in line with fourth quarter of 2014. And for the full year, it with 37% versus 36% in 2014.

During the fourth quarter, we closed one deal greater than $1 million with a new customer. We will continue executing on our two-pronged strategy of broadening our relationships with existing customers, as well as increasing new customer additions. As of December 31, 2015, 45% of customers had purchased more than one product family, up from 42% as of December 31, 2014, further validating our focus on innovation and expanding the use cases for our products.

Before moving on to the profit and loss items, I would like to point out that I will be discussing non-GAAP results going forward unless otherwise stated, which for the fourth quarter of 2015 excluded total of $2.1 million in stock-based compensation expense. Please note that a detailed GAAP to non-GAAP reconciliation can be found in the tables of our press release, which is available on our website.

Gross profit for the fourth quarter was $40.7 million, representing a gross margin of 93% compared to a 92% gross margin in the fourth quarter of 2014. Sales and marketing expenses were $23.4 million, or 53% of revenues for the fourth quarter of 2015 compared to $18.6 million, or 55% of revenues in the fourth quarter of 2014. We are making thoughtful investments in our go to market initiatives to capitalize on the positive demand environment Yaki discussed in his remarks.

R&D dollars in the fourth quarter were $7.8 million, or 18% of total revenues compared to $7.1 million or 21% of total revenue last year. We are focused on making measured investments in innovation so we can introduce products to the market that extend our value, increase our use cases, and expand our total addressable market.

G&A expenses were $3.8 million, or 9% of revenues, compared with $3.2 million, or 9% of revenues in the fourth quarter of 2014. Operating expenses totaled $35 million in the fourth quarter, compared to $28.9 million last year. As a result, our operating income was $5.6 million for the fourth quarter, compared to an operating income of $2.1 million in the same period last year.

During the quarter, we had financial expense of $780,000, primarily due to foreign exchange losses compared to an expense of $806,000 due primarily to foreign exchange losses in the same period last year.

As you know, foreign-exchange gains and losses can fluctuate. Our guidance does not consider any additional potential impact to financial and other income and expense associated with foreign exchange gains or losses, as we do not estimate movement in foreign currency rates.

Our net income was $4.7 million for the fourth quarter of 2015, or $0.17 per diluted share, compared to net income or $1.5 million, or $0.06 per diluted share for the fourth quarter of 2014. This is based on 27.8 million and 27.2 million diluted common shares outstanding for Q4 2015 and Q4 2014 respectively.

During the fourth quarter, we generated positive operating cash flow of $1.9 million. We ended the quarter with 947 employees, a 13% increase from 840 at the end of the fourth quarter of 2014 and an addition of 55 people from the prior quarter. We've continued to increase our headcount to grow the business and realize productivity improvements as we scale.

I will now quickly recap full-year guidance. Total revenues were $127.2 million, increasing 26% over 2014 and 29% on a constant currency basis. License revenue increased 22% for the full year and 27% on a constant currency basis. And maintenance revenue increased 30% over 2014.

Non-GAAP operating loss was $11 million, an improvement compared to $12.6 million in 2014 as we realized leverage in the business. Non-GAAP loss per basic share was $0.52, compared to a loss of $0.60 for 2014.

If we look at the balance sheet, we ended the year with approximately $106.3 million in cash, cash equivalents and short-term deposits. During the full year 2015, we used $2.7 million in cash from operations compared to $7.1 million of cash used for operations in 2014.

Our ASP for the full-year 2015 was $59,000 compared to $58,000 in 2014. This reflects the strength in our high-volume low ASP model and our ability to grow 2015 total revenue 26% without meaningful contribution from large deals.

Moving to guidance, for the first quarter of 2016, we expect total revenues of $28.3 million to $28.8 million. We expect our non-GAAP operating loss to range between $10 million and $9.6 million and non-GAAP loss per basic common share of $0.39 to $0.38. This assumes a tax provision of $100,000 to $300,000 in 26.1 million basic common shares outstanding.

As a reminder, our first quarter includes expenses related to our annual sales force kickoff, which is primarily to train our sales force in our exciting new offering. For the full-year 2016, we expect total revenues in the range of $153.5 million to $156.5 million, representing year-over-year growth of approximately 21% to 23%.

We expect our non-GAAP loss to be in the range of $12 million to $10 million and non-GAAP loss per basic common share of $0.49 to $0.42. This assumes a tax provision of $800,000 to $1.1 million and 26.2 million basic common shares outstanding.

To summarize, we are pleased with our fourth-quarter and full-year 2015 performance. We believe we are very well-positioned for success in 2016 and beyond. With that, we would be happy to take questions you have. Operator?

(Operator Instructions)

Matt Hedberg, RBC Capital Markets.

This is actually Matt Swanson on for Matt. Thank you for taking my questions and congratulations on the quarter. Yaki, it was really nice to see the strong growth across your major geos. What changes have you seen throughout the year, whether it is improvement in the go to market or just better market awareness? What do you think you have to keep doing to keep this execution that we saw in the quarter? For the rest of the world category, can you let us know what percentage of the decline is from Russia?

First regarding the business, I think it is very important to understand that it's a developing market. And when you are looking at volumes, you need to look at it at a multi-quarter basis and even on an annual basis. Throughout the year, we told you that we feel very comfortable about the American business. Regarding the Company, we feel comfortable about the Company's ability to execute and feel very comfortable, and now we have also Eric on board about our abilities to do it at scale.

But even more importantly is the external conditions. It was very interesting what happened in the security market. Early on, we saw a lot of emergency spending, but it generated a lot of awareness that there is just enormous consequences regarding security breaches to your top line. People will not do business with you if their data is not protected. The bottom line, there is so much you can invest in security and it needs to be effective. And the overall risk, every business has a lot of -- if you will agent secrets and digital assets that they need to protect. And we are front and center in this.

So early on, when organization had emergency spending, when they had emergency spending, we did not benefit so much. But then we started to, in many board rooms, started to have a discussion of what it means, what are the assets that we need to protect? Where is the risk? The risk coming from inside of in the form rogue employees?

Look at almost all the breaches; it is coming from inside or malware that's stealing your credentials or privileged accounts. More than 50% of the time, unstructured data is involved. All of the time, file systems are involved. We are the only company that can solve it.

What happened was early on, we started with web leads and more RFPs, and we started to see a very attentive market. We come into meetings, we see people in the room that we need less to educate. This is really what drove the strong finish for the year.

The last thing is DatAlert. What happened was people are starting to have budgets for insider threat and user behavior analytics.

With DatAlert, there's a lot of automation around it. You're coming with [vonce], and youDatAlert don't need to do anything, and you are protected. You have meaningful events.

In the market, some events that we did in the product, it is a sales force that is not mature. Everything starting slowly but surely to come together. Regarding the rest of the world and Russia --

Regarding Russia, we had very little expectations that we'd grow any business in Russia, and expectation remains that the Russian business remains frozen.

And then looking from a year-over-year perspective for the rest of the world, how much revenue was from Russia last Q4?

Was a few million last year, and it remains the same this year.

All right. Thank you. And then just one more quick question. Hiring really picked up in the back half of the year. Can you give us some thoughts on what your outlook is into 2016? Is there anything unique on geographies or areas of the Company you plan on concentrating in the headcount?

It is important to understand it's a tremendous opportunity. We are the owner of the market. The competitive advantage is second to none. Fundamentally the business is very profitable and very strong.

The strategy in the markets that we are well established in North America and several key markets in Europe, there are around 14,000 customers with more than 1,000 users. We want to have good coverage around it. We want to make sure we cover the opportunity right. We also need to make sure we have the right productivity gain.

So we are going to increase sales capacity, but as we saw last year, we are doing it in a measured way. We are doing it in a very responsible way. We generated cash from operation in the third quarter and the fourth quarter. We are feeling very comfortable with the way that we are investing, the way that we are scrutinizing it, the places that we put people. How we are carving the territories and also the balance between new market and investing in the market that are established for us and we are doing very well in.

All right. Thank you for your time.

Thank you. Greg McDowell, JMP Securities.

Hi. This is Rishi Jaluria dialing in for Greg McDowell. Thank you for taking my questions. It looks like this is the third quarter this year that you've had positive operating cash flow. Just wanted to see is this a sign that you're starting to see some operating leverage in your model. And looking forward to 2016, is it something you think that can continue into next year, especially given the healthy growth that you've guided to?

Rishi, we know how to run a profitable business. We've done it in our history, and there is a lot of earning power in our model. In 2015, we saw nice leverage and we expect to show more leverage in 2016.

The overall guidance called for approximately 150 basis points of leverage, and we also think we can generate positive cash flow in 2017. We know it's a huge market opportunity, but we didn't change the philosophy of investments. We are balancing between making the necessary investments to grow the business in our sales organization and R&D and new product developments. And we are also taking the steps on our path to profitability as we grow in scale.

To add a bit to what Gili said, we used very small amount of cash in 2015, and we burned a very small amount of cash. This is the plan for 2016. We are planning to generate cash from operation in 2017, and profitability is front and center in everything we are doing. We just want to be profitable at scale. You see the number of customers and how the base is buying and everything that is going on with the insider threat.

Our goal now is to take the Company to $0.5 billion and make sure that investments for the business capitalize on the tremendous opportunity that we have on the budget that is slowly but surely coming to us. We worked very well with growth, profitability and investing back in the business, and I think that we are demonstrating that we are doing it in a very responsible way.

Okay. Thank you. And have you seen any signs of a slowdown in IT spending, be it here in North America or in any other geographies that you are playing it?

At this point, we didn't. I think that what we are doing -- when customers realize that they need it, it's critical to the business almost in every condition. I can't really talk about the economy, but we didn't see any slowdown. It was very interesting, the way that the market is shaping is different, and you need to understand that.

In the last decade, very few companies in enterprise software build a completely new market category, and this is what we are doing. Big data analytics company that is focused on insider threat. We didn't see any slowdown. At this point, we see the healthy pipeline is building.

Another thing to remember, also with the emergency spend, we didn't benefit from it. But after that, we really started to benefit from a very thoughtful way of spending that's coming from board rooms, that's coming from audit committees that people are sitting for hours and hours and saying, where are my information assets, what I can do and what are the processes that my organization can digest? That is becoming front and center in this discussion.

The other thing we saw just in case of several folds in our web leads, without anything that we did, people are looking to solve a dissolution. Again, it's enterprise sales cycle, it takes 6 to 9 months. People need to get approval and everything.

It is a very attentive market. There's a lot a mandate to solve this problem that are coming from the business. The business understands that in order to be in business, to protect the business, they need to make sure that information assets are under control. And well over 50% of them in most organizations are unstructured data.

Great, then last one for me and I will jump off. But given some of the other products, and I'm especially curious about DatAnywhere, what traction have you been getting with that product?

We see traction, but at this point, we have what we call the UBA. With DatAlert, there is so much awareness that came to all of that, and we are really directing the sales force more to focus on that. DatAlert, just tagging a lot of direct to we sell and all the DatAdvantage and the DCS. There was just a shift in the market towards us. At this point, the security team, the sales teams are more focused on security related risks.

Okay. Great. Thanks a lot, and Yaki and Gili, congrats on the quarter.

Thank you.

Raimo Lenschow, Barclays.

Hi, guys. This is Andrew Kisch on for Raimo. First congrats on the quarter. Can you guys maybe talk about product roadmap? What areas do you see might be the next that you want to tackle, and maybe you can talk on timing?

I'm very limited in my ability to talk about it, but I will say is that it's very interesting that there is a lot of understanding from many levels that you really need to understand what users are doing with user behavior analytics. But user behavior analytics, there is a lot of people trying to do it on top of sales solutions, and the most important thing is the data.

You didn't hear about one security breach that data was not involved. Unstructured data is 50% of the data. All the critical information is on file systems.

What's happening is very interesting. It was more than a decade of enormous machine learning and development and development of collecting meta data for governments. And on top of that, we can do a lot of analyses by what we call threat model. With so many customers, so we know how they are behaving towards data file system configuration, and within these models, to do a lot of analysis.

What you're getting, which is a game changer with very minimum false positives regarding your data. It's very easy to do forensics, very easy to be ahead of problem. You can find so many things and so many problems with very little noise. A lot of what we are doing is to open that cloud is a big opportunity for us, and we are doing many things related to the cloud.

It's very exciting times. It's a lot of the hard work that we did is coming together. Everything that we are doing regarding user behavior analytics is changing a lot of the dynamics and really catering to what organizations understand that they need. We are very excited about the future.

Okay. And then maybe if I can have one more? Dave DeWalt with FireEye said that from where he sits, he thinks that you're going to see reduced growth for cyber security spending in 2016 and especially in less emergency spending. Can you comment if you are seeing something similar from where you are sitting and how it might shake out for you guys?

I can't comment about what he said. I can tell you what I see. And what I see, it was emergency spending. So I think in security, there are a few trends. One that was generationally secular and one that was based on a lot of fear.

The other thing, you have two kinds of architecture, one with longevity and the other one that is getting commoditized fast. What we see is that there is no doubt that the consequences of security are here, and they are huge, and there is a lot of -- this is front and center in every board room. The other thing is, what are we protecting? You are protecting the formation assets. From whom? Anyone with credentials that can access data, your privileged accounts and any type of malware, this is what it's going to attack.

Unfortunately there was emergency spending because we did not -- we called on operations people. We didn't benefit from it. Now we are starting to really benefit from very thoughtful approach to security.

When you want to do and you don't need to check the box, you need to come in. And if you need solve an insider threat of the unstructured data and file system in a complete way, in a way that you are really protected. In the way that you are really protected, we are virtually the only game in town. We really benefit from it in a huge way.

Seeing the data is going, user behavior analytics is becoming big from everywhere, companies like Palantir and Ardell but doing it on different domains and everything related to unstructured data, digital identities and file systems, it worked very well for us. I think it was the same comment from them in Q3. We came in with a very strong Q4.

I think it is just different dynamics. I think people that are covering us and the investment community needs to understand that this is a new market that's emerging. It's a process, but it will be very hard to be in business if you cannot protect your critical information assets.

We believe that it is a secular stationary plan, and we also believe it's a very doable trend. In terms of our competitive edge, it is as strong as it can get. Many people tried, and it's very, very hard to do.

And very we feel very comfortable with our competitive edge, and all our indicators show that insider threat is front and center, and unstructured data getting a lot of attention. And Varonis is here to capitalize on this opportunity.

Cool. Thanks, guys. Congrats again.

Melissa Gorham, Morgan Stanley.

Thanks for taking my question. Yaki, you highlighted the hiring of Eric Mann as COO. It sounds like it's a great hire for you. Can you release detail if we should be expecting any significant changes, either from a sales organization perspective or go to market with the new leadership?

No. Eric built two multi billion-dollar business, one in EMC and one in NetApp. Obviously, we work together and next goals. I think we a clear route to be a $0.5 billion business. We have a very unique metric-driven sales process, and Eric is a second to none operator. We've been in discussions for some time and just came to augment the team.

Eric is responsible for all the building block of the sales engine, which is the sales force, the SCs, professional services, field marketing, talent development. There is a lot to do, and Jimmy and the team are selling very well to customers. Who knows? We will bring new hires and maybe we make some incremental changes, but Eric just came to be complementary to the team. And it's natural in the Company evolution, you get to a certain size and bring a person with a multi billion-dollar experience.

The other thing with Eric, he sold billions of billions of dollars of storage for unstructured data. These same fellows selling it in the same environment, they want to protect this data. I just think it's for the overall sales motion, net of what Eric did, we did two things very well. Number one, he brought them to the enterprise in a very consistent, strategic way.

The other thing, he enabled the channels. This is what he came to do, and we are sure that he is the right person to do it.

Okay. Great. Thanks. And then the percentage of customers that have purchased more than one product continues to tick up. Just wondering if you've made any changes to the sales organization or if you're now incenting your sales organization to accelerate the upsell opportunity?

Upsells are much easier for us. The other thing that is important to understand is that for two years, we brought in a lot of new customers. You're buying your product, you're deploying it, it's adding value, and with time, they are buying more and more.

It is an organization plan. This is how it works. If you want to protect your unstructured data on your Windows 5 system, you want to do it in UNIX, you want to do it in the cloud, you want to do it in Exchange and SharePoint, it is an authorization plate.

The other thing with DatAlert because DatAlert is starting to change the sales motion. I will elaborate a bit more about it. Early on, we sold a lot to operations for governance and silos, to the wind server operations and to storage people.

But now the real-time alerting, what we are doing, we bring the infrastructure people many times, but we sell more to security. And security want to secure all the assets. Once we are already in, when we are selling DatAlert, it's pushing for more DatAdvantage, Data Classification Framework, direct to resell.

So this is really what you're seeing. You are seeing a market that is evolving and a lot of awareness evolving around it, and you see what we call also no-touch value. We see our ability to get to organizations and make sure they are protected with relatively little configuration in deployment time.

Great. Thank you.

Gur Talpaz, Stifel.

This is actually Chris Speros on for Gur. Congratulations on the quarter. In previous calls, you guys have mentioned you've done a fair bit of educating the customers on the risks associated with unstructured data. Do you believe that customers now are beginning to understand these risks and see you guys as more of a strategic security investment?

Without a doubt. It is very interesting, the way it evolved. The first thing was web leads, and then we started to see a bit more RFPs. But we are coming to a more attentive audience. It's still as I said, enterprise sales cycle with everything.

We need to be a POC. Without a POC, it's not working. They need to see the value, it's an emerging category. You're coming in to educate everybody, to understand that they have the problem.

Also the other thing is relative the other problems that you have, if you're doing the POC the right way, and you are showing the value the right way, it is much easier to prioritize. I will call it a much more attentive market. We need to make sure we attack the market, much more attentive market.

And it's still high-volume, low-ASP, but it's also the conditions in that market give us the ability -- still we need the volume and we need the density -- but also to be more targeted. It is a gradual process. It takes time.

The other thing and I think on the same token, it's important for me to explain that a Company like Varonis in a market that is shaping, you can't really judge on a quarter by quarter basis. It's more multi-quarter view on an annual basis, but this is without a doubt a much more attentive market. And when you are in the sales campaign, it is much easier to get to C level, and it's much easier to get the budget. People have budgets for these kinds of things.

All right. Perfect. Also, can you touch on the state of your federal business and your progress in penetrating that one?

It is still early innings for us. We believe that it's a massive opportunity, and we are investing in the market. We believe that once we have good momentum going, we will do very well. It is a process. But we have initial sales there, and there are all the indicators it's a big market for us.

All right. Sounds good. Thank you, guys.

Michael Kim, Imperial Capital.

Hi. Good afternoon, guys. With the expansion marketing initiatives and the market awareness for your solutions, can you talk about where you're -- by geo -- seeing the strongest improvement in inbound leads and pipeline and where your visibility is certainly around some of the EMEA opportunities?

Primarily North America and the places that we are doing well in Europe, which is France and the UK. But we see it everywhere. The customers are everywhere, and data opportunities are everywhere.

I think for us it's a bit now to decide what not to do. We just want to make sure that we are establishing this territory, that we are getting to a critical mass and making sure our partners doing enough revenue with us with enough margin to make sure that with time we are going to gain the productivity gains that we want.

The problem is all over. Primarily we are operating in Europe and North America, and we are so small and the opportunity is big. This is really -- but first and foremost, we see where most of the investment will go. And with time obviously we're going to expand all over the world.

Specifically, do you see a need to continue to expand on the distribution side of your channel partner relationships? Do you focus most of your attention on North America opportunities?

It is both. Every place that we are selling, it is both. One of the things we are doing, we are focusing on more channel enablement and partner enablement and how we go to market and we want to make sure that we can contribute more in every phase of the sales cycle. But this is work in progress.

Very good. Thank you.

Srini Nandury, Summit Research.

This is actually Jonathan Kees for Srini. Thank you for taking my questions and congratulations on the quarter. Yaki, if I may, your RFPs, can I ask in terms of what trends are you seeing in terms of your win rates? Are they picking up? You are owning the market. I'm assuming you are winning most of those RFPs and they are picking up.

The win rates are very, very high. Regarding the RFPs, what we call structure demand. People are coming, and we have a mandate to serve, to make sure that we know who is touching the unstructured data, whether it is normal behavior, to make sure what the privileged accounts are doing regarding unstructured data.

We need to classify our critical assets. We see initiation of projects. We find a project. We have a deadline to solve the problem. It's exciting for us. It is something we didn't experience in previous years so much.

Okay. Great. Let me ask about the one figure that was over $1 million. I'm assuming it's multiple products with a very large customer.

Can you talk in terms of how that customer, how that deal is different from some of your other customers? And is this an existing customer and it was a land and expand? Or was this all a new customer?

It was a new customer, but usually our sizeable deals, the way they are working in chunks is they are starting small. Then there is another bill or two, and they decided to do an authorization around the infrastructure and they are buying everything.

Okay. So this is also a larger corporate customer, more like a corporate 100 customer too?

It is a customer with many users.

Great, thanks a lot. All right. Congratulations.

Thank you.

Yun Kim, Brean Capital.

Congrats on a solid quarter. Obviously a lot of market interest in your insider threat prevention. Can you talk about what you are seeing in terms of the urgency of the customers to address this threat and any new competitor that you may be facing in this new market?

And then trying to understand how this impacts your business model. Is a deal size in this market somewhat consistent with your historical trend or perhaps larger? I know you talked about sales cycle as still six to nine months, but can that get shorter as you start to have some strong referenceable customers given the urgency to deploy the solution? And like you said, they have the budget to do it.

I think there is a very good understanding that most of the threat is coming from the inside and also the consequences. This works very well for us, and we can prioritize very well.

The sales motion is the same. You're coming in, and they want to see the value. They want to see the value more than ever because there is an acute need to make sure they are solving the problem completely and everything is working and they are protected. This works very well.

Still you're coming to an enterprise, and you want to get a big chunk of money, there is just approval processes, why we are doing and making sure they are involved and are we going to operationalize it. This is a process.

What I will say the difference is -- I'm not sure. Regarding the sales cycles less, I don't think it would ever change, but it's small. It is not open-ended.

We know that it we're going to do everything right, come in and install the POC, involve the C level people if they are attentive. They will be in the room, they will see the security assessment and will see the results. It's not something that they can ignore.

No one CFO, no one legal department in the world today, no one board can know that we have this problem and ignore it. This is over. This is a new world. This is why you can have a bit more targeted approach.

Our philosophy was always, we are not going to be commitments. You come in, you prove your value as one license or part of the infrastructure, part of the department. We are expanding from there.

We are much more focused on overall customer lifetime value than ASP. We want to get to the right customer. We want to make sure that we are serving them right and we want to make sure it's going on time.

You asked me previously about more customers that buy more products. This is really the way it works. We really want to attack hard the midsize market and the enterprise market. There are times we are more than $1 million, but we're not banking on it. It is very important to have very strong customer lifetime value and make sure the overall authorization play is working.

Regarding the overall marketing, part is us and part is them. What I mean by that is, we created the product and invented this market, if you well, but there is also market pull. The results are people understand the consequences. They understand what needs to be done. They are thinking about it, what is working and what is not and what they need to do first.

It is a process. I think it is a gradual process that works for us because you need to protect your data. You need to protect your data where it lives, you need to protect the data from the inside out, and this is really where we are.

That's great. Thank you so much with that detail. Are you seeing any new competition, or is there are a lot of different vendors with a different solution trying to address this such that there's a lot of time spent on who has got the true solution versus the other people trying to address it from -- maybe not necessarily a direct solution to it?

It's very interesting. A percentage now is a percentage of total evaluations. The competition as a percentage stayed the same if not lower. We see something that is interesting.

Sometimes in a very rare incident, someone decides to choose a competitor and not us, now they need to solve the solution completely. This is not just a checkbox. They need to make sure they're getting in and they are protected. They understand what is going on. They know -- they understand -- they have real time alerting and they still can support in an effective way multiple platforms.

What we saw in the last six months that some organizations that bought their products from competitors in the last two years are coming back and buying Varonis and they are very happy with us. This is the other thing that we are seeing. We are seeing an approach from companies toward the problem a very strategic approach. We know that we need to solve the problem, they understand it is a strategic solution.

We are a moving target. It is hard to catch this target. We have a lot of very strong engineering capacity as a customer that we bring on board and make us better and better. It is something that is very hard to do.

You can look at all the patents that we have, we also -- it's a new class of intellectual property. At this point, I'm not worried about competition.

Great. Gili, I might've missed it, but can you tell us what the ASP was for the year?

It was $59,000 and last year it was $68,000. As Yaki said, our model continues to be high volume, low ASP. It served us very well, we're not dependent on large deals. And we are focused on the high customer lifestyle value and the land and expand.

Okay. Great. Thank you so much.

John DiFucci, Jefferies.

Hi. Thanks for taking my questions. Most of them have been answered. A higher level question, Yaki. We often hear about Varonis being used for security against internal attacks, like Yun was asking. We also hear about it being used to improve the efficiency of storage assets.

We really see Varonis as a platform to manage human generated unstructured data. It seems to us that it can probably be used for a lot of different use cases. I'm wondering if you are starting to see other use cases come about, and can you help us to think about that and perhaps identify other use cases today where Varonis might be used?

There are many use cases. From infrastructure consolidation, what data you need to take to the cloud and whatnot. Ownership, records management, parts of e-discovery. There's so many things that you could do.

What changed a bit is that early on, companies understood the risk, and we needed to talk about a lot of operational efficiencies around it. Today there is just a real understanding that the threat is impacting your top line, generating risk that you cannot tolerate and impacting your bottom-line. It works very well for us. It's this simple low strategic sales motion in the past few months.

Yes, once we are getting in, it's a much easier deal to do. It's also rewarding that you have a CFO and a legal department and a CIO that got amended from the audit committee to serve and insider threat problem.

So yes, it's a platform for many uses, as I said. I think we started, always the risk was front and center. Make sure the right people can access the right data, you can monitor use and alert on abuse. Now it just works very well for us.

Interestingly enough, what happens is that we can simplify the message, we can sell to less people and be more strategic. I can't complain about that. Once we are in, there are many use cases, and the organization, at the end of the day, it's cutting costs and increasing productivity is also very important. We definitely are focused on all the use cases in that you can realize value from all the use cases.

The fact that you can come and make sure you need to monitor all the state with the real-time alerting and analytics, you can do it with no touch value. You don't need a lot of operations people around that.

There is the objection of, yes, I need it, I know it, but I don't have people to do it now this is going away. This is what I mean about friction in the sales force. This is just reducing friction, and it's a good feeling.

Great. Thank you, Yaki. That's helpful.

That will conclude today's question-and-answer session. I'd like to turn the call back over to Yaki for any additional or closing remarks.

I want to thank the all employees for their contribution to our success this year, and all of our customers for their continued support. Thank you for joining us today. We look forward to speaking with you soon.

That does conclude today's conference. Thank you for your participation.