Varonis Systems Inc (VRNS) 2017 Q2 法說會逐字稿

Greetings, and welcome to the Varonis Second Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, [Yun Kim], Director of Investor Relations for Varonis. Thank you, [Mr. Yun] -- Thank you, [Mr. Kim], you may begin.

Thank you, Doug. Good afternoon. Thank you for joining us today to review Varonis' second quarter 2017 financial results. With me on the call today are Yakov Faitelson, Chief Executive Officer; and Guy Melamed, 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 will be considered forward-looking statements under Federal Securities Laws, including projections of future operating results for our third quarter and fiscal year ending December 31, 2017. 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 sales personnel and engineers; general economic and industry conditions, including expenditure trends for data security solutions; risk 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. Varonis expressly disclaims any implication 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 most directly comparable GAAP financial measures is also available in our second quarter 2017 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. Yaki?

Thanks, [Yun]. We are very pleased to welcome you as our Director of Investor Relations. Good afternoon, everyone. Q2 was another strong quarter for Varonis. With license revenues increasing 31% year-over-year to $28.4 million and total revenues increasing 30% year-over-year to $50.2 million. We continue to experience strong demand drivers for our business and are executing well on our key goals of increasing awareness and adoption of our solutions. We're more effectively targeting companies with 1,000 or more employees, with larger customer lifetime value, and innovating to expand the value we deliver to our customers and extend our differentiation. We need to look no further than ransomware attack as WannaCry and NotPetya to know that organizations large and small are exposed. Files and emails are most at risk and often breached because they are high-value assets, and usually vulnerable to misuse by insiders and outsiders that breach the perimeter. The Varonis Data Security Platform not only protects enterprise data from cyber attacks but also from insider threats and data breaches. Our platform analyzes content, accessibility of data and then behavior of the people and machine that access data to alert on misbehavior enforced in this privilege model and automate data management function.

DatAlert continued to be an important driver for our business and a hook for our vision, our message and our operational approach to security: detect, prevent and sustain. As you know, DatAlert is one of the newer products, and many customers have only had it for a short time. Still, our recent survey with TechValidate shows that approximately 80% of respondents have detected critical security issues with DatAlert, such as ransomware, hijacked accounts, employees stealing data and administrators violating policy. These findings illustrate 2 things: one, the dangerous threat that we detect to occur frequently; and two, the DatAlert is very effective in detecting and stopping them.

In Q2, we saw 2 very high-profile attacks that illustrate how vulnerable organizations are at their core. By combining ransomware with sophisticated exploits, Wanna Cry and NotPetya spread quickly and damage many systems and compromise far too much critical data. The core is where we fight. We protect the data stored on these core systems; once ransomware or malware gets through the perimeter and endpoint protection, Varonis is there as the critical layer of defense. Not only for stopping ransomware, but for addressing any threat to core data.

New customer, Autoliv, the worldwide leader in automotive safety systems, purchased DatAlert suite during the second quarter, and their director for IT Security said, and I quote, "In the wide range of fast-growing security products, only a few suppliers meet the high expectations and innovation as well proven technology track record. We have invested in Varonis' tools, as they will bring us much higher visibility and control for the usage of our Active Directory landscape. One government customer added DatAlert to their DatAdvantage purchase, because they had a need to improve monitoring for compliance regulation, and after a large data move, since the folders were found to be more open than designed. The customer stated, and I quote, "The amount of PII and PCI data we had on our servers was an eye opener." They also said that DatAlert is providing the most valuable alerts of all the security technologies that they have invested in, and DatAlert saved the security teams hours per week monitoring and searching for anomalous behavior against their data. This government agency is a great example of how combination of regulatory requirements and overall risk reduction remains a key driver for our business.

More organizations realize they need to protect data. Knowing where the important data is help prioritize remediation efforts. This, combined with DatAlert's ability to alert on unusual access to sensitive data is driving demand to our platform and products like the Data Classification Framework.

In the second quarter, an existing customer, [Lead Count in Oregon] added DCF to their DatAdvantage installation to identify and manage the regulatory compliance requirement and help mitigate future risk by having the ability to identify sensitive data in various locations. We believe DCF and our contact discovery capabilities, along with our Data Security Platform fits squarely with the approaching GDPR regulation. We continue to expect GDPR will be a tailwind to our business, as we move through the second half of 2017, due in [2018]. We are seeing increased interest across broad sets of stakeholders outside of our usual buyers, including legal, operation and data protection officers. As we said before, we expect GDPR adoption to have a long tail, and we believe that we are well positioned to capture the opportunity as it builds.

As we continue to build out our platform, we are expanding our addressable market. The reason to release Varonis' Automation Engine are accelerated remediation they are offering, but automatically finding and fixing some of the most dangerous 5 system security issues, so that you are less vulnerable to attacks, more compliant and sustainably enforcing a less-privileged model. In the months or so the Automation Engine has been in the market, the initial interest has been strong. And it is a natural fit with conversations we are having with new and existing customers. Customers understand that we are elevating the value of product delivered, and we are extending the total customer lifetime value. We are also seeing interest with DatAdvantage for cloud platforms, including Office 365, OneDrive, SharePoint Online and Exchange Online. As we see organizations shift aspects of their infrastructure to the cloud, our compatibility with the cloud is an important part of our offering, and our experience with on-premises data stores has helped us deliver our solutions for cloud data stores. Our customers understand the value that our Data Security Platform offers, and they are anxious to extend its coverage to the cloud.

Our ability to capture market opportunity created from the heightened data breach environment for security and regulatory compliance, along with our investments in our platform and go to market, is enabling us to successfully execute our land-and-expand strategy.

During the second quarter, we added 254 new customers, bringing the total customer count to approximately 5,750. And these new customers continued to increase their initial commitment. 45% of our license and first-year maintenance came from our existing customers, up from 41% in the year-ago period. In addition, 50% of our customers had 2 or more product families. When you look at our total number of customers, the customers that we are targeting are related to upsell and co-sell. Our continuing investments and focus on innovation to drive use cases and the maturing sales teams, we believe, we are putting the right investment in place to build our business to reach $0.5 billion and then $1 billion in sales, and we will continue to do so while driving scale.

With that, I will turn the call to our CFO, Guy Melamed. Guy?

Thanks, Yaki, and good afternoon, everyone. I'll begin by reviewing the quarterly results, and then I will discuss our outlook for Q3 and the full year 2017.

Total revenues for Q2 were strong at $50.2 million, an increase of 30% year-over-year and above our guidance. License revenues were $28.4 million. This represents a 31% increase from Q2 '16.

Our maintenance and service revenues were $21.8 million, increasing 29% compared to the same period last year. These results were supported by our consistently high maintenance renewal rate, which again, came in at over 90%.

Looking at the business geographically, U.S. revenues increased 36% to $33.1 million or 66% of total revenues. EMEA revenues were 28% of total revenues or $13.9 million, an increase of 17%. Rest of world revenues increased to $3.2 million or 29%, which is 6% of total revenues.

For the second quarter, existing customer license and first-year maintenance revenue contribution was 45%, up considerably from 41% in Q2 '16. We maintain our focus on expanding our relationship with existing customers as well as increasing the number of new customers. During the quarter, we added 254 customers compared to 285 new customers in Q2 '16. We are pleased to see our new customers, again, making larger initial commitments to us, as we continue to focus on attracting companies with 1,000 or more employees.

As of June 30, 2017, 50% of our customers had 2 or more product families, up from 46% as of June 30, 2016. This positive trend validates the success of our innovation through our Data Security Platform, together with our growing customer lifetime value. It also illustrates the significant opportunity we still have to sell to our existing customer base.

Before moving on to the profit and loss items, I would like to point out that I'll be discussing non-GAAP results going forward, unless otherwise stated. For Q2 '17, that excludes a total of $5.3 million in stock-based compensation expense and $199,000 of payroll tax expense related to stock-based compensation. 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 second quarter was $45.6 million, representing a gross margin of 90.8%, consistent with the gross margin in Q2 '16. Turning to the operating expenses. During the second quarter, we made investments in the business, which among others, included increased focus on maturing our sales and marketing teams in Europe to drive growth as well as ongoing support of our growth in the U.S.

In R&D, we are focused on increased our strategic investments to both enhance our value to our customers and enable delivery of additional products and features, extending our security data analytics platform in order to widen our differentiation and expand the use cases and value for our customers.

Operating expenses totaled $45.5 million in the second quarter compared to $37.2 million last year, an increase of 22%. Our success in driving growth and realizing leverage, in line with our strategy, resulted in a significant improvement in our margins, moving from negative 5.5% in Q2 '16 to positive 0.2% in Q2 '17.

As you know, foreign exchange gains and losses can fluctuate. During the quarter, we had financial income of $950,000 compared to financial expense of $605,000 in Q2 '16, primarily due to foreign exchange gains this quarter.

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.

Net income was $400,000 for the second quarter of 2017 or $0.01 per diluted share compared to net loss of $3 million or a loss of $0.12 per basic and diluted share for the second quarter of 2016. This is based on 30.5 million diluted common shares outstanding for Q2 '17 and 26.3 million basic and diluted common shares outstanding for Q2 '16.

Looking at the balance sheet, we ended our quarter with approximately $121.6 million in cash, cash equivalents and short-term investments. During the first 6 months of 2017, we generated positive operating cash flow of $7.4 million compared with $2.3 million in the first 6 months of 2016.

We ended the quarter with 1,171 employees, an 18% increase from 996 at the end of the second quarter of 2016. In comparison to the prior quarter, we added 23 net additional employees. We have continued to increase our headcount to grow the business and realize productivity improvements as we scale.

Moving to guidance. For the third quarter of 2017, we expect total revenues of $50 million to $50.8 million. We expect our non-GAAP operating income to range between $100,000 and $500,000 and non-GAAP loss per basic and diluted share of $0.01 to $0.00. This assumes the tax provision of $450,000 to $650,000 and 27.5 million basic and diluted common shares outstanding.

For the full year 2017, we are again raising both our revenue and profit guidance. We now expect total revenues in the range of $205 million to $207 million, representing year-over-year growth of approximately 25% to 26%. We expect our non-GAAP operating income to be in the range of $2.7 million to $3.7 million and non-GAAP net income per diluted share of $0.07 to $0.09.

This assumes a tax provision of $1.9 million to $2.3 million and 30.5 million diluted common shares outstanding. We also continue to expect to generate positive cash flow from operations for 2017.

In closing, we are pleased with our performance in Q2 and with a growing market awareness and adoption of our products. We believe that the investments in our business are paying off, as evidenced by the improved Q2 cash flow from operations, positive trends in our customer satisfaction metrics and the continued leverage in the business, enabling us to not only increase our revenue guidance, but also increase our non-GAAP operating profit guidance for the 2017 year.

With that, we'll be happy to take questions. Operator?

(Operator Instructions) Our first question comes from the line of John DiFucci from Jefferies.

I think this question is probably for both Guy and Yaki, and I have a follow-up, which will probably be more for Yaki. But listen, this quarter, nice growth and execution on the part of your team. One of the things, though, on this quarter that sort of made us look again was, you're also demonstrating the leverage in this model in both earnings, but even more importantly, in cash flow. I guess -- given what seems like an outsized opportunity here, can you just refresh us or talk a little bit about your philosophy regarding the balance between growth and profit, going forward?

John, it's Yaki. You know, the philosophy was always to improve the economics of the business gradually. It's an enormous market opportunity. We are virtually alone, and we ran the company profitable for a long time. So we put upfront investment, and when we sell more licenses, and we have very high renewal rate, profit just comes. At scale, growing the business, selling more licenses and the profitability are just going hand-in-hand in our business. So we're really doing exactly what we said that we will do. We put some upfront investment. We had good coverage. In a very methodical way, we are increasing sales capacity. Very good land-and-expand. We are going upmarket because the market is coming to us, and this is really what you're seeing, overall profitability KPIs. But this is exactly what we said that we will do. It's part of the core of the model. When you scale at that, the business, and you sell more licenses, your profitability is, to some extent, is almost assured. And sometimes, we are doing upfront investment. But in -- we're just increasing the sales force and the engineering in a very meticulous way. And we have just ROI analysis on everything that we are doing, and this is exactly part of the plan.

And John, to add on that, this is Guy. In this quarter, we flew down approximately 70% to the bottom line. Like Yaki said, we're extremely focused on both growing market share but also on the bottom line. And with the earning power we have in the model, we -- we're really -- the opportunity is out there for us to increase market share, bring in new logos, but also upsell and cross-sell to the existing customer base. And that's exactly what we're doing.

Well, it's working nicely. And my follow-up, really, has something to do with that and existing base and expansion, that land-and-expand. And you pointed out that the percentage of license from first-year maintenance from the existing customers jumped to, I think 55%. It was in the 40s in the last 4 quarters. Before that, in the 30s. And the number of customers is growing nicely, but the number of new customers signed in the quarter has been coming down a bit. And I don't mean to pick on something because frankly, these results look really good, and they continue to be really strong here. Everything seems to be working well. But are there things you could do to improve the land part of the strategy? Because the expand is working really well. Or do I have that wrong? I mean, should I just assume that going forward, you just get more and more from your existing customers? As long as you to continue to add a good number of new customers, things should be fine. How should I be thinking about that?

Yes. So for the whole company, we went to upmarket. What happened is that our sales campaigns just became so much more predictable, and the numbers are not telling the story. Because if you look at our customers, the 2,000 and above user customers, we have very strong growth there. The other thing, we brought so many customers in the last 2 years, and we had so many SKUs to sell them, we also see big uptick in visibility of the product. So our salespeople need to cater to the base, our marketing team is doing a very good job. And there is an effort economy. How much time you spend, and what you get in return. And you see how everything is working. So from our point of view, we see very good market expansion. In the 1,000, (inaudible) 2000 and above. This is working. This is exactly our strategy. And 254 customers is -- it's a lot of customers. And these are the right customers, with the right size and with the right industries.

And just to add to that, John, the aggregate sales that came from new customers this quarter was greater than the aggregate sales to new customers in Q2 '16. So it's in line with our strategy, and we're extremely happy with that.

Okay. So it's actually -- the -- your new customers are actually larger customers. They're able to spend more on Varonis.

Our next question comes from the line of Matt Hedberg from RBC Capital Markets.

First one is about your new Automation Engine. Interest appears quite strong. I know it's still early, Yaki, but could you talk about the potential uplift to customer spend? If it's cross-sold into a customer? I guess, theoretically, could you see the same uplift that you're seeing when DatAlert is cross-sold?

I don't want to compare the two. But in the core, we're really doing 2 things: one is security analytics, just to make sure that if there is anything bad is happening; and the other one is remediation. And remediation is something that is very hard, but where the world is going in just reduction of risk, making sure that the right people will access the right data is the most important component. And it just automates the whole process, and you really can quantify the ROI. So we believe that it is a massive potential on all the platform. Like with DatAlert, everything takes time, but the initial interest is great, and we are very bullish about this opportunity.

That's great. And then, maybe as a follow-up. U.S. growth was quite impressive. I believe, I heard it was 36%. I think Europe grew a little bit slower. Is that largely a function of just the size of the U.S. market, where you're diverting most of your spend to? Just wanted -- I think rest of world grew a little bit faster than Europe. Just trying to get a sense for geographic growth rates.

Yes. No. Europe is a very, very good market for us. You need to understand that we are very measured with the way that we're investing in the business. And in the last 2 years, just maturity in the U.S. market was extremely good for us. So after all the crazy spending in security, everything came to us. It was a very thoughtful process. In the U.S. just people understand us, recognize the brand. It's just -- it's a top priority. And we invested more in sales capacity here. The other thing that we did in Europe, is really, we put a good leadership in the U.K. Now we hired someone -- the right person in Germany. And now, under these people we are increasing capacity. We're also starting to see the initial same trends that we saw in the U.S., we're starting to see in Europe. Don't forget, Matt, that we really build these markets, so the process of interest into demand, into revenues is very familiar to us. And we know very well how to analyze it. And if you look how the prices we're working, the sales cycles we run them, the predictably of sales cycles in Europe, it's very good Europe, in the first half of the year, it's 21%. And we believe Europe can be very strong going -- very strong country, better for us. We have long history in the region, and we know very well how to operate. Where we also have the foundation to scale effectively. We want always to scale in the most effective way. So first, really the upfront investment. And then, the capacity and we believe that the investment will come to fruition soon.

Our next question comes from the line of Melissa Gorham from Morgan Stanley.

So Yaki, DatAlert obviously is a product that's going well for you all. But I'm wondering if you could provide any additional metrics in -- or around how penetrated that solution is within your customer base? And just trying to get to an idea of how much more runway you have in terms of selling that into the existing base?

Well, we are not giving these metrics, but we -- there is a lot of meat on the bone. We can do so much with this product, but it's just not only DatAlert. It's everything. DatAlert in a sense of the no-touch value. It's just coming in. And what happened is, Melissa, if you look at this, all of this malware, really, this is what is happening. And I think, this is something that is very, very important to understand. If you have, like a lining defense, there are perimeter security that things will not get in. But once they get in, and you see how often they get in, we are the best solution that you can have. This very sophisticated alerts. And everything related to remediation so the events and the [wall] that everything use is working very well for us. The other thing is, DatAlert, once it's in, it pulls a lot of additional DatAdvantage, and Data Classification Framework. And other products that help a lot with the cloud. So it's not just the DatAlert. Once DatAlert is in, it's much easier for us to sell the additional platforms. So it's really -- it takes a life of its own to some degree.

Okay, that's helpful. And a question for Guy. So you've been able to sustain 30%-plus growth year-to-date on license revenue. But if I'm looking at guidance for the full year, it does assume a deceleration in the second half of the year. Aside from just typical conservatism, is there anything to note that would drive that magnitude of deceleration?

So this is the second quarter that we beat and raised. So we obviously feel extremely confident about the business, and we feel very strong about the second half of the year. The philosophy of our guidance hasn't changed. We want to guide in a very responsible way. And we do feel very strong about the business.

Our next question comes from the line of Greg McDowell from JMP Securities.

I was wondering, if you could give us some commentary on the geographical performance. I just noticed that there was quite the acceleration in rest of world year-over-year revenue, while there is a deceleration in EMEA. And I was just hoping you could give us a little more color on sort of what transpired in those geographies, and then I have 1 follow-up.

It's Yaki. I just mentioned it before, when -- the market in the U.S. became much more mature more for investment in capacity and in marketing. And what we have done, we performed -- historically, we are performing very, very well in Europe. So what we did, we really put the right management in place. And invested very gradually in the right team. And now we are accelerating this investment and behind very strong infrastructure, very strong China infrastructure. And a very strong management, but when the market presented itself in such a way here, we put more investment in the U.S., make sure the infrastructure is there in Europe. And now we are investing, and we have -- we strongly believe that Europe can perform very well for us for a long time. The prices work very well. The sales cycles work very well. Land-and-expand works very well. We just need to increase even a -- a bit of volume. In terms of the rest of the world, it's a small region for us. And in the U.S., the market is really prime here, and there is just so much opportunity. And there's just so much understanding of what we do. A lot of recognition of the brand. A good ability to do large deals, good ability to do large deals with smaller customers. So we are really pleased with the investment we did across all the region. And we are very pleased with the way that the external conditions of the markets are playing out.

That's helpful, and I apologize if you had to answer that same question twice. I guess, 1 follow up is just on the cross-sell, certainly, one product or product cycle we're going to be tracking is Automation Engine. And I know, the DatAlert product cycle certainly exceeded our initial expectations. And I was just wondering if you could comment, and I know it's a very new product still, but if you could just comment on sort of the level of excitement for the Automation Engine product compared to the level of excitement for DatAlert at similar stages in the product cycle?

I'm not an excitement expert, but there is definitely a lot of massive interest in the Automation Engine. Across all of our customers, remediation is in the core of what we are doing. The betas work well. Even with DatAlert, it took 3 quarters before it really took off, but we believe that there is tremendous opportunity with the Automation Engine. And we also believe that our customers understand it and that the product and the features are there to fulfill the value that everybody expected.

Our next question comes from the line of Gur Talpaz from Stifel.

So Yaki, I was hoping you could talk about your push-up stream here. You noted you're seeing greater traction with organizations with more than 2,000 users, can you give us some color with regard to what's driving that? Is it better understanding of security use cases? And I guess, going forward, how do you think about the balance of your high-velocity sales model with this push-up stream?

I think, it's -- what happened that it's becoming -- security analytics, information retention, remediation is starting to be at the core of what organizations are doing. The other thing that is happening, Gur, if you will analyze most of the breaches, it's files and emails. This is what we are doing. So there is -- traditional legacy security, if you will, they'll always need a firewall and everything else, but in terms of analytics, classification, remediation, the new things that really protect these information assets, it's primarily us. And when you have a top priority there, it's Varonis. And what's happened is that we're starting to have simpler sell cycles and that are much more strategic with security officers, with CIOs, so we can go to these organizations and we know that when we demonstrate the value in the right way, we have a high probability to win the business. And we still, it's not that we are going to these monster organizations, a lot of the focus is 2,000 to 20,000 user shops, and even more than 1,000. One, we are doing very nice deals, larger deals and smaller user counts, which is very, very exciting. And it's still transactional, but salespeople are becoming much more productive with less user counts and more targeted approach. And as the market will -- as the market -- we believe that the market will keep coming to us and this eventually will become a mainstream. So we will be able to do more with smaller territories for our salespeople. So this is really what you see. See an understanding of the value, see we are sending sometimes more SKUs, or we're penetrating smaller, and then, we are expanding within the organization. And you see a security landscape that this is one of the most high-value offering that you can have. If you want to be protected, if you want to make sure that your unstructured data is protected, your Active Directory is protected, big part of your critical infrastructure and to do it with the finite resources that you have in IT, you need Varonis.

That's helpful, Yaki. And then you touched on GDPR briefly in the prepared remarks, for me, what it would be helpful to hear, is if you could talk about what you're seeing in terms of planning on the part of the customers, and more importantly, partners in Europe?

What I think about GDPR, first, I think that as I said before, it's very important to understand, because we really built this market, but we have very good senses regarding the way sometimes something generates noise. And then, there is interest. Then it's generate demand. And then it translates into sales. And what we see with GDPR, everybody is talking about it, everybody is saying they can do things for GDPR, but if you look at it and you look at the articles, and you look at what you need to attack. And you understand, well you need to deal with security. And how you demonstrate it. And where are the biggest risk. And what you need to do first. Varonis, we believe, is going to benefit from it in a big way. But it's just the process. What we see now, it's a lot of noise. Now what we see is just people are calling us to come to the table and in the table, we see different stakeholders. We see legal people. We see COOs. We are explaining our core offering, not something else, and they understand that they need to do it. We see more POCs that are very visible to the business side. And we believe that this pipeline together with the fact that GDPR will come into effect, will gradually generate a lot of demand for us. But we saw this movie before. It takes time, but eventually, like you see in the U.S., most time, it really translates into demand and really a circular trend. A tailwind that stays with you and you can really capitalize on. And reducing friction in the sales motion and elevating the overall value of the offering.

Our next question comes from the line of Michael Kim with Imperial Capital.

Specifically, in regards to ransomware and some of these high-profile attacks like Wanna Cry and Petya -- NotPetya, did you see an escalation inbound inquiries and activities around POCs, and just any general characterizations post those attacks?

Yes. We definitely see a lot of interest, but what we see that is much more exciting for us, when you have these attacks, again, you have a lot of noise, everybody is talking about it. But now what we see a few weeks after, this thoughtful process that this is generating. People look at it and saying, "I have my perimeter security, these things can come in. Once they come in I need to remediate the scope of the risk to make sure that if I took your credentials, you can't do a lot of damage, and I want to detect it and to detect it fast and to make sure I understand what is the origin of the user and the machine, the scope of damage that they did and the call to action." And this works extremely well for us. The process that is generated, the awareness, not just for these 2, and this -- any panic spend just the overall understanding that there is -- once it's in, I need to treat it completely different. And I need to invest in the right way. And I need to look at remediation. This is something that we -- this is what builds market for us. So this and GDPR, and many other things just create the network of the market. And they are very strong.

And then, just switching gears on the government vertical, do you see some opportunities on the federal side, with working with some of the system integrators and other partners, and how you see that trending in the federal fiscal year and in September?

We invested a lot in federal. We believe that our product offering is extremely valuable for the federal government. We entered this quarter with a good pipeline, and believe that we have very strong potential.

Are you seeing many contract awards in the fiscal year?

Sorry, again?

Are you assuming some significant contract awards this year?

We think that the team will perform very well.

(Operator Instructions) Our next question comes from the line of Srini Nandury with Summit Redstone Partners.

Yaki, can you talk about your conversations you're having in EMEA? In EMEA, for some reasons, seems to be a little lumpy. Last quarter, you had a nice recovery, this quarter, it's 17% (inaudible) overall growth, what worked and what did not, and what geos are working in EMEA, please? And I have a follow-up.

The main geos we're working with, you always need to take a multi-quarter view, and as I said, we just stick to the sales cycle, and the way that we invested in sales capacity, look at the quality of the builds and the capacity that we have there. Overall, we are pleased with the performance of the region. And we believe that in the next few quarters, it will start to work very well for us.

Okay. My next question is on the sales cycle event. I know you touched on this on the call a little bit, you've been evangelizing awareness solutions for the last 2 or 3 years. Net of the large customers, if you take out the large customers, which you guys focused on the last year or so. Can you talk about the sales cycles in general, are they compressing, and what are you seeing in the general trends?

We say that the sales cycles, they stay relatively the same. What we see is that much higher probability to win. When you are coming in, if you are bringing the right C-level people to them, and you demonstrate the value in the right way, it's very hard to ignore the fact that you need a solution, and you need it relatively fast. It's still an enterprise sale. It takes time. It needs the budget, but the budgets are there. People understand that this is something that they need. The market is coming for us. And we have a very good ability to win larger customers, and much more importantly to win, then just to make sure that they are buying more for the long term.

There are no other questions in queue. I'd like to hand the call back over to management for closing comments.

Before we end the call, I would like to thank all of our employees for their contribution to our success this past quarter, and all of our customers and partners for their continued support. Thank you so much for joining us today, and we are looking forward to speaking with you again soon.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.