Varonis Systems Inc (VRNS) 2017 Q4 法說會逐字稿

Greetings, and welcome to the Varonis Fourth Quarter 2017 and Full Year Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to the conference over to your host, Yun Kim, Investor Relations.

Thank you, operator. Good afternoon. Thank you for joining us today to review Varonis' fourth quarter and full year 2017 financial results. With me on the call today are Yaki 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 our future operating results for our first quarter and fiscal year ending December 31, 2018. Actual results may differ materially from those set forth in such statements. Important factors such as risks associated with the anticipation of growth in our addressable markets; competitive factors, including increased sales cycle times; changes in 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; 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 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 in our reports filed with the Securities and Exchange Commission. We encourage all the 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 fourth quarter and full year 2017 earnings press release, which can be found at www.varonis.com in the Investor Relations section. Also, please note that the 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?

Thank you, and good afternoon, everyone. Q4 was a very strong finish to 2017, with license revenues increasing 34% for the quarter and 33% for the full year. This demonstrates that the highly differentiated data security solutions are helping to solve critical needs of organizations globally. Total revenues for the fourth quarter were $73.2 million, an increase of 35%, and total revenues for the full year were $217.4 million, 32% growth year-over-year.

For the full year 2017, both U.S. and European revenues grew greater than 30%. In the last 3 years, we had doubled the revenues and done so while improving the profitability profile and delivering meaningful levers of cash flow from operations. We are building an organization that is durable and well positioned to extend our lead globally.

There are several key trends that are driving our business, which we think are sustainable and provide the foundation for our future growth. One, data growth continue to be explosive across all data stores, both on-premises and in the cloud, which has remained prominent in the news, and data-centric security solutions are becoming a priority, especially in an increasingly complex hybrid environment. We have reached a much greater level of awareness around the problem in our differentiated platform, especially with senior-level executives who own and control budget. They realize that securing data is not just an IT problem but a business problem.

To keep the business safe, they have to keep their data safe. With new regulations looming, data protection and data center security are even more critical than ever. Our investment in innovation and our focus on companies with 1,000 or more employees are paying off. As new customers make larger initial commitments and new product licenses and room to grow in our installed base, we believe that we have barely scratched the surface across our current customer base, and we continue to add meaningful number of new customers each quarter who are just beginning their journey with us.

Let's spend a moment on these important items for our business and why we believe we are well positioned to execute against the considerable opportunity ahead of us in 2018 and beyond. A data-centric approach to security is becoming a standard. Almost every breach involve data assets in the form of files, e-mails and videos that are stored and going on-premises and cloud file systems. These are high-value, high-volume data stores that, without us, are way out of control.

The market is increasingly recognizing our Data Security Platform as the leader in protecting this data. Our highly differentiated solution locates sensitive data and determine who can and should access it and can detect abnormal user behavior that threaten this sensitive data. We are also able to automate the labor-intensive processes required to lock down and sustain current access.

Customers also know that we are living in a hybrid world. While most of our customers' critical data resides on-premises today, there is a move to the cloud. Without a well-defined perimeter, any current data security solution requires support for relevant on-premises and cloud data environments. We believe our solution supports a comprehensive list of relevant data environments in the market today. Adoption of our Office 365 solutions are accelerating. We plan to continue to support more data environments in the future both on-premises and cloud.

For example, during the first quarter, a provider of natural gas based in U.K. undertook a major security initiative to reduce risks related to overly-exposed sensitive data and gain visibility into who has access to what and monitor their activities for potential breach.

The single most important requirement for this initiative was a technology platform that could provide visibility across both on-premises and cloud data environments through a single pane of glass. After a Varonis risk assessment, the company believed that Varonis was the only vendor that had demonstrated these capabilities on their hybrid production environment. The company decided to implement our Data Security Platform, including DatAdvantage and Data Classification Engine for multiple on-premises and cloud environments, DatAlert suite and Data Transport Engine.

As we said before, data security has become a business and a board-level problem. If you don't know where the data resides, who has access to it and how it locks down, you are vulnerable to breaches and regulatory fines. The result is that we have seen more simplicity and reduced friction in the sales motion and much more sophistication in the product usage. We are speaking directly to CIOs and CISOs at some of the largest companies around the globe who appreciate the value of our solution and their relevance in addressing their most pressing data security issues.

Looming regulations also increased awareness for our solution. In Q4, we began to see the benefit from GDPR. As we said consistently, while GDPR helps with awareness and presents opportunity that we believe we are well positioned to capture, we never lean on GDPR alone. We're always focus on the broader value that comes with adopting our comprehensive Data Security Platform. Our platform and methodology help organizations fundamentally change the way they manage and secure those sensitive data, going far beyond checking boxes for compliance. More than 5 of our licenses directly associated with some portion of GDPR regulation. Our GDPR patterns help us convene on this -- help us begin the sales process and make our risk assessment more relevant for GDPR. But it's important to remember, the GDPR patterns require both DatAdvantage and the Data Classification Engine.

In addition, we saw an increased interest in our other product offering, such as DatAlert, Data Transport Engine and DataPrivilege. We will also help companies with GDPR -- which also help companies with GDPR compliance and, more importantly, dramatically improve the overall security efficiency.

With the GDPR deadline approaching, a major global insurance provider who has been a Varonis customer turned to us for assistance. We are able to help them locate, manage and protect sensitive, personal, identifiable information through GDPR patterns. We were also able to use the opportunity to further reduce the company exposure to a potential data breach and insider threat by deploying additional DatAdvantage licenses for cloud data environments and using DatAlert to monitor the hybrid environment.

Being an existing customer, they understood the risk of open global access involving access controls. In fact, they had been working with a third-party firm to help them address this problem manually over the past several years which took on average an hour of consultant time to fix just 1 folder. With the Automation Engine, the company is now able to remediate thousands of unique folders in 1 hour. We continue to expect the GDPR adoption will have a long tail and will be one of the many global drivers of our business in 2018.

This customer example in our expanding use cases illustrate how innovation is the lifeblood of Varonis. In 2017, we introduced the Automation Engine, GDPR patterns and Varonis Edge, along with innovation across the product families. The market continued to hunger for automation and cost-saving security solution as organizations target to keep pace with data growth, complexity and relentless new attacks. We believe that the Automation Engine is a quantum leap in data protection. It automates labor-intensive processes required to make sure only the right people have access to the most sensitive data.

Remember, our risk assessments show that, on average, at least 20% of an organization data is open to every employee that approximately 50% of the companies had at least 1,000 sensitive files open to everyone in the company. The Automation Engine fixes this issue automatically in small fraction of the time other methods take, significantly reducing the likelihood of a breach and dramatically reducing the scope of potential damage. The Automation Engine adoption has been very, very strong and a key differentiator for us.

Varonis Edge, the third product announcement we made in 2017, spots signs of malware, advanced persistent threat and other attacks, and puts them next to alerts customer get about their data from DatAlert. With the complete picture of an attack, how threats get in, how they move around, what sensitive data they touch and try to touch, we elevate our [value] in security analytics, data classification and flaw remediation capabilities in core infrastructure protection. Innovation strengthens our lead in the market and enhances the overall value we provide to our customers.

In 2018, we expect to increase our investment in R&D to deliver new product feature and functionality, building on past success. New product introduction and our focus on customers with 1,000 or more employees fuel our land-and-expand strategy which is paying off. This mid- and large-sized enterprises know that they have a problem, and we see less friction in the sales motion when we reach leaders in these companies who control the budget. We have consistently increased the percentage of customers who own 2 or more products, and our average sale price is up to $83,000.

We see greater initial commitment and larger upsell. With numerous product families and licenses to sell, we believe that the untapped opportunity within our customer base is substantial, and we continue to add a meaningful number of new customers each quarter. On both fronts, our land-and-expand strategy, we're still just scratching the surface in our opportunity in driving lifetime value across the customer base.

A new customer, a U.K.-based financial services firm, was suspicious of insider snooping around files and e-mails and also detected unauthorized access from outside. They wanted to secure their inner communication and monitor and track suspicious activities across all of their on-premises and cloud data environment. Our solution provided them with the ability to protect and secure their highly valued data and also to detect real-time abnormal activities coming from stealth-type of user accounts that outsiders use to gain access, which they were not able to do before.

They purchased DatAdvantage, DatAlert suite and Data Classification Engine to increase the overall security measures. In addition, they are deploying the Automation Engine to further reduce the risk profile against insider threat and GDPR patterns to help them with the reporting requirements.

As an example of an upsell, a large pharmaceutical company, first turned to Varonis DatAdvantage last year for user automation management. One of its facilities was experiencing extremely high turnover rates, and they were suspicious that employees were walking out the door with valuable intellectual property.

In Q4, the company decided to take further steps to protect its intellectual property from being stolen and added DatAlert to detect any abnormal user activities that could signal any employees stealing intellectual property and the Data Classification Engine to continuously locate and secure all their highly valued intellectual property on their network. These are all great examples how our strategies are working, with risk assessment to identify our customers' pain points and demonstrate our value proposition early in the sales process.

We believe that our highly differentiated and comprehensive data security solutions are unmatched. We build strong relationships with our customers with the value we deliver and expand our penetration through innovation. Our strategy supports our investment in R&D and sales and marketing to support regulations of GDPR and strengthening markets internationally and ensure we have enough strength, salespeople to capture our meaningful opportunity and drive durable, scalable growth over the long term. I'm confident more than ever that we have the strategy, the market and the team to build a $1 billion business.

Before I turn the call over to Guy, I would like to congratulate him on also being named Chief Operating Officer, the role he has already been performing for much of the last year and would also like to congratulate David Bass on his promotion to Executive Vice President of Engineering and Chief Technology Officer, effective March 1, 2018.

David has been with Varonis since the beginning and has been instrumental in our product vision, leading the product development organization for a long time. I would also like to take a moment to express my gratitude to Ohad, who has been a true friend and a partner to me and was instrumental in building the company from the ground up and turning it to the highly successful global company it is today. Ohad is stepping away from his role as CTO, and I look forward to his ongoing contribution to Varonis as he remains a member of the Board of Directors. With that, let me turn the call over to Guy. Guy?

Thank you, Yaki, and good afternoon, everyone. I'll begin by reviewing our fourth quarter and full year results in accordance with ASC 605. Then, I'll move on to discussing our outlook for Q1 and full year 2018 according to the new 606 standard. I would like to note that this change in standard has no material impact on our financials.

For Q4, total revenues were strong at $73.2 million, an increase of 35% year-over-year and above our guidance range. Q4 license revenues were $46.6 million. This represents a 34% increase from Q4 '16. Maintenance and services revenues were $26.6 million, increasing 35% compared to the same period last year. These results were supported by a consistently high maintenance renewal rate, which, again, came in at over 90%.

Looking at the business geographically, we saw strong growth. U.S. revenues increased 28% to $42.8 million or 58% of total revenues. EMEA revenues increased 52% to $26.5 million, representing 36% of total revenues. Rest of World revenues were $3.9 million or 5% of our total revenues.

For the fourth quarter, existing customer license and first-year maintenance revenue contribution was 44%, up from 43% in Q4 '16. During the quarter, we added 331 new customers and, for the full year, similar to last year, added nearly 1,000 new customers fueling our land-and-expand strategy.

We continue to have success adding new customers who make larger initial commitments and can meaningfully expand with us over time. This supports our strategy to target companies with 1,000 or more employees, while, at the same time, we're increasing revenues from our ever-growing customer base.

As of December 31, 2017, 52% of our customers had purchased 2 or more product families, up from 48% as of the same date last year. We believe that this positive trend validates our platform approach to data security and supports our investments in R&D to expand and extend the solution we offer our customers. It also further reinforces the significant opportunity we still have to sell into our existing customer base.

One upcoming change in regard to our product families. When we first introduced DatAlert, we thought of it as an add-on to DatAdvantage. Since then, detection has become a core use case and its own business driver while, at the same time, DatAlert became far more sophisticated. With our introduction of Varonis Edge, which complements DatAlert, we have decided to make them their own product families beginning in 2018. When we report Q1 2018, we will provide the associated attach rates and the prior year compares.

ASP. Our ASP was $83,000 for the full year 2017 compared with $65,000 in prior year, reflecting the strong business trend and increases in customer lifetime value we are driving.

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 Q4 '17, that reflects a total of $5.4 million in stock-based compensation expense and $284,000 of payroll tax expense related to stock-based compensation. We report non-GAAP results in addition to, and not as a substitute for, financial measures calculated in accordance with GAAP.

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 $67.6 million, representing a gross margin of 92.4%, consistent to the gross margin in Q4 '16.

Turning to operating expenses. During the fourth quarter, in line with our strategy, we continued to expand our sales and marketing teams in Europe and the U.S. to drive growth. In R&D, we remain focused on increasing our strategic investments to deliver additional products and features, expand our use cases and enhance our value to customers. The result is that we have been able to drive growth and scale in our business. During the fourth quarter, our operating margins improved to 16% from 14.9% in Q4 '16.

As you know, foreign exchange gains and losses can fluctuate. During the quarter, we had financial income of $321,000, compared to financial expense of $739,000 in Q4 '16, primarily due to foreign exchange gains this quarter. Our guidance does not consider any potential impact to financial and other income and expense associated with foreign-exchange gains or losses as we do not estimate movements in foreign currency rates.

Net income was $11.2 million for the fourth quarter of 2017 or $0.36 per diluted share, an improvement compared to net income of $7 million or $0.24 per diluted share for the fourth quarter of 2016. This is based on 31.1 million diluted shares outstanding for Q4 '17 and 29.3 million diluted shares outstanding for Q4 '16.

During the quarter, we added 52 net additional employees, ending the quarter with 1,251 employees, a 14% increase from 1,098 at the end of 2016.

I will now quickly recap full year 2017 results. Total revenues were $217.4 million, increasing 32%. License revenues increased 33% for the full year, and maintenance and services revenues increased 31%. Non-GAAP operating income was $7.4 million, a significant improvement compared to a $2.5 million loss in 2016, with operating margin improving to 3.4% from negative 1.5% in 2016. Non-GAAP net income per diluted share was $0.24 in 2017 compared with a loss of $0.17 per basic and diluted share for 2016.

Looking at the balance sheet. We ended the year with approximately $136.6 million in cash, cash equivalents and short-term investments. For the year, we generated positive operating cash flow of $16.4 million compared to $7.3 million in 2016.

Now turning to guidance. I would like to note again that this guidance is based on ASC 606, which has no material impact on our financials. Beginning with our Q1 2018 results, we plan to report on a full retrospective method. In addition, we have provided a 605 to 606 reconciliation for Q1 and full year 2017 in our press release.

As a reminder, a meaningful portion of our expenses are in Israel, mainly related to R&D. Historically, we've handled foreign exchange fluctuation by entering into hedging contracts when we finalize our yearly budget. In 2017, the U.S. dollar devalued significantly against the Israeli shekel. Consistent with the previous years, we entered into hedging transactions for the full 2018 year. Based on these rates, we expect the headwind to our Q1 2018 and fiscal year 2018 operating margin of approximately 300 basis points.

For the first quarter of 2018, we expect total revenues of $49.2 million to $50 million, representing year-over-year growth of 24% to 26%. We expect our non-GAAP operating loss to range between $8.6 million and $8.2 million, and non-GAAP loss per basic and diluted share of $0.32 to $0.31. This assumes a tax provision of $400,000 to $600,000 and 28.3 million basic and diluted shares outstanding.

For the full year 2018, we expect total revenues in the range of $260 million to $264.5 million, representing year-over-year growth of approximately 21% to 23%. We expect our non-GAAP operating income to be in the range of $1.5 million to $4 million, and non-GAAP net loss per basic and diluted share of $0.04 to non-GAAP net income per diluted share of $0.02. This assumes a tax provision of $2.7 million and $3.2 million. It is also based on 28.6 million basic and diluted shares outstanding and 32.2 million diluted shares outstanding, respectively.

For 2018, we expect to continue to see improvement in our cash flow from operations compared to 2017. I would like to note that we will be making leasehold improvements in several of our offices globally in order to have the infrastructure we need to support our next leg of growth. Our expectation is that CapEx will be approximately $12 million to $17 million for 2018, depending on exact timing on those projects.

On the R&D front, we expect to increase expenditures as a percentage of total revenues during 2018 while showing overall leverage, excluding the impact of currency fluctuations. We believe these investments will strengthen our capabilities to achieve our goal of building a $1 billion business that grows revenues meaningfully while expanding profit.

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

(Operator Instructions) Our first question is from Matt Hedberg, RBC Capital Markets.

Outside of the headline numbers, the European growth, I think it was 52%, really stood out to me. Yaki, in your prepared remarks, you mentioned GDPR. I'm wondering, is there anything else that drove those results? Was there any pent-up demand or budget flush in Q4? And I got one follow-up.

No, nothing. It's just -- it, for us, was business as usual. It's exactly how we explained the market is evolving. So what we saw overall, the problem that we saw in data protection, cybersecurity and information management is becoming much more mainstream and a top priority for C levels. And what happened with GDPR is that GDPR is really generating a very thoughtful process regarding cybersecurity, data protection and infrastructure protection. And they bring a very high - a high-level decision-maker that think about where are the assets, what they need to do. And in this process, Varonis wins. We don't sell for GDPR, we just sell our overall value, and it's just a perfect fit for this thought process that GDPR provokes. So we always did well in Europe. This is a business that you need to measure on a multi-quarter view. But without a doubt, in the overall sales motion, GDPR makes it more predictable. It's like the ultimate marketing campaign for Varonis.

That's helpful. And then in terms of the disclosures, we're looking forward to the DatAlert disclosure in Q1. So I guess I'll ask about the Automation Engine again. I think you mentioned that on the call, but can you give us an idea of who's adopting this? I assume it's mostly existing customers. But any sort of anecdotal evidence on the attach rates and the upsell opportunity you see for Automation Engine?

First, it's still early, but the early indicators are outstanding. And it's for new customers and upsells, it's for everybody. We understand that remediation is the core offering for information security today. Making sure that the right people will be able to access the right data is 50% of the battle. And what is going on, that in this sales environment, organizations understand that this is something that they need to do, but they need to [man] this automation around it. And the Automation Engine works extremely well. So in terms of -- it was just far beyond our expectations. Again, it's still early innings, but we believe that we can sell it to a lot of our customers and also to take this feature set and make it applicable to so many things. It's just showing a lot of promise.

Our next question is from the line of Gur Talpaz, Stifel.

Yaki, you talked about reduced sales friction and the go-to-market motion. I was hoping you could talk a bit more about that in terms of what you're seeing in terms of customer and channel awareness for the company and for your products and perhaps what's driving that reduced fiction.

Yes. What is driving it is just the traditional security solutions are still relevant, but they have very limited value in protecting data and the core infrastructure mainly in this very complex, hybrid mode and a very data-centric approach to security that is practical, it's working very well. So what you see is that cybersecurity is becoming just a board-level discussion. You need to protect your organization, you need to protect your customers or you will not be in business. So you need the overall trust foundation. And then you need to get -- you need to know where to invest. You can spend a lot of money and get nothing. And you also made a solution that the organization can digest. And what is happening, there are 3 things that happens. One, it's -- we've seen many more projects, we've seen many more C-level discussion. Usually, the CISO is the catalyst. We sell to the CISO, and he brings all the stakeholders from the business. And I think -- and another thing that we see, Gur, is a simple, much more strategic sales motion and significantly more sophistication in the use of the product. And our ability to get into the organization operation like dls, Automation Engine, critical classifications from there to doing remediation and ownership and really get our customer to a very predictable, effective journey of value. So definitely now it's -- slowly but surely, the market is shifting. And also we are hitting scale, and it makes sense for the partners to push it. And we have more and more brand recognition and almost no competition. So all of these factor, with scale working very well for us.

That's helpful. And Yaki, you always say look at the story on a multi-quarter view. Well, if you do that, you've accelerated license quite nicely here into the low 30s. Maybe talk about what's helping to kind of drive that multi-quarter acceleration? Is it pushing into bigger customers that have 1,000 employees or more? Is it general increase in ASP, multi-solution adoption, all of the above? Any color there would be very helpful.

So it's all of the above. But if I need to break it down, because of the market becoming more mature, a targeted approach to the market coverage works very well. So we didn't do any tremendous shift in just 1,000 and above. It's a huge market. I think with the federal just in North America and Europe is close to 30,000 potential customers. It's big. The other thing is as the market is more maturing, customer wants more licenses. So you're getting the customer at the same size and do bigger initial purchase and much stronger total customer lifetime value that works very well for us. So just coverage of market. And then when you have these 1,000-plus customers, we maintain very good relationship with and then the upsell are just becoming more predictable. But I think what you said is 100% right, you need to look at it in a multi-quarter view and you need to look at how we articulate what is going on and how the market is developing, and I think it's just a very unique situation.

Our next question comes from Saket Kalia, Barclays.

First, maybe for you Yaki, just to go back to the Automation Engine. Understanding that it's early, can you just talk a little bit about how automation -- again, in sort of early days, how you can see this product sort of impact the average selling price in some of your existing deals?

With your permission, I just don't want to talk about the ASPs. The simplistic way to look at it is if somebody buys DatAdvantage for Windows, it's just natural that they like the Automation Engine, and you can increase drastically the average sales price. But I want to step -- just to take a step back and look at the problem. When you are going through any risk assessment, frankly, 30%, sometimes 50%, of the data is open to everybody in the organization. You need to understand that more than 1,000 files of critical, critical information is open to everybody in the organization. Without breaking any business process, it takes so much time to fix it. You need to understand what's going on. Even with the core DatAdvantage, this is a tremendous quantum leap. You're talking about second-to-none productivity gains in a very quantifiable way to reduce risk. And if you're looking at any malware and almost any sizes, the first thing that they'll do is browsing the file share to see what is open and to take critical information. And this eliminates this key problem. So this is just a very, very interesting product that, in a very quantifiable, frictionless way, solves one of the biggest security problems and have massive cost savings. Because if you need to do it, without it, it's just a very hard undertaking and, many times, just impossible to do it in any realistic time frame.

Got it. That makes sense, Yaki. Maybe for my follow-up, maybe for you Guy. I think you said that R&D is going to go up as a percentage of revenue, understand it was because of FX. But could you just talk a little bit about how you think about the sales and marketing line in 2018? Presumably, you're not going to be seeing as much FX headwind there. So just anything you can talk about, headcount plans or other drivers on how sales and marketing grows in 2018.

So we're very focused on our goal to becoming a $1 billion company. So -- and I think what we've done in the past, we've focused on our investments, we took them in the right place, and we've definitely seen good ROI in terms of R&D. And if you just look in the last year alone, we came up with 3 products: the Automation Engine, GDPR and Varonis Edge. So in that regard, we're definitely focused on putting the right investments in R&D for the long term. When you look at the sales and marketing, we've seen good leverage in that department. And we definitely plan -- in 2018, if you exclude the FX headwind, we definitely plan to improve margins compared to 2017. So we're very focused on the bottom line. And our philosophy hasn't changed, but we want to continue to invest now for the long term.

Our next question is from Greg McDowell, JMP Securities.

My first question, I wanted to ask about sales productivity and how you're thinking about making investments in 2018 in the sales force, especially as it relates to geographies and maybe field sales versus inside sales and just maybe how you're thinking about sales headcount, sales productivity and trends you're seeing. I'll start there.

So the total addressable market, just in units of economics and customers in 1,000-plus, is huge. And as we have more products that we can sell, so our salespeople, in order to be productive, they need less accounts coverage. And anytime we bring a new customer, we can sell them too much. And we need to maintain these relationships, make sure that they are successful. So it's a balance. Really, the way to think about is the balance between us covering the market, we also need to make sure that we manage the right attention and effort economy on -- and the probability model for us to be successful and productive as the whole company coverage and [perhaps]. So we -- in a very -- in the right way, we are going to increase capacity. Obviously, most of the focus is 1,000-plus. So we're going to increase capacity with these enterprise reps. And most of our investments are North America and Europe at this point. Slowly but surely, we will go to APAC, but this is really where we are investing because we are still very small relatively to the overall opportunity. And lastly, as the market is -- this is a unique platform. As the market as evolving, so many use cases are just stemming from the platform. We have so much visibility of how to innovate. So we just -- we're starting with small bets, we see how they are working, and then we are going deep and wide, these things, like the Automation Engine and dls and others, and making sure that once a customer is onboard, we can sell them so much for a very long time. So this is really the way to look at it. And everything and all the investments need to materialize and make sure that gradually, we're improving the economics of the business.

That's helpful. And one quick follow-up, just the commentary on the disclosure and making them their own product families. Is that strictly sort of a financial-related disclosure? Or if you're a Varonis customer, are you going to be buying and consuming? Or is there any like price list change to -- or bundling change that customers will feel? And if yes, how should we think about the impact of those changes?

No, there is no -- obviously, there is price list change because we have now Edge on the price list, and last year was a big innovation year for us with Edge, with the GDPR patterns, with the overall Automation Engine. But we are really innovating 3 big things. One is everything that's related to Security Analytics. Very, very, we are extremely effective with everything that's related to unstructured data and file systems and Active Directory. We extend now with Edge to proxies and to DNS and VPN. And with that, everything that's related to insiders and malware detection after the malware passed the perimeter security, in my humble opinion, we are the most important security analytics company in the world. The second one is remediation, making sure the right people can really assess the right data. This is another big thing that we are innovating across our platform on the service information management to make sure that we know what information is critical, it's in the right place and in the right hands. And this is really thematically how to think about these 3 big areas of focus and in everything that's related to security analytics. Just the DatAlert became this big part of our business very fast, and our customers realize tremendous value. And we believe that the force multiplier with Edge can be acutely strong, so it's just make sense to put them both in one family.

And Greg, just to add on that. Starting Q1 2018, when we put the Edge and DatAlert together, we'll provide number of companies who have 2 or more product families and also number of companies who have 3 or more product families. Just to provide -- from a disclosure perspective, to give you more transparency and visibility to the attached rates of DatAlert and Edge.

Our next question is from Shaul Eyal, Oppenheimer.

So Yaki, a great start -- ongoing start with the Automation products, good feedback from customers. Even though it's early days, assuming you're not operating in some sort of a void, who are you seeing on a competitive landscape when approaching customers with the Automation product?

With Automation, because it's such a natural add-on to DatAdvantage, at this point, we just don't -- we barely see any competition to DatAdvantage, there is so little competition. And this is just an organic extension, if you will, to our commit engine, our ability to do remediation. So this is a place that -- this is still a highway for us. We are almost [alone].

Got it, got it. And then maybe sticking with Automation, so is the discussion for the upsell opportunity with that tool, does that take you in a different direction within the organization? Is it someone new within the IT department you need to push your product towards? Or pretty much the same people you've been interacting with so far when pushing it into your existing and new customer base?

Same people. It's seamless to the overall sales motion, the only difference is that at the end, you need to pay more money. It's just very small. Here you have just tremendous automation without any friction to solve one of your biggest problems that is very visual, and it just has additional cost. This is how it works.

And Shaul, just to give -- in addition to that, if you want to buy the Automation Engine, the prerequisite is DatAdvantage, so you have to buy that. And Automation Engine is 50% of the DatAdvantage list price. So really, at the end of the day, it really helps us with customer lifetime value. We can extract more dollars from customers new and existing over time.

Our next question comes from Melissa Franchi, Morgan Stanley.

Yaki, I just have a question about the business model. So primarily, it's license and maintenance today. I'm just wondering if customers are asking you to maybe increasingly sell subscription-based offerings, and I'm just wondering what's the thought process on maybe going to more ratable sources of revenue over time. Is that something that's on the road map?

At this point, they are not asking us to do it, just -- they -- we are not thinking to change the model. Maybe, at the future, we will release some products that we will sell on a subscription-based. But at this point, they model stay the same.

Okay, that's helpful. And then just a quick one for Guy. Can you sort of remind us the percent of exposure to FX both on revenue and on OpEx or, specifically, for OpEx exposure to the shekel?

So as I said in my prepared remarks, we have a portion of our expenses in Israel, and it's mainly related to R&D. So you can see, when we get close to closing our budget, we just lock in and close hedging transactions to the year, and that's mostly the exposure. There are some exposure in some of the other departments, like support in Israel and back office as part of the G&A, but the majority is related to R&D.

Okay. And on the top line, the FX disclosure?

On the top line, we have exposure to pound and euros. We are naturally hedged in those currencies because we pay our employees in that local currency. So it's not the same exposure as the shekel where we don't have any revenue coming from the Israeli shekel.

Okay. And is there an FX tailwind to revenue in the guidance?

Yes, there's a -- for the year, there's approximately a 2% tailwind related to FX in those currencies.

Our next question comes from Alex Henderson, Needham & Company.

Great. I was hoping you could be a little bit more granular on the R&D. So I just want to make sure I understood the mechanics of it. So you did 19.4% of revenues in R&D, and it sounds like you're suggesting we simply add 300 basis points to that number and then, on top of that, add some noncurrency-related spending growth. I was wondering, if you were to adjust out to the currency impact, what kind of growth in R&D you're anticipating on a constant currency basis.

Great question. So I don't -- I wouldn't take the 300 basis points and put them all in R&D. I'd just say that the majority of the FX is related to R&D because we have a great engineers team in Israel. But it is impacted as well by the support team in Israel and the back office. So I'd say the majority relates to R&D. But what we have decided is not to have the FX impact our decision to invest. And I think what we've done nicely in 2017 is prove everyone that we can show operating margin improvements. And if you look at the last 3 years alone, you'll see that we improved the operating margin by close to 1,600 basis points. So we know how to do that. And part of our decision now to invest in R&D, and kind of put aside the FX impact, is our desire to become a $1 billion business in sales. And this is what we need to do in order to get there. And that's why we're putting slightly more investments in the R&D department. Does that answer your question?

No, not actually at all. I totally understand why you're doing it. It makes perfectly good sense, it's a good business strategy, and I have no issues with that. I'm just trying to get some sense of what the rate of change would be if I adjust out the currency impact. Are you increasing it modestly less than the rate of growth in your revenue guidance, excluding the impact of currency? Or is there some other rate of change that we should be thinking about, excluding currency?

So excluding currency, you would still see the R&D portion out of revenue increase slightly. But what we still want to do is we would still try and show operating margin improvement compared to 2017, excluding the FX. So if you're looking specifically on the R&D front, the FX would impact about 220, roughly, around that number, basis points just from FX.

So 5% to 10% growth in R&D, excluding currency?

Roughly so, yes.

Okay, great. And going back to the customer count, I missed the customer count. Could you give that again?

331.

331. And finally, you did talk about the split out of DatAlert and Varonis Edge and all that. Could you talk a little bit about the scaling of that package when you separate it out how big a package is it on $1 per user or $1 per feet, or whatever you want to measure it on, relative to the other factors that you have? Is it similarly sized?

So the split that we're doing is, just from a financial reporting perspective, we are providing the information to investors and basically breaking out Varonis Edge and DatAlert, and they are going to be their own product family. The only reason we wanted to provide the heads-up now is to be transparent when the metrics change. But there's no change in the way we price, and there's no bundling or any combination of licenses. We're just providing that for transparency purposes.

I see. So that's not changing the structure of the go-to-market motion?

No, no, no. This is just from a reporting perspective. This is to provide -- I know one of the questions that we get a lot is what are the attach rates of DatAlert. Now that DatAlert fits with Varonis Edge, and we're introducing that to 2018, it makes a lot of sense to put them together as one product family. And we'll just -- from a reporting perspective, we'll provide the number of customers that have 2 or more product families and the number of customers that have 3 or more product families starting Q1 2018.

Our next question comes from Mark Schappel, The Benchmark Company.

Yaki, starting with you, with respect to your move upmarket into larger organizations, I was wondering if you could just address what you're doing differently as a company on the marketing front to make sure you're reaching the right people.

We are doing -- obviously, we have many programs, but just the same things. I mean we just -- we're doing more targeted marketing for 1,000-plus in the 10, 15 verticals that are working very well. We are doing a lot of field marketing, very effective ones, with our channel partners, to new prospects, and then to the base, which is [going] well for marketing content. But they're working very well. These are -- a lot of these organizations are just hungry for a solution like ours. So it's working well. And in many markets, we are generating very good awareness. And there is very good brand recognition and understanding, before we are there, of the problems that we are solving.

Good. As a follow-up, with respect to operating margins longer term, I mean, what are the thoughts on a normalized operating margin expansion rate over the next couple of years? Is it something we could expect somewhere in the range of, say, 100 to 200 basis points?

So I think what we're doing right now is exactly what we said we would do. I think we're executing according to our plans. We've been able to show significant operating margin improvements when we wanted to. And what we plan to do is, excluding FX headwind, we expect to show margin improvements in 2018. And that's consistent with our philosophy but we just feel that now is the right time to invest in R&D and improve and increase the use cases for our customers.

Our next question comes from Michael Kim, Imperial Capital.

Can you talk a little bit about the activities in the government vertical, if you're continuing to see inflection or positive momentum as we're heading in '18? And what kind of resources or investments you're putting into that vertical and partner leverage.

Right. Across the government, we're doing very well in government. Last year, we invested a lot in the federal market, and we got a strong results, and we believe that we are well positioned to do the same these this year. Really, it just started, so it's hard to comment on it. But I think that, overall, it's a very good vertical for us, a vertical that understands the problem, that has a lot of data, a lot of critical data that we need to protect, and we can do well there.

And are the products they're purchasing different from what you're seeing on the enterprise side?

No. The same, exactly the same.

Then just as a follow-up, on the migration to cloud -- or migration of IT workload to the cloud, is that becoming an increasing driver to licensed growth and gives you an opportunity to expand your coverage of data?

Yes, without a doubt. We really experienced just very, very good traction with our support of Office 365 and Azure. And it's just another big platform. And when we are going to our customers, the world is hybrid. So they have just data all over the place, and we are licensed by user and platforms that we are supporting. And this is just same files, same files shared and almost same active directory. So it's very easy for us to expand. So it's working very well with upsell, and it's working very well with new customers. And without a doubt, the cloud is increasing the total available market.

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Yaki Faitelson for closing remarks.

Before we end the call, I would like to thank all of our employees for their contribution to our success in the past quarter and the full 2017 year and all of our customers and partners for their continued support. Thank you all for joining us, and we're looking forward to speaking to you soon.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.