Varonis Systems Inc (VRNS) 2018 Q1 法說會逐字稿

Greetings, and welcome to the Varonis First Quarter 2018 Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Yun Kim, Investor Relations.

Thank you, operator. Good afternoon. Thank you for joining us today to review Varonis First Quarter 2018 Financial Results. With me on the call today are Yakov Faitelson, Chief Executive Officer; and Guy Melamed, Chief Financial Officer and Chief Operating Officer. After preliminary remarks, we will do -- we'll 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 second 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 anticipated growth in our addressable market; competitive factors, including increased sales cycle times; 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 and data and cybersecurity solutions; risks associated with those -- 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 earning press release that we issued today under the section captioned "Forward-Looking Statements", and these and other important risk factors are described more fully in our reports filed with Securities and Exchange Commission.

We encourage all investors to read our SEC filings. These statements reflect our views only as of today and should not be relied upon as representing our views as of any subsequent date. Varonis expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements made herein.

Additionally, non-GAAP financial measures will be discussed on this conference call. A reconciliation for the most directly comparable GAAP financial measures results are available on our -- in our first quarter 2018 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?

Thank you, and good afternoon, everyone. Q1 was a very strong start to 2018, with license revenues increasing 39% year-over-year. Total revenues for the first quarter were $53.5 million, an increase of 35% year-over-year. Strong across both North America and Europe. We continued to add meaningful number of new customers and sell more towards existing ones. We provide a solution for company-wide problem to delegating board-level attention, reducing risk, prevent breaches and compliance.

Our results for the quarter reaffirms that the steps we are taking to build a durable company with growth and scale are working. Over the decade ago, Varonis recognized that enterprise capacity to create and share data far exceeded its capacity to protect it. We believe that the vast movement of information from analog to digital mediums, combined with increasing information dependents, will change both the global economy and the risk profile of corporations and governments. Since then, our focus has been on using innovation to address the cyber implications of this movement, creating software to track and protect data wherever it stop.

We offer our customers an industry-leading platform that is built to protect the world's most valuable and most vulnerable data from both internal and external threats. Our platforms eliminate competitive manual cleanup project and automates manual protection routines, so we bring security and cost savings together, providing understaffed security in IT departments with the solution they need. As data continue to grow, on-premises and in the cloud, the complexity of data protection increases, combined with new regulation, that sits with and Board of Directors realize that they must implement a strategy to manage and protect their data and are looking for partner that can solve evolving needs. With our focus on innovation, including our enhancements to DatAlert and our Data Security Platform and more recent additions such as GDPR Patterns, Automation Engine and Varonis Edge, we are more and more becoming a partner of choice.

Our operational journey, detect, prevent, sustain is really a journey of value for our customers, by deploying and using our products, they unleash their potential to be most secure, more efficient and more productive. When we are talking about risk reduction, preventing breaches or compliance with regulation of GDPR, our operational journey provide context that help our customers think about their business and their data protection efforts more holistically, and dives our land and expand strategy. We added 183 new customers in Q1, and 49% of our license in first year maintenance came from existing customers, up from 46% in the year-ago period. 70% of our customers now have 2 or more products families compared with 66% in the year-ago period, and 37% of customers now have 3 or more product families, up from 31% a year ago. Once our customers start their journey and begin using our products, they usually realize that they need to use them more. We are training our sales teams to use our operational journey to better identify new opportunities and increase product usage, find and strengthen ties with new stakeholders and build stronger relationship with customers. We believe that the operational journey give us an advantage as data protection and compliance projects, like GPO, come together and is leading to both more initial deployments and expansion of the existing deployment. For example, during Q1, a new customer, a global retailer, knew it needed to protect filesystem data to prepare for GDPR. Varonis data risk assessment on their U.S. and new EU data stores was an eye-opening, uncovering EU citizen data and payment account information and always open to everyone in the organization.

After reviewing the risk report, the customer's IT, security, legal and auditing teams will convince they needed Varonis. They purchase DatAdvantage for Windows, DatAlert suite, Data Classification Engine for Windows and SharePoint and GDPR Patterns to find GDPR and other sensitive data. Monitor permission and alert to suspicious user activity. Where consultants in other companies couldn't best provide one time statics snapshot of the fire shows, Varonis make it possible for companies to take continuous action.

As we have said consistently, while GDPR helps with Varonis and the present opportunities that we believe we are well positioned to capture, we don't lean on compliance alone. We focus on the embedded value that comes with adapting our comprehensive Data Security Platform. To this risk, prevent breaches and oversimplify compliance. In Q1, we continue to see more senior-level executives realize that they have to take ownership and control of their data. Too many organizations have overexposed and unprotected files and emails on corporate networks worldwide. This is something security in IT have known for a long time, and now we see the tide turning. More executives are paying attention when they see how exposed they are through the Varonis risk assessment.

Our recent published Varonis Data Security report revealed that on average, 21% of an organization folder were accessible to every employee, and 41% of companies had at least 1,000 sensitive files open to all employees in the organization. Those included unmanaged, stale and sensitive data regulated by SOX, BPA, PCI, GDPR and other standard. And users use passwords that never expire. The Varonis Data Risk Report puts client in center where companies are being breached, where data-related regulation are being enacted while both need to be very concerned and while we believe our solutions are so critical to solving these problems. To give you an idea of the magnitude of the problem, our risk report reveals that 58% of companies have over 100,000 folders open to every employee in the organization. When they should have barely handful. Almost all of them need to be fixed. Think about what it means from a risk perspective. And now think about what it means that fixing a single folder without breaking everything can take 6 to 8 hours if you try to fix it without Varonis. This explains why demand is so strong to -- for our Automation Engine. The Automation Engine was built to fix these folders automatically. Projects that would've taken months and quarters are now being completed in days or weeks. Executives are now beginning to understand that it is our solution that significantly increase the likelihood of the breach and dramatically reduce the scope of potential damage. The Automation Engine adoption was very strongly again this quarter and is key differentiator for us. As an example, how compliance and risk reduction come together, a global corporate law firm understood the impact of GDPR deadline could have on the organization. In Q1, they contacted Varonis for a data risk assessment to gain insight into sensitive data on the file servers and prepare for GDPR. During the data review, we walked them through our potential journey, explaining how it will help to reduce risk and simplify compliance at the same time. Varonis identified GDPR data residing on their network and folders open to every employee. The firm estimated that it would take 200 days to fix these folders manually. The Automation Engine fixed them in 5 days. In addition, the purchasing of the Automation Engine, the firm now monitor file productivity and user behavior with DatAdvantage and gaining visibility into those sensitive files with Data Classification Engine and GDPR Patterns.

In addition to compliance, data breaches and risk reduction, we have also been talking about the cloud. And now, we believe that we are especially well positioned to address challenges in hybrid environment. Here is an example. In Q1, an employee in large U.S. energy firm fell for phishing attack, compromising dozens of Office 365 accounts. Attacker then configured accounts' rules so user e-mail would forward to an unknown outside others. After staggering to understand the scope and impact of this attack with native auditing tools in Office 365 and customers' voucher's clip, the company called Varonis. Varonis used DatAdvantage for SharePoint and OneDrive and successfully removed this threat within few hours. They were already using DatAdvantage, DatAlert, Data Classification Engine and DataPrivilege for the on-premises data stores and have now added support for their Office 365 environment. They are now equipped to track future incidents and keep their data safer, both on premises and in the cloud. This quarter, we again saw accelerated adoption of our Office 365 solution. Preventing data breaches in cloud and on-premises data stores continue to be a major, major concern. And we see no slowdown in damaging high-profile cyber attacks. These attacks continue to enforce awareness and continue to make DatAlert very important part of our portfolio.

Recently, [a] customer analyzed a brute-force attack when DatAlert detected hundreds of the accounts being locked out. During the investigation, we're able to familiarize them with some of our sophisticated features, like how they could analyze past events without behavior-based threats model, and this led to an upsell opportunity. When customers operationalize DatAlert, we see how quickly it strengthens our relationship and improve our ability to sell additional products, like Varonis Edge. Varonis Edge is our newest addition, which enables enterprises to correlate events and alerts from DatAlert to track potential data leak and spot vulnerable -- at the point of vulnerabilities, at the point of entry. We are excited about our recent Data Security platform upgrades and features. Our result this quarter reinforce our belief in our strategies we're working with. Our technology provides the platform to help prevent data breaches, reduce risk and achieve compliance.

In our operational journey -- show our customer how to use our technology to its fullest extent. Our focus on innovation enable us to solve more of our customer data security needs and strengthen our relationship with them. This has driven our land and expand strategy and provide us a path for a durable, scalable growth over the long term. I remain confident that we have the strategy and team to build a billion dollar revenue business. With that, I will turn the call over to Guy. Guy?

Thank you, Yaki. Before I begin, I would like to remind you that our Q1 results are in accordance with the new 606 accounting standard, which we adopted according to the full retrospective method.

Total revenues for the first quarter were $53.5 million, an increase of 35% year-over-year and 32% on a constant currency basis and above our guidance. License revenues were $25.1 million. This represents a 39% increase from the first quarter of 2017 and 32% on a constant currency basis. Our maintenance and services revenues were $28.5 million, increasing 32% on both the reported and constant currency basis compared to the first quarter of 2017. These results reflect our consistently high maintenance renewal rates that were, once again, above 90%.

Looking at the business geographically, we continue to see strong growth. North America revenues increased 24% to $31.6 million or 59% of total revenues. EMEA revenues came in at 38% of total revenues or $20.3 million, an increase of 60%. Rest of World revenues represent 3% of total revenues or $1.6 million. For the first quarter, existing customer license and first year maintenance revenue contribution was 49%, up from 46% in the first quarter of 2017.

During the quarter, we added 183 new customers, while similar number to Q1 '17 new customer addition, these new customers made larger initial commitments, and with our focus on the customer journey, we believe there is a meaningful opportunity for them to extend with us over time. This is in line with our strategy to target companies with 1,000 or more employees, while at the same time, increasing revenues from our existing customer base. We ended the first quarter with approximately 6,000 customers, which excludes roughly 400 data-anywhere-only customers. To remind you, as of February 2018, in order to focus our resources on our Data Security portfolio, we no longer sell DatAnywhere to new customers, and we do not expect renewals or sales of the product to our existing customers. I would also like to note that DatAnywhere revenue contribution was minimal in previous year's results.

In addition, as discussed in our last earning call, beginning in 2018, DatAlert and Varonis Edge became a new product family. The attach rates and customer accounts, as of March 31, 2018 and 2017, reflect these changes. As of March 31, 2018, 70% of our customers had purchased 2 or more product families, up from 66% as of March 31, 2017. 37% of our customers had purchased 3 or more product families compared with 31% in Q1 of 2017. These trends validate Yaki's description of our customers' behavior. Once they start their journey with Varonis and begin using our products, they typically realize how valuable our products are to them, which drives our land and expand strategy. This also supports our R&D investment strategy as we extend our capabilities to help our customers reduce risk, prevent breaches and comply with regulation. Before moving onto the profit and loss items, I would like to point out that I'll be discussing non-GAAP results going forward, unless otherwise stated, which, for the first quarter of 2018, excludes a total of $6.9 million in stock-based compensation expense and $1.9 million 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 first quarter was $47.7 million, representing a gross margin of 89%, in line with our gross margin in the first quarter of 2017. Turning to operating expenses. In line with our stated strategy, we increased our investments in our go-to-market initiatives to drive our global growth and support our customers' journey of value. We also increased investments in R&D to continually improve our products, enabling our customers to be more secure, more efficient and more productive. Operating expenses totaled $54.4 million in the first quarter compared to $42.3 million in the first quarter of 2017. As a result, our operating loss was $6.7 million or an operating margin of negative 12.5% for the first quarter, an improvement compared to our operating loss of $7.1 million or an operating margin of negative 18% in the same period last year.

During the quarter, we had financial income of $978,000 compared to $469,000 in the first quarter of 2017, primarily due to foreign exchange gains in each of the period. As you know, foreign exchange gains or 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 movements in foreign currency rates.

Our net loss was $6.3 million for the first quarter of 2018 or a loss of $0.22 per basic and diluted share, an improvement compared to our net loss of $6.9 million or a loss of $0.25 per basic and diluted share for the first quarter of 2017. This is based on $28.4 million and $27 million basic and diluted shares outstanding for Q1 '18 and Q1 '17, respectively.

If we look at the balance sheet, we ended the quarter with approximately $153.7 million in cash, cash equivalents and short-term investments. During the quarter, we generated positive operating cash flow of $17.4 million compared with $8.3 million in Q1 '17. This year-over-year improvement is keeping with our strategy to scale our business, delivering increasing levels of cash flow from operation.

We ended the quarter with 1,318 employees, a 15% increase from 1,148 at the end of the first quarter of 2017. From the previous quarter, this is an addition of 67 people. We continue to increase our headcount to grow the business and realize productivity improvements as we scale.

Moving to guidance. For the second quarter of 2018, we expect total revenues of $61.5 million to $62.5 million, representing year-over-year growth of approximately 24% to 26%. We expect our non-GAAP operating loss to range between $1.5 million and $0.5 million and non-GAAP loss per basic and diluted share of $0.07 to $0.04. This assumes a tax provision of $500,000 to $700,000 and $28.8 million basic and diluted shares outstanding. For the full year 2018, we are raising both our revenue and profit guidance. We now expect total revenues in the range of $264 million to $268.5 million, representing year-over-year growth of approximately 23% to 25%. We now expect our non-GAAP operating income to be in the range of $2 million to $4.5 million, and non-GAAP income per diluted share to range between $0.01 and $0.07. This assumes the tax provision of $2.7 million to $3.2 million and $32.3 million diluted shares outstanding.

In closing, this was a strong quarter for Varonis. We are executing well on our growth strategy, making progress towards our 2018 goal of delivering solid profits and improving cash flow from operations. Our investments in innovation is proving itself as we further extend our competitive differentiation and increase the attach rate across our customer base. We are well positioned to deliver a solid 2018.

With that, we would be happy to take questions you have. Operator?

(Operator Instructions) Our first question comes from John DiFucci, Jefferies.

Yaki and Guy, I have 2 questions. So first one, it sounds like -- listen, you've hesitated to say GDPR was going -- I mean, it's going to be a benefit but not the only driver here, and I -- we understand that. But the strength in Europe looks really strong here. The question I have, though, isn't about that, it's more about U.S. government. It seems like that could also be just a significant customer, especially for what you're providing here. Can you talk a little bit about that? Have you focused on U.S. Federal Government at all as a potential customer? And are there any certifications you need to become a trusted government vendor?

John, yes, we're definitely investing in the federal market. We have a strong leadership and very strong team. And we figured that this business can perform very well for us and just also get to a significant scale with time. But in general, I think the theme is really what is happening in the world. In economy and a society that is completely digital. And what it means that you have a data breach that you can protect the data. And I think what GDPR did primarily, it just provided a very comprehensive framework how to think about governments and how to think about cybersecurity and how to think about dealing with the personal and critical information. And everybody understand, in order to benefit from the tremendous productivity gains and the progress these technologies are bringing, we need to get control over the data, if not, the downside will be huge. And I -- and we all strongly believe that Varonis is going to be a critical component to make sure that you can realize all the benefits with very little risk. So it's just becoming much more irrelevant to the discussion and when you look at -- overall, you're looking at your assets, and where the damage can happen, we are protecting the most critical information with the largest volumes that is the most vulnerable.

Okay. I get it, Yaki. So this applies across anywhere, doesn't matter, the government, Europe, U.S., anywhere. I just have a quick question for Guy. And Guy, I think you said that you're not gonna take any renewals of DatAnywhere. And I know you said something right after that, that -- I'm not sure your exact words but that -- it wasn't material. But can you give us any more detail on that just because it would be, kind of like, a little bit of a headwind, was it less than $5 million in revenue that you're not gonna take renewals on? Or approximately, how much was it? Or Less than $3 million? Less than $10 million, something like that?

Yes. So as part of the 10-K, we actually put some -- we put some color there. There was approximately 400 DN customers -- stand-alone DN customers that we're not including. The revenue coming from DN wasn't material, much less than that. And the -- and from -- when we look at the reason, it's really not strategic for the Data Security Platform. We're not expecting any renewals. We're not expecting any upsells from DatAnywhere, and that's kind of the reason we're excluding those customers.

Okay, okay. And then you say much less than that? I am sorry, I threw out a bunch of numbers. And the lowest number I threw out was $3 million. Is it much less than that?

It's less than $1 million. The allocation for 2018 is less than $1 million.

Our next question comes from Matt Hedberg, RBC Capital Markets.

Our next question comes from Saket Kalia, Barclays.

Maybe first for you, Guy. Can you just talk a little bit about the seasonality of deferred revenue a little bit? You know, I think we've all, sort of, seen it down usually from the fourth quarter [to] the first quarter. But it was down just a little bit more than what we've seen. So can you just talk about some of the moving parts in that line under the FX and maybe DatAnywhere could've played a role, but can you just kind of walk us through, maybe, how that line ebbed and flowed this quarter, and what's in the moving parts [were]?

Absolutely. So as you know, Q4 is usually the largest dollar-value selling quarter for the year, which -- and Q1 is usually the quarter with the most collection, which is part of the reason we have such great cash flow from operations in Q1. The deferred revenue wasn't impacted by DatAnywhere, but it's been pretty consistent and fluctuates from quarter-to-quarter. But there wasn't anything material there. And we're happy with the numbers.

Got it, got it. And then maybe for you, Yaki, a little bit higher lever. Can you just talk a little bit about Automation Engine versus some of the other products that Varonis has kind of introduced in terms of ramp? You've talked about it as being a differentiator, of course, it's still relatively early, but perhaps qualitatively, how do you think about the successive Automation Engine versus your other new products at, sort of, this stage of their life cycle, if that make sense?

So far, the signs are very positive from -- just every KPI, the volume, the overall revenues but primarily from the value that customers get. So today, if you think about excessive access control and file system, this was -- this is the problem -- this is the main problem for a lot of the malware and insider threat. First thing the people are doing, they are going to file shares and trying to take data that is not there. And the easiest way for a malware is to go network share and try to steal data. We are going to organizations, show them that, at many times, thousands and thousands of critical files are open to everybody in the organization. They need to remember that access control is a business process. People need to access the data. And if you going to break it in a way that it's not sensible, you will break business processes, and you will have productivity. So it's just -- to come in, to show you all the exposure and then in a fraction of the time, it took [3] DatAdvantage. And I'm not talking without it, that it's virtually impossible, you reduce the risk without any additional spent. So this is really the -- just the ultimate example of risk reduction and savings. And it works just extremely well for us. So just access control, excessive access control remediation is in the core of every security program. And their ability to find critical data and access -- excessive access and just make sure that only the right people can access it without breaking any processes is just a tremendous value proposition. So from every angle, in terms of the overall value, the way that it's working on DatAdvantage, and the net impact on revenues, it's working very well.

Our next question comes from Matt Hedberg, RBC Capital Markets.

Yaki, you guys have been having success with larger customers, how your seat counts, Guy mentioned it in his prepared remarks. I'm curious, can you talk about what's driving some of the momentum? And when you get into some of these larger customers, do any of them ask for ELA-type contracts?

Yes, so first, it's very important with the company because of the fact that our sales motion is becoming most strategic and simpler, and there are more and more budget, we just -- we can have more and more targeted approach. And we are really focusing on 1000-plus employees. But one of the things that happen, in terms of customer lifetime value and many times initial sell, we are selling 1000-plus to the same customer we sold before, but we sell them more. And over time they have much better and more predictable customer lifetime value. We still haven't done any ELA's, customers are talking to us about it. But there is a lot of value, and more and more customers need a lot of the product that we have, and in terms of content, I mean, product content there is so much that we can offer, so with time, we find a

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we can consume over time more value in a predictable way. But just again, we are focusing on 1,000 plus and selling initial bills and overall customer lifetime value, just bigger because we have more products. And we have products that deliver immediate time to value, and customers are really understanding very well the journey of value. And they want to make sure that they have all the pillars and the building blocks, and we have this multiyear relationship with our customers. And we make sure that they can protect their data and constantly improve the overall security posture.

That's super helpful. And then quick one for Guy. It sounds like you guys are now breaking out DatAlert and Varonis Edge as separate products. I'm wondering if could give us the attach rate of DatAlert in your base?

Absolutely. Yes, the attach rate for DatAlert in Q1 '18 was 48.1%, and that's versus 42.4% in Q1 '17.

That's helpful. I think Varonis Edge is a lot less than that, I don't know -- it was just launched, though.

We provided as a product family. Obviously, the Edge is very initial. So this is as a DL product family, as mostly DL currently.

Our next question comes from Gur Talpaz, Stifel.

I'm gonna ask about EMEA. I mean, growth rate was stellar at 60%, and Yaki, I know you want us to look at things on a multi-quarter basis, but still, the number itself is impressive. In the past, you've talked about using GDPR as a way in the door inside of customers, inside EMEA. Is that still the case today? And can you talk about the selling motion into European customers?

The selling motion in the European customers, and customers in the U.S. are the same. People just -- people understand the implications of not protecting data. Without a doubt, what happened with GDPR. You can think about it like the ultimate marketing program for Varonis on steroids. It provided a framework for board and management to think about data security, compliance and cybersecurity and to sit and really say, "Where are the assets? What are the problems?" And the other thing that is happening in security growth, which is phenomenal for us, and it was -- we tried to illustrate it in the customer examples, is that we are in a place that we need to prove quality. You can have alerts, they need to be the right alerts, you need to catch bad things when they will happen. You need to remove excessive access control without breaking business process. You need to classify data result for positives. And everything works very well for us. So it really elevated. Also, GDPR elevated in many multinational -- in North America, there was a discussion but what you see -- and also, what you see what happened with Facebook. These things are happening, and everybody are looking at it and saying, "We need to act. We need to understand what is going on." And when you have a thoughtful process about where are your assets? How to protect them? And where you need to allocate your capital? And what processes the organization can digest in order to be protected on-prem and in the cloud, this overall discussion benefit Varonis tremendously. And this is what you see.

That's helpful. And then in the prepared remarks, you talked a bit more about the cloud and deploying an Office 365 and Onedrive in cloud environments more so than you talked about in prior quarters. Can you talk about what you're seeing now as far as your deployments in cloud-based environments and hybrid-cloud environments? And as something you know fundamentally shifted quarter-on-quarter that's pushing you into more of these deployments now?

The customer are pushing us. So what we see -- it's very interesting is that we see more data in the cloud, interestingly enough, we don't see file servers -- full file servers going to the cloud, we see the SharePoint online and definitely a lot exchange and on directories and OneDrive, and there are many, many incidents. We see sometimes more incidents than on-prem, it's another big platform, you have a lot of data, customers understand they need a single pane of glass, and they need to be protected. And our support for Office 365 and Azure, it's just getting tremendous momentum. We are very happy, but it's primarily for market conditions. It's becoming another platform with critical massive data. Very hard to manage permissions. You need very effective alerting. The data is all over the place. The whole -- This whole situation is extremely beneficial for Varonis.

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

So you guys were pretty busy on the new product development front, not just [started our] say but prior to that, with the extensions to DatAdvantage, the Geolocations, GDPR stuff and the Automation Engine enhancements. Can you talk about how you're -- what response you had to those? And how you're pricing those? I know that you've historically been, sort of, underpriced to the value of your product and had a bias to upward trajectory and pricing and ASP as you've added additional feature functionality. Is that the case here?

So last year, we were very busy. And Automation Engine is doing very well. All the enhancement for 365, everything that we did with GDPR and Classification and the new feature is going very well. Edge is still early stages. And from the beta, we have very good momentum. We feel that we price it in the right way, and it's just adding a lot of value. And with all the products that we have, customers -- something that customers can consume effectively, and it's priced correctly. If we see that it's not priced correctly, we can always increase prices, and it's something that we have done in the past. But we believe that we executed very well. And our 3 things is a security analytics, remediation and management and classification, and we were able to increase materially the value we bring to our customers in each area of innovation.

You talked a little bit about larger deal sizes, didn't really quantify it, but indicating that you're seeing solid little or larger deal sizes. Usually when that happens, that also result in some extension of the time-to-close transactions. Can you talk a little bit about that trade off? Are you seeing any extension of the time it takes to close deals? Or is the deal time staying the same as the deal sizes are going up?

So far -- so primarily, we're talking about customer lifetime value, we are not talking about ASPs. What is happening is that we sell to customers with the same size. If you look at our business, that is 1,000 plus, we're just focusing on it. The sell cycles are the same because, in terms of the complexity of getting deals and consensus and getting to the champions, it stay the same. It's still -- it always involves some challenges and pains because this is how enterprise software works. But it's just -- it stay the same. And also, with time, we see more and more budget that are earmarked towards the problem that we solve, like insider threat and compliance and all of this stuff. Malware detection. And it's still not earmarked towards just the back it like a firewall or a storage element or something of this nature but definitely, there are budgets. So I think in this condition, even if there are buying more upfront, it's -- the market conditions help us to justify, relatively, in the same sales cycle that we experienced before.

One last technical question. The share count, if you had been profitable in the quarter, what would been the fully diluted share count number as opposed to the basic employ diluted to be the same as a result of the fact that you had a loss?

So the share count, we provided, actually, for the guidance for the full year because we are expecting to be operating margin profit for the year. But that would be -- the share count is about $32.3 million on a fully diluted basis for the full year.

(Operator Instructions) Our next question comes from Melissa Gorham Franchi, Morgan Stanley.

Yaki, I'm wondering if you can maybe just comment on how you're feeling about sales capacity right now, particularly in EMEA? And if you feel like you need to make significantly more incremental investments in that region to fully take advantage of GDPR? If you can just give us a sense of growth and the number of sales has either quantitatively or qualitatively, that would be helpful.

Melissa, we are operating in a -- just a massive market. We virtually can sell to everyone. So obviously, to fulfill our potential, we need sales capacity. We're constantly adding seller and sales engineers and customer success people, we're just doing it in the right way. We want to make sure that there is management in place, and we can enable them, and they get the right support, and we slice and dice territories in the right way. So we're just balancing it. After our IPO, we go aggressively and we said, we needed to get to a certain capacity, and after that, we can do it in a more measured way. And this is what we are doing right now. So make sure that people that we are bringing on board, they will have all the chances and all the support to be very successful. And big part of the strategy is to add sales capacity, which is going to -- we're just doing it in a measured, responsible way.

Okay, got it. And just one follow-up for Guy. Just looking at the operating income guidance for the full year. Q1, you saw a big beat in operating income, but the full year guide is about as much as the Q1 beat. So I'm just wondering if you can maybe talk about where you're hoping to kind of put that reinvestment into the business for the rest of the year?

Sure. So this is very consistent with what we discussed last quarter. And as you remember, we discussed on our R&D investments. So part of the beat in Q1, we -- when we look at the guidance for the year, we're planning to put some of it back in the business because we see the great opportunity that we have ahead of us. But when you look at, on a non-GAAP basis, and as you exclude the FX headwind that we discussed last quarter, we still plan to show leverage on the operating margin compared to 2017. So we're continuing with the same philosophy.

Our next question comes from Shaul Eyal, Oppenheimer.

Guy, I want to start actually with you. So as you guys probably know better than I do. The recent ruling by the Israeli tax authorities have some implications in regards to the adaptability of stock-based compensation, I think that it implies for foreign companies where there's really R&D subsidiary. So how are you thinking about it? Are you anticipating any onetime future charges down the road? I know Imperva took one back on Thursday? What's the view here?

So we've reviewed and studied the court ruling. And we believe we have sufficient provision to address the court ruling.

Got it. And my second question. So Yaki, existing customers as well as new customers seem to be pushing you towards new directions, positive directions. Are you seeing, in that context, any new resellers, distributors? Do you have no access to historically revisiting their Varonis relations? Any new opportunities to expand into various regions you operate, [will] you distribution channel?

We definitely see that much more attention. We are starting to hit scale, we are very relevant to the cloud, as you know there is a lot of pressure on infrastructure valves, so we see a lot of attention. We build very good robust distribution, a partner distributions throughout the years, but they just can do much more with us, they can do professional services, and they are benefiting tremendously when they are introducing us into the customers. So we definitely see that they are embracing us much more. We are more strategic for them, and there is a lot of appetite to push our products and introduce them to their customer.

Our next question comes from Greg McDowell, JMP Securities.

Guy, just one quick one for you. I think one number that really stood out to me was your operating cash flow and free cash flow performance, which was more than double last year. Was hoping you could just maybe talk us through some of the puts and takes for the Q1 outperformance? And as we think about cash flow for the rest of the year, maybe how we should be thinking about it?

So if you remember, the way our business works, Q4 is the largest revenue from a dollar perspective. And which kind of generates Q1 to be the largest from a collection perspective, and if you look at the cash flow from operations last year, you'll see very similar trends. We're very happy with the cash flow from operations, the number we generated this quarter. I think it's a great indication of how strong the businesses is, we feel very good with the momentum and believe that we can continue to generate significant cash flow going forward.

So Q2, typically, you burn cash in the last couple of years, so I guess, predictable patterns for the next couple of quarters is what I'm trying to get at.

Since Q1, from a dollar perspective, a selling perspective is the lowest for the year. The cash flow generated from operations in Q2 is significantly lower than the numbers in Q1.

Our next question comes from Srini Nandury, Summit Insight (sic) [Insights] Group.

Yaki, out of the 6,000 customers you have, can you give us some color qualitatively or quantitatively how many of these customers have at least 1,000 employees or more?

This is Guy. We actually don't break down the number of customers that are over 1,000. What I emphasize is that, even though we're focused on customers with more than 1,000 plus -- and we're -- we've seen that we're, from a customer lifetime value, we were able to generate more through those customers. We haven't neglected the customers that are below 1,000. We have an inside sales team that focuses on them as well. We tried to sell them through WebEx and over the phone. Out of the 6,000, it's still the majority that are below 1,000, which just emphasizes the potential that we still have in targeting the larger customers. So we're very focused on the 1,000 plus but haven't neglected the ones under that.

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

Guy, just one question. With respect to the incremental investments you plan to put back into the business from the first quarter upside, where do you plan to direct those investments?

So you really feel the opportunity and what we see in making this company become $1 billion in sales in the future, we need to make some R&D investments. But as you know, we're very focused on both growing the business and on the bottom line. So the philosophy hasn't changed. We're doing the exact same thing we've done in the past. Most of the investments that we plan to do and, kind of, what we're bringing from the beat of Q1 will be focused in R&D. But we'll make investments in other places if we find them appropriate. But we're very focused on the top-line growth and bringing some of it to the bottom line.

Our next question comes from Rishi Jaluria, D.A. Davidson.

Just really quickly. I guess, first, as you focus more specifically on organizations with 1,000-plus employees, have you seen any impact on churn with, maybe, the smaller-sized customers? I know you've talked about the 90%-plus maintenance when you're rich as a whole, but just curiously on the lower side of customers, have you seen any impact on churn with that relief folks? And then quick follow-up.

No, we see across the board very strong renewal rate.

Okay. That's helpful. And just -- coming out of a RSA couple of weeks ago, I mean, definitely saw a lot of companies messaging both around GDPR and then as well, messaging some sort of language around data governance or user behavior analytics. Just kind of wanted to understand, from your perspective, has the competitive environment been relatively maintained? Or have you seen any sort of changes as some of these larger organizations, at least from a marketing perspective, start messaging stuff that sounds somewhat to what you do?

No, we -- the competitive landscape didn't change. We are coming -- it's the same sales motion. It's a very visual sale, we show them our demo and then we are selling it via POC. And once we are doing it, everything is clear. So we are selling on the value of the product that people are touching with their hands and not marketing sound bites. So it just works very well for us, and we don't see any changes in the competitive landscape.

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

So to end the call, I would like to thank all of our employees for their hard work and contribution to our success this past quarter. I would like to thank all of our customers and partner for their continued support. Thank you for joining us today, and we are looking forward to talk to you again soon.

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