Varonis Systems Inc (VRNS) 2018 Q3 法說會逐字稿

Greetings, and welcome to the Varonis Third Quarter 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to Jamie Arestia, Investor Relations. Please go ahead.

Thank you, operator. Good afternoon. Thank you for joining us today to review Varonis' third quarter 2018 financial results. With me on the call today are Yaki Faitelson, Chief Executive Officer; and Guy Melamed, Chief Financial Officer and Chief Operating Officer. After preliminary remarks, we will open up the call to a question-and-answer session.

During this call, we may make statements related to our business that would be considered forward-looking statements under federal securities laws, including projections of future operating results for our fourth 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 anticipated growth in our addressable market; competitive factors, including sales cycle time, changes in the competitive environment, pricing changes and increased competition; the risk that we may not be able to attract or retain employees, including sales personnel and engineers; general economic and industry conditions, including expenditure trends for data and cybersecurity 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 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 is also available in our third 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?

Thanks, Jamie, and good afternoon, everyone. We had solid performance in the third quarter of 2018. Total revenues were $67.1 million, an increase of 26% year-over-year and ahead of our guidance. North America revenues increased 27% in the quarter, while EMEA revenues increased 20%.

To drill down a bit more on North America, we were pleased with the region performance and the contribution from the West Coast. As we discussed with you last quarter, we felt confident in our ability to drive growth in North America where the demand for our product is very strong. This is exactly what we saw in Q3.

Now I would like to discuss a few examples of how we are executing on our growth strategy. Let's begin with our customers. First, I'm pleased to report that we added 188 new customers in the third quarter. As you know, we made strategic decision several years ago to focus on customers with more than 1,000 employees. Larger customers yield larger initial deals and strong upsell opportunities and offer a great deal of customer lifetime value.

As an example, a global manufacturing company based in the U.S. with approximately 1,500 employees wanted to ensure it was doing everything it could to protect its valuable intellectual property and lock down employee data protected under GDPR. A Varonis data risk assessment revealed the customer's worst fear: exposed intellectual property and personally identifiable information covered by GDPR. The company purchased DatAdvantage to map and monitor their data stores, Data Classification Engine to locate those sensitive data and GDPR Patterns to identify GDPR data in their environment. The customer also purchased Automation Engine to speed up remediation to exposed data. With Varonis, they will have a turnkey approach to finding and securing overexposed data throughout their enterprise. This is another reminder that GDPR regulations are not just relevant to our EMEA customers, but to all multinational companies doing business in the EU.

This example is only one of many where we are seeing our customers making bigger initial commitment to us, validating that our operational approach to detect, prevent and sustain is working. Our customers see the value we provide as they think more critically and comprehensively about their businesses and their data protection effort.

But it's not just new customer acquisition that is driving our business. It is upselling as well. We continue to have success with our journey of value. We are confident that once our customers use our products, they will then buy more. Our sales teams continue to make progress helping our customers understand the value they can derive across the platform. This quarter, we continue to see number of customers who purchased 2 or more and 3 or more product families increased year-over-year. At the same time, the percentage of licenses and first year maintenance from existing customers increased to 53% from 49% in the prior year period.

By way of example, a large accounting firm began using DatAdvantage in 2015 to control access to sensitive client files and avoid potential risk and loss of business resulting from exposed data. Every year since, they have continued to add Varonis products, including Data Classification Engine and DatAlert, to identify sensitive information and monitor and alert on threat. In the third quarter, the firm once again turned to Varonis with the purchase of Automation Engine. Thanks to the visibility, control and automation provided by Varonis, the firm can automatically identify and classify data and remediate suspicious activity as it unfolds.

This is yet another example of what we are seeing across our customer list, where customers see the value for our Data Security Platform and the strength of the combination of DatAdvantage, Data Classification Engine and DatAlert. And this makes perfect sense. DatAdvantage provides a map, who can access data; Data Classification Engine identifies which data is critical; DatAlert analyzes the access activity and provides real-time alert of abnormal behavior. The combination of risk reduction, sophisticated alerting and simplified compliance offers our customers a unique value proposition.

The alerts are compelling when customers are monitoring one type of data store, more so when they monitor multiple data stores. In today's hybrid world, the alert and the investigation capabilities behind them are invaluable. We have seen attach rates for DatAlert grew steadily and now just below 50%, which emphasize the potential to continue to sell DatAlert to our existing customer base. Across all our offerings, the years we have spent working with customers on remediation project has made our products and methodology better, and we are now using the same approach with cybersecurity.

As an example, a North America aerospace company was recently under are an active phishing attack. So the attackers were successfully able to compromise several user accounts. They reached out to us, and we were able to help them determine whether additional machines were compromised and whether any GDPR information was affected.

I'm also pleased to note the adoption of our Office 365 solutions continue to be very strong. Our strategy remains to help customers manage and protect data anywhere, whether it's stored on-premises or in the cloud. As an example, an international educational organization with students and faculty around the world turn to Varonis to secure their hybrid on-premises and cloud environment. DatAdvantage will map and monitor their data stores. Data Classification Engine will give them visibility into sensitive files. Data Transport Engine will allow them to create tools and automatically migrate archive of these files, and DatAlert will analyze behavior to detect internal or external threat. And through GDPR Patterns, they can run country-specific rules to locate and lock down files containing personal data. Thanks to Varonis, the organization is taking a proactive approach to protect their hybrid data stores and will be prepared as they continue to migrate to the cloud.

To further our cloud strategy, in July, we announced the upcoming integration with Box to secure enterprise content in the cloud. Box will be supported as part of our Data Security Platform, tracking user activity and providing customers with the ability to manage risk and secure the enterprise data wherever it is.

In short, our financial and operational results this quarter reaffirm our belief that we are building durable and scalable company that can reach $1 billion in sales. I'm excited as I look forward to the fourth quarter and beyond, and I'm confident that our strategy and team positions us well for long-term profitable growth.

With that, let me turn the call over to Guy. Guy?

Thank you, Yaki. I'll begin by discussing our quarterly results and then move on to discussing our outlook for Q4 and the full year 2018.

Total revenues for the third quarter were $67.1 million, an increase of 26% year-over-year and above our guidance. License revenues were $35.8 million, which represents a 23% increase from the third quarter of 2017. Maintenance and services revenues were $31.2 million, increasing 28% compared to the third quarter of 2017. Our maintenance renewal rate in the third quarter was again over 90% and continues to increase as it has over the past several quarters.

From a geographic viewpoint, we saw growth in both our major regions in the third quarter. We were pleased with the strong growth we saw across all regions in North America where revenues increased 27% to $44.9 million or 67% of total revenue. EMEA revenues increased 20% to $19.8 million or 29% of total revenue. Rest of World revenues, which represents 4% of total revenues, were $2.4 million. For the third quarter, existing customer license and first year maintenance revenue contribution was 53% compared to 49% in prior year period.

As Yaki mentioned, we added 188 new customers during the quarter compared to 208 in Q3 of 2017. The decrease in net new adds year-over-year is in line with our strategy to focus on companies with 1,000 or more employees, which continues to result in customers making larger initial commitments to us. At the same time, we continue to see increased revenues from our existing customer base, which serves as a strong source of additional revenues given the broad platform of products we have and the growing volumes and complexity of enterprise data that they have.

We ended the third quarter with approximately 6,350 customers. As of September 30, 2018, 72% of our customers purchased 2 or more product families, up from 68% as of September 30, 2017. 39% of our customers purchased 3 or more product families compared with 34% in Q3 of 2017. These percentages, which have continued to grow over the last few quarters, are evidence that our strategy of ongoing investment in R&D is working as we are seeing customers buy more licenses than ever. As we innovate and expand our product offering, we expect to have an even broader suite of products to offer our customers, further driving our land-and-expand strategy.

Before moving on to the profit and loss items, I would like to point out that I will be discussing non-GAAP results going forward unless otherwise stated, which for the third quarter of 2018 excluded a total of $8.4 million in stock-based compensation expense and $430,000 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. 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 third quarter was $60.5 million, representing a gross margin of 90.2%, in line with our gross margin in the third quarter of 2017. I want to remind everyone that embedded in our 2018 financial guidance was our desire to continue to grow revenues while improving our non-GAAP operating margin, excluding the 300 basis point headwind related to FX.

We continue to execute against our plan. Operating expenses in the third quarter totaled $65.1 million compared to $51.4 million in the third quarter of 2017. As a result, our operating income was $2 million or an operating margin of 3% for the third quarter compared to operating income of $1.9 million or an operating margin of 3.6% in the same period last year.

During the quarter, we had financial income of $99,000 primarily from interest income compared to financial income of $622,000 in the third quarter of 2017 primarily due to foreign exchange gains. As you know, foreign exchange gains and losses can fluctuate. Our guidance does not consider any additional potential impact to financial and other income and expense associated with foreign exchange gains or losses as we do not estimate movement in foreign currency rates.

Our net income was $1.5 million for the third quarter of 2018 or income of $0.05 per diluted share compared to net income of $1.8 million or $0.06 per diluted share for the third quarter of 2017. This is based on 32.5 million and 30.8 million diluted shares outstanding for Q3 '18 and Q3 '17, respectively.

Turning to the balance sheet. We ended the quarter with approximately $158.1 million in cash, cash equivalents and short-term investments. During the first 9 months of 2018, we generated operating cash flow of $16.3 million compared to cash flow generated from operations of $10.8 million in the first 9 months of 2017. This year-over-year improvement is keeping with our strategy to scale our business, improving our non-GAAP operating margin while delivering increased levels of cash flow from operations. We ended the quarter with 1,386 employees, a 16% increase from 1,199 at the end of the third quarter 2017.

Moving now to guidance. For the fourth quarter of 2018, we expect total revenues of $86.5 million to $88 million, representing year-over-year growth of approximately 18% to 21%. We expect our non-GAAP operating profit to range between $11 million and $12 million and non-GAAP net income per diluted share in the range of $0.32 to $0.34. This assumes a tax provision of $600,000 to $800,000 and 32.6 million 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 $269.5 million to $271 million, representing year-over-year growth of approximately 25% to 26%. We now expect our non-GAAP operating income to be in the range of $5.5 million to $6.5 million and non-GAAP net income per diluted share in the range of $0.11 to $0.13. This assumes a tax provision of $2.3 million to $2.5 million and 32.4 million diluted shares outstanding. We also expect our cash flows from operations for the full 2018 year to be greater than full year 2017.

In summary, the need for companies to monitor and protect critical data has never been more important and the continued demand for our solutions confirms that our strategy is working. We are selling more licenses to both new and existing customers, and renewal rates are increasing. At the same time, we continue to scale our business, improving non-GAAP operating margin while delivering increasing levels of cash flow from operations. We look forward to continued financial and operational success in the fourth quarter as we build towards a billion-dollar business.

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

(Operator Instructions) Our first question will be coming from the line of Saket Kalia with Barclays.

First, maybe for you, Yaki. You touched on this on your prepared remarks, but now that we have another quarter under our belt on the West Coast performance from last quarter, did the team learn anything new about what contributed to the result last quarter, sort of a postmortem sort of analysis?

No, not really. No. It was unexpected. We just -- in our playbook, we have [been dealing with] with the company for many years. We just came in and make sure that we are doing just the fundamentals that both [affirm] in terms of pipeline development, closing, enablement, time management, and it works exactly as we expected.

Got it. Got it. Maybe for my follow-up for you, Guy. Obviously, the quarter is very clear and it's still early to talk about specifically about 2019. But of course, we're all in the planning process. So the, I guess the question is, with the hiccup that we had in the West Coast last quarter and with maybe the differing views that the market has on the overall macro going into next year, the question is how do you balance some of those things with the secular growth that you have in your market, again, as you start to plan for next year?

Hi, Saket. So first of all, we have Q4 ahead of us. So we'll talk about 2019 after Q4. But we do feel very strong about the market. I think the West Coast performed very well, and we were very happy and we weren't surprised with that. And we're just -- more customers want to buy more and more licenses, and we see that all the time.

The next question is from the line of Matt Hedberg with RBC.

Yaki, congrats on getting the West Coast back on track. I wanted to dig down into that market a little bit more, I guess the U.S. in particular. Can you talk about just how the federal vertical did this quarter and just kind of how the overall momentum feels? I know it's still kind of early for you guys, but just a little more commentary there would be helpful.

Yes, so federal could have done better, and the growth driver was our regular commercial business. In terms of the long-term expectation from the federal market is unchanged. We just started to invest in the market 2 years ago and to build the pipeline, build on the programs, do the certification. So it's just the early innings. But just a commercial business in North America worked very well, and I'm just telling you what I -- what I'm saying for years. With this business, you need to take a multi-quarter view.

That's great. And then it's great to see the number of customers with 2 or actually 3 or more products. I think they were at an all-time high. You mentioned upsells were strong. I guess digging into that a little bit more specifically, are you guys doing anything to improve the overall sales motion? And I think I've asked this in the past, but are you getting more customers asking for more ELA-type contracts that want to consume even more Varonis?

At this point, not ELAs, but we really see that what we are doing in data protection works extremely well and also on the cybersecurity. Definitely, 365 and the cloud, Azure compute works extremely well for us. So there are very, very strong building blocks and a very deep and broad value proposition. We can spend more time with our customers, and we can really take them for this journey of value. So the way that they're using the product, the way that they are getting the value, our effort economy, if you will, how much time we spend with them and what is the result is becoming, with time, more predictable. And it makes sense to spend more time with larger customers.

The next question comes from the line of Alex Henderson with Needham & Company.

Just a quick one. Can you give us the headcount? And I guess as you're starting to see the number of accounts buying 2 or more getting close to 100% or approaching it, are you going to start to add 4 or more or something of that sort to the list? My primary question though is really on the Canadian -- I mean, the European business. So obviously, it slowed down quite a bit from 60% growth rate last quarter. I assume that that's primarily a reflection of: a, a strong 2Q; and b, the summer pattern of vacations in Europe. But could you talk a little bit about what transpired there? Because I would have expected that to be a little bit on the plus side?

Hi, Alex. It's exactly as you said. We always need a multi-quarter view. And with a very strong Q2 and the summer, that can make the European business a bit unpredictable. We saw these growth rates. But 40-ish, 45% growth in Europe, the business is very strong. We have good teams, good coverage. We see good demand across the board, and we believe we can do very well in this market.

And Alex, just to address that -- sorry, go ahead.

But is the 45% kind of the rate that you would expect as we're looking into the fourth quarter? Or do you [expect it to be something]…

No. No. The guidance is -- the way that we guided, I just said that we are at 45% year-to-date, and you always need to take multi-quarter view. You can't analyze the business on a quarter-by-quarter basis, and we just feel comfortable overall about the European business and believe that it will do well.

And Alex, just to answer your first 2 questions, we ended the quarter with 1,386 employees. And in regards to the number of customers buying 2 or more products and 3 or more products, this is the first year we actually added the 3 or more products. So we have provided more color because -- not only the change with DatAlert and the Edge, but we have provided more color to investors and analysts and providing -- and basically showing how customers are buying more and more products from us. So the fact that we've gone up to 72% from 68% last year on the 2 and more products and 39% from 34% in the 3 or more products is a great indication that we really see customers buying more and more products from us, and we're very happy with that.

Next question is from the line of Gur Talpaz with Stifel.

You talked about a pipeline for a broader suite of products heading into 2019. With that in mind, can you give us some high-level indication about where you plan on taking the portfolio? Should we expect more in the way of cybersecurity products like Varonis Edge? Or how are you thinking about the evolution of the business and the suite of solutions heading into next year?

Just constantly expanding on the building blocks of the value proposition. Cybersecurity is one of them. And I think that we are doing things that are extremely innovative and very, very unique and everything that's related to insider threat and APT and also the way that we are doing enriched conclusive forensics. This is something that works very well for us and we can add a lot of strings there on the data protection, automation and reporting and a lot of effective remediation. And obviously, the cloud. So there are just -- there is a lot to do, and we see a lot of pipeline and we believe that there is, in terms of innovation, more ahead of us than behind us.

That's helpful. And then Guy, you talked about selling more licenses and improving renewal rates. How much of this would you attribute to sort of the push upstream into customers with more than 1,000 employees versus just better understanding of your value prop generally across the installed base?

Hi, Gur. I think we see customers across all sizes buying more licenses. I think it's really an indication of the market and how there's a problem that we are there to solve. So we really -- our focus on customers with more than 1,000 employees has helped us with not only generating large initial commitments, but also in the customer lifetime value. And that's been working very well, but we see more licenses across the board.

And in terms of -- Gur, in terms of the overall economics of the deal and the customer lifetime value, it just makes more sense to spend more time with them. As we spend more time and this solution becoming more mainstream and budgeted and broad-level problem, we know that if we're doing the right thing, we have a higher probability that budget will come towards us. And then we can also have the right -- the coverage model that will support this sales motion. But again, for us, large customers with 1,000 users and above, in terms of number of customers, we're talking about tremendous available market.

The next question is from the line of John DiFucci from Jefferies.

I have a question for Yaki and then maybe a follow-up for Guy. Yaki, you talked about the cloud more recently, and I know you're agnostic to where Varonis is deployed. But can you talk about what you're seeing out there as far as your deployments in cloud-based environments or in hybrid cloud environments? Are you seeing any shifting happening in your customer base? Is there any change at all right now?

Hi, John. No, we see -- definitely we see more adoption for the cloud, 365 and Azure that works very well for us. You see we have now Box support. So you see this repository. Unstructured data still primarily is growing and resides on-premises. But with Active Directory and Azure AD and everything that we are doing now with DNS and proxies and VPN and geolocation, the cloud is extremely relevant for us. In terms of customers, we are agnostic. We see some customers running our main servers, their IDU in AWS, I mean, Azure and some on-prem. It's just more data repositories, more workload, more infrastructure, more complexity with the regular use of the [taxing form] everywhere and DevOps just creating a better opportunity for Varonis.

Okay. Okay. Great. So that's good to hear. You don't care where it is. You're going to be there. I guess for Guy, listen, these results, it is nice to see a nice bounce back here and they're strong across the board. And I don't want to nitpick too much. But looking at cash flow, because that's going to drive your valuation over the long term, was a bit below our expectations. And I guess when I look at it and I see a big uptick, usually you get an uptick in accounts receivables, but this is a really big uptick in accounts receivables. Can you talk a little bit about that? And I guess, I would assume that we'll see that benefit cash flow next quarter because you'll collect those receivables?

Hi, John. So I'll get those 2 points. From a DSO perspective, our DSO was lower in Q3 2017. And when you look at the cash flow from operations over the last 9 months, the numbers that we have for 2018 are greater and we've seen a nice improvement compared to last year. So obviously, there's some timing issues from one quarter to the other. But the overall trend, and if you take the multi-quarter view, we've seen great improvement on the cash flow and we continue -- and we plan to continue to show improvements on the cash flow as we continue to grow the business and show the non-GAAP operating margin leverage.

Okay. Well -- and we do look at it over time. But is it accurate for me to think about collecting those receivables, that bigger jump this quarter, within the next quarter or so?

Well, just to give you some colors. If you remember, our strongest collection quarter for the year is Q1. And the reality is that, that Q4 is still a good collection quarter. So we expect to continue to show improved cash flow from operations for the year should be at better levels from 2017. And again, there is some timing from one quarter to the other.

The next question comes from the line of Melissa Gorham Franchi with Morgan Stanley.

I just wanted to follow up on EMEA. So I appreciate the lumpiness and the difficult comparable, but I want to know to what extent GDPR is driving conversations. Obviously, that's something that is probably material in that region. But just wondering if there was a change in the quarter, if it's becoming more relevant in the conversations over the past few quarters, and then if you're comfortable with the level of investment that you've put in that region or do you feel like you need to ramp up investment.

Hi, Melissa. No, we feel comfortable with the -- overall with the level of investment. GDPR is definitely front and center in terms of the conversation and the criticality of data protection and cybersecurity and incident response. It's definitely driving a lot of awareness. But for us, it's like a very effective marketing campaign. I think overall in EMEA, there is a good awareness for data protection, for cybersecurity, for privacy, and the overall condition for a solution like ours are very good and we believe that it will be the situation for a long time.

Okay. That's helpful. And then I just wanted to follow up on the sales force efficiency. So naturally, you're going to get some leverage as more of the business comes through the existing base. But I'm wondering if you're seeing better leverage in new customer acquisition just as you're getting greater scale and you're becoming more well-known in the marketplace?

Definitely we have more reps in the productivity curve. The brand is known. The problem is known. So gradually, as you can see, we get nice productivity gains. But it's just, I think, exactly the way that we explained that we are investing in the business, and we believe that it will grow and gradually will improve overall margins. So this is what we are doing. And as the company becomes bigger and more reps are in the productivity cycle and we have more customers willing to buy more, we see gradual productivity improvement in the sales [force].

The next question is from the line of Shaul Eyal with Oppenheimer.

Yaki, we understand the focus on companies with greater than 1,000 employees. Thank you for this incremental color and examples in your prepared remarks. Can you also share with us, talk to us about the high-end enterprise and dynamics around this segment and as it relates specifically to Varonis?

It's definitely a segment that we are attacking with outstanding, very large enterprises, but it's still a relatively high-volume business. We just want to make sure that we are benefiting from the market size in terms of units of economics, and we can do very nice deals and very impressive customer lifetime value with these customers within 1,000 to 10,000 customers and that's it. So the focus is all over. We just -- the sales force slowly but surely becoming bigger and we have the right coverage. And so we just want to make sure that we are covering all the segments of the market in the right way, but we don't want to put too much resources on parts of -- because we can sell to everybody -- on parts of the market that the economics doesn't make sense. So we just want to make sure that we'll have enough volume, we can cater to the customer, give them enough attention, take them through what we call the journey of value and make sure that they will use the product in the right way, that we'll go with them to the cloud, that we'll address all the regulation and compliance needs that they have. And need to cater as well to very large enterprises and also to 1,000-plus. But we are doing a lot of our revenues in the 1,000 to 15,000 user shop. And this is overall, when we are talking about multi-quarter view, what makes this business over several quarters very predictable and very doable.

Understood. Understood. And anything new to update us on the boring, yet I've got to ask, the competitive landscape? Any newcomers, privates, start-ups? Some of the big guys attempting to take a stab at the market you guys are addressing and products that are...

Traditionally, the competitive situation is the same. David and team analyzing diligently all the competitive situation and where we see them. And from overall evaluations, we see even less competition than ever. And if we are selling well over 90% of our deals via POC and evaluation. And if we are eval-ing on a lot of data, we are almost always alone. So in terms of the competitive landscape, it's better than ever in the presence of other competitors or ankle biters in the -- in any of our sales campaign.

Next question is from the line of Chad Bennett with Craig-Hallum.

So maybe for Yaki, so if you think about the strategy towards 1,000-plus employee enterprises and in conjunction with that, kind of growing products per enterprise or per customer, if we think about those 2 metrics and the customers that fit in that bucket, when you look at the customers that are at 3-plus, 4-plus, 5-plus products and maybe they're 2,000-plus employee type customers, are you being asked to be part of a broader security solution at that point? And I guess what I mean, are you integrating with other security vendors? And maybe in particular, are you asked to -- particularly, the data that you guys get and gather, which I think is really valuable, are you asking to kind of feed that into any other systems?

Yes, we're definitely integrating with many solutions as many as we can. And we feed our alerts to same systems and working with identity and access management, working with the discovery solutions. There is just a lot that is going on in terms of our integration with other security solution, and we want to make sure that for our customers, our customers 1 plus 1 will -- equals 3. So any time that we get there, one of the things that works very well for us is that we are coming in and with the cybersecurity and classification and the data protection will make some of the previous investments and sometimes investment that is hard for them to realize so much more productive. So yes, it's definitely one of the things that we are doing. We want to make sure that our customers will utilize their other solutions better and that the whole ecosystem will work together well.

Okay. Great. And then maybe a quick follow-up for Guy. Guy, as you look at the December quarter updated guidance that you gave, I wouldn't believe this was the case, but are you thinking about the seasonality into the end of the year any differently heading into this year versus last year? And maybe talk about any drivers or incremental drivers this year that you didn't have last year?

Our philosophy on guidance hasn't changed. And when you look at the guidance that we provided, the fact that we not only beat but also raised for the full year is an indication of how strong we feel going into the quarter. But in terms of the philosophy, we're kind of guiding in the same way, the same manner. I think we feel very strong about the business, and the results and the guidance is an indication of that.

The next question is from the line of Daniel Ives with Wedbush Securities.

My question is in regards to sales force and just feet on the street partners. How are you looking about ramping that up, especially in Europe just given some of the strength you've seen on GDPR?

Can you repeat the question?

Can you repeat the question?

Yes, in terms of increasing your feet on the street as well as partnerships in Europe, just given the strength that you're seeing there, how are you thinking about that over the next 6 to 12 months?

We always -- the market is so big, and virtually, we can sell to everybody. The key for us is -- it's a proprietary sales force. We really work almost from first [principles], and we have a unique sales motion and you need to understand how to explain and demonstrate the value proposition. So the way that we are increasing the sales capacity is just in the right way that we can [suggest to] people, we can really cater -- enable them and give them the right management with the right account. The market is so big. We can have a large sales force, but we really need to make sure that we are doing it in the right way. So for us, it's not the market demand or the market size is not the problem in the way that we are bringing people in. We just want to bring them in responsibly, that we can enable them, make sure that they we will be successful and make sure that we are serving our customers in the right way and also gradually improving their margins. So this is the leading indicators, not market conditions or market size.

Got you. And just to follow up, just given the West Coast bounce back, is there anything that you've done now definitely looking ahead to make sure in your pipeline process, sales process, that those things that you could control, that there's not maybe going to be a speed bump on the horizon? Anything that you've instituted on this just impressive sort of bounce back?

It's a business. You will always have some kind of speed bumps, but this is why we say that you always need to have a multi-quarter view. If you have a multi-quarter view, everything works very well. So we have very strong sales leaders within the company and many that are with us for a long time. And for us, it wasn't a surprise. If there was a problem, we are coming with a playbook. We have a lot of management capacity. We can inject the right people in place. They will give air cover and also, when needed, will be in the trenches and make sure that the team will be successful. The business is very doable. If you look from the time we went public, you see that the business is very doable. If there is any issues, usually we are bouncing back fast. I really think that we are good operators and we know how to tackle problems and solve them systematically. And this is what you saw here. Sometimes we'll have problems. Just -- business is a living organism, but we have a very good immune system most times and we know how to tackle it fast. And this is why we are saying, always have a multi-quarter view. And in multi-quarter view, I don't think that we have a problem.

The next question is from the line of Erik Suppiger with JMP Securities.

So your new customer license revenue was under 50%. I presume that's because you're targeting larger customers. Can you comment on what that shift is doing in terms of your sales cycle? And do you expect the new customer licensing revenue to remain below 50%?

I think that it will move from time to time. So much depend -- customers are buying and then deploying and there is different level of usage for cybersecurity, for remediation, for classification. Thankfully, the platform is doing very well, and we just did -- the new customers are very important for us and the land and expand, absolutely, is very important for us. And it's just a balance, and this is also can fluctuate from quarter-to-quarter. But the 2 growth drivers are very important for us.

Just to add on that though, the license from existing customers, over time, we expect that percentage to continue and increase. I think last quarter one of the questions that we got was why is the license and first year maintenance from new customers, why did that kind of go up? And we said take a multi-quarter view. And as you can see in this quarter, license and first year maintenance from existing customers continue the trend. Like Yaki said, we're very focused on both the new customers and the existing, and I think we're doing a very good job on both.

Well, then can you just comment, exclusive of the new versus existing customers, can you comment on how the focus on larger accounts is affecting the sales cycle? Has it made any difference in terms of the length of the sales cycle?

We haven't seen any change on the sales cycle, and our focus on companies with more than 1,000 employees, the strategy has been working very well.

The next question is from the line of Mark Schappel with The Benchmark Company.

Just one question, Yaki, to you. With respect to your earlier comments on your federal business that it could have done better, could you just go into some of the challenges that you're seeing in your federal sector? I know it's relatively new. But still, is it more or less an educational sales still in the federal sector unlike the commercial sector?

No, it's not educational. We definitely had several wins that validated that they need the product, they need all the products and we can have very nice deals. It's just to make sure that we have kind of more maturity and we're all in the programs and moving the business along. But it's just at this point, it is small and it's not like a material growth driver for us. But we believe that with time, there are all the indicators that it should be a very good business.

Next question is from the line of Rishi Jaluria with D.A. Davidson.

Yaki, I wanted to touch on the integration that's upcoming that you announced with Box. Just wondering if you could dive a little bit more into that. Is that something that you got feedback from customers as a functionality that they wanted? And what does the sort of customer overlap between you and Box tend to look like? And then I've got a follow-up.

It's another repository that some of our customers use. And there's -- as time will go by, we want to -- anything that's starting to be commercially viable and we see that enterprise is putting data there, we want to make sure that we are protecting it. We want to make sure that we're taking security telemetries and we can classify the data. This is just another repository. So we saw -- definitely, we saw enough customers saying that there is a need, and we are catering to this need.

Okay. Great. That's helpful. And then Yaki, again, for you. You mentioned ramping up or increasing spending in research and development, and you mentioned cloud was one area. I was just wondering if you could expand about specifically, is that just having it built in -- having more integrations like the Box one and having more hookups with cloud infrastructure and cloud application or is it something else? What's the right way to think about what the priority and product development on the cloud side looks like?

I can't provide all the details, but it's everything. The cloud is here. The cloud is real. There are a lot of data repositories. Definitely, infrastructure, the world is completely hybrid. And data protection, cybersecurity and classification are big pain points for this new brave world, and we believe that we can capitalize them.

We have reached the end of our question-and-answer session. I will now turn the floor back to management for closing remarks.

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

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