Greetings. Welcome to Varonis Systems' Third Quarter 2020 Earnings Call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to your host, James Arestia, Director of Investor Relations. Thank you. You may begin.

Thank you, operator. Good afternoon. Thank you for joining us today to review Varonis' third quarter 2020 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 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 ending December 31, 2020. Due to a number of factors, actual results may differ materially from those set forth in such statements. These factors are set forth 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 application or undertaking to release publicly any updates or revisions to any forward-looking statements made herein. Additionally, non-GAAP financial measures will be discussed on this conference call, which excludes stock-based compensation and associated payroll tax, FX gains and losses and the amortization of debt discount and issuance costs related to our convertible notes issuance in May. A reconciliation for the most directly comparable GAAP financial measures is also available in our third quarter 2020 earnings press release, which can be found at www.varonis.com in the Investor Relations section. Also, please note that an updated investor presentation, as well as a webcast of today's call, are 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. Thank you for joining us to discuss our third quarter 2020 results. We're extremely pleased with our results and I want to give you an update on our business in the current operating environment, and talk about how we expect the market trends we are seeing to continue to benefit Varonis over time. I'm also excited to announce our agreement to acquire Polyrize and explain how it will expand the Varonis Data Security Platform to cover additional cloud applications and infrastructure. Finally, I will turn the call over to Guy to discuss our third quarter financial results in more detail. The team continues to execute well in this virtual environment. With significant customer engagement and inbound interest, companies understand that the elevated risk they face in a work-from-home world is here to stay. Sensitive and regulated data is more exposed than ever before. Remote employees use unsecured computers to access critical data in Teams, Office 365 and on-premises via VPN. Companies face an ever-increasing number of advanced persistent threats from external bad actors and hackers who seek vulnerable targets. At the same time, insider threats are growing as our customers report a higher number of alerts warning of employees accessing sensitive data in abnormal ways. Our ability to address this risk is unmatched and our platform continues to resonate with new customers who are buying more licenses in their initial purchase and with existing customers who consume more licenses over time. We all understand that a data-centric approach to security is critical. As a result, we continue to take greater share of the available security spend. The path to double-digit licenses per customer has never been clearer. And I want to highlight three important wins in Q3 that demonstrate the enormous opportunity in front of us. One example of a large initial commitment by a new customer is a U.S. hospital that purchased 10 licenses in their initial deal. During the onset of COVID, they experienced a huge increase in targeted phishing attacks and our assessments successfully demonstrated our ability to address the risks inherent in the hybrid environment: The Varonis deployment, including DatAdvantage and Data Classification for multiple on-premises and cloud platforms, as well as DatAlert. We are also pleased with the performance of our federal business this quarter. For example, a government agency with thousands of users became a Varonis customer after they discovered sensitive PII was open to every employee for months—a material vulnerability. This was a key driver in the purchase of a subscription for 12 licenses they are deploying enterprise-wide to identify PII, remediate overexposed permissions and stop exfiltration of sensitive data across on-premises data centers and Office 365. In most instances, these new customers were able to quickly realize the value of our platform, which results in greater lifetime values through healthy renewals and future license upsells and cross-sell. We also know that we remain significantly underpenetrated within the existing customer base. The team is focused on closing expansion opportunities with those customers so they see even more value from our platform. A good example of this in Q3 was a large technology company that initially purchased four licenses in December of 2019 to protect their on-premises data stores. They had a multiyear plan to move to Office 365 but this was accelerated due to COVID. During the risk assessment, DatAlert also caught a brute force attack, which was resolved by our incident response team. Knowing Varonis would meet their needs, they purchased a subscription for seven additional licenses and they now have a total of 11 licenses to protect their data and alert them on threats in Office 365. All of these examples illustrate the strong adoption and customer engagement trends that, combined with a healthy pipeline, leave us well-positioned for a strong close to 2020 and beyond. We know that our continued innovation will further differentiate our platform. And we are very excited about the acquisition of Polyrize. Polyrize is our first acquisition, and we believe that their technology fits nicely in our strategy to follow the data, to accelerate product development and reduce time to market in the cloud applications they support. Their software maps and analyzes the relationship between users and data in a number of cloud data stores, including Google Suite, Salesforce, Okta, GitHub, Slack, Amazon S3 and others. We plan to incorporate these capabilities into our platform, thereby allowing us to introduce new licenses, which in turn will expand our addressable market. We've seen tremendous momentum with Office 365 and Azure, and we believe expanding to other data stores in the cloud addresses a growing pain point for customers, allowing us to offer a more unified view of the organization's security posture. Polyrize is based in Israel, and we are happy to have them join the Varonis family. As we said last quarter, we believe that the current environment has cemented the need for our platform. We know that continued innovation and execution are critical. This is where we are focused as we close 2020 and capitalize on the long-term opportunity in front of us. With that, let me turn the call over to Guy. Guy?

Thanks, Yaki. Good afternoon, everyone. Thank you for joining us today. I hope you and your families are safe and healthy. We had a strong third quarter; the subscription transition is finished. Our results demonstrate that the demand for our platform combined with the power of the subscription model is accelerating revenue growth and driving operating leverage. With that, let's discuss the quarter. To remind you, our focus as we manage the business is threefold. First, landing new enterprise customers; second, expanding with existing customers; and finally, strong renewals of both subscription and maintenance of perpetual licenses. On the new customer front, we continue to see the average number of licenses on the initial purchase be more than 5 compared to the 2 to 3 licenses customers bought under the perpetual model. This trend is resulting in greater lifetime value through healthy renewals and future license upsells. Specifically, as of September 30th, 60% of our customers with 500 employees or more purchased 4 or more licenses, up from 50% a year ago, while 26% of our customers purchased 6 or more licenses, up from 17% a year ago. The rapid growth in these metrics underscores the logic behind our transition and is another confirmation that we are unleashing the potential of our platform, which is also reflected in ARR of $261.1 million, a 46% increase as of the end of Q3. At the same time, renewal rates of maintenance of perpetual licenses continued to be above 90%. As a result, more than 98% of our Q3 revenues were recurring in nature, which provides visibility into future revenues. Turning now to our third quarter results. Total revenues grew 17% to $76.8 million and included a 99% subscription mix compared to 74% a year ago, and was well ahead of the midpoint of our revenue guidance of 6% growth. Subscription revenues grew 89% year-over-year, and were $44.1 million. Maintenance and services revenues were $32.3 million and reflect the strong renewal rates I just referenced. Looking at the business geographically, North America revenues grew 21% to $57.1 million, or 74% of total revenues. In EMEA, revenues grew 7% to $17.8 million, representing 23% of total revenue. Rest of world revenues were $1.8 million, or 2% of total revenues. Turning back to the income statement, I'll be discussing non-GAAP results going forward. Gross profit for the third quarter was $67 million, representing a gross margin of 87.2% compared to 87.6% in the third quarter of 2019. Operating expenses in the third quarter totaled $63.9 million. Operating income was $3.1 million on an operating margin of 4% for the third quarter, compared to an operating loss of $4.7 million on an operating margin of negative 7.2% in the same period last year. Our Q3 operating margin was again well ahead of our guidance, which was negative 4% at the midpoint. During the quarter, we benefited from a meaningful outperformance on the top-line driven by larger new customer adoption and existing customer expansion, COVID-related cost savings primarily due to travel and marketing activities, and continued prudent management of expenses across the business. Looking ahead, we do expect both employee travel and in-person marketing events to gradually resume and we will continue to invest responsibly to support the growth of the business. During the quarter, we had financial expense of approximately $733,000 primarily due to interest expense on our convertible notes partially offset by interest income. Net income was $2.1 million for the third quarter of 2020, or earnings of $0.06 per diluted share, compared to a net loss of $4.8 million, or a loss of $0.16 per basic and diluted share for the third quarter of 2019. This is based on the 35.4 million diluted shares outstanding for Q3 2020 and 30.4 million basic and diluted shares outstanding for Q3 2019. We ended the quarter with $325.6 million in cash and cash equivalents, marketable securities and short-term deposits. For the three months ended September 30, 2020, we used $2.7 million of cash from operations compared to using $13.6 million of cash from operations in the same period last year. We ended the quarter with 1,629 employees, an 8% increase from the third quarter of 2019 and an increase of 55 net new employees from the second quarter of 2020. As we have said, we expect to continue hiring to support the growth of the business with a particular focus on sales and R&D. Before I discuss guidance, I want to welcome the Polyrize team to Varonis. We are excited about the potential of their technology and are working to integrate their capabilities into our platform. In Q4 2020, and for fiscal 2021, we do not expect the acquisition will contribute revenues, ARR or any material expenses. Moving to guidance for the fourth quarter of 2020. We expect total revenues of $82 million to $85 million. We expect non-GAAP operating income to range between $5 million to $6 million and non-GAAP net income per diluted share in the range of $0.10 to $0.13. This assumes 35.4 million diluted shares outstanding. Let me provide a bit more color on guidance before we open for Q&A. First, similar to last quarter, the low end of our guidance again considers the possibility of broader macroeconomic volatility for the foreseeable future, given the potential direct and indirect effects of COVID. Second, we will continue to be thoughtful in the rate and pace of our investments and we'll balance investing for growth with our plan to show non-GAAP operating margin expansion and cash flow generation. Third, I want to remind everyone that the subscription mix in Q4 will be more apples-to-apples, as this was 82% in Q4 2019. As a result, ARR percentage growth will naturally be impacted. In summary, we're pleased with the third quarter, which further demonstrates the demand for our platform and the power of the subscription model at an increasingly larger scale. Thanks for joining us today. We hope you and your loved ones remain safe and healthy. With that, we will be happy to take questions. Operator?

Thank you. Our first question is from Saket Kalia with Barclays.

Hey, guys. It's Saket Kalia from Barclays. Yaki, maybe first for you. You've talked a lot about multiple licenses per customer as part of both subscription licensing and just a heightened security environment post COVID. Can you just maybe speak anecdotally about product usage from some of these multi-product customers? And are you finding that usage is sort of following that greater adoption? Does that make sense?

Yes, it makes complete sense, and it's a great question. Definitely, we see there is correlation between the amount of products that customers have and how much value they get and their ability to buy more. It really works very well for us. I think that what we see in the marketplace is that slowly but surely customers understand that this approach of data-first is the right approach for security. In the three use cases that we are catering to—data protection, threat detection and response, and compliance and privacy—we see a lot of automation: automation in classifying the data, automation in remediation, in visibility and in forensics, and the ability to identify abnormal behavior and to have high-fidelity alerts. So one thing we see is much more usage within the customer—and by usage I mean automated usage. They don't need to spend a lot of time and they get a lot of ongoing value. We are more and more integrated within their day-to-day processes, and they are buying more. This has also worked extremely well for us in the cloud and Office 365 and Azure has been tremendous for the business. We can spend more time with our customers, and they are just buying more. So the overall model is working, the move to subscription really supported it, and customers can buy more licenses; the business becomes more predictable and the value and the predictability for customers and the ability for them to buy more is really working very well.

Got it. That's really helpful. Guy, maybe for my follow-up for you. You noted the subscription transition here is largely complete, particularly on the top-line. Could you maybe talk about anything that we should be thinking about regarding the margin trajectory here as more of the business becomes recurring?

Absolutely. So first of all, we're extremely pleased with the Q3 results. And as you mentioned, Q3 has a larger portion of renewals that get into place, and that obviously helps with the margins. Our philosophy really hasn't changed. We want to continue to invest. There's obviously a significant opportunity ahead of us in the market, and we want to capitalize on that. So we'll keep investing in R&D since we've seen such a tremendous ROI there. At the same time, we want to show year-over-year margin expansion, and we plan to balance between the top-line growth and bringing some of it to the bottom-line.

And Saket, we are going to do it gradually. We're trying to do everything that we said. But remember, we are always following the data. When you have more platforms that meet the use cases that we are catering to, there is just tremendous opportunity. This is what we see now with COVID, really with the cloud adoption and all these security threats that we are uniquely solving for. We are going to balance it, but we believe that we have a great future, and a lot of it is through predictable innovation, doing the same to other platforms, and we are going to capitalize on the opportunity while being very mindful of margin.

Our next question is from Sterling Auty with JPMorgan. Please proceed.

So I think one of the big questions on investors' minds going into these earnings across all software companies is the ability to attract new customers. You mentioned your ability to sell more into those new customers. But I'm just kind of curious, what you saw in terms of pipeline generation, close rates and the typical metrics around bringing new customers in, beyond just being able to sell more to them with each deal you did?

We saw strong ability to build pipeline, and this COVID environment was very favorable. All the demand generation channels are working very well for us. The market is very attentive. We also see that we have very good ability to attract new customers in the right size. We are going upmarket to customers of the right size, but we also need to balance it because we have a tremendous customer base that is untapped and that fits many of our products. With the transition to subscription, we were able to unlock the potential of the platform and prospects need more and more from our products. It makes sense for us to spend more time with our customers. So, on both ends—acquiring new customers and gaining share in the market—but also making sure that our customers are using the product and buying more because it's correlated one-to-one: when they have more licenses, they get more automation and more value. In Varonis, it's really 1 plus 1 equals 5. So the model works very well.

I appreciate that. I think that definitely hits the question. Just one follow-up on the acquisition. Can you give us a little bit more color, maybe number of employees and exactly the technology, I wasn't 100% clear, what it actually brings to the table that Varonis doesn't already do within the platform?

I talked about the technology and the market. We see tremendous momentum with Office 365 and Azure, primarily related to adoption. We built the technology and organizations are adopting the cloud, which has worked very well for our three use cases. We're starting to see adoption of other cloud applications and infrastructure. The cloud is a massive opportunity for us. Part of our roadmap was to apply everything we do to any place that has users and data and infrastructure elements so you can understand permissions and activity. This acquisition drastically accelerates time to market. Polyrize has the ability to connect to many cloud platforms quickly and provide permission modeling and event collection. So we can take this technology and go wide and deep into the cloud for Salesforce, Google, Box that we already support, and obviously AWS S3 and GitHub. You are starting to see many users with critical data in these stores. What we do on-premises and with Office 365 and core infrastructure in the cloud can work very well there. We really believe it increases the overall addressable market and it's a natural fit for us; we are very excited.

And just to add on that, one of the things that I mentioned in the prepared remarks, apart from being very excited about the technology and the potential, this is a technological tuck-in. So we don't expect any contribution from a revenue perspective in Q4 or 2021. But we are very happy to welcome the Polyrize team to the Varonis family.

Our next question is from Brent Thill with Jefferies. Please proceed.

Just on the demand environment, I'm curious if you could just help us color what Q3 kind of looked like in Q2? There's been some concern that maybe we saw an initial surge from the work-from-home, now we're moving to the work from anywhere. What are you seeing in terms of overall demand trends and the signs that are leaving you comfortable that this isn't just a short-term burst?

For us, we never benefited from anything short-term; we are benefiting from long-term secular trends. This approach of data-first is something organizations increasingly understand. In terms of demand and our ability to close business, it worked better and better as the year progressed, and we hope that it will continue. We believe that slowly and surely it's becoming a standard. If you have a modern enterprise and you want to protect your data in your core infrastructure, you need Varonis for data protection, for forensics and for sophisticated alerts to classify data, for privacy and for compliance requirements. We believe every day it becomes more standard, and demand has improved as the year progressed.

To add some data points, when we look at the three pillars: new customers buying more than five licenses under subscription versus 2 to 3 under perpetual is a great indication and has been consistent. We're very happy with that. Renewal rates are strong, and existing customers are buying more. The KPI of companies with more than 500 employees that purchased 4 or more licenses increasing from 50% last year to 60% this year, and 6-plus licenses from 17% to 26% shows how much more we can sell to the base and that we're truly selling the platform.

That's great. And just a quick follow-up. In the 26% that are buying 6 or more, is there one or two modules that are standing out? Which ones are showing the bigger uptick?

It's all of them. Office 365 and Azure are exploding, but it's everything and it's all about automation. Automation across our three use cases drives value and customers buy more licenses and keep buying more. That's the key for us. If we get customers to four or five licenses, they usually progress to many more.

Our next question is from Matt Hedberg with RBC Capital Markets. Please proceed.

Yaki, it was really good to hear. I think you started out the script saying significant inbound interest. I know you talk a lot about Office 365 and Azure but I'm wondering if you can talk more specifically about Teams, in particular. We continue to think and hear from some channel context that Teams is driving a lot of deals, pulling you guys into deals maybe at an accelerating rate. I'm wondering if you can talk specifically about Teams and then also support of other collaboration tools like Slack and Atlassian?

At the end of the day there's tension between productivity and security, mainly with data protection. Teams is a client on top of OneDrive and SharePoint Online, using Exchange Online; it's widely used and generates a tremendous amount of content in the hands of end users. You also have on-premises exploding. So data is all over the place. This is why we did the acquisition: we see adoption across many data stores and collaboration tools that contain critical data where we can add a lot of value. There's value in GitHub and massive volume in S3. What we do to on-premises repositories and in Office 365 and core cloud infrastructure we can extend to many more platforms—we're following the data. This digital transformation to the cloud is opening a tremendous opportunity for Varonis and will change the security landscape toward a data-first approach, where we expect to benefit significantly.

That's great. And then maybe as a follow-up, another thing that I picked up that you mentioned, federal did well. I know that's been an issue for you guys for years, and you've been making steady progress, but it's really good to hear you guys call that out with the large government agency this quarter. I'm curious, can you talk a little bit more about what's driving that federal interest today? Is there anything that's changed in that environment? And maybe just any sense on how penetrated you guys are from a federal perspective on a vertical basis?

Federal had a good quarter and North America overall was outstanding. We have a very capable team in federal. There is a lot of critical unstructured data in federal environments, and we are extremely relevant, but we are in the early innings. We believe we can build a significant business there—it's a big opportunity for us.

Our next question is from Rob Owens with Piper Sandler. Please proceed.

I was hoping you could touch a little bit more on Polyrize. I believe this is your first acquisition. Does this change your strategy a little bit where you will look for tuck-ins moving forward? I appreciate this accelerates time to market relative to the cloud opportunity. Is this something you'll be opportunistic on going forward or was this more of a one-off?

It depends on the opportunity. We're always looking at opportunities and want to do the right thing for the business. If we find the right opportunity that shortens time to market and brings value to the company, we'll do it. We're pragmatic; we're not dogmatic. This was a natural step.

To add, when we looked at acquisitions to date, they have been technological tuck-ins. This is the first acquisition and we expect any future acquisitions would also be technological tuck-ins.

And then second, hoping you could touch on Europe a little bit. I think you mentioned last quarter how Europe still lagged the transition, you were happy with the pipeline. If you look at the growth rate, though, it's still down in the single digits. So I was just hoping for an update on that front.

We grew 7% in EMEA. Remember Europe was about a six-month lag behind North America in adopting the subscription model, so the flywheel is not completely in motion. We have a very good team in Europe, great customers and channel partners. It's a huge market for us and we believe we will do very well there.

Our next question is from Shaul Eyal with Oppenheimer. Please proceed.

Yaki, another question on the Polyrize acquisition. It seems to be a nice strategic extension to everything you've been doing in recent years. If Varonis has 2-6 licenses under product families, how many modules is Polyrize adding to the mix? Is there a specific family they align with or is it a standalone new one?

It's both. We can run the same play of products we have to most of the data stores Polyrize supports. For some data stores we can do classifications; for others, you can't. Forensics and alerting can work for everyone. Data protection varies but they have very good coverage and it will add a lot of new content. How we package it for customers will ensure the economics work and it's easy for customers to buy. But yes, it adds a lot more content and new products.

To emphasize, the additional licenses from Polyrize cover platforms we don't currently cover. These licenses are in addition to existing Varonis licenses, which is part of why we see the TAM expanding with this acquisition.

Yaki or Guy, maybe also going back to the macro. Some countries, specifically in Europe, are heading into another round of lockdowns. Have you seen any ramp-up in demand or at least elevated interest in recent weeks that could replicate the incremental short-cycle we've seen back in April and May? Or do you think CISOs and CTOs feel comfortable with their current security infrastructures?

So far it's unknown, but so far what we see is very good demand overall.

Our next question is with Hamza Fodderwala. Please proceed.

This is Hamza Fodderwala from Morgan Stanley. Yaki, maybe the first question for you. I wanted to expand on the prior comments on longer-term demand, especially as we see more cloud and digital transformation. Are you having those conversations with customers already as they think about their security architectures longer term, moving to a more decentralized work environment? Are they starting to think about making those changes? How is Varonis fitting into that longer-term CISO conversation?

Customers understand it's all about the data and core infrastructure. We see more C-level conversations and they are not thinking in narrow terms—they're thinking strategically about where critical data is, what users are doing, and how to profile usage. Many organizations accelerated cloud adoption and now realize they need automation to manage these environments. When they realize what we do, we become more strategic. We're almost unique in this market; it's a big market and organizations are creating multi-year strategic plans around how they will deploy solutions like ours to cover all information states. We expect to benefit tremendously.

Our next question is from Jason Ader with William Blair. Please proceed.

I wanted to ask you about structured data. Today, you don't support structured data with your platform. Is that something on the roadmap? Do you think it's necessary or important for you to support structured data over time?

We are not discussing roadmap specifics, but we believe unstructured data is more exposed and is our primary focus. We do support semi-structured data in SharePoint and others, and in the cloud with API access we can perform our three use cases on many unstructured data stores. We'll address customer needs as they arise, especially if they align with our intellectual property and core strategy.

Quick follow-up, not related: I wanted to ask about data privacy and some of the new compliance mandates around the world. Are you seeing an increase in pipeline or interest in using Varonis for that type of use case?

We definitely see increased demand driven by regulation. Regulation and compliance are prompting boards and management to require robust data controls. Organizations realize they need automation and tooling to manage data across many systems. We benefit from cloud adoption, explosion of data, distributed repositories, and regulation—customers need to protect information or face serious consequences.

Our next question is from Gur Talpaz with Stifel. Please proceed.

Yaki, we've seen sharp growth in ransomware over the past several months. Have you seen this as a driver for the business? Have customers been pushing Varonis into more data stores because of this?

Yes, ransomware and other advanced persistent threats are a driver. Many are sophisticated APTs that bypass EDR and exfiltrate data before encrypting it or threatening release of data. This underscores the need for data protection, classification, forensics and active directory security, including Azure AD and our Edge product. Ransomware incidents highlight that customers often don't know there are threats inside their environment. The ransomware wave is effectively a strong signal to organizations—they now understand they need solutions like ours. Traditional security solutions are limited for this problem; customers need to be proactive and invest in data-centric controls, and we benefit from that.

That's helpful. Building on that, can you talk about demand for Varonis Edge, especially with users working from home and renewals coming up?

Work-from-home helps us because people access data over VPN, home computers and unsecured networks, increasing cyber risk. Cloud workloads and applications were opened quickly and may lack proper configurations. Many organizations realize they need solutions like Varonis. Customers often react quickly to incidents and then prioritize long-term controls. Over time, we become a higher priority as organizations realize protecting information products is essential—the data is the lifeblood of the business.

Our next question is from Chad Bennett with Craig-Hallum. Please proceed.

Guy, did you speak about net expansion or net retention (NRR) numbers on the call?

We mentioned last quarter that we would provide net retention on an annual basis. To remind you, the number we had last quarter was greater than 120%. We're extremely happy with Q3 numbers and are seeing continued expansion within our base. We'll provide more color in the next quarter's earnings call.

Okay. Then on net new versus expansion: I know you haven't broken that out for a while. Has that mix changed dramatically over the last few quarters relative to historically from a bookings or ARR standpoint?

Strategically, over the last couple of years we have a much larger base and therefore expect a larger impact from existing customers. The cost of generating revenue from existing customers is lower for us, so that's in plan. We're also going up-market for new customers—getting the right new customers in place. The fact they're consuming the platform and buying more than five licenses indicates the path to double-digit licenses per customer has never been clearer. Everything is working as planned and we want to continue executing on that strategy.

Once customers moved to subscription, the company changed drastically. The market realized the platform's value, customers can consume more easily, and they began buying more. The strategy of land and expand and market penetration is working as planned. We became more strategic to both new and existing customers, and the output of our engagements has improved.

Just one last one. On initial deal license expansion, it's playing out like you thought and perhaps accelerated. Going from initially 2-3 to now more than 5 licenses, how would we compare and contrast initial deal size on a dollar basis or ASP? I don't need exact numbers, just relative to that license expansion.

When we look at expansion getting to more than five, that's actually better than we initially expected when planning the move to subscription. This is extremely encouraging and consistent over the last couple of quarters. We haven't spoken about ASPs in detail, but discount levels on new customers have stayed consistent, which shows we're not selling more licenses at higher discounts—pricing has remained firm while driving higher initial purchases.

Our next question is from Erik Suppiger with JMP Securities. Please proceed.

On Polyrize, can you comment when you would be introducing the products? It sounds like you said there won't be revenue in fiscal '21, but will you be introducing some new modules in '21? Also, how many people were at Polyrize?

Yes, we are working on the integration and will be working to introduce capabilities and licenses over time in 2021. We're committed to making this a successful acquisition.

In terms of headcount, Polyrize had fewer than 20 people. From a revenue perspective, we don't expect any contribution in Q4 or in 2021, but we're extremely excited about working with them and introducing additional platforms later on.

Okay. You've clearly been able to navigate the pandemic and COVID very effectively. What challenges has the pandemic posed? Are you finding logistics issues with working with companies that are remote? What challenges did you face, if any?

We have long experience working virtually with customers including remote deployments. Our management team has worked together for many years, so communication is efficient. COVID reduced travel, which had effects, but overall it cemented the need for a solution like Varonis. Digital transformation accelerated and Varonis benefits from that. There are challenges, but we have addressed them and seen a lot of success.

Our next question is from Joshua Tilton with Berenberg. Please proceed.

It seems the acquisition may result in more overlapping functionality with SailPoint. Is that the right way to think about it? If so, do you expect more competition with SailPoint in the future, especially as you move up-market?

No, that's not accurate. SailPoint is not a direct competitor in the way you might be thinking. The relationship between users and data is what we focus on: data protection, detection and response, and compliance needs related to data in core infrastructure. Polyrize is a natural fit to accelerate our cloud coverage. We don't see SailPoint as overlapping in a way that changes our competitive set materially.

Our next question is from Daniel Ives with Wedbush Securities. Please proceed.

When you think about hiring on the sales side over the next 6 to 12 months, without giving numbers, are you planning to accelerate hiring strategically given your success in the field?

When we discussed hiring plans after Q1, we planned to continue hiring on the sales front but held off in other departments until we saw how the market evolved. After Q2 results, we began hiring in other departments to take advantage of the opportunity. Q3 results reemphasize the opportunity. We will continue to hire in a measured way, balancing top-line and bottom-line, but expect hiring mostly in sales and marketing and R&D.

When is the webinar for how to successfully move to a subscription transition? Are you going to start at that date?

I'll send you the details again.

We have reached the end of our question-and-answer session. I would like to turn the conference back over to James for closing remarks.

So thank you all very much for your interest today. We hope everyone stays safe and healthy, and we look forward to speaking with everyone more this quarter. Have a good night, and thank you again.

Thank you. This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.