Greetings and welcome to the Varonis Systems, Inc. Fourth Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Operator Instructions. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, James Arestia, Director of Investor Relations. Thank you.

Thank you, operator. Good afternoon. Thank you for joining us today to review Varonis' fourth quarter and full year 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 first quarter and full year 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 expenses, payroll tax expense related to stock-based compensation, amortization of acquired intangible assets, acquisition related expenses, foreign exchange gains and losses, amortization of debt discount and issuance costs related to our convertible notes issued in May 2020 and acquisition related taxes. A reconciliation for the most directly comparable GAAP financial measures is also available in our fourth quarter and full year 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 fourth quarter 2020 results, which exceeded all expectations on both the top and bottom line. Our performance is a testament to the demand for the Varonis data security platform, the team's continued execution especially during this challenging time and the power of our subscription model. We are well-positioned to capitalize on the acceleration we are witnessing in global digital transformation and we believe it will make for an exciting 2021. I want to begin today by recapping our 2020 performance, and then discuss how the secular trends that organizations are experiencing today and that many are predicting to continue, provide Varonis a long-term opportunity to fulfill its mission of protecting sensitive data for our customers. I will then turn the call to Guy to discuss our results and guidance in more detail. Let's start by looking back on our performance over the last 12 months. When I spoke to you a year ago, we were completing what we believe was one of the fastest transitions to subscription in the history of software. But our momentum was interrupted in mid-March as COVID hit. Companies had to enable their employees to work-from-home almost overnight. However, once they had addressed employee safety and business continuity, companies quickly realized their remote workforce was more dependent than ever on access to sensitive data on-prem and in the cloud, exposing them to heightened risks. These risks don't only relate to working from home, but also to the reality of greater digital collaboration, which is here to stay. As a result, we started to see a significant uptick in the use of our platform by customers and our pipeline became stronger. From that point on, business improved each quarter. Our Q2 results were solid. Q3 further improved and our Q4 results were outstanding. With this upswing, we gained the momentum needed to exceed the high end of the full year 2020 revenue guidance we provided pre-COVID. I would like to now discuss how secular trends have accelerated, impacting our customers and creating strong demand for our product. The engine that is fueling the strength is digital transformation. Let's start there. Employees in every organization have been collaborating across multiple platforms for years, leading to more complexity and more exposed data. This is a given and will only continue increasing data risks and potentially stopping business globally. We have all seen the expansion accelerated on cloud applications like Microsoft 365 and Teams. The shift to the cloud highlights the need for a zero trust approach, which Varonis has always subscribed to. Specifically, we believe that perimeter security by itself is insufficient, that users should only have access to the data they require and that companies should continually monitor for abuse and violations. So digital transformation is the engine and the trends coming from that are accelerating, bringing with them a significant escalation of risk. One trend is cybercrime and its collision with data protection. Cryptocurrency has made stolen data easier to monetize and those who want to steal it are more sophisticated than ever before. This year alone, companies around the world saw COVID-related phishing emails specifically targeting unstructured data, advanced persistent threats or APTs like Maze, Emotet and Ryuk, vulnerabilities in perimeter devices, remote access servers and in Active Directory itself, and continuous threat from rogue insiders that many times is the biggest risk of all. The target of this hack is almost always critical data, which is our mission to protect. As a result, customers increasingly tell us our platform is a must have. Another trend is regulation. Digital transformation and increased cyber attacks have made compliance with data-centric regulation like GDPR and CCPA a serious challenge. This creates substantial operational and reputational risks that companies can no longer ignore and it's another reason customers continue to tell us Varonis is a must-have platform. This brings me to the overriding need and growing demand to streamline processes through automation. For every CISO, companies often have thousands of employees creating data and generating risks. The security team cannot keep pace to secure this data, mitigate cyber threats and ensure compliance. Automation is the answer, and it's another must-have which we've built into our integrated platform. With our subscription model, our customers find it seamless and efficient to initially purchase more licenses and continue to consume more over time, realizing and benefiting from the power and flexibility of our offering. Let me provide a few examples from Q4. One example is a large initial commitment by a new customer, a U.S. healthcare company that had data retention and PHI reporting issues. During a risk assessment, we found that 90% of the data was being shared externally, allowing attackers to easily sidestep their endpoint tools. We also demonstrated how our automation engine could fix global access issues in days. Doing so manually would have taken several years. This new customer purchased Data Advantage and Data Classification licenses for multiple on-prem and cloud platforms as well as Data Alerts and Automation Engine. In addition to new wins like this, we remain significantly under-penetrated within our customer base. In Q4, the team was again successful in closing expansion opportunities with a number of existing customers. The prime example is a local government agency in the U.S. with more than 3,000 employees, which has relied on Varonis for more than two years to protect their data on-prem. Like many Varonis customers, this agency was planning to move data to the cloud. Doing a risk assessment for the Microsoft cloud data stores, we alerted them to ransomware attacks, which convinced them to add licenses for Data Advantage for Azure, Exchange Online, SharePoint Online, OneDrive as well as Edge. In total, we now provide them with 12 subscription licenses. This example further demonstrates that our path to double-digit license adoption with other customers has never been clearer. With our acquisition of Polyrize, which closed in Q4, our capacity to provide more licenses will significantly increase. We would be well-positioned to address our customers' needs as they move sensitive data to additional cloud applications and infrastructure, delivering data protection through the necessary visibility and control. Today Varonis is stronger than we have ever been. As I said, going into 2021, we are more than ready to take advantage of the digital transformation and execute on the market opportunity we see. We remain focused on the long-term opportunity as we move closer to our $1 billion target and beyond. With that, let me turn the call over to Guy. Guy?

Thanks, Yaki. Good afternoon, everyone. Thank you for joining us today. We're pleased with our outstanding fourth quarter results, which helped us close a strong year despite the challenges. Last quarter, I said that the demand for our platform combined with the power of our subscription model is accelerating revenue growth and driving operating leverage. Q4 continued and validated both of these trends with total revenues growing 31% and non-GAAP operating margins at 14.6%, both ahead of our expectations. To drill down into our top line performance, we continue to execute across the three pillars that drive our business. First, landing new enterprise customers; second, expanding within existing customers; and finally, strong renewals. On the new customer front, our strategy of focusing on larger enterprises continues to be successful. We know our customers realize greater incremental value by purchasing multiple licenses and the ease of the subscription model allows us to deliver on that demand. New customers purchased on average more than five licenses or about 2x what was previously purchased under the former perpetual model. This trend increases our customer lifetime value through healthy renewals, and future license upsell opportunities. As of December 31, 2020, 63% of our customers with 500 employees or more purchased four or more licenses, up from 54% a year ago. At the same time, 30% of our customers purchased six or more licenses up from 20% a year ago. The rapid growth of these metrics confirms that we are successfully unleashing the potential of our platform. This is also reflected in ARR of $287.3 million, which grew 37% year-over-year as of the end of Q4. More than 98% of our total fourth quarter revenues were recurring, which helps provide visibility into future revenues. Our dollar based net retention rate or NRR, which accounts for the growth in ARR from all active customers was 116% at the end of Q4. Turning now to the fourth quarter results in more detail. Total revenues grew 31% to $95.2 million and included a 99% subscription mix compared to 82% a year ago. Subscription revenues came in at almost 100% growth year-over-year at $62.7 million. Maintenance and services revenues were $32.1 million driven by renewal rates, which once again exceeded 90%. Looking at the business geographically, North America revenues grew 35% to $66.7 million, or 70% of total revenues. In EMEA, revenues grew 33% to $25.9 million, or 27% of total revenues and we are pleased that the subscription flywheel is now kicking in after a slower start in early 2019. Rest of world revenues were $2.6 million, or 3% of total revenues. Turning back to the income statement, I'd like to point out that I'll be discussing non-GAAP results going forward. Gross profit for the fourth quarter was $84.4 million, representing a gross margin of 88.7% compared to 87.5% in the fourth quarter of 2019. Operating expenses in the fourth quarter totaled $70.5 million. As a result, operating income was $13.9 million, or an impressive operating margin of 14.6% for the fourth quarter compared to an operating loss of $2.4 million, or an operating margin of negative 3.3% in the same period last year. This continues to validate the strength of our model and our execution capabilities, which we anticipate will drive operating margin leverage going forward. In Q4, we again benefited from meaningful outperformance on the top line, ongoing prudent expense management and, like everyone else, COVID-related cost savings. During the quarter, we had financial expense of approximately $846,000, primarily due to interest expense on our convertible notes. Net income was $12.3 million for the fourth quarter of 2020 or earnings of $0.34 per diluted share compared to a net loss of $2.8 million, or a loss of $0.09 per basic and diluted share for the fourth quarter of 2019. This is based on 36.1 million diluted shares outstanding for Q4 2020 and 30.5 million basic and diluted shares outstanding for Q4 2019. We ended the year with $298.3 million in cash and cash equivalents, marketable securities and short-term deposits. For the 3 months ended December 31, 2020, we generated $7.7 million of cash from operations compared to an insignificant amount used in the same period last year. We ended the year with 1,719 employees, a 9% increase from the fourth quarter of 2019 and an increase of 19 net new employees from the third quarter of 2020 as we continue hiring to support the growth of the business and take advantage of the opportunities we see in the market, with a particular focus on sales and R&D. I will now briefly recap our full year 2020 results. Total revenues grew 15% to $292.7 million, exceeding the high end of the original guidance we issued a year ago, pre-COVID. Our subscription mix was 99% compared to 65% subscription mix in 2019. In 2020, 97% of our revenues were recurring. Our operating margin was negative 1.5% compared to negative 10.7% for 2019, again demonstrating the strength of our business. Before I turn to guidance, I would like to go over ARR one more time. As I've said in the past, we are not converting perpetual customers to subscriptions. And so ARR growth is primarily driven by ACV from new customers, as well as net new subscription licenses to existing customers. As a result, 2021 should normalize closer to an apples-to-apples comparison with ARR tracking more closely to revenue growth. I also want to take a moment to discuss a few housekeeping items. We have historically provided the percentage of customers purchasing two or more and three or more product families. And while these metrics continue to trend positively, they are less relevant given our success selling more licenses to customers across the same product family. As such, we will stop providing this metric in the future. We expect that CapEx in 2021 will be in the range of $10 million to $13 million. Lastly, we are announcing today a 3-for-1 split of our common stock to make it more accessible to employees and investors. Each stockholder of record on March 12, 2021, will receive two additional shares of common stock for each then-held share. Trading will begin on a split adjusted basis on March 15, 2021. Our results and guidance have not been adjusted for the impact of the stock split. Moving to our guidance for 2021. For the first quarter, we expect total revenues of $68 million to $69.5 million, representing growth of 26% to 28%. We expect non-GAAP operating loss in the range between $12 million to $11 million, and non-GAAP net loss per basic and diluted share in the range of $0.41 to $0.39. This assumes 32.1 million basic and diluted shares outstanding. For the full year, we expect total revenues of $357 million to $366 million, representing growth of 22% to 25%. We expect non-GAAP operating income to range between breakeven to $7.5 million and non-GAAP net loss per basic and diluted share in the range of negative $0.16 to non-GAAP net income per diluted share of $0.03. This assumes 32.8 million basic and diluted shares outstanding and 36.9 million diluted shares outstanding, respectively. In summary, we are proud of our Q4 and full year results as we continue to execute on our strategy and capitalize on the long-term opportunity ahead of us. I want to thank all of the Varonis employees for their outstanding contributions this year, and I know I speak on their behalf when I say we are excited going into 2021. Thanks for joining us today. And with that, we would be happy to take questions. Operator?

Operator Instructions. And our first question comes from Sterling Auty with JPMorgan. Please state your question.

Yes, thanks. Hi, guys. So I'm curious what gives you confidence when you look at your business that the growth that you're experiencing now will continue post pandemic? In other words, is there a concern that there was a massive pull forward of demand just on that shift to work-from-home that you outlined, Yaki, in your prepared remarks?

Hi, Sterling. No, we don't think that it's a pure pull-forward from work-from-home. I think what happened is an acceleration of the overall digital revolution and you have a lot of critical data in many repositories. The data protection problem is something that humans can't manage and this is the biggest problem. When you're talking about zero trust, only the right people should access the data that they should access and this is where the world is going. So there are secular trends; some shifts during the pandemic may not be here to stay, but the secular trends are very strong. One of them is overall digital transformation: more things becoming digital, more data being generated and more repositories. Microsoft 365 was a very strong growth engine for us. The way that we sell the platform, we always envisioned that data protection, cybercrime and regulation would collide. For us, at the beginning of this pandemic when everybody dealt with business continuity and set up for remote work, we saw an uptick in the usability of the platform, but it was not as easy to close business. Every month that went by you had new configurations and new workloads and access to data. The risk increased leaps and bounds. From where we sit, we strongly believe that it's inevitable. This is where things will go: attacks will become much more sophisticated, you'll have many clouds and data on-prem, and a lot of infrastructure and data repositories in applications. We are well-capitalized to protect this digital universe and digital economy.

That makes sense. And one housekeeping question, Guy, for you. Now that we're at the end of the year, would you be willing to give us a total customer count update?

One of the things that we talked about in terms of the customer count is that we're not focusing so much on the number, we're focusing on the type of customers that we can acquire. A couple of years ago, we started focusing more on larger customers and it's much more about the quality of the customers that we bring in and that really helps us in increasing the customer lifetime value. So we think the absolute number is less important for investors, and we're focused on increasing customer lifetime value by getting the right customers and the right size.

Sterling, for us, the focus as a company is on customers with 1,000 users and above and the business really changes. It's not just that the subscription changed; the company changed in terms of the value that customers are getting, the licenses that they are buying, the time that it makes sense to spend with customers, the conversion of the pipeline — it's a completely different business than three years ago.

Understood. Thank you.

And our next question comes from Matt Hedberg with RBC. Thank you.

Hey, guys. Thanks for taking my questions and congrats on a really strong year. I guess, obviously, you're seeing some really nice acceleration in trends and multiproduct attach. I'm curious, how do you think the SolarWinds breach potentially is an accelerant to your business? I would think the importance of data governance and broad data security is even more important in a post-Sunburst world.

Hi, Matt. It definitely increased pipeline in the fourth quarter, though it didn’t necessarily change deal outcomes immediately. What happened with SolarWinds is, unfortunately, inevitable. You have state actors that are extremely sophisticated, and that sophistication is spilling into the commercial space. Also, cryptocurrency makes it easy to monetize cybercrime. If you have critical data, you have a target. With sophisticated forces and automated tools, attackers will be able to get to you. Additional security products are critical, but often insufficient. You need something like Varonis and you need to focus from the critical digital asset backwards: this is the critical data asset, this is the critical infrastructure and this is what you need to protect. There are many problems from service accounts and many ways to get in. Unfortunately, SolarWinds may be the canary in the coal mine. This is just the beginning. If you have critical data, someone wants it. We believe you'll see a shift in security to protect these scenarios. There's a constant tension between security and productivity — organizations want to develop quickly and be agile, but that increases risk. This is where we play: helping organizations get the productivity gains with the right protections. COVID helped the market understand this faster, and we're benefiting from those secular trends and increased product adoption and customer lifetime value.

That's great. And then maybe one for Guy. Obviously, I mean, Yaki just got done talking about pipelines expanding and great profitability this quarter. You're guiding the street a little bit lower on margins next year. Can you talk about how you're thinking about that investment vis-à-vis sales and marketing perhaps accelerating quota-bearing sales reps, R&D? Just trying to get a sense of the OpEx side of the equation as you look to 2021.

Absolutely. Our philosophy hasn't changed: we want to balance both profitability and top line growth. We want to continue to invest in responsible ways, but there's a huge opportunity in front of us. When you look at the margin improvement year-over-year, you can see that in 2019, we were at negative 10.7% non-GAAP operating margin, and that was impacted by the transition and headwinds on the revenue front. In 2020, we finished at negative 1.5% non-GAAP operating margin, and we're guiding now for full year 2021 with about a 1% positive non-GAAP operating margin at the midpoint. So we're moving in the right direction. We match expenses with planned revenues. The strong top-line growth provides the opportunity for us to invest in the longer term in a responsible way. The two areas where we intend to put the majority of the investments are sales and marketing and R&D.

Got it. Thanks a lot, guys.

Thank you.

Our next question comes from Brent Thill with Jefferies.

Good afternoon. Yaki, just when you look at the growth of a lot of these new cloud-based systems, whether it's Teams or Slack or some of the other solutions, can you talk to how you're providing the next level of protection as these assets are exploding in usage in the corporate environment? What are you doing there and what are you seeing in terms of uptake? And maybe for Guy as you come into this year, when you look at quota-carrying capacity, are you going to be on an increase, kind of take last year's group and make them more productive? How do you think about the shape of the sales hiring for 2021? Thank you.

Thanks for the question. We believe there is tremendous opportunity for all these cloud data stores and cloud applications. Everything we've done for on-prem data stores, Active Directory and 365 we can replicate in the cloud, and this is why we acquired Polyrize. The same technology and the same playbook with our technological moat can be applied to these cloud repositories, which will be critical for our customers. On-prem data is not slowing down either — you have data spread all over, humans can't manage it anymore. You need automation, intelligence, complex visibility, effective alerting, forensics and user behavior analytics. This is where we play, and we believe we will be the standard for SaaS and cloud data repository protection, forensics and UBA.

To touch on the quota-carrying reps question, our approach in 2020 was to continue hiring quota-carrying reps even when COVID created a near-term headwind. Each quarter gave us more confidence to continue hiring. In Q4, we grew net new 90 employees in the quarter as part of taking advantage of the long-term opportunity. We're increasing quota-carrying headcount and have a larger component of more mature reps, so we expect productivity gains. All of that sets us up for 2021 and is reflected in our guidance and confidence in the business and the pipeline.

Thank you.

And our next question is from Saket Kalia with Barclays.

Hey, guys. Thanks for taking my questions here. Maybe first for you, Yaki. Little bit related to the last one that was asked about cloud stores, but can you just talk a little bit about your initial impressions around Polyrize? And looking out into the future, how do you envision the product portfolio once that's been fully integrated?

So far we are very happy with the acquisition — very happy with the team, the technology and the cultural fit. We believe it was a great move and we're very focused on the integration and happy with the progress. There is still work to do, but there's massive potential. It accelerates our time to market for cloud capabilities. Eventually we will have a full integration, but this was a quality acquisition with a great team, and we are headed in the right direction. Next year, we expect to see revenue from these efforts.

Got it. Guy, my follow-up for you, you touched on this in the prepared remarks, but I just want to make sure I understand. You clearly aren't guiding ARR for next year, but how should we think conceptually about ARR growth versus revenue growth, which you did guide to? What are some of the puts and takes between the two?

Absolutely. We expect ARR in 2021 to track closer to revenue growth. When we introduced the metric it provided visibility during the transition. ARR growth is primarily driven by ACV from new customers and net new subscription licenses to existing customers. We're not converting our perpetual customers to subscription, which is why as we normalize with a 99% subscription mix, ARR should track much closer to revenue growth in 2021.

Very helpful. Thanks, guys.

And the next question is from Rob Owens with Piper Sandler.

Great and thanks for taking my questions. First, could you possibly talk about the integration roadmap with Polyrize and where you're at — where you might hope to be in terms of deliverables over the near-term?

I'm sorry, I couldn't hear. Can you please repeat?

Yes. Could you talk a little bit about the integration roadmap with Polyrize and where you're at right now? Any incremental deliverables that you would hope to deliver over the near-term?

Yes, the integration is working very well. We have internal milestones that we needed to hit, and we strongly believe that we are going to hit them. We will see revenue in 2022; we don't expect material revenue in 2021. Initially Polyrize will operate somewhat standalone with minimal integration, then we'll do small integrations and within a few cycles it will be completely integrated into the Varonis platform.

To emphasize: we expect revenue contribution more meaningfully in 2022; we don't expect material revenue in 2021.

Great. And then guys, when you looked at the growing pipeline and you talked about the pillars, is that more related to land-and-expand at this point? Can you give us a little more color about how things are shaping up? Is it velocity or scale or both?

It's both — both within the customer base and with new customers. We're doing it with the right customers in the 1,000 users and above segment, enterprise sales, and we've increased customer lifetime value drastically. Conversion rates of the pipeline are higher; it's a top priority in the organization. We're seeing signals from the C-level and boards. There's a huge uptick in visibility of the platform. We feel comfortable with the pipeline, how customers are using it, and where to focus our efforts. Results are becoming more predictable.

Great. Thank you.

And our next question is with Alex Henderson with Needham & Company.

Great. Thank you. I was hoping we could talk a little bit about what you're hearing as you're talking to CEOs, CFOs and those types, post the SolarWinds hack announcement. There's been a lot of discussion that there's been an increase in spending intentions for not just IT, but security specifically and budgets are going up. Have you had conversations with people that support that viewpoint? And if so, how much do you think the Varonis segment of the market is being tapped as part of that solution set?

We constantly talk with our customers. Regarding SolarWinds, from our view, it was inevitable that something like that would happen and such incidents will increase. The cybercrime space is growing, and insiders are a huge risk. We're seeing customers map digital assets and assess the risks and how to mitigate them. There's also a shortage of skilled people, so automation is critical. Actionable visibility, threat detection and response, and compliance in these complex, data-driven organizations are top business priorities. We're seeing deeper budgets being allocated to insider threats, data protection and compliance, and we expect to benefit from that. Organizations now understand that a breach can happen to them and it's a huge problem. The need for a trust foundation to enable digital transformation is urgent and Varonis is positioned to play a critical role.

Just to be clear, you did not have any impact directly on your operations from being hacked. And you don't have any suppliers or anybody else that's been hacked that represents a threat to your operations, right? You are clear?

Yes, nothing happened to us.

Perfect. Thank you very much.

And our next question is from Shaul Eyal with Oppenheimer.

Thank you. Good afternoon, gentlemen. Congrats on a strong performance and outlook. Another SolarWinds related question, but from a different direction. Post the breach, there's been discussion about what potential solutions might have been able to flag the breach ahead of its impact. Do you view the Varonis platform as potentially being able to prevent at least a portion of this massive attack? I have a follow-up.

Yes, without a doubt. Our ability to automatically understand what service accounts are doing — even a sophisticated service account like SolarWinds that uses many APIs — allows us to map behavior and detect abnormal activity. We can also prevent many types of attack patterns, but customers need sufficient license coverage to enable those capabilities. We are a core player in solving these kinds of attacks.

Understood. And Yaki or Guy, are you beginning to see companies with bigger headcount, say greater than 5,000 or 7,500, adopting or showing elevated interest in the Varonis platform?

Yes, without a doubt. Many of them are showing interest and adoption.

Got it. Thank you for the call. Good luck. Good job.

Thank you.

And our next question is from Hamza Fodderwala with Morgan Stanley.

Hey, guys, thank you. I want to talk a little bit about your goal to get to $1 billion in revenue. Have you given any thought around the timeline for that? And do you feel like you have the product portfolio in place to get there?

I'm not giving timelines, but yes, we believe we have the product portfolio in place. We have done most of the investments needed. When you have large goals, you need to ensure you don't have too many unknowns that make it take too long. We believe we have the building blocks and high probability to win with incremental investments.

Got it. And then a follow-up for Guy: you mentioned Polyrize not being a material contributor to 2021. It closed in Q4 — was there any impact at all to ARR or billing even less than a point?

No, there was no material impact in Q4 and when we built the guidance, we didn't bake in any material impact from Polyrize for 2021.

Okay. Thank you.

Thank you.

Okay. And our next question is from Chad Bennett with Craig-Hallum.

Great. Thanks for taking my questions. Nice job on the quarter, guys. For Guy, in terms of the guide for the year, could you provide any directional movement on the maintenance segment of the business? Retention rates are high; you're not converting maintenance. What are your expectations for that line item — up, down, flat?

It's important to remember that the maintenance portion of the perpetual license isn't getting new fuel because we're basically not selling material perpetual licenses. We expect maintenance associated with perpetual licenses in 2021 to decrease low single-digit percentages. We still have high renewal rates, but it's not getting additions, so that's the normal course.

Okay. That implies an upper-40% to possibly 50% growth on the subscription line, which is phenomenal. When you look at the business from a new logo versus net expansion standpoint, how would you think about the relative mix going into this year?

We're focused on acquiring new customers, and from a commission perspective reps have to bring new customers to achieve target. Most of those targeted new customers are over 1,000 employees. We're very focused on that, because it drives customer lifetime value. At the same time, we're under-penetrated within our existing customer base — you can see that in the 500-plus metrics for four or more licenses and six or more licenses. We have 30% in the six-or-more category, so there's more to sell to our base. The subscription model allows us to sell the platform and customers see more value. It's a balance of both: existing customer expansion should be a majority because of our large base, but we're also focused on bringing the right new customers.

And one last quick one on NRR. You reported 116% at the end of Q4 and an average NRR for the year of 119%. Do you expect net expansion to continue accelerating through the year?

Yes. The average NRR for the year was 119%. We've only been a subscription company for about a year, so there's timing involved. We provide the metric on an annual basis and we're pleased with the long-term opportunity; expansion within the base is a growth driver.

Got it. Thanks much. Nice job again.

Thank you.

Thank you.

And our next question is from Jason Ader with William Blair.

Yes, thanks. First question for Yaki. Given your growth and the secular tailwinds, are you expecting to see more competition? Where do you expect that competition to come from?

At this point, looking at sales campaigns that come to us, we see less competition. This space is complex to execute in. We're focused on our customers, product roadmap and execution to maintain and increase our competitive edge. We are stronger than ever and are doing everything we can to keep that advantage.

Do you think competition will come more from security players or from repository platforms that integrate more data access governance?

From repository providers it's very hard to do — access governance vendors are not the same as dealing with data. There's no single company that naturally has the domain expertise and engineering to extend organically across this entire space. We believe we can maintain this competitive edge for a long time.

Okay. And then a follow-up for Guy on Polyrize: could you quantify the dilution in 2021 or at least how much OpEx you're expecting to spend for the integration and the added OpEx?

When we acquired Polyrize, the OpEx portion was very small compared to Varonis' overall expense. We are hiring more people to build the integration, and that's already baked into our guidance. We don't expect any material fluctuation; it's part of the Varonis expense base and not material.

But it's fair to say it's creating some dilution to the earnings in 2021, correct?

It is a very small dilution on the operating side as we're hiring more people to build the integration, but it's not something that would materially change the numbers for us.

Understood. Okay, thank you.

Thank you.

And our next question is from Erik Suppiger with JMP Securities.

Yes. Thanks for taking the question and congrats on a good quarter. Can you comment a little bit on average deal size? You're clearly doing well in expanding the number of licenses customers are buying. Can you translate that to ARR per customer or what your deal size has done over the last year? And then I have a follow-up.

One of the things we've seen with our strategic decision to move upscale is that with subscription customers are happy to consume more licenses. We've seen customers buy on average close to double the number of licenses they used to buy under the perpetual model. That number is now more than five licenses under subscription on average. That allows us to provide more value up front and increase customer lifetime value. The more licenses customers own, the more value they see and the higher likelihood of follow-on purchases.

So can you comment: if customers buy twice as many licenses now versus the perpetual era, does that translate into roughly 2x lifetime value?

Remember that the subscription price is lower than perpetual on a license-to-license comparison. Our subscription list price is around 45% of the perpetual list price for the same license. So it wouldn't translate directly to 2x lifetime value, but lifetime value is definitely increasing.

The market couldn't consume perpetual effectively at scale. By reducing friction with subscription, customers can purchase more licenses and get more automation, which increases customer lifetime value drastically. It's not an apples-to-apples license price comparison; subscription enables consumption.

Okay, very good. Second question: given the leverage you saw and margin expansion in 2020, you're guiding to only slight margin expansion in 2021. Is there anything that could change that would cause the leverage to slow? Do you anticipate acceleration in hiring or cost changes that would slow the leverage?

Our philosophy is to balance profitability and investment. There's a tremendous opportunity and we see the potential to build the business and invest where it matters. The record transition to subscription was heavy lifting; now with good growth rates we want to build something big and not leave anything on the table. We believe the unit economics are strong and as we scale, profitability will improve. We're taking a measured approach to investment and gradual margin improvement.

Very good. Thank you.

And our next question is from Mark Schappel with Benchmark Company.

Hi. Thank you for taking my question and nice job on the quarter. Guy, nice to see Europe rebound strongly. Are particular countries driving this? And remind us of changes you made in Europe over the last year or so.

The European team adopted subscription slightly slower than North America, which is part of why the subscription flywheel took longer to kick in. We have good presence in France and the U.K., and across the rest of Europe. There are territories that remain under-penetrated which we view as growth drivers in the coming years. The teams in place are strong and you can see that in the Q4 results.

We have very strong teams in Europe, great customers and good channel distribution. When we moved to subscription, EMEA was a couple of quarters behind North America. So the Q4 strength in EMEA is encouraging but not surprising.

Great. Thank you.

Our next question comes from Joshua Tilton with Berenberg Capital Markets.

Hi, guys. Thanks for taking my question. The commentary around the secular trends suggests this shouldn't be the case, but I wanted to confirm: are you seeing any meaningful change in the momentum of new or incremental subscription bookings growth going into 2021?

At this point we see a healthy pipeline and very strong usability around 365. The move to the cloud is a tremendous growth engine for us and we feel the market is moving toward our solution.

Okay. And Microsoft announced a data governance preview. It seems incomplete today. How do you guys think about that given Varonis' focus on Microsoft data stores?

We have a strong partnership with Microsoft and their security products are good, but they're different from what we do. Microsoft is an enabler and what they are doing so far is complementing and pushing the business. We're very complementary to Microsoft.

Thank you very much. Appreciate it.

And our next and final question is from Rishi Jaluria with D.A. Davidson.

Hey, guys. Thanks for squeezing me in and great to see continued strong execution. I've got two questions on the outlook and guidance. First, Guy, you mentioned COVID-related cost savings. How are you thinking about the sustainability of those cost savings, especially as we head into the back half of the year when business travel and T&E could come back? How should we think about that?

When we built the guidance, we took into consideration what we know but also tried to bake in uncertainties about when things return to normal in terms of flights and physical marketing events. We've tried to address and bake some of a return to normal in the second part of the year into our guidance. Regarding expenses as a whole: Polyrize acquisition impact is not material — it adds roughly about 1% on the operating margin. When we acquired Polyrize there were fewer than 20 employees; we're increasing that headcount in R&D and also adding in sales and marketing. We tried to balance expenses and commit to year-over-year margin improvement while taking advantage of the long-term opportunity.

Got it. And then on seasonality: it looks like seasonality has been relatively consistent versus the perpetual model. ASC 606 makes things less clean and ratable. Why haven't we seen a big reduction in seasonality and how should we think about seasonality going forward?

With ASC 606, the license portion of a subscription is recognized upfront and the maintenance portion is recognized ratably over the term. Because of that, the seasonality basically stays similar to how perpetual recognition worked, where Q1 is the lowest revenue quarter and Q4 has historically been the largest. We expect that trend to continue and ASC 606 contributes to that pattern.

All right, wonderful. Thank you so much.

Thank you.

Ladies and gentlemen, we have reached the end of the question-and-answer session. I would now like to turn the call back over to James Arestia for closing remarks.

So thank you, everyone, for joining and for your interest today. We look forward to speaking with everyone more this quarter. Thanks and have a good night.

Thank you. This concludes tonight's conference. You may disconnect your lines at this time. Again, thank you for your participation and have a great evening.