Greetings, and welcome to the Varonis Systems, Incorporated Third Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, James Arestia, Director of Investor Relations. Thank you, James. You may begin.

Thank you, operator. Good afternoon. Thank you for joining us today to review Varonis' third quarter 2021 financial results. With me on the call today are Yaki Faitelson, Chief Executive Officer; and Guy Melamed, Chief Financial Officer and Chief Operating Officer of Varonis. 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 will be considered forward-looking statements under federal securities laws, including projections of future operating results for our fourth quarter and full year ending December 31, 2021. 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. A reconciliation for the most directly comparable GAAP financial measures is also available in our third quarter 2021 earnings press release, which can be found at www.varonis.com in the Investor Relations section. Also, please note that all common stock and per share data have been retroactively adjusted for the impact of the 3-for-1 stock split effective March 15, 2021. Lastly, 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 strong Q3, which was a major milestone for Varonis, our first quarter to surpass $100 million in revenues. As companies around the world became more aware of the need to protect sensitive data, we see this achievement as just scratching the surface of the enormous opportunity ahead of us. I want to thank the entire Varonis team for their efforts, which led to the success. With that, let's jump in as I provide an update on our business. I want to focus on the security problem facing all organizations and why our data-first approach continues to resonate with new and existing customers. I will then turn the call to Guy to discuss our Q3 results and updated financial guidance. Let's start with the current operating environment, where our world is more reliant on data than ever before and the ultimate objective of security efforts is to protect it. The global digital transformation has led to many collaboration benefits, but it has also fundamentally changed how companies must approach security, as we have said. Sensitive data is now stored and accessed from more places. The perimeter is hard to define and even harder to monitor and protect. Endpoints now serve mostly as access points to large data stores on-prem and in the cloud. Organizations are using the sanctioned data stores and critical business applications so that their employees can more easily collaborate and extract more value from data. However, the ease and speed of collaboration has made securing data far more challenging, and we continue to see that without the right protection, it is getting harder and harder for enterprises to manage security without impacting productivity. As this part of data continues, the attack surface grows, and behind it, critical digital assets are woefully unprotected. The potential for damage from just a single compromised user, which we define as the blast radius, is tremendous. And this doesn't need to be the case, we see this with our customers on a daily basis, especially with ransomware. With Varonis, CISOs have better visibility into risks that are growing by the day. In addition to this fundamental data protection concern, we see misconfigurations exposing sensitive data to many people, and the interconnectivity of SaaS applications increasing the risks that attackers can utilize these connections to move laterally in the cloud. The sophistication of today's hackers cannot be overstated as state actors lead the efforts and their techniques spill over into the commercial world. At the same time, we see how cryptocurrency makes it easy to monetize crime without any trace. Nearly every organization faces these problems and the need to solve this aligns perfectly with the primary use cases we are addressing: data protection, threat detection, and privacy and compliance. We have discussed data protection and threat detection, and companies can no longer ignore regulations like GDPR and CCPA when we are beginning to see enormous signs of noncompliance. In short, we are unleashing the potential of our platform as companies think more strategically about data-centric security. And we do not expect this momentum to slow down. Let me provide a few examples of some key customer wins for this quarter. One of Europe's most recognized international organizations with nearly 20,000 employees became a Varonis customer in the third quarter. In addition to other threat detection needs, they sought to secure active directory, prepare data for migration to the cloud, and ensure compliance with GDPR. After we revealed where they were at risk and showed our ability to remediate overexposure to sensitive data, they purchased multiple licenses, and we are currently discussing additional licenses that will broaden the coverage we provide. As we have said, we believe all Varonis customers should get double-digit numbers of licenses based on the current and growing threat landscape. The higher upfront value we provide through our subscription offering consistently leads to healthy expansion and options. A strong example is the utility company serving a major U.S. city, which first became a Varonis customer several years ago under our perpetual model, purchasing three licenses. In 2020, they took advantage of our subscription offering to secure data in the cloud as well as monitor the perimeter and remediate open access issues. In Q3 of this year, they further expanded their deployment to cover additional data stores and easily migrate data across platforms. In less than three years, this company went from three Varonis licenses to 20, and this does not include our recently introduced cloud licenses, which leave room for additional expansion in the future. These examples illustrate the continuation of strong adoption and engagement trends we are seeing, coupled with a healthy pipeline. We are well-positioned to close the year strong. As we have said, we believe our position in the market is unmatched, and the team is relentlessly focused on continued execution and capitalizing on the enormous opportunity before us. With that, let me turn the call over to Guy. Guy?

Thanks, Yaki. Good afternoon, everyone. Thank you for joining us today. We are pleased with our third quarter results, which demonstrate the power of our platform and the continued need of our customers to secure their sensitive data. Financial highlights in Q3 include 31% total revenue growth year-over-year to surpass $100 million of revenue for the first time in our history. This was driven by 36% growth in ARR to $354.2 million. Our continued execution against our targets resulted in another strong quarter of growth. The confidence we have in our business is reflected in our Q4 guidance, which is the highest growth we have guided to since 2014. That year, our total revenues for the year were approximately $100 million, which is the revenue we delivered this quarter alone. Looking at our results, we continue to see a healthy balance of new customers making substantial upfront commitments and existing customers expanding their Varonis deployment after we demonstrate the value of our platform. We are pleased that the number of licenses purchased by new customers has increased over time, reflecting a meaningful increase in customer lifetime value. As of September 30, 2021, 70% of our total customers with 500 or more employees purchased four or more licenses, up from 60% a year ago and 50% two years ago. At the same time, 37% of our total customers with 500 or more employees purchased six or more licenses, up from 26% a year ago and more than double the 17% in Q3 2019. The rapid growth in these metrics demonstrates the strong customer engagement we see and also illustrates the ongoing opportunity we have to get all Varonis customers to a double-digit number of licenses. Turning now to our third quarter results in more detail. Total revenues grew 31% to $100.4 million. Subscription revenues grew 59% to $70 million, while maintenance and services revenues were $30 million as our renewal rates remained strong at over 90%. Looking at the business geographically, revenues in North America grew 32% to $75.6 million or 75% of total revenues. In EMEA, revenues grew 28% to $22.8 million or 23% of total revenues. Rest of World revenues were $1.9 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 $88.3 million, representing a gross margin of 88% compared to 87.2% in the third quarter of 2020. Operating expenses in the third quarter totaled $80.2 million. As a result, third quarter operating income was $8.1 million or an operating margin of 8.1%. This compares to operating income of $3.1 million or an operating margin of 4% in the same period last year as we continue to drive operating margin leverage. During the quarter, we had financial expense of approximately $908,000, primarily due to interest expense on our convertible notes. Net income for the third quarter of 2021 was $5.7 million or income of $0.05 per diluted share compared to net income of $2.1 million or income of $0.02 per diluted share for the third quarter of 2020. This is based on 119.1 million and 106.1 million diluted shares outstanding for Q3 2021 and Q3 2020, respectively. We ended Q3 with $813.4 million in cash, cash equivalents, marketable securities, and short-term deposits. For the nine months ended September 30, 2021, we generated $6.8 million of cash from operations compared to negative $13.5 million used in the same period last year. We ended the third quarter with 1,969 employees, an increase of 99 net new employees from the second quarter of this year. We continue to invest across departments and geographies as we believe these investments in innovation and capacity will allow us to capture the opportunities we see in the market. Moving to our guidance, we believe the strength of our Q4 financial guidance, especially against our outstanding performance in Q4 2020, reflects our ability to continue capitalizing on the growing demand for our platform. For the fourth quarter of 2021, we expect total revenues of $120 million to $123 million, representing growth of 26% to 29%. We expect non-GAAP operating income of $16.5 million to $18.5 million and non-GAAP net income per diluted share in the range of $0.12 to $0.13. This assumes 119.8 million diluted shares outstanding. For the full year, we are again meaningfully raising our guidance and now expect total revenues of $383.5 million to $386.5 million, representing growth of 31% to 32%. We now expect non-GAAP operating income of $19.5 million to $21.5 million and non-GAAP net income per diluted share in the range of $0.10 to $0.11. This assumes 118 million diluted shares outstanding. In summary, we are pleased with our third quarter results as the ongoing execution of our go-to-market strategy continues to drive top line growth, operating margin expansion, and cash flow generation while also resulting in our first quarter with $100 million in revenues. We are proud of this milestone, and we know that continued outperformance and investment in the business positions us for a strong close to the year and the next milestones to come. Thanks for joining us today. And with that, we would be happy to take questions.

Thank you. We will now be conducting a question-and-answer session. Thank you. Our first question comes from Sterling Auty with JPMorgan. Please proceed with your question.

Yes, thanks. Hi, guys. So Guy, I think you had alluded to the idea of stronger or bigger initial commitments from customers. I guess I interpret that as larger initial deal sizes. Can you give us maybe a quantitative look at how much have they grown and maybe a qualitative explanation as to what do you think is driving it and what do you think the trend from here will look like?

It's a great question. The answer is very much the platform consumption of our customers. They are buying way more licenses. They're buying approximately double the number of licenses that we had when we sold perpetual licenses. And what we've also seen is that the more licenses they acquire, the higher the likelihood that they see value in the product and they will come back and buy more. So when we price the subscription price lift, it was at 45% of perpetual on first year maintenance. When you think about the fact that they're acquiring double the number of licenses, you can see how that ASP is much higher than what we initially thought would be when we just initiated the transition. And this consumption of the technology is what's driving the growth and the customer lifetime value.

That makes sense. And one follow-up would be, as you look at your sales hiring and sales capacity, what are you doing in terms of current hiring to set you up to capture that what you mentioned as durable demand moving forward?

We continue to hire due to the significant market opportunities ahead of us. Our customers have a strong understanding of the need to protect their data, which is primarily stored in sanctioned data repositories, both on-premises and in the cloud, and we are seeing substantial benefits from this. However, it's important that we enable them effectively, and we recognize the need to provide the right guidance. The potential for growth within our existing market is immense, and we plan to expand our sales force appropriately to ensure we can support this growth. We have adequate management in place and diligent training programs to ensure that new team members are set up for overall success.

Makes sense. Thank you, guys.

Thank you.

Thank you.

Thank you. Our next question comes from Matt Hedberg with RBC. Please proceed with your question.

Hi, guys, thanks for taking my question and congrats on the results. Yaki, I want to start with you. I guess I'm curious. What is Varonis' stance right now sort of return to work or return to travel? And I guess as the world opens up a bit here into next year, do you think if there is more travel by your team, could that actually help in pipeline generation?

Hi Matt. First and foremost, it's just safety of employees, customers, and partners. So we are just diligently following the rules of the health authorities and our HR team in the local offices and markets we operate. But yes, we definitely benefited from remote work in terms of 365 and everything we are doing with DatAdvantage Cloud. So the digital transformation helped us. But as you know, very well, enterprise sales is a full contact sport in the sense of that it makes sense to be with the customers and also with our team. So we are gradually moving to just a hybrid working environment. In places that we can meet customers and we can meet partners, we are doing. We just build them.

Got it. Thank you. And then maybe just a follow-up for Guy. As ARR decelerates, you're off of more difficult comparisons. As we start to think about the model next year, obviously, you're not guiding to next year yet, but how is the right way that we should think about sort of revenue and growth rates converging? I mean, are we to the point where next year, we might see more of a convergence between the two?

I think there's a lot of confusion regarding the relationship between ARR and revenue. First, I want to highlight that we are pleased with ARR increasing by 36% and revenue by 31%. When we analyze ARR and revenue, it’s important to recognize that ARR is an annual metric while revenue is quarterly, which may lead to discrepancies. However, when you examine recurring revenue, including subscription and maintenance on a 12-month trailing basis, you can see that both revenue and ARR have actually converged, each showing 36% growth. Regardless of whether you assess it quarterly or annually, these results are very strong and demonstrate the strength of our business. As we approach the next quarter, we will provide additional insights regarding 2022.

Got it. Thanks, guys.

Thank you.

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

Great. Just ARR grew nicely, 36%, but only 2% sequentially. So I think there are many questions. Just trying to understand kind of the trajectory and what's driving this going forward? And maybe if you could also just comment a little bit about from a federal versus commercial perspective, any color to add to the federal vertical on what you saw this quarter?

So I think when we look at the overall growth, the ARR being at 36% and, like I said, the revenue being at 31%, very strong numbers, most of the growth was driven by the enterprise business. We feel very good about the pipeline. I think it's a great indication when you look at kind of the Q4 guidance and the guidance providing being at 26% to 29% is kind of an indication of how strong we feel about the business because it's against an outstanding Q4 of 2020. So we definitely feel very good about the business and closing the year strong.

And sorry, Guy, was there any color on federal in terms of what you're seeing?

As Guy mentioned, the growth driver was the overall enterprise business. We saw in federal, there was a lot of focus on remote work and collaboration in Office 365. So we saw just a lot of opportunities, but it was just a bit hard to allocate the budget. But what we do see is that 365 and the exploring of data is to manage the opportunity for us. So we see just many opportunities for the next year, and there are a lot of projects related to zero trust. We are front and center for the zero trust initiative to many of the federal customers and prospects. We believe that they can do very well in the next year, but the growth was primarily driven by the enterprise.

Great. Thanks.

Thank you. Our next question comes from Saket Kalia with Barclays.

Maybe for you first, Yaki, the multiproduct adoption here continues to grow. I mean I think the adoption numbers speak for themselves as well as your focus on larger customers. I was curious, I mean, as the base sort of gets to a point where so many more of them have multiple products, have you ever thought about enterprise license agreements with customers in the future? And what are some of the puts and takes as you sort of think about that?

We do. So what we see definitely is that customers understand that they need to protect data. The perimeters are very hard to define. We saw this explosion with endpoint. They are more like access points. Most of the data is in what we call sanctioned repositories on-prem and in the cloud. So when customers are already investing in us, the return of investment many times is tremendous. If you have security efforts in order to protect your digital assets, Varonis is one of the top, if not the top platform that you have. Definitely, the other thing that we see is that more is more. When you have more licenses, there is a much higher capability that you will consume many more licenses over time. Customers want to have the most efficient way to do it. So it's still early stages, but we definitely think about it, and we constantly think about what is the right way to make sure that it will be easy for our customers to consume more products and that they will benefit from it and we will benefit from it. But this is something that is in the works, and we'll see how it will play out, but we definitely think about it.

Got it. That's really helpful. Guy, maybe for you. I mean, the question was asked about sort of the convergence of ARR and revenue growth. Maybe I'll ask about ARR slightly differently. I mean it's been a pretty nice sort of mid- to high 30% ARR growth here for the last few quarters, several quarters. Is there anything to think about on the glide path of that ARR growth going forward? I mean, the transition is done. We've had several high-profile breaches. Of course, we have had COVID last year. Understanding that you don't guide to ARR, what are some of the puts and takes that we should think about when modeling ARR, let's say, for the next couple of years?

Saket, as we analyze the ARR figures and the discussions surrounding them, we recognize there is some uncertainty in how to approach these numbers. One thing we've considered is offering more clarity on ARR as we approach the next earnings call for 2022. Currently, our primary focus is on revenue for this year. However, as we increase sales of DatAdvantage Cloud licenses and recognize DatAdvantage Cloud income gradually, ARR will start to be an important indicator for us. Therefore, we believe it's essential to provide additional insight on that as well.

Saket, one thing from my end, there are these high-level breaches, but the way that demand typically builds for us is as a result of high-level breaches, emergency spending, organizations taking reactionary measures. But then they start a very thoughtful process, mapping where their assets are, what they need to do. I'm drowning in alerts, and what is the best way to protect my enterprise given the scarcity of resources. This is where we are benefiting from. So I just think what's happened is that when the dust settles, this is where we are benefiting more and more and just becoming more mainstream, and the customers are standardizing around us and really looking for a solution.

Our next question comes from Rob Owens with Piper Sandler.

That was a nice lead into DA Cloud, realizing it's still relatively early. But any customer feedback you can give where it's being attached? Any types of rates or if it's actually providing the tip of the spear in terms of your selling motion?

We'll not see material contribution this year, but the customer conversations are very positive. We started to build pipeline. We believe that it's a massive opportunity and really where contemporary risks are going to reside. These are the business applications that are running your business. So we believe the 365 is a good indicator of what we can do with DatAdvantage Cloud, and the initial indications are that it can be a very strong offering from us.

Yes. And second, I don't know if you've given this metric before, I apologize if you have, but you've talked about getting to double-digit license adoption. Can you give us an idea of what share of customers or how much of the base have actually reached it or gotten there?

The metric we started providing last year was the number of customers with more than 500 employees that have four or more licenses and six or more licenses. The numbers there are supporting exactly what we're talking about, about customers consuming the platform. We have seen the four or more licenses go from 50% two years ago to 60% last year and 70% this year. On the six or more licenses, we're at 37% this year, actually more than doubling what we had two years ago. So very strong indication of the customers consuming the platform and the fact that we are very much in believing that we can get to double-digit licenses on average per customer.

All of you need to understand that the basis is automation. Once they have more customers, they gain much more automated value. This is what you see with the sheer progress in automation when they have more licenses.

Our next question comes from Roger Boyd with UBS.

Congrats on the results. Just thinking about one of these tailwind drivers, Office 365, wondering if you could provide a little more color about what you're seeing in terms of the strength of this tailwind over the past couple of quarters and how you're thinking about it into 4Q and calendar '22?

365, which is the whole suite is geared towards collaboration. What we see is that customer capacity to create and share data far exceeded the capacity to protect. And it's just designed to collaborate and not protect. This exposes a lot of risk to the organization that is using it. With COVID, you see a lot of adoption there. Our ability to protect data and show the risk is just very effective. Once a customer gets to a critical mass in 365, they almost always see a lot of value in what we are doing, and this is a tremendous growth area for us. In the same token, we also believe that the other SaaS services are designed more toward collaboration and are very hard to do data protection. The tension between productivity and security presents a tremendous opportunity for Varonis. We are just uniquely positioned to solve these challenges. It's very hard. We need our Metadata Framework and a lot of efficient visibility and remediation and classification feature set in order to solve these issues.

Our next question comes from Andrew Nowinski with Wells Fargo.

So I want to ask about maintenance revenue. If you look at the subscription revenue in isolation, you had amazing growth. However, the maintenance continues to weigh on your overall growth rate. I guess why isn't maintenance revenue declining faster? And when should we expect more existing customers to convert over to subscription?

So the percentage that you see in a decline is an indication of the strong renewal rates that we have. The maintenance of perpetual has had renewal rates that have been consistently over 90%. We have said all along that we don't go back to our existing customers and try and convert them to subscription, but rather just sell them additional licenses under the subscription. They keep their maintenance of perpetual and they buy additional licenses. We have so many more licenses to sell to our customers that we can provide more value with that recurring component. For them, it's one line item as an OpEx line item. So if we see customers wanting to convert, we'll be happy to address it, but we haven't seen it so far, and we're not pushing.

So those customers that are buying more licenses, are they purchasing them on a subscription basis or does your perpetual license still exist?

No, we're not selling the perpetual licenses as they represent a very small number. We are selling additional licenses as subscriptions.

Our next question comes from Mike Cikos with Needham & Company.

I am trying to understand the sales cycle better. Considering the current heightened sense of urgency due to the threat environment, I wonder if this is influencing your sales cycles by compressing them. Conversely, are you observing that sales cycles are actually lengthening as customers are being more deliberate and choosing to purchase more licenses upfront? I would appreciate your insights on these two opposing trends as I think about sales cycles.

Overall, if you examine the overall deals, the sales cycles remain consistent. While there may be some acceleration in the closing process on a case-by-case basis, our sales approach is becoming increasingly strategic. Customers are purchasing more licenses and, over time, acquiring additional licenses. We are observing better conversion rates in the pipeline, a more predictable sales process, and an ability to engage with larger accounts, often by connecting with the CISO and securing larger deals. The overall relationship with our customer base is becoming increasingly strategic.

Our next question comes from Hamza Fodderwala with Morgan Stanley.

I wanted to follow up on some of the newer cloud products that you have rolled out earlier this year. I know they're not material to sales today. But just as the materiality of pipeline, are you seeing more interest in the cloud solutions as you look at your pipeline going forward into Q4, into next year? Maybe a question for Yaki on that one.

So we definitely see a lot of interest. Just thinking about how customers fill their data, Salesforce, Google, Box, GitHub, how many customers are using stuff like Okta and FSA is a huge part of the world's information. Contemporary risks are where they are going. They don't have much data on endpoint. When you compromise an endpoint in order to get to the central repository, the business application, 365, is where you see the most significant exposure. The other thing is that all the SaaS applications are interconnected. The ability to strike massive damage in the organization is just huge. Therefore, we are solving the data protection program for business applications and we are uniquely positioned to do so. We are the only ones at this point that can do this. We believe that what we saw in 365 is just that we can add a lot of value, and this will be a big part of our business, which could include DatAdvantage Cloud. As we said, this year, we won't see material contribution from it, but we definitely believe that we can be the company that protects your data and be the foundation for digital transformation.

Got it. And maybe just a follow-up for Guy. Not to beat a dead horse on the ARR question, but I think one of the ways that people look at ARR just on a quarterly basis is looking at net new ARR additions. The net new ARR additions grew quite strongly in the first half in Q1 and Q2. In Q3, it was somewhat flattish. I'm just curious, as we think about seasonality in ARR, how should we think about that metric into Q4 just generally relative to Q3?

When you look at the seasonality for the subscription and you compare the seasonality to what we used to see under the perpetual model, we don't see much change. The expectation for Q4 was always that it's the largest dollar quarter of the year, and so is that expectation under the subscription model. So seasonality, as we see it, stays the same.

Our next question comes from Chad Bennett with Craig-Hallum.

In terms of the new cloud products and the cloud data store coverage you have with Polyrize, now that it has been rebranded, do you have any insights on whether the penetration is more focused on Microsoft-based cloud products within your base or is it more about non-Microsoft cloud applications or data stores? What is your current penetration or, viewed from another angle, what opportunities exist now that you have introduced these new data stores and cloud data products?

We believe the activity is massive. Most of the cloud platforms that we protect with DA Cloud with the Polyrize acquisition coexist with 365 and Microsoft and others coexist with this all of them. This is the beauty with the cloud. This is one of the strengths moving forward. Everything in SaaS and always you get to a lot of these SaaS applications once we reach critical mass. A lot of them become standard, and we need to protect them. As I said before, there is much more collaboration, API connectivity, and less focus on security, which presents a massive opportunity for us. We see a huge opportunity in the base to be the standard for data protection, threat detection, response, and privacy compliance in critical SaaS applications.

Our next question comes from Shebly Seyrafi with FBN Securities.

Can you talk about the strength of your pipeline currently? And now that the month of October is behind us, can you just talk about how it went? Did it beat your expectations?

Well, I think when we look at the pipeline, a good indication to see how we think about it is the guidance that we provided for Q4. Q4 guidance is the highest guidance we provided since 2014, and it's against an outstanding Q4, as I said before, Q4 of 2020. When you look at the indication of where we are going to the end of the year, we're putting guidance out there and we're still guiding in the same responsible way. So I think we feel good about the opportunity that we have. We feel good about our ability to continue to sell to our existing customers and acquire new customers. We've done that throughout the year, and we intend to do that in Q4 as well.

Our next question comes from Shaul Eyal with Cowen and Company.

Congrats on the quarterly results and guide. Guy or Yaki, supply chain constraints, it would appear as if you're seeing none right now also when looking at your gross margins. But any commentary, any color on your end on this topic, which has been on investors' minds greatly?

At this point, it's not relevant for us. We don't have anything to say about it.

Our next question comes from Jonathan Ruykhaver with Baird.

So I'm wondering if you could talk about the threat detection and response use case. I understand it's mostly driven by automation. But just trying to get a sense for how material that is to the overall business? And then just strategically, how you're looking at that area going forward, just because we see a great number of security companies focused on more effective detection, faster remediation. And it's not only about malware, but you see companies moving into user behavior, so activity around file systems. So just kind of curious how you look at that area and what you're doing from a product development standpoint to maybe add more capabilities over time?

Yes, we have very strong capabilities that we are continually enhancing. Our perspective is data-driven, focusing on the data itself rather than just the endpoint and network protection that many are concerned with. We analyze access to the data store, which provides us with a reliable stream of data. This allows us to build user profiles and identify deviations, classifying users such as regular users, service accounts, and VIPs within the organization, while also specifying the data and infrastructure closest to that data. As a result, we can generate highly accurate alerts if any issues arise, including alerts indicating where an attack is occurring and accessing the data. This method is very effective in the area of threat detection and response.

Our next question comes from Andrew Smith with Berenberg Capital Markets.

Just a question on competition from me. As you move into securing more cloud data stores with DatAdvantage Cloud, do you expect to potentially run into competition from CASB products? I understand that organizations are likely not 100% in the cloud. So is having the ability to holistically cover both data on-prem and in the cloud an important advantage for you?

Yes. The hybrid is definitely a big advantage, but the other advantage is just the focus on data. CASB generates confusion. They are not really competition because when you take just a large data set and visualize who can access it, critical and abnormal behavior is completely different. Once we install the product and show the risk, remediate it, classify the data at scale, it's very visual, and the customer understands immediately that it's a completely different offering. The amount of competition or confusion that we see so far with DatAdvantage Cloud is the same that we see with our enterprise DatAdvantage offering.

Our next question comes from Joshua Tilton with Wolfe Research.

Given last year's COVID impact to the business, are there any guardrails you can provide us to help us think about normal Q4 subscription revenue seasonality aside from the biggest quarter, maybe anything unusual from last year's Q4 to call out?

When we developed the guidance, we factored in slightly increased travel expenses, though still below pre-pandemic levels. The revenue guidance reflects our confidence going into the quarter. Looking back at 2020, we experienced a setback in Q1 due to COVID, followed by improvements in Q2 and Q3, with Q4 being exceptional. We're offering strong guidance based on those impressive results. We are optimistic about our position as we approach the end of the year and believe we can perform well across all aspects of our operations.

There are no further questions at this time. I would like to turn the floor back over to James Arestia for any closing comments.

So thank you, everyone, for your interest and for joining tonight. We look forward to speaking with you this quarter. Please don't hesitate to reach out if we can be helpful. Have a good night.

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