Greetings! And welcome to the Varonis Systems Incorporated, First Quarter 2022 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, Vice President of Investor Relations. Thank you, James. You may begin.

Thank you, operator. Good afternoon! Thank you for joining us today to review Varonis' First Quarter 2022 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 would be considered Forward-Looking Statements under federal securities laws, including projections of future operating results for our second quarter and full year ending December 31, 2022. 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 revision 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 first quarter 2022 earnings press release, which can be found at www.varonis.com, in the Investor Relations section. 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. Thanks for joining us today. Driven by 32% year-over-year ARR growth and a record quarterly operating cash flow, 2022 is off to a solid start for Varonis. Even with the steps we have taken stemming from the war in Ukraine, which Guy will discuss in more detail. Our thoughts are with our employees, customers, partners and all of those impacted by the war, and we are hoping for a peaceful resolution soon. Our mission of protecting sensitive data has never been more important as we continue to see a threat landscape that becomes more dangerous by the day. As a result, our pipeline is healthy and the demand environment is strong. I will discuss these trends and how we are well positioned to capitalize on them. So let’s jump in. As we have been saying for many quarters, we believe that the current environment underscores the need for our platform. To remind you, Varonis addresses three premium use cases that our customers view as increasingly interconnected. These are: Data protection; Threat detection and response; and Privacy and compliance. Given the current threat landscape, I want to focus today on our threat detection capabilities. Data growth, the dependence on critical data, and the increased profitability of stolen data has led to threat activists continuing to refine and sharpen their strategies. And as cyber-attacks continue to increase in frequency, sophistication, and severity, the need for companies around the world to protect their sensitive data only becomes more urgent. Between state actors and commercial groups, cyber-attacks are in the headlines on a constant basis, and the target is always sensitive data. As a result, our data-first approach continues to resonate, validating both our strategy and what we have been saying for many years, that the perimeter is essential, but it isn’t enough. Our risk assessments show that once perimeter defenses are bypassed, critical data stores are wide open to attackers and insiders, with insiders potentially posing the biggest threat of all. In short, any system, account, or person can be a potential attack vector, and all it takes is one. Companies need to assume that attackers will breach at least one vector, if they haven't done so already, and once they do, attackers will go straight for critical data stores to maximize their profits. Specifically, we see them establish remote control, exploit any weakness they can find, go after accounts with higher-level access, and use these accounts to steal data. Unfortunately, unless Varonis is in place, attackers rarely encounter any resistance once they are inside. This is why we say that every cybersecurity leader and company should assume breach. It’s not a question of if, but when they will be compromised. When you assume breach, the first step is to assess the blast radius. All the data that an attacker could steal if one employee or vector is compromised, and then make the blast radius as small as possible. A smaller blast radius makes the attackers’ job harder and gives our detective controls more chances to catch them as they work to overcome stiffer resistance. Our unparalleled ability to reduce the blast radius, take inventory of sensitive data, ensure that only the right people have access, and put go-forward detective and corrective controls in place to keep it locked down is why customers continue to describe our platform as a must-have. Before I turn the call to Guy, I want to briefly discuss some key customer wins in the first quarter. A multinational media conglomerate with 35,000 employees became a new Varonis customer in Q1. They had massive amounts of sensitive information in Microsoft 365 and no way to accurately classify it, see where it was at risk, and understand who was using it. After proving that we could provide visibility for their data in Microsoft 365 and help remediate critical open access issues, they purchased 7 Varonis licenses, and we are already discussing additional licenses to further protect their data on-prem and in AWS. At the same time, the opportunity to get our existing customers to double-digit number of licenses is clear, and the team had another strong quarter closing significant expansion deals. One of the largest toy companies in the world significantly broadened their Varonis deployment in Q1. Originally a perpetual customer with a more tactical view of data protection, they needed classification and alerting across multiple on-prem and cloud environments, the ability to clean up stale and risky data from acquisitions, and automation to help them maintain a secure state. Today, they utilize more than 20 Varonis licenses, and we are discussing how our newer DA Cloud offering can address risks stemming from this data in AWS. These are just two examples of how we are helping our customers solve their biggest data protection challenges, which has been our mission since we founded Varonis in 2004. We are focused on continued execution and capitalizing on the enormous market opportunity before us, and we are excited for another strong year. With that, let me turn the call over to Guy. Guy?

Thanks, Yaki. Good afternoon, everyone. Thank you for joining us today. Our first quarter results were solid, highlighted by 32% year-over-year growth in ARR to $404.5 million, and by record quarterly operating cash flow of $24.5 million. Total revenue growth of 29% was at the high end of our guidance range, and our first quarter operating margin improved versus last year, despite the 350 basis point FX headwind we discussed on our last earnings call. Before I discuss results, I want to briefly comment on the impact to our first quarter performance from the Russia/Ukraine war. Historically, Russia has represented only about 1% of our business. As a result of the sanctions imposed by the U.S. and other countries, the write-off of that business in Q1 impacted ARR by approximately $3 million. For the full year, we are assuming zero contribution from the region, and consequently the impact to our original revenue and ARR expectations will be in the $4 million to $5 million range. Though the sanction write-down is the current reality, we see a strong demand environment, and therefore we are reaffirming our original full-year guidance for both ARR and revenue. Highlighted by the examples Yaki just discussed, we continue to see strong adoption trends from new customers, as well as healthy expansion from existing customers who are eager to consume even more of the Varonis platform. Let me give you a few data points that support the higher customer lifetime value we see today, which in turn positions us for sustainable future growth. As of March 31, 2022, 74% of our customers with 500 or more employees purchased four or more licenses, up from 66% a year ago and 55% two years ago. Even more powerful is that 42% of those customers purchased six or more licenses, up from 32% a year ago, and twice the 21% in Q1 of 2020. Our new customers are trending toward more and more Varonis licenses, leading the way to double-digit purchases, a clear validation of our strategic transition and the greater value we provide. And as companies around the world take an increasingly strategic approach to securing their sensitive data both on-prem and in the cloud, we expect to see a continued increase in customer lifetime value. Turning now to our first quarter results in more detail. Total revenues grew 29% to $96.3 million. This includes subscription revenues of $69 million, which grew 53% year-over-year. Maintenance and Services revenues were $27.3 million, with renewal rates again over 90%. Looking at the business geographically, North America revenues grew 31% to $69.1 million or 72% of total revenues. In EMEA, revenues grew 20% to $24.2 million or 25% of total revenues. Rest of World revenues grew 67% to $2.9 million or 3% of total revenues. Turning back to the income statement, I’ll be discussing non-GAAP results going forward. Gross profit for the first quarter was $82.4 million, representing a gross margin of 85.6%, compared to 85.4% in the first quarter of 2021. Operating expenses in the first quarter totaled $90.3 million. As a result, first quarter operating loss was $7.9 million or an operating margin of negative 8.2%. This compares to an operating loss of $6.3 million or an operating margin of negative 8.4% in the same period last year. The strength of our model continues to prove itself as we were able to show year-over-year leverage, even with the 350 basis points of FX headwind that I mentioned earlier. During the quarter, we had financial expense of approximately $858,000, primarily due to interest expense on our convertible notes. Net loss for the first quarter of 2022 was $10.2 million or a loss of $0.09 per basic and diluted share, compared to net loss of $7.7 million or a loss of $0.08 per basic and diluted share for the first quarter of 2021. This is based on 108.2 million and 100.2 million basic and diluted shares outstanding for Q1, 2022 and Q1, 2021 respectively. As of March 31, 2022, we had approximately $804 million in cash, cash equivalents and marketable securities. And as I mentioned, for the three months ended March 31, 2022, we generated a record $24.5 million of cash from operations, compared to $20.4 million generated in the same period last year. We ended the first quarter with 2,127 employees, an increase of 62 net new employees from the end of 2021, as we continue to invest across the company to support the overall growth of the business. Moving to our guidance. As mentioned, we are reaffirming our full-year guidance for both ARR and revenues. I also want to remind everyone that our 2022 full-year operating margin guidance reflects a 200-basis point headwind related to our hedging program for our FX exposure to the New Israeli Shekel. On a constant currency basis, the midpoint of our guidance shows expansion of approximately 140 basis points year-over-year. In the second quarter of 2022, the impact is a 300-basis point headwind, and on a constant currency basis, the midpoint shows expansion of approximately 225 basis points year-over-year. For the second quarter of 2022, we expect: Total revenues of $110.5 million to $112.0 million, representing growth of 25% to 27%. I would point out this excludes approximately $1 million of revenues from Russia, which we previously expected; non-GAAP operating income of breakeven to $1 million; and non-GAAP net loss per basic and diluted share in the range of $0.02 to $0.01. This assumes 109.7 million basic and diluted shares outstanding. For the full year 2022, we expect ARR of $484 million to $489 million, representing year-over-year growth of 25% to 26%; total revenues of $485 million to $490 million, representing growth of 24% to 26%; non-GAAP operating income of $27 million to $30 million; and non-GAAP net income per diluted share in the range of $0.16 to $0.18. This assumes 127.3 million diluted shares outstanding. In summary, we intend to capitalize on the strong demand environment we see, which will enable us to further expand our market leadership as we execute on our long-term strategy to drive topline growth, margin expansion, and cash flow generation. Thanks for joining us today, and with that, we would be happy to take questions.

Thank you. Thank you, our first question comes from Matt Hedberg with RBC Capital Markets. Please proceed with your question.

Hi guys! Thanks for taking my questions. I appreciate the color on Russia. I just wanted to ask, just maybe just to double click on that a little bit. It sounds like Europe overall is strong. I just wanted to make sure that excluding Russia there was no other sort of Eastern Europe exposure that you thought was also at risk. And then if I could just squeeze in, just a quick follow-up. You didn’t really talk about DA Cloud this quarter and I know there are some early traction in 4Q. Curious if that had any positive uplift on 1Q results? Thanks guys.

Hi Matt! Overall we see a strong pipeline in Europe with strong customer and prospect engagement. We have very good teams, very good partners there, and just overall we believe that the long-term market opportunity is big. Yes, everything is related to Russia, but in general we can generate some uncertainty, but also in our case it can be a catalyst for elevated cybersecurity crimes. It's very hard to predict how it is going to play out, but for the long term we don't see any changes in the opportunity and we see a very healthy pipeline. Regarding DA Cloud, we are very happy with what we see and primarily extremely excited with the version that we just released on Salesforce.com. We think that all the DA Cloud licenses can be very successful, but if you look at just Salesforce, think about just the magnitude of this business, all the critical data and the numerous applications connected to it. There's a lot of collaboration on this platform and a very, very complex permission structure. So we believe what we have done with 365 and the on-prem data is very relevant there and we see major releases coming. We believe that over time the DA Cloud can be a big and very important business for us.

Thank you. Our next question comes from Joseph Gallo with Jefferies. Please proceed with your question.

Hey guys! I really appreciate the question. Has there been any change in the competitive landscape, especially now that you're selling cloud? And then just any sense of discounting in the quarter and then can you just speak to the familiarity of your sales force and the channel with cloud?

Yes, so in terms of the competitive landscape, nothing has changed. Regarding DA Cloud, it’s the same things like the other Varonis platform. When you are talking about big data sets and the infrastructure that is in closer proximity to the datasets, we are really the only complete solution in the marketplace. It's the way that people perceive our functionality, which is very similar to everything that Varonis is doing. This was really part of our roadmap, and we demonstrated our time to market with the acquisition of Polyrize. It's like 365. It’s a business that is exploding for us. The teams need to understand the platform that we support; Salesforce is big, S3 in the Cloud is big, Okta is big, but it has a lot of similarity, and the overall Varonis functionality is relatively the same. But we always have cadence. They need to learn how to sell it. We are always doing everything we can to support them, but we are very bullish and very excited about the opportunity.

And regarding the discount levels, our discount levels have been holding very nicely, especially when you look at the number of licenses, additional number of licenses we've been selling with the move to subscription. The amount of additional licenses we have been selling is significant. We recently introduced bundles that are intended to simplify the selling process, and we have a silver, gold, and platinum bundle as part of our offering now. They include seven licenses, 13 licenses, and 15 licenses, and they appear as one line item. As I said, we recently introduced them, and we hope that this will provide simplicity in the selling process. But overall, as we look at the discounts right now, they've been holding very firm.

Thank you. Our next question comes from Fatima Boolani with Citi. Please proceed with your question.

Hey! Good afternoon! Thank you for taking my questions. Guy, this one’s for you on Russia. I really appreciate the quantification of the impact there as you wind down that business. But I was hoping you could help me with some math. So you talked about an aggregate $4 million to $5 million headwind on the top line, but $3 million of that was basically realized as a headwind in the first quarter. So I guess my question is, why so front-end loaded for that write-down, and how should we think about that linearity affecting the full year basis for both ARR, and total revenue. Thank you.

So just like I said in the prepared remarks, Russia has an immaterial impact, but it still has an impact on our KPIs. If you think about it in a simplistic way, the impact is 1% to both our revenue and ARR. Like I said, there is approximately $3 million of headwind to ARR. But when you think about the full year in 2022, we expect approximately $4 million to $5 million headwind for both ARR and revenue, as we are really assuming zero contribution from that region going forward. When you think about the impact, the majority of it is happening in Q1, but obviously when you look at the comparable numbers in Q2 through Q4, you'll have that impact as well.

Thank you. Our next question comes from Joel Fishbein with Truist. Please proceed with your question.

Hi! Thank you. Can you just comment, Guy, on hiring plans going into '22? I know in Q1 it looks like you were on plan. But I'd love to hear what the plans are going into the remainder of the year and where most of those resources will be allocated? Thanks.

So very similar to what we've done last year, the majority of our hires are coming in both the sales and marketing department and the R&D department; very balanced in our plans to increase both our footprints of additional engineers and sales capacity. We are very focused on both managing top line growth and profitability, so we want to do it at the right pace, and so far we are very focused on executing according to plan.

Thank you. Our next question comes from Andrew Nowinski with Wells Fargo. Please proceed with your question.

Alright, thank you. I just had a question on, as it relates to the new logo growth. So I was wondering if you could talk about what you saw in terms of the year-over-year growth in new logos in Q1 and if you look at your net new ARR in Q1, it looks like it was down year-over-year and if you add back that $3 million it was basically flat. So I’m wondering if you can just provide more color on the net new ARR as it relates to new logos as well. Thanks.

I’ll start with the second question. When you factor in that $3 million headwind coming from Russia, that really changes the picture in terms of that net new ARR contribution and that has to be taken into consideration. Can you just remind me of what was the first question?

I'm just wondering if you could provide any color on your new logo growth. I know a lot of customers are adding — existing customers are adding more licenses, so I'm wondering how your new logo growth fared in Q1.

Absolutely! So you're right in the fact that the majority of our revenue still comes from the base. We have a lot to sell to the base and you can see that in terms of the number of licenses. We have both the four or more licenses and the six or more licenses, we definitely have a lot more to sell. But when you look at the new logo contribution, we had positive growth of new customers. But even more importantly, it’s the size of those customers that we are bringing in. We are focusing on the larger enterprises. We have done very well focusing on those and we continue to target customers that can generate significantly higher customer lifetime value.

It's also important to understand that this is a big platform and most of the product development, all of the customers, and this is just the evolution of the business. It’s a complete platform play. This is a real land and expand with key use cases, and thankfully when customers are buying, over time they are buying more and more and this is just how it evolves.

Thank you. Our next question comes from Matt Saltzman with Morgan Stanley. Please proceed with your question.

Hey guys! This is Matt Saltzman from Morgan Stanley. I’m subbing in for Hamza Fodderwala tonight. So thanks for taking the question. As you mentioned, this year is a difficult year for pursuing margin expansion. You got a number of external factors, whether it be FX, competitive hiring environment, wage inflation, really you name it. Yet your operating income guide is going up. So I'm just curious, kind of how you're thinking about balancing profitability inflection from that operating leverage and aligning that with the growth opportunities that you're seeing on the DA Cloud side and just net new customer adds. Thanks.

You're absolutely right. In terms of our focus on profitability, that really hasn’t changed comparative to how we run the business over the last many years. We are very focused on growing top line growth, but we are also very conscious and focused on bringing some of it to the bottom line. If you look at the things we can control on a constant currency basis, we ended Q1 with basically 370 basis points of margin improvement, which shows that we are able to manage through wage inflation and through the other factors that are part of our challenges. I believe there's a lot of leverage in our model, especially with our ability to expand within our existing customer base and the fact that we can continue to sell more licenses. We are maintaining our discount levels firmly, and when you look at that expansion and how we've managed the business to date, we plan to continue to balance top line and bottom line growth while achieving margin expansions.

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

Great! Thanks for taking my question. So Guy, could you provide, in the $4 million to $5 million headwind from the Russia exposure in ARR, if we were to look at that from a revenue standpoint, can you provide a rough estimate of maintenance versus subscription?

So maintenance is about half.

And then just circling back on the EMEA question before, I understand the Russia impact, but I think by my math your EMEA business showed a pretty decent growth deceleration. I think it was probably the weakest growth quarter in five. So I’d like to get a little more detail into whether you feel confident that that business performed to expectations from a bookings and billing standpoint in the quarter and that you're going to see some growth acceleration from here in EMEA throughout the year.

Chad, you're absolutely right. When you look at EMEA, and just for clarity purposes, Russia is part of EMEA. When you look at those numbers, EMEA grew at 20% in Q1, but on top of the Russia impact we had close to 400 basis points of currency headwind versus last year. So when we look at the pipeline and the conversations, we feel very good about our ability to continue to grow the European business. When you put all of this together, both the Russia and the currency headwinds, it paints a very different picture.

Thank you. Our next question comes from Jason Ader with William Blair. Please proceed with your question.

Hey guys! This is Billy Fitzsimmons on for Jason Ader. Yaki, for you first. Any anecdotes from customers as you roll out the DA Cloud or any feedback from customers regarding the new features for Salesforce you announced in the quarter? And then I’d also like to ask, any feedback on the effectiveness of the free risk assessment?

It’s similar to a lot of our platform; it’s the same features. But now with the release of the new functions for Salesforce, we see a lot of momentum in the pipeline and customers are receiving a lot of value. It’s much more than just the platform itself. I think that one of the more stationary trends after COVID is that the endpoints are like access points, leading to the adoption of SaaS applications. That really is a positive trend, as this is where you have digital information for organizations, and the data on-prem is not going anywhere. So the combination between the on-prem data and the SaaS applications is very strong. Some of the SaaS applications are just norms, like Salesforce. There’s so much critical data in play for collaborations. So when you provide visibility and a data-oriented approach, it creates a massive value and this represents the biggest blind spot for most organizations. Just think about Salesforce, the issue of size of revenues and the installed base, and take even a fraction of that. It represents a huge security business opportunity. For each platform, from open repositories and D-Tab to open data formats, we believe it increases greatly, and many of our customer base are using these SaaS platforms. This presents a significant opportunity, and we are in the right direction.

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

Awesome! Hey guys! Thanks for taking my question here. Guy, I’d love to dig into the bundles that you talked about a little more. So maybe just a couple of parts to this question, all on bundles. The first one is, what are some of the most differentiated products when you compare gold to silver and then compare gold to platinum? You gave a number of products, and I’m curious kind of what the products are that differentiate those. Can you just remind us when those bundles were made generally available? Anything that you think is particularly compelling on pricing?

First of all, when we thought about the bundles, it really came from the fact that we have so much to offer to our customers, and we're seeing customers wanting to purchase more of the platform upfront; we've seen that throughout the transition. If you go back to when we sold data advantage and the data classification engine, that was kind of the security sale. And with the Office 365 licenses and the automation engine, and the fact that we have so many more licenses geared towards automation, we just realized that there's more that customers want to consume, and it really depends on their needs. So when you think about the different bundles and how they fit with customer needs, they would include some sort of Office 365 if that customer has it and wants to protect those platforms; it includes our automation engine; there are just more licenses that we can offer. As for the introduction date, we started that process a couple of quarters ago, but I can tell you that only last quarter was it the first real quarter that we were making sure they are fully available for reps, and we pushed that.

Thank you. Our next question comes from Shaul Eyal with Cowen and Company. Please proceed with your question.

Thank you. Good afternoon guys! Yaki, I think it was last quarter or the quarter before that I’ve asked about potential supply chain constraints and standard business model. I see how well you've done this quarter. I think all-in-all the guidance for the year is absolutely encouraging in light of out of Russia. But again, I just want to revisit this question, given that it is a hot topic in tech and software land, and I know you guys are not specifically an appliance-based name. But I want to get some more color or a definitive response, as was the case last quarter or the quarter before that. So what's the thinking along these lines?

Yeah, hi Shaul! We don’t see any direct impact because if you want to install our on-prem, it can be virtual machines or you can install it in AWS, Azure, or Google. So these machines are available to our customers, and everything that relates to DA Cloud is our sub-solution, so we don't see a direct impact at this point.

Thank you. Our next question comes from Shebly Seyrafi with FBN Securities. Please proceed with your question.

Yeah, so thank you very much. My question is on the gross margin line. It declined by 400 basis points sequentially, which is a little bit steeper than last year. Could you talk through the factors that drove that decline and whether you expect, in the last three quarters of this year, the gross margin to decline year-over-year or to stabilize?

First of all, I think when you look on a non-GAAP basis, operating margins are basically flat year-over-year. When we look at the leverage we have in the model, we see a lot of leverage and there is the regular seasonality within the year. Q1 has historically been the lowest quarter of the year from a revenue perspective, and Q4 has historically been the highest quarter of the year in terms of topline, where our expenses are relatively flat. Therefore, you have that seasonality on a sequential basis, but when you look year-over-year, the non-GAAP operating margin is relatively flat.

Thank you. Our next question is from Joshua Tilton with Wolfe Research. Please proceed with your question.

Yeah, hi guys! Thanks for taking my question. Your new subscription dollars were essentially flat on a year-over-year basis. So I'm just wondering if there is anything from a bookings perspective outside of Russia worth highlighting in the quarter and how do we expect the new subscription dollars to trend for the remainder of the year?

Yes, there is. When you look at new subscriptions one thing to point out is we added the perpetual line item because it's immaterial this year. We included it as part of the subscription line item and when you look at the year-over-year numbers, it's important to factor that in. The subscription overall has been strong. We feel very good about our pipeline and our ability to grow, and overall feel very good about the business.

Thank you. 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 joining. We look forward to speaking with you this quarter and please don't hesitate to reach out if we can be helpful. Thanks and have a good night!

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