Earnings Call Transcript - VRNS Q4 2021

Operator, Operator

Greetings. Welcome to the Varonis Systems, Inc. Fourth Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note, this conference is being recorded. I will now turn the conference over to your host, James Arestia, Director of Investor Relations. Thank you. You may begin.

James Arestia, Director of Investor Relations

Thank you, operator. Good afternoon. Thank you for joining us today to review Varonis fourth quarter and full year 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 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, 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 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 fourth quarter and full year 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?

Yakov Faitelson, CEO

Thanks, Jamie, and good afternoon, everyone. Thank you for joining us to discuss our Q4 2021 performance, the results of a steady, consistent and well-executed year by our team. Looking ahead, we are excited to capitalize on the countless opportunities we see for 2022 and beyond and are focused on positioning Varonis for durable long-term growth. Before I discuss these opportunities, I want to start by reviewing the key themes for 2021. Guy will then review our Q4 results and our financial guidance for 2022. So let's jump in. As we think about the market for data security in the last 12 months, it is important to ask what has stayed the same and what is changing? Starting with what has stayed the same. For many years, we have bet on secular trends. To name a few, explosive data growth, the sophistication of threat actors and increasing regulation. We now see another trend which is serving as a strong tailwind for our growth, and that is a global scarcity of in-house technical expertise. This presents a significant need for added automated protection for all organizations. Let's spend a moment on this trend which continued to accelerate in 2021, driving demand for our platform. The first is data growth, which we have talked about since we founded Varonis. This showed no signs of slowing during 2021, whether on-prem or in the cloud, which only opens companies around the world to greater risk. The second is the threat environment, giving the growing dependence on critical data which makes every company highly vulnerable. It is not surprising that threat actors continue to refine and sharpen their strategies. Cybercrime gets worse by the day, and it has become more profitable than ever before. The third trend is regulation. A natural byproduct of these attacks, all of these regulations have sharp teeth. And as we have seen in the past year, noncompliance results in substantial fines. The last trend that I mentioned earlier is technical scarcity. We constantly hear from customers and prospects that their IT and security experts are stretched too thin, and that they need automated platform solutions that allow them to do more with less. This is exactly what Varonis provides at scale across the diverse and complex environments. Our technology has never been a better fit than for today's market. As a result, our data-first approach continues to resonate with customers regardless of size, industry or region. Now let's turn to what is changing, starting with the digital transformation which has drastically impacted how companies must approach data security. As we have said, with work-from-anywhere, the perimeter is hard to define and even harder to protect. There has been an explosion of endpoints which primarily serve as access points to enterprise data stores, both on-prem and in the cloud. And sensitive data now lives in the sanctioned data stores, which makes collaboration easier and security much harder. As we all know, when solutions to problems are found, new problems often emerge. We believe the biggest problem for data-driven organizations over the next decade will be managing the tension between productivity and security. The digital transformation has made collaboration so easy that the average employee has access to 17 million files on the first day, most of which are not necessary for their job. As a result, the potential for widespread damage from just one compromised user, which we call the blast radius, is enormous. On top of that, attackers have so many vectors to get sensitive data. It can be through an endpoint, a vulnerable gateway, or a misconfiguration, and it only takes this one. For every company, the scale of the problem can be massive, and it is impossible to solve without automation. This is exactly what we are laser-focused on going into 2022 and beyond, and how we are positioning the company for durable long-term growth. We intend to go both wider and deeper as we expand our platform, with a distinct focus on SaaS data stores. DatAdvantage Cloud meaningfully expands our market opportunity as we can now provide coverage for Google Drive, Salesforce, AWS and many more SaaS data stores and applications. We can also go deeper on many of these as we already have with classification for Google Drive and Box, and there is so much more we plan to do on learning and integration. The one common theme across these efforts is automation, which is truly transformational for our customers and addresses the data protection challenges they face. And we believe that we are just scratching the surface of an enormous market opportunity. Before I turn the call to Guy, I want to briefly discuss some key customer wins in Q4. The U.S. healthcare service organization with 30,000 employees became a new Varonis customer this quarter. It viewed Microsoft 365 as a significant risk and brought us in. Not only did our risk assessments validate their concern, but it also expanded the initial use case to address ransomware open access issues and permissions mapping. They purchased a double-digit number of licenses, and we are now already discussing how they can expand with DA Cloud licenses for additional protection. At the same time, our existing customer base continued to serve as a strong source of incremental revenues, and the team had another outstanding quarter, closing a number of significant expansion deals. One of the world's largest auto manufacturers, originally a perpetual customer with only two licenses, significantly expanded their Varonis deployment in Q4. Prompted by the need to comply with regulation and take a more strategic approach to securing sensitive data, they now have a double-digit number of licenses. These are just two examples of how the trend impacting organizations today, fueled by the digital transformation, provides Varonis a long-term opportunity to fulfill its mission of protecting sensitive data for its customers, coupled with our platform innovation and continued investments across the business. We believe we have a clear path to our $1 billion ARR target. I want to thank our team for their great effort and hard work last year, and I know I speak for them when I say how excited I am for 2022. With that, let me turn the call over to Guy. Guy?

Guy Melamed, CFO

Thanks, Yaki. Good afternoon, everyone. Thank you for joining us today. We are extremely pleased with our fourth quarter results. Our continued execution resulted in impressive performance across all key metrics, highlighted by 35% ARR growth to $387.1 million. We also achieved total revenue growth of 33% and non-GAAP operating margin of 17.7%, both ahead of our guidance. Similar to previous years, we showed greater operating leverage in the second half of the year, bringing almost all of our Q4 top-line beat down to the bottom line. As we look at the market, we continue to see broad-based demand for our platform coming from new and existing customers, all of whom recognize the growing and pressing need to secure their sensitive data. Our experience confirms our belief that more is more and that it's easier to get a customer from six to double-digit licenses than from one license to five. Why? Because the more licenses our customers buy, the greater value they realize, and the higher the likelihood that they expand with additional licenses. And we're seeing this over and over again as our customers increasingly take a more strategic and longer view to securing their data. As of December 31, 2021, 73% of our customers with 500 or more employees purchased four or more licenses, up from 63% a year ago and 54% two years ago. And even more powerful is that 41% of those customers purchased six or more licenses, up from 30% a year ago and more than double the 20% in Q4 2019, setting the stage for the further expansion I just described. Lastly, our dollar-based net retention rate for subscription customers was above 120% at the end of the 2021 year. Turning now to our fourth quarter results in more detail; total revenues grew 33% to $126.6 million. This included subscription revenues of $96 million which grew 53%. Maintenance and services revenues were $29.6 million as our renewal rates, again, were over 90%. Lastly, our Q4 results included several hundred thousand dollars in ARR from DatAdvantage Cloud. Looking at the business geographically; we saw strong performance across all regions. In North America, revenues grew 34% to $89.1 million or 70% of total revenues. In EMEA, revenues grew 32% to $34.2 million or 27% of total revenues. Rest of World revenues grew 27% to $3.3 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 fourth quarter was $113.4 million, representing a gross margin of 89.6% compared to 88.7% in the fourth quarter of 2020. Operating expenses in the fourth quarter totaled $91 million. As a result, fourth-quarter operating income was $22.4 million or an operating margin of 17.7%. This compares to operating income of $13.9 million or an operating margin of 14.6% in the same period last year as we continue to maintain our focus on balancing margin expansion with top-line growth. During the quarter, we had financial expense of approximately $850,000, primarily due to interest expense on our convertible notes. Net income for the fourth quarter of 2021 was $18.5 million or income of $0.16 per diluted share compared to net income of $12.3 million or income of $0.11 per diluted share for the fourth quarter of 2020. This is based on 118.6 million and 108.4 million diluted shares outstanding for Q4 2021 and Q4 2020, respectively. As of December 31, 2021, we had $807.6 million in cash, cash equivalents and short-term deposits. For the 12 months ended December 31, 2021, we generated $7.2 million of cash from operations compared to negative $5.8 million used in the same period last year. We ended the year with 2,065 employees, an increase of 96 net new employees from the third quarter and an increase of 346 employees in the last 12 months. I will now briefly recap our full year 2021 results. Total revenues grew 33% to $390.1 million, well above the high end of our guidance. Subscription revenues grew 67% to $268.9 million. Our full year operating margin was 6.5% compared to negative 1.5% for 2020. The 800 basis point improvement validates the leverage in our model that we have talked about throughout the transition. We continue to be thoughtful with our ongoing investments that capitalize on the long-term opportunity generated by the trends that Yaki discussed and accelerated by the digital transformation. Before I move to guidance, I want to note that as our SaaS offering continues to increase in the years ahead, ARR will become even more important as a leading indicator for our business, given the ratable revenue recognition of SaaS. Additionally, some color on our 2022 guidance. I 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 120 basis points year-over-year. In the first quarter of 2022, the impact is more pronounced with a 350 basis point headwind. And on a constant currency basis, the midpoint shows expansion of approximately 140 basis points year-over-year. These rates were, in retrospect, as good as we could get for 2022. And just to remind you, these headwinds follow the 100 basis point of tailwind we benefited from in 2021 as we took advantage of COVID-related volatility in early 2020 to lock favorable rates for the year. In general, we try to minimize volatility through our hedging program, with our larger focus on margin improvements where we have control. Lastly, we expect that CapEx for 2022 will be in the range of $12 million to $14 million. Moving to our guidance; for the first quarter of 2022, we expect total revenues of $94.5 million to $96.5 million, representing growth of 26% to 29%. Non-GAAP operating loss of negative $10.5 million to negative $9.5 million and non-GAAP net loss per basic and diluted share in the range of $0.11 to $0.10. This assumes 108.4 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%. This assumes approximately $5 million of ARR from DA Cloud. Total revenues of $485 million to $490 million, representing growth of 24% to 26%. And this assumes approximately $2.5 million of revenue from DA Cloud. Non-GAAP operating income of $26 million to $29 million and non-GAAP net income per diluted share in the range of $0.16 to $0.17. This assumes 128.5 million diluted shares outstanding. As I look back at the recent challenges posed by the pandemic, it is clear to me that not only have we overcome them, but we have generated significant growth, margin expansion, and improved cash flow during the last two years while positioning ourselves to take full advantage and capitalize on the longer-term opportunity that lies ahead. Thanks for joining us today. And with that, we would be happy to take questions.

Operator, Operator

Thank you. At this time, we will be conducting a question-and-answer session. Our first question comes from the line of Matt Hedberg with RBC Capital. Please proceed with your question.

Matt Hedberg, Analyst

Great, guys. Thanks for taking my question. Congrats really on a strong end of year. I think we all appreciate the ARR guide this year. When we think about the algorithm for that, how should we think about the new customer adds versus expansion of your base? Obviously, you highlighted DA Cloud which seems super exciting. But just wondering, with the added investments, what is the right way to think about new customers versus expansion?

Yakov Faitelson, CEO

I think that we definitely see that the strategy is working. And there is this underlying architecture that is forming with the digital transformation that data is concentrated in the sanctioned data repository that with DA Cloud we are covering and with all the efforts that we have done. So customers see the value and we really have a path that many of our customers will have between 15 to 20 licenses. Having said that, new customer adds are also very important for us, but it's also extremely important for us to cover the market in the right places. And before that, it was 1,000 plus. Now the focus is even 2,000 users and above and then really to take them to 15-plus licenses. So overall, it's working. We just need to make sure that we are focusing on the right places. And sometimes, it's very important to decide what not to do. But definitely, it's still early innings for DA Cloud. And as you know, with 365 and the automation engine, it always really takes a year that the stationary trends will form, but we believe that there is just a huge opportunity. We see tremendous opportunity with 365. We also see an explosion of the data on-prem and more and more just realization of organizations all over the world that the efforts of cybersecurity and data protections are in order to protect digital assets, and this is where Varonis shines. So the short version of the answer is it's both, but we need to focus on the right size of customers.

Operator, Operator

Thank you. Our next question comes from the line of Sterling Auty with JPMorgan. Please proceed with your question.

Sterling Auty, Analyst

Yeah. Thanks. Hi, guys. Thanks again for the ARR guidance, I appreciate it. I'm just wondering if DA Cloud turned out to be $15 million instead of $5 million. So in other words, if you added $10 million more, how does that impact ARR? Obviously, you get $10 million from the DA Cloud. But what I'm asking is, given the ARR treatment of traditional on-prem subscription licenses, what's kind of that mechanism? So for every $10 million of DA Cloud, what's the net impact to ARR?

Guy Melamed, CFO

Thank you for the question, Sterling. It's an important one, so I'll provide some context before addressing your specific inquiry about the mechanics of ARR and revenue. We are issuing the ARR guidance for three primary reasons. First, we want to enhance transparency as ARR becomes the leading indicator of our business, particularly with the increasing sales of DA Cloud and its associated revenue recognition. Looking back at 2020 and 2021, it’s crucial to understand how ARR and revenue operated. In those two years, revenue exceeded ARR due to the nonrecurring nature of professional services. Specifically, in 2020, revenue was $5.5 million higher than ARR, and in 2021, it was higher by $3 million, primarily attributed to those professional services. As we move into 2022, the gap between revenue and ARR is closing due to the DA Cloud. We anticipate around $5 million in ARR contributions, with about half of that recognized as revenue, which helps close the gap from previous years. Looking forward, we expect that as we continue to sell more DA Cloud licenses, ARR will eventually surpass revenue and represent a larger amount in dollar terms. Now, to address your specific concern, there seems to be some confusion. For the year, we assume $5 million for DA Cloud in ARR, which, as Yaki noted, reflects our positive momentum with licenses. However, it's important to clarify that this $5 million only represents about 1% of our full-year ARR expectation. This differs from 2019 when we transitioned the company from perpetual to subscription models over five quarters. We are responding to investor feedback about wanting a leading indicator, which is why we are providing ARR guidance, but we are not giving revenue guidance with the assumption that we will lower it throughout the year. This situation is quite different from the 2019 transition.

Operator, Operator

Thank you. Our next question comes from the line of Brent Thill with Jefferies. Please proceed with your question.

Joe Gallo, Analyst

Hey, guys. You have Joe on for Brent. I appreciate the question. Guy, maybe for you, can you just parse out the different components of op margin in 2022? I appreciate the 120 basis points of constant currency expansion. But shouldn't this be the year you finally see a massive uplift from 2019 renewals? And maybe just a little more color around the investments on the hiring side? Thanks.

Guy Melamed, CFO

That's a great question. In 2021, we achieved 800 basis points of margin expansion, which occurred while we were making significant investments. Our long-term focus allows us to capitalize on opportunities by making necessary investments while also improving the bottom line. In Q4, nearly all of the improvement contributed to the bottom line, and the 800 basis point expansion compared to last year's results was a result of our cautious investment approach. However, we aim to maximize our potential and will continue this strategy into 2022. Also, on a constant currency basis, we are seeing an operating margin improvement of about 120 basis points, which aligns with our strategy.

Operator, Operator

Thank you. Our next question comes from the line of Rob Owens with Piper Sandler. Please proceed with your question.

Rob Owens, Analyst

Great, thanks for taking my question. This is one of the strongest quarters of net new ARR growth that you have seen. Can you discuss the current sales cycles and their progress throughout the year? Additionally, what do the prospects look like as we move into 2022? Thank you.

Yakov Faitelson, CEO

Sales cycles have remained relatively unchanged. Organizations are gradually recognizing that their investments in cybersecurity and data protection are primarily aimed at safeguarding digital assets. Currently, these digital assets are mostly situated within the platforms we are protecting and the accompanying infrastructure. There is a gradual realization of the significant return on investment and efficiencies gained when customers invest in our platform, leading to overall expansion. The market demand is strong, particularly following the pandemic, which has resulted in an increase in the adoption of SaaS applications and on-prem data, along with numerous endpoints serving as access points concentrated at the center. We are addressing this considerable need. Once customers make their initial purchases, they tend to expand their investments. This trend was evident in the fourth quarter, and we believe that over time, there will be a clear understanding that this is the most effective method for protecting data.

Operator, Operator

Our next question comes from the line of Joel Fishbein with Truist. Please proceed with your question.

Joel Fishbein, Analyst

Good evening and great results. I just have a question for you, Guy, regarding the number of licenses sold. Would you consider giving us the number of customers that were taking 10 or more licenses, considering you're moving upstream? And it seems like you're having some really good success.

Guy Melamed, CFO

You're absolutely right. We are seeing a lot of success, and the numbers reflect what we've been discussing—specifically, that more is indeed more. We've been very clear about the metrics we share and for now, we want to focus on the four or more licenses and the six or more licenses to avoid creating confusion with too many metrics. However, as we've demonstrated in the past, we provide the relevant metrics at the right time, and we are committed to being transparent with our investors and analysts.

Operator, Operator

Our next question comes from the line of Fatima Boolani with Citi. Please proceed with your question.

Fatima Boolani, Analyst

Hey. Good afternoon. Thank you for taking my questions. Guy, the question is for you with respect to the ARR guidance. So you're looking at $100 million of implied net new ARR in calendar '22, which is relatively flat, I guess, what you experienced in calendar '21. So maybe can you help us walk through some of the puts and takes into that ARR guidance? And maybe specifically, what is embedded from a maintenance ARR decay standpoint in that guidance, particularly in the context of, I think, what you said with a 90%-plus renewal rate for maintenance? So any color there would be really helpful. Thank you.

Guy Melamed, CFO

Absolutely, that's a great question. The philosophy behind our guidance remains unchanged. We aim to be responsible in our approach, just as we have in the past. If you consider the relationship between revenue and ARR, we are starting at the highest revenue point for the full year that we've seen in years. While the KPI ARR may be a new aspect of our guidance, the individual providing that guidance is the same as always. We want to ensure we guide responsibly, and I believe this serves as a solid starting point for us.

Operator, Operator

Our next question comes from the line of Roger Boyd with UBS. Please proceed with your question.

Roger Boyd, Analyst

Hi. Thank you very much for taking my question. Congrats on the nice results. A question on the operating margin, Guy. Can you just talk about the impact on gross margins from DA Cloud, recognizing that's coming in at about 1% of ARR? But as you build up the cloud infrastructure, what sort of impact should we expect to see on the gross margin line in calendar '22?

Guy Melamed, CFO

Definitely. So as I mentioned before, the expectation for ARR incremental coming from DA Cloud is about $5 million. And the revenue expectation is about half of that. Therefore, the margin impact shouldn't be significant in 2022. But as we continue to sell that and that becomes a larger part of the business, we'll provide more color. But as of 2022, that's not an impactful impact for us.

Operator, Operator

Our next question comes from the line of Alex Henderson with Needham & Company. Please proceed with your question.

Alex Henderson, Analyst

Thank you very much. So I was hoping you could talk a little bit about the DA Cloud in terms of whether that's just a single subscription. I mean there's a lot of functionality in that, whether it's privilege, whether it's stale identity removals, shadow identity discovery. Is there more than one subscription in there? Or is that just a single subscription? It's a lot packaged in if it's just one.

Yakov Faitelson, CEO

It's like there are several licenses there, and we also realize a lot of synergy with our Classification Engine. And the way that we work with it, we have bundles for DA Cloud. And usually, customers are buying several licenses. But it's still early. So as we are progressing with it, we are going to provide more color and more details of how it is moving forward. We are very encouraged from the first quarter. We believe that it's a huge opportunity, but it's still the beginning.

Operator, Operator

Our next question comes from the line of Hamza Fodderwala with Morgan Stanley. Please proceed with your question.

Hamza Fodderwala, Analyst

Hey, guys. Thanks for taking my question, and thanks a lot for all the color around the ARR guide. Maybe a question for either Yaki or Guy. The SaaS ARR guide, how much of that is the $5 million that you've guided to based on pipeline that you're seeing today, perhaps from existing customers, versus pipeline that you're going to generate in 2022? Is that ARR $5 million more back-end-loaded in '22 versus front-end? Thank you.

Yakov Faitelson, CEO

We have a wealth of experience in introducing new products to our customers and sales team. We see positive initial signs and feel assured about reaching the $5 million in annual recurring revenue. Looking ahead to the next few years, our customers show a strong presence in SaaS, and many of these licenses will be significant for them. We believe the success we've seen with the 365 suite and Azure can translate to DA Cloud, but it's important to note that we're just getting started.

Operator, Operator

Our next question comes from the line of Nick Mattiacci with Craig-Hallum. Please proceed with your question.

Nick Mattiacci, Analyst

Hi, this is Nick on for Chad Bennett. Thanks for taking our questions. So gross margins looked really strong again in the quarter. Can you just help me to understand what is driving the gross margin improvements? And should we think about this being a 90% gross margin business going forward? Or is there anything else to consider when thinking about gross margins this year?

Guy Melamed, CFO

So I think, obviously, 2021 was a very strong year for us, and we ended it on a very, very positive note. Gross margins were roughly the same and definitely a number we're very pleased with. As you look at 2022, we don't expect a major change on the gross margin front, especially because of that ARR incremental addition of DA Cloud, as I mentioned before, being around that $5 million and only half of it being recognized. So I think kind of in our view for 2022, we expect those numbers to continue in the same range.

Operator, Operator

Our next question comes from the line of Jason Ader with William Blair. Please proceed with your question.

Jason Ader, Analyst

Yeah. Thank you. Yaki, kind of a high-level question for you. What are your top priorities as CEO for 2022 for the company?

Yakov Faitelson, CEO

Yes. My top priority is to add value to our customers. And in order to do that, we need to create the right product, hire and retain the right talent, and make sure the right people are in the right places and to make sure that the company is focusing on the right opportunity. But when I see, I see tremendous opportunity. I see tremendous opportunity in terms of coverage, so where the data repositories are growing and tremendous opportunity with automation. And when I'm looking to the future, I see that there is just so much innovation ahead of us than behind us. And I see the challenges in the customer base. And I believe that with coverage in automation, we can build a very strong, important company that can serve as the foundation for the trust that is needed to function in this digital universe. And I think that an organization's capacity to share and create information is far exceeding the capacity to protect it. And just to manage this constant tension between productivity and security is going to be the biggest problem for organizations moving forward. And I believe that we can solve it, and we can solve it completely.

Operator, Operator

Our next question comes from the line of Saket Kalia with Barclays. Please proceed with your question.

Saket Kalia, Analyst

Okay, great. Hey guys, thanks for taking my question here. Yaki, maybe just as an extension to that last question, maybe more specifically, can you just talk about any changes to sales comp or strategy in 2022? You've talked a lot about still being early in customer module adoption. Is there anything that you've thought about maybe doing with your existing base in 2022 to help accelerate that, just given all the value that they get with more licenses versus less?

Yakov Faitelson, CEO

No, there are no significant changes in terms of compensation or anything like that. The only shift is that we plan to focus more on customers with 2,000 users and above because we now see a clear path where customers will need 15 or even 20 licenses. Our model of "more is more" is performing exceptionally well. One common issue we observe within organizations is a shortage of security talent; very few people are available to tackle numerous large problems. With more licenses, customers benefit from enhanced alerting and remediation, the ability to classify many repositories, and substantial productivity gains through automation, leading to a much more complete solution. Our goal is to focus on customers with 2,000 users and ensure they have enough licenses to leverage significant automation value, which has resulted in them purchasing more. So, the changes we see are mainly about increased coverage, but overall, it's gradual and consistent with our existing approach.

Operator, Operator

Our next question comes from the line of Shaul Eyal with Cowen. Please proceed with your question.

Shaul Eyal, Analyst

Thank you. Good afternoon, guys. Congrats on the quarter and outlook for 2022. Guy, very, very quick and simple question. Have you met your hiring targets for 2021? And what's the headcount you plan on adding during fiscal '22?

Guy Melamed, CFO

So when we look at the hiring plan for 2021, we successfully increased our headcount, particularly in the sales and marketing department and R&D, which was our goal for the year. We've effectively added people in key areas. Looking ahead to 2022, while we don't provide specific guidance on headcount, our intention is to keep hiring, especially in R&D due to the return on investment it has provided over the years, and in the sales department, not only for quota-carrying representatives but also for the supporting functions that enhance customer value. Overall, our strategy is proving effective, and we're successfully hiring in the right areas.

Operator, Operator

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

Andrew Nowinski, Analyst

All right, thank you. You've talked in the past about how it's easier to get customers to go from 6 to 10 licenses than it was to get them to go from two to five licenses. And if you look at the percentage of customers that have now purchased six or more licenses, it looks like that increase has been pretty linear each quarter. So, I'm wondering will we ever see any sort of step function increase in that percentage of customers that are buying six or more licenses? And if not, where do we see evidence that it is in fact easier to get customers to double the number of licenses they're purchasing? Where would that show up?

Guy Melamed, CFO

So I think, obviously, as we have a platform that has today over 35 licenses, our offering has increased. And we're seeing, from all the feedback and all the conversations, that our ability to get to double-digit licenses on average per customer has been significant. You're absolutely right. When you look at the six or more licenses, that the increase there has been significant, 20% two years ago, 30% last year, 41% at the end of this year. But you're also right in the fact that, that number also shows the opportunity we have. If you look at it in reverse order, it basically means that we have approximately 60% of our customers that have five licenses or less. And that just talks about the opportunity that we have ahead and how much meat on the bone we have within our existing customer base to continue to grow. So obviously, we'll provide more color in the quarters ahead and in the years ahead as we find fit and without causing confusion. But I think that overall, from all the indications that we have seen, the path to double-digit licenses on average per customer has never been clearer.

Operator, Operator

Our next question comes from the line of Shebly Seyrafi with FBN Securities. Please proceed with your question.

Shebly Seyrafi, Analyst

Thank you very much. I believe you have projected an improvement of about 120 basis points in operating margin for 2022 on a constant currency basis. I assume you're expecting a shift towards a post-COVID environment with increased travel and related expenses. I would like to know what that operating margin improvement on a constant currency basis would look like when you account for the rise in travel expenses in 2022.

Guy Melamed, CFO

I think that's a great question. And our assumption for travel is that it will pick up in 2020, gradually increasing quarter-over-quarter. But in total, it still will be below the pre-pandemic levels. But you're absolutely right that as we kind of guide and bake in the expense level related to travel, we're assuming a gradual return to a more normal world.

Operator, Operator

Our next question comes from the line of Erik Suppiger with JMP Securities. Please proceed with your question.

Erik Suppiger, Analyst

Yeah. Thanks for taking my question. On the OpEx, talk a little bit about how you see the increased spending between R&D and sales and marketing. Is this going to be driven more on the sales and marketing side? Then what opportunity is there to drive productivity on the sales and marketing side? Where are you from a productivity perspective versus your targets?

Guy Melamed, CFO

So I'll start, with your permission, with the second part of the question. I think when you look at our model, there's a lot of leverage coming out of the model. And you can see in the 2021 results that, that 800 basis points of margin improvement are coming over the year with significant investments, meaningful investments that we have had kind of throughout the year. When you look at kind of the sales and marketing department on a non-GAAP basis, you can see that a significant portion of that came from the sales and marketing department. And that's mostly because of the renewals that are obviously cheaper, and our expansion within our existing customer base that allows us to generate that leverage. But we want to make sure that we still make the necessary investments to capitalize on that longer-term opportunity. So I think as you look at our investments, they would be focused mostly on the R&D and the sales and marketing front.

Operator, Operator

Our next question comes from the line of Jonathan Ruykhaver with Baird. Please proceed with your question.

Jonathan Ruykhaver, Analyst

Yeah. Thank you and good evening. Yaki, I was wondering if you could drill down just a bit more on this automation opportunity that you've been highlighting this evening. Maybe touch on where you see this automation from a product standpoint benefiting the company the most. And just from an innovation perspective, does this suggest that we could see more response and remediation type solutions across the platform over time?

Yakov Faitelson, CEO

Yes. Overall, we believe there is significant potential in our operational plan to enhance automation across all phases. This includes automation in remediation, classification, and time to resolution. This focus on automation is crucial for us, and we recognize numerous opportunities in this area.

Operator, Operator

Our next question comes from the line of Joshua Tilton with Wolfe Research. Please proceed with your question.

Joshua Tilton, Analyst

Hey, guys. Thanks for taking my question. I just want to actually follow up on Sterling's question from earlier, from a different perspective. If you sell more DA Cloud this year, is that going to detract your sales from selling your traditional licenses? Or should we think of it as purely incremental to the current term business?

Yakov Faitelson, CEO

You can think about it primarily as incremental. Obviously, when you sell licenses to customers, there is sometimes a limit to how much they can buy, but overall, it's going to be incremental.

Operator, Operator

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

James Arestia, Director of Investor Relations

So thank you, everyone, for joining. Please don't hesitate to reach out in the coming days if we can be helpful, and we look forward to speaking with you this quarter. Thanks and have a good night.

Operator, Operator

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.