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Varonis Systems Inc  (NASDAQ:VRNS)
Q3 2018 Earnings Conference Call
Oct. 29, 2018, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the Varonis Third Quarter 2018 Earnings Conference Call. At this time, all participants will be in listen-only mode. A brief question-and-answer session will follow a formal presentation. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to Jamie Arista of Investor Relations. Please go ahead.

Unidentified Speaker --

Thank you, operator. Good afternoon. Thank you for joining us today to review Varonis's third quarter 2018 financial results. With me on the call today are Yaki Faitelson, Chief Executive Officer; and Guy Melamed, Chief Financial Officer and Chief Operating Officer. After preliminary remarks, we will open up the call to a question-and-answer session.

During this call, we may make statements related to our business that would be considered forward-looking statements under federal securities laws, including projections of future operating results for our fourth quarter and fiscal year ending December 31, 2018.

Actual results may differ materially from those set forth in such statements. Important factors, such as risks associated with anticipated growth in our addressable market; competitive factors, including increased sales cycle time; changes in the competitive environment, pricing changes and increased competition, the risk that we may not be able to attract or retain employees, including sales personnel and engineers, general economic and industry conditions, including expenditure trends for data and cybersecurity solutions; risks associated with the closing of large transactions, including our ability to close large transactions consistently on a quarterly basis; our ability to build and expand our direct sales efforts and reseller distribution channels; new product introductions and our ability to develop and deliver innovative products; risks associated with international operations; and our ability to provide high quality service and support offerings could cause actual result to differ materially from those contained in forward-looking statements.

These factors are addressed 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 second quarter 2018 earnings press release, which can be found at www.varonis.com in the Investor Relations section. Also, please note that a webcast of today's call will be 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?

Yaki Faitelson -- Chief Executive Officer

Thanks, Jamie, and good afternoon, everyone. We had solid performance in the third quarter of 2018. Total revenues rose $67.1 million, an increase of 26% year-over-year and ahead of our guidance. North America revenues increased 27% in the quarter, while EMEA revenues increased 20%.

To drill down a bit more on North America, we are pleased with the region performance and the contribution from the West Coast. As we discussed with you last quarter, we felt confident in our ability to drive growth in North America where the demand for our products is very strong. This is exactly what we saw in Q3.

Now, I would like to discuss a few examples before we are executing on a go-strategy. Let's begin with our customers. First, I'm pleased to report that we added 188 new customers in the third quarter. As you know, we made strategic decisions several years ago to focus on customers with more than 1,000 employees.

Larger customers yield larger initial deals and strong upsell opportunities and also greater customer lifetime value. As an example, a global manufacturing company based in the US with approximately 1,500 employees wanted to ensure it was doing everything it could to protect its valuable intellectual property and lock down employee data protected under GDPR.

A Varonis data risk assessment revealed the customers (inaudible) exposed intellectual property and personally, identifiable information covered by GDPR. The company purchased data advantage to map and monitor other data stores. Data classification engine to locate those sensitive data and GDPR (inaudible) to identify GDPR data in their environment.

The customers also purchase automation engine to speed up mediation to expose data. With Varonis, they will have a turnkey approach to finding and securing overexposed data throughout their enterprise. This is another reminder the GDPR regulations are not just relevant to our immediate customers, but to all multinational companies doing business in the EU.

This example is only one of many from where we are seeing of customers making bigger initial commitment to us validating that our operational approach to detect prevent and sustain is working. Our customers see the value we provide as they sync more critically and comprehensively about their businesses and their data protection efforts. But it's not just new customer acquisition that is driving our business, it is up selling as well.

We continue to have success with our journey of value, we are confident that once our customers use our products, they will then buy more. Our sales teams continue to make progress helping our customers understand the value they can derive across the platform. This quarter, we continue to see number of customers who purchased two or more and three or more product families increase year-over-year.

At the same time, the percentage of licenses and first-year maintenance from existing customer increased to 53% from 49% in the prior year period. By (inaudible) example, a large accounting firm began using data advantage in 2015 to control access to sensitive client file and avoid potential risk and loss of business resulting from exposed data.

Ever since, they have continued to advance products including data classification engine and data (inaudible) to identify sensitive information and monitor and allow (inaudible) sites. In the third quarter, the firm once again turned to Varonis with the purchase of Automation Engine, thanks to the visibility control and automation provided by Varonis, the firm to automatically identify and classify data amid immediate suspicious activity as it unfolds.

This is yet another example of what we're seeing across our customer base where customers see the value for data security platform and the strength of the combination of data advantage, data classification engine and data level and this makes perfect sense. Their advantage provides them up, who can access data classification engine identify which data is critical, data alert analyzes the access activity and provides real-time alerts of abnormal behavior.

The combination of risk reduction, sophisticated alerting and simplified compliance offers our customers a unique value proposition. The alerts are compelling when customers are monitoring one type of data store more so so when they monitor multiple data stores. In today's hybrid world, the alerts and the investigation capabilities behind them are invaluable.

We have seen tax rates for DatAlert grew steadily and now just below 50% which emphasized the potential to continue to sell DatAlert to our so existing customer base. Across all our offerings, the years we have spent working with customers on remediation projects has made our products and methodology better, and we are now using same approach with cyber security.

As an example, North America aerospace company was recently under an active fishing attack, where the attackers were successfully able to compromise several user accounts. They reached out to us and we were able to help them determine where additional machine will compromise and whether any GDPR information was affected. I'm also pleased to note the adoption of our Office 365 solutions continue to be very strong.

Our strategy remains to help customers, manage and protect data anywhere whether its stored on-premises or in the cloud. As an example, an international educational organization of students and faculty around the world turned to Varonis to secure their hybrid on-premises and cloud environment. Their advantage will map and monitor the data stores.

Data classification engine will give them visibility into sensitive files. Data transport engine will allow them to create tools and automatically migrate archive of each file and DatAlert when (inaudible) analysed behavior to detect internal or external sites. And coming to (inaudible) GDPR patterns, they can run country specific rules to locate and look down files containing personal data. Thanks to Varonis, the organization is taking a proactive approach to protect the hybrid data stores and will be prepared as they continue to migrate to the cloud.

To father our cloud strategy, in July, we announced the upcoming integration with Box to secure enterprise content in the cloud. Box will be supported file to file data security platform tracking user activity and providing customers with the ability to manage risk and secure the enterprise data wherever it is. In short, our financials and operational results this quarter reaffirm our belief that we are building doable and scalable company that can reach $1 billion in sales.

I'm excited as I look forward to the fourth quarter and beyond. And I'm confident that our strategy and team, position us well for the long -- for long-term profitable growth. With that, let me turn the call over to Guy. Guy?

Guy Melamed -- Chief Financial Officer and Chief Operating Officer

Thank you, Yaki. I'll begin by discussing our quarterly results and then move on to discussing our outlook for Q4 and the full year 2018. Total revenues for the third quarter were $67.1 million, an increase of 26% year-over-year and above our guidance. License revenues were $35.8 million, which represents a 23% increase from the third quarter of 2017.

Maintenance and services revenues were $31.2 million, increasing 28%, compared to the third quarter of 2017. Our maintenance renewal rate in the third quarter was again over 90% and continues to increase as it has over the past several quarters. From a geographic viewpoint, we saw growth in both our major regions in the third quarter.

We were pleased with the strong growth we saw across all regions in North America, where revenues increased 27% to $44.9 million or 67% of total revenues. EMEA revenues increased 20% to $19.8 million or 29% of total revenues. Rest of world revenues, which represent 4% of total revenues were $2.4 million. For the third quarter, existing customer license and first-year maintenance revenue contribution was 53%, compared to 49% in prior year period.

As Yaki mentioned, we added 188 new customers during the quarter, compared to 208 in Q3 of 2017. The decrease in net new ads, year-over-year is in line with our strategy to focus on companies with 1,000 or more employees, which continues to result in customers making larger initial commitments to us. At the same time, we continue to see increased revenues from our existing customer base, which serves as a strong source of additional revenues given the broad platform of products we have and the growing volumes and complexity of enterprise data that they have.

We ended the third quarter with approximately 6,350 customers. As of September 30, 2018, 72% of our customers purchase two or more product families, up from 68% as of September 30, 2017. 39% of our customers purchased three or more product families, compared with 34% in Q3 of 2017. These percentages, which have continued to grow over the last few quarters, are evidence that our strategy of ongoing investments in R&D is working as we are seeing customers buy more licenses than ever.

As we innovate and expand our product offering, we expect to have an even broader suite of products to offer our customers, further driving our land and expand strategy. Before moving on to the profit and loss items, I would like to point out that I'd be discussing non-GAAP results going forward unless otherwise stated which for the third quarter of 2018 excluded a total of $8.4 million in stock-based compensation expense and $430,000 of payroll tax expense related to stock-based compensation.

We reported non-GAAP results in addition to and not as a substitute for financial measures calculated in accordance with GAAP. A detailed GAAP to non-GAAP reconciliation could be found in the tables of our press release, which is available on our website. Gross profit for the third quarter was $60.5 million, representing a gross margin of 90.2% in line with our gross margin in the third quarter of 2017.

I want to remind everyone that embedded in our 2018 financial guidance was our desire to continue to grow revenues, while improving our non-GAAP operating margin excluding the 300 basis points headwind related to FX. We continue to execute against our plan. Operating expenses in the third quarter totaled $65.1 million, compared to $51.4 million in the third quarter of 2017. As a result, our operating income was $2 million or an operating margin of 3% for the third quarter, compared to operating income of $1.9 million or an operating margin of 3.6% in the same period last year.

During the quarter, we had financial income of $99,000 primarily from interest income, compared to financial income of $622,000 in the third quarter of 2017, primarily due to foreign exchange gain. As you know, foreign exchange gains and losses can (inaudible) punch rate. Our guidance does not consider any of this additional potential impact of financial and other income and expense associated with foreign exchange gains and losses as we do not estimate movements in foreign currency rates.

Our net income was $1.5 million for the third quarter of 2018 or income of $0.05 per diluted share, compared to net income of $1.8 million or $0.06 per diluted share for the third quarter of 2017. This is based on 32.5 million and 30.0 million diluted shares outstanding for Q3 '18 and Q3 '17 respectively.

Turning to the balance sheet, we ended the quarter with approximately $158.1 million in cash, cash equivalents and short-term investments. During the first nine months of 2018, we generated operating cash flow of $16.3 million, compared to cash flow generated from operations of $10.8 million in the first nine months of 2017.

This year-over-year improvement is keeping with our strategy to scale our business improving our non-GAAP operating margins while delivering increased levels of cash flow from operation. We ended the quarter with 1,386 employees, a 16% increase from 1,199 at the end of the third quarter of 2017.

Moving now to guidance. For the fourth quarter of 2018, we expect total revenues of 86.5 million to $88 million, representing year-over-year growth of approximately 18% to 21%. We expect our non-GAAP operating profit to range between $11 million and $12 million and non-GAAP net income per diluted share in the range of $0.32 to $0.34. This assumes a tax provision of $600,000 to $800,000 and 32.6 million diluted shares outstanding.

For the full year 2018, we are raising both our revenue and profit guidance. We now expect total revenues in the range of 269.5 million to $271 million, representing year-over-year growth of approximately 25% to 26%. We now expect our non-GAAP operating income to be in the range of $5.5 million to $6.5 million and non-GAAP net income per diluted share in the range of $0.11 to $0.13. This assumes a tax provision of 2.3 million to $2.5 million and $32.4 million diluted shares outstanding. We also expect our cash flows from operations for the full 2018 year to be greater than full year 2017.

In summary, the need for companies to monitor and protect critical data has never been more important and the continued demand for our solutions confirms that our strategy is working. We are selling more licenses to both new and existing customers and renewal rates are increasing.

At the same time, we continue to scale our business improving non-GAAP operating margins, while delivering increasing levels of cash flow from operations. We look forward to continued financial and operational success in the fourth quarter as we build toward $1 billion business. With that we would be happy to take questions you have. Operator.

Operator

Thank you. At this time, we'll be conducting a question-and-answer session. (Operator Instructions). Our first question would be coming from the line of Saket Kalia with Barclays. Please proceed with your question.

Saket Kalia -- Barclays -- Analyst

Hi guys, thanks for taking my questions here, a nice bounce back. First, maybe for you Yaki. You touched on this in your prepared remarks, but now that we have another quarter under our belt on the West Coast performance from last quarter, did the team learn anything new about what contributed to the result last quarter, sort of a post-mortem, sort of analysis?

Yaki Faitelson -- Chief Executive Officer

No, not really. No, it was as expected, we just -- on our playbook, we have a little bit is with the company. For many years, we just came in and made sure that we are doing just the fundamentals that both us here in terms of pipeline development, closing, enablement, time management and it works exactly as we expected.

Saket Kalia -- Barclays -- Analyst

Got it, got it. Maybe my follow-up for you, Guy. Obviously, the quarter is very clear and it's still early to talk about specifically about 2019. But of course for all in the planning process. So I guess the question is with the hiccup that we had in the West Coast last quarter and with maybe the different views that the market has on the overall macro going into next year, the question is how do you balance some of those things with the secular growth that you have in your market again as you start to plan for next year.

Guy Melamed -- Chief Financial Officer and Chief Operating Officer

Hi, Saket. So first of all, we have Q4 ahead of us. So we'll talk about 2019 after Q4. But we do feel very strong about the market. I think the West Coast performed very well and we were very happy and we weren't surprised with that. And we're just -- more customers want to buy more and more licenses and we see that all the time.

Saket Kalia -- Barclays -- Analyst

Got it. Very helpful. That's it for me. Thanks very much.

Guy Melamed -- Chief Financial Officer and Chief Operating Officer

Thanks, Saket.

Yaki Faitelson -- Chief Executive Officer

Thank you.

Operator

The next question is from the line of Matt Hedberg with RBC. Please proceed with your questions.

Matthew Hedberg -- RBC Capital Markets -- Analyst

Hey, thanks, guys. Yaki congrats on getting the West Coast back on track. I wanted to dig down into that market a little bit more, I guess the US in particular. Can you talk about the how the federal vertical did this quarter and just kind of how the overall momentum feels right now, it's still kind of early for you guys. But just a little more commentary there would be helpful.

Yaki Faitelson -- Chief Executive Officer

Yes. So Federal could have done better. And the growth driver was the regular commercial business. In terms of the long-term expectation from the Federal market is unchanged, we just started to invest in the market two years ago and build the pipeline build on the programs do the certification, so it's just the early innings. But just a commercial business in North America, who worked very well and I'm just telling you what I am saying for yield, with (inaudible) this business, you need to take a multi-quarter view.

Matthew Hedberg -- RBC Capital Markets -- Analyst

That's great. And then, yeah, it's great to see the number of customers or two or actually three or more products, I think they were at an all-time high, you mentioned up sales are strong. I guess digging into that a little bit more specifically, are you guys doing anything to improve the overall sales motion and I think I've asked this in the past, but are you getting more customers asking for more ELA type contracts they want to consumer even more Varonis.

Yaki Faitelson -- Chief Executive Officer

Yeah, at this point, not ELAs, but we really see that what we are doing in data protection, works extremely well and also on the cyber security. Definitely 365 and the cloud Azure Compute works extremely well for us. So there are very, very strong building blocks and very it deepened Board value proposition. We can spend more time with our customers and we can really take them for this journey of value. So the way that they are using the product, the way that they are getting the value are -- (inaudible) economy if you will how much time we spend with them and what is the results becoming with time more predictable, and it makes sense to spend more time with larger customers.

Matthew Hedberg -- RBC Capital Markets -- Analyst

Great. Congrats again.

Yaki Faitelson -- Chief Executive Officer

Thank you.

Operator

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

Alex Henderson -- Needham & Company -- Analyst

Thanks. Just a quick one. Can you give us a headcount? And I guess, as you're starting to see the number of accounts buying two or more getting close to a 100% approaching it, are you going to start to add forum (inaudible) or something of that sort to to the list. My primary question though is really on the Canadian, I mean, the European business, so obviously slowed down quite a bit from the 60% growth rate last quarter. I assume that that's primarily a reflection of a strong 2Q and be the summer pattern of vacations in Europe, but could you talk a little bit about what transpired there, because I would expect that to be a little bit on the west side.

Yaki Faitelson -- Chief Executive Officer

Hi Alex, it's exactly as you said. You always need a multi-quarter view and with a very strong Q2 and the summer that can make the European business a bit unpredictable. We saw these growth rates, but for the year it's 45% growth in Europe. The business is very strong. We have good teams, good coverage, we see good demand across the board and we believe we can do very well in this market.

Guy Melamed -- Chief Financial Officer and Chief Operating Officer

And Alex just to address that -- sorry, go ahead.

Yaki Faitelson -- Chief Executive Officer

But as the 45% kind of the rate that you would expect in as we're looking in to the fourth quarter --

No. (Multiple Speakers) The guidance is the way that we guided. I just say that we are at 45% year-to-date, and you always need to take multi-quarter view. You can't analyze the business on a quarter-by-quarter basis and we just feel comfortable overall about the European business and believe that it will do it.

Guy Melamed -- Chief Financial Officer and Chief Operating Officer

And Alex, just to answer your first two questions, we ended the quarter with 1,386 employees and in regards to the number of customers buying two or more products and three or more products, this is the first year we actually added the three or more products. So, we have provided more color, because not only the change with data alert and the edge, but we have provided more color to investors and analysts in providing, and basically showing how customers are buying more and more products from us.

So the fact that we've gone up to 72% from 68% last year on the two and more products and 39% from 34% in the three or more products is a great indication that we really see customers buying more and more products from us, and we're very happy with that.

Alex Henderson -- Needham & Company -- Analyst

Great. Thank you.

Yaki Faitelson -- Chief Executive Officer

Thank you.

Guy Melamed -- Chief Financial Officer and Chief Operating Officer

Thank you.

Operator

Next question is from the line of Gur Talpaz with Stifel. Please proceed with your questions.Please go ahead with your question. Caller, please go ahead with your question.

Gur Talpaz -- Stifel -- Analyst

Apologies, I was on mute. So, sorry about that. You talked about a pipeline for a broader suite of products heading into 2019. With that in mind, can you give us some high level indication about where you plan on taking the portfolio? Should we expect more in the way of cyber security products like Varonis Edge or how are you thinking about the evolution of the business and the suite of solutions heading into next year?

Yaki Faitelson -- Chief Executive Officer

I would just constantly expanding on the building blocks of the value proposition. Cyber security is one of them and I think that we are doing things that are extremely innovative and very, very unique in everything that related to inside of it and APT and also the way that we are doing in rich conclusive forensics. This is something that works very well for us and we can add a lot of streams there, on the data protection, automation and reporting a lot of effective remediation. And obviously the cloud, so there are just -- there is a lot to do and we're seeing a lot of pipeline and we believe that there is in terms of innovation more ahead of us than behind us.

Gur Talpaz -- Stifel -- Analyst

That's helpful. And then, Guy, you talked about selling more licenses and improving renewal rates. How much of this would you attribute to sort of the push upstream into customers with more than 1,000 employees versus just better understanding of your value prop at general across the installed base?

Guy Melamed -- Chief Financial Officer and Chief Operating Officer

Hi Gur. I think we see customers across all sizes buying more licenses. I think it's really an indication of the market and how there is a problem that we are there to solve. So we really are focused on customers with more than 1,000 employees has helped us with not only generating large initial commitments, but also on the customer lifetime value and that's been working very well, but we see more licenses across the board.

Yaki Faitelson -- Chief Executive Officer

And in terms of Gur, in terms of the overall economics of the deal in the customer lifetime value just makes more sense to spend more time with them as we spend more time and this solution becoming more mainstream and budgeted in Board level problem. We know that if we're doing the right thing, we have a higher probability that budget will come -- will come toward us and then we can also have the right -- the coverage model that will support the sales motion. But again, for us, large customers with 1,000 users and about in terms of number of customers, we're talking about tremendous available market.

Guy Melamed -- Chief Financial Officer and Chief Operating Officer

Okay, thank you. Congrats on the bounce back.

Yaki Faitelson -- Chief Executive Officer

Thank you.

Operator

The next question is from the line of John DiFucci with Jefferies. Please proceed with your questions.

John DiFucci -- Jefferies -- Analyst

Thank you. I have a question for Yaki and then maybe follow up for Guy. Yaki, you talked about the cloud more recently, and I know you're agnostic to where Varonis is deployed. But can you talk about what you're seeing out there as far as your deployments in cloud-based environments or at hybrid cloud environments. Are you seeing any shifting happening in your customer base? Is there any change at all right now?

Yaki Faitelson -- Chief Executive Officer

Hi, John. No, we see -- definitely we see more adoption for the Cloud 365 and Azure that works very well for us. You see, we have now Box support. So you see these repositories, unstructured data still primarily is there going and reside on-premises. But with Active Directory and Azure AB and everything that we are doing now is with DNS and proxies and VPN and geolocation. The cloud is extremely relevant for us. In terms of customers, we are agnostic. We see some customers running our main servers, the IDU in AWS, I mean Azure and some on-prem. Just more data repositories, more work load, more infrastructure, more complexity with the regular use of the taxing from everywhere and DevOps just creating better opportunity for Varonis.

John DiFucci -- Jefferies -- Analyst

Okay, great. So that's good to hear. You don't care where it is, you're going to be there. I guess for Guy, listen, these results, it is nice to see a nice bounce back here and they're strong across the Board. And I don't want to nitpick too much, but looking at cash flow, because that's going to drive evaluation over the long-term. It was a bit below our expectations and I guess when I look when I see a big uptick. Usually you get an uptick in accounts receivables, but is a real big uptick in accounts receivables. Can you talk a little bit about that? And I guess I would assume that we'll see that benefit cash for the next quarter, because you'll collect those receivables.

Guy Melamed -- Chief Financial Officer and Chief Operating Officer

Hi, John. So those two points from the DSO perspective. Our DSO was lower in Q3 2017. And when you look at the cash flow from operations over the last nine months and the numbers that we have for 2018 are greater and we've seen a nice improvement compared to last year. There obviously is some timing issues from one quarter to the other, but the overall trend and if you take the multi-quarter view, we've seen great improvement on the cash flow and we continue -- and we plan to continue to show improvements on the cash flow as we continue to grow the business and shows a non-GAAP operating margin leverage.

John DiFucci -- Jefferies -- Analyst

Okay. Well -- and we do look at that at over time. But is it accurate for me to think about collecting those receivables that bigger jump this quarter -- within the next quarter or so?

Guy Melamed -- Chief Financial Officer and Chief Operating Officer

Well, just to give you some colors. If you remember, our strongest collection quarter for the year is Q1. And this seasonality is that the Q4 is still a good collection quarter. And so we expect to continue to show improved cash flow from operations for the year should be at better levels from 2017 and again there is some timing from one quarter to the other.

John DiFucci -- Jefferies -- Analyst

Okay, great, thanks a lot guys. Nice job.

Yaki Faitelson -- Chief Executive Officer

Thank you.

Guy Melamed -- Chief Financial Officer and Chief Operating Officer

Thank you.

Operator

Next question comes from the line of Melissa Gorham Franchi with Morgan Stanley. Please proceed with your question.

Melissa Franchi -- Morgan Stanley -- Analyst

Okay, thank you. Thanks for taking my question. I just wanted to follow up on EMEA. So I appreciate the lumpiness and the difficult comparable, but I want to know, to what extent GDPR is driving conversations. Obviously, that's something that is probably material in that region, but just wondering if there was a change in the quarter, if it's becoming more relevant in the conversations over the past few quarters. And then if you're comfortable with the level of investment that you've put in that region or do you feel like you need to ramp up investments?

Yaki Faitelson -- Chief Executive Officer

Hi Melissa. No we feel comfortable with -- overall with the level of investment. GDPR is definitely front and center in terms of the conversation in the criticality of data protection and cyber security and incident response. It's definitely driving a lot of awareness, but for us, it's like a very effective marketing, very effective marketing campaign. I think overall in EMEA, there is a good awareness for data protection, for cyber security, for privacy and the overall conditions for a solution like ours are very good and we believe that it will be the situation for long time.

Melissa Franchi -- Morgan Stanley -- Analyst

Okay, that's helpful, thanks. And then I just wanted to follow up on the sales force efficiency, so naturally you're going to get some leverage as more of the business comes through the existing days. But I'm wondering if you're seeing better leverage in new customer acquisition just as you're getting greater scale and you're becoming more well known in the marketplace?

Yaki Faitelson -- Chief Executive Officer

Definitely, we have more reps in the productivity curve, the brand is known, the problem is is known. So gradually, as you can see, we get a nice productivity gains but it's just, I think it's exactly the way that we explained that we are investing in the business and we believe that it will go and gradually will improve overall margins. So this is what we are doing and the company becoming bigger and more reps are in the productivity cycles and we have more customers that are willing to buy more. We see gradual productivity improvement in the sales reps.

Melissa Franchi -- Morgan Stanley -- Analyst

Okay, great. Thank you.

Yaki Faitelson -- Chief Executive Officer

Thank you.

Operator

The next question is from the line of Shaul Eyal with Oppenheimer. Please proceed with your questions.

Shaul Eyal -- Oppenheime -- Analyst

Thank you. Hi, good afternoon. Yaki, Guy and Jamie. Congrats on the quarter.

Yaki Faitelson -- Chief Executive Officer

Thank you.

Shaul Eyal -- Oppenheime -- Analyst

Yaki, we all understand the focus on company with the greater than 1,000 employees. Thank you for this incremental color and and examples in your prepared remark. Can you also share with us, talk to us about the high-end enterprise and dynamics surrounding this segment and as it relates specifically to Varonis?

Yaki Faitelson -- Chief Executive Officer

It's definitely a segment that we are talking, we have outstanding, very large enterprises, but it's still -- it's a relatively high volume business. We just, and we want to make sure that we are benefiting from the market size in terms of units of economics and we can do a very nice deals and very impressive customer lifetime value with these customers between 1,000 to 10,000 customers. And that's it, so the focus is all over, just the sales force slowly but surely becoming bigger, and we have the right coverage, so we just want to make sure that we are covering all the segment of the market in the right way.

But we don't want to put too much resources on parts -- because we can sell to everybody on parts of the market that the economics doesn't make sense. So we just want to make sure that we'll have enough volume, we can cater to the customers, give them enough attention take them to what we call the journey of value and make sure that they will use the product in the right way that will go with them to the cloud, that will address all the regulation and compliance needs that they have and it caters well to very large enterprises. And also to 1,000-plus and, but we are doing a lot of our revenues in the 1,000 to 15,000 day user shop.

And this is overall when we are talking about multi-quarter view what makes this business over several quarter very, very predictable and very doable.

Shaul Eyal -- Oppenheime -- Analyst

Understood, understood. And anything new toward the data on the boring. Yes, I got to ask at the competitive landscape, any newcomers, private start-ups, some of the big guys attempting to take a stab at the market you guys are addressing and products that --

Yaki Faitelson -- Chief Executive Officer

The competitive situation is the same. David and team analyzing diligently all the competitive situation and where we see them and from overall evaluations we see, even less competition than ever. And if we are selling well over the 90% of our deals, we are seeing an evaluation and we are evaluing on a lot of data, we are almost always alone. So in terms of the competitive landscape, its better than ever in the presence of other competitors or ankle biters in the -- in any of our sales campaigns.

Shaul Eyal -- Oppenheime -- Analyst

Thank you for that. Good luck.

Unidentified Speaker --

Thank you.

Operator

Next question is from the line of Chad Bennett with Craig-Hallum. Please proceed with your question.

Chad Bennett -- Craig-Hallum -- Analyst

Great. Thanks for taking my question. So maybe for Yaki, so if you think about the strategy toward 1000 plus employee enterprises. And in conjunction with that kind of growing products per enterprise or per customer, if we think about those two metrics and the customers that fit in that bucket, when you look at the customers that are at three plus, four plus, five plus products and maybe their 2,000 plus employee type customers. Are you being asked to be part of a broader security solution at that point? And I guess what I mean are you integrating with other security vendors. And maybe in particular, are you asked to particularly the data that you guys get and gather which I think is really valuable, are you asking to kind of feed that into into any other systems? Thanks.

Yaki Faitelson -- Chief Executive Officer

Yes, we're definitely integrating with many solutions, as many as we can. And we see there are alerts to think systems and we are working with identity in the access management, we're working with the e-discovery solutions. There is just a lot that is going on in terms of our integration with other security solution and we want to make sure that for our customers, one plus one will equals three. So any time that we get there, one of the things that works very well for us is that we are coming in and with the cybersecurity and the classification and the data protection and we make some of the previous investments and some times investments that it's hard for them to realize so much more productive. So yes it's definitely one of the things that we are doing, we want to make sure that our customers will utilize their other solutions better and that the whole ecosystem will work together well.

Chad Bennett -- Craig-Hallum -- Analyst

Okay, great. And then maybe a quick follow-up for Guy. Guy, as you look at the December quarter, updated guidance that you gave, I wouldn't believe this was the case. But are you thinking about the seasonality into the end of the year, any differently heading into this year versus last year and maybe talk about any drivers or incremental drivers this year that you didn't have last year? Thanks.

Guy Melamed -- Chief Financial Officer and Chief Operating Officer

Thanks for the question. Our philosophy on guidance hasn't changed. And when you look at the -- at the guidance that we provided the fact that we not only beat, but also raised for the full year is an indication of how strong we feel going into the quarter. But in terms of the philosophy, we're kind of guiding in the same way the same manner. I think we feel very strong about the business and the results and the guidance is an indication of that.

Chad Bennett -- Craig-Hallum -- Analyst

Thanks guys.

Guy Melamed -- Chief Financial Officer and Chief Operating Officer

Thank you.

Operator

Next question is from the line of Daniel Ives with Wedbush Securities. Please state your question.

Daniel Ives -- Wedbush Securities -- Analyst

Yeah thanks. Congrats again on this bounce back West Coast. My question is in regards to sales force, and just the industry partners. How are you looking about ramping those especially in Europe just given some of the strengths you've seen on GDPR?

Guy Melamed -- Chief Financial Officer and Chief Operating Officer

Can you repeat the question?

Yaki Faitelson -- Chief Executive Officer

Can you repeat the question?

Daniel Ives -- Wedbush Securities -- Analyst

Yeah, in terms of increasing your feet on the street as well as partnerships in Europe, just given the strength that you're seeing there, how are you thinking about that over the next 6 to 12 months?

Yaki Faitelson -- Chief Executive Officer

So we always. The market is so big and virtually we can sell to everybody. The key for us, is it's a proprietary sales force. We really work almost from first principles and we have a unique sales motion, and you need to understand how to explain and demonstrate our value proposition. So the way that we are increasing the sales capacity is just in the right way that we can -- just the people we can really give cater enable them and give them the right management with the right accounts. The market is so big, we can have a large sales force, but we really need to make sure that we are doing it in the right way. So for us if not -- if not the market demand or the market size, it's not the problem in the way that we are bringing people in. We just want to bring them responsibly that we can enable them, make sure that they will be successful and make sure that we are serving our customers in the right way. And also gradually improving our margins. So this is the leading indicators, not market conditions or market size.

Daniel Ives -- Wedbush Securities -- Analyst

Got you. And just a follow-up, just given the West Coast bounce back. Is there any thing that you've done now differently looking ahead to make sure in your pipeline process, sales process that the least thing that you can control that there's not, you're maybe going to remain speed bump on the horizon. Anything that you've instituted on this just impressive sort of bounce back.

Yaki Faitelson -- Chief Executive Officer

It's a business, you will always have some kind of speed bumps, but this is why we said that you always need to have a multi-quarter view. If you have a multi-quarter view, everything works very well. So we have very strong sales leaders in the company and many that are with us for a long time. And for us it wasn't a surprise, there was a problem, we are coming with playbook, we have a lot of management capacity, we can inject the right people, the right people in place, they will give air cover. And also when needed, we'll be in the trenches and make sure that the team will be successful.

The business is very doable, if you look from the time when, probably you see that the business is very doable, there is any issues usually we are bouncing back fast. I really think that we are good operator and we know how to tackle problems and solve them systematically and this is what you saw here. Sometimes we'll have problem just business is a living organism, but we have very good immune system most times and we know how to tackle it fast. And this is why we are saying always have a multi-quarter view. In a multi-quarter view, I don't think that we had a problem. In a multi-quarter view, I don't think that we had a problem.

Daniel Ives -- Wedbush Securities -- Analyst

yeah, great job. Thanks.

Operator

The next question is from the line of Erik Suppiger with JMP Securities. Please proceed with your question

Erik Suppiger -- JMP Securities -- Analyst

Yeah, thanks for taking the question. So your new customer license revenue was under 50%. I presume that's because you're targeting larger customers. Can you comment on what that shift is doing in terms of your sales cycle, and do you expect the new customer licensing revenue to remain below 50%.

Yaki Faitelson -- Chief Executive Officer

I think that it will move from time to time, it so much depend, customers are buying and then deploying, then to -- if they are bigger, there is different level of usage for cybersecurity, for remediation, for classification. Thankfully the platform is doing very well and we just did -- the new customers are very important for us and the (inaudible) -- the upsell is very important for us and it's just the balance and this also can fluctuate from quarter-to-quarter but the two growth drivers are very important for us.

Guy Melamed -- Chief Financial Officer and Chief Operating Officer

Just to add on that though. The license from existing customers over time we expect that percentage to continue and increase. I think last quarter, one of the questions that we got was why is the license and first-year maintenance from new customers, why did that kind of go up and we said take a multi-quarter view. And as you can see in this quarter, license and first-year maintenance from existing customers continue the trend. Like Yaki said, we're very focused on both the new customers and the existing and I think we're doing a very good job on both.

Erik Suppiger -- JMP Securities -- Analyst

Well then, can you just comment exclusive of the new versus existing customers. Can you comment on how the focus on larger accounts is affecting sales cycle, has it made any difference in terms of the length of the sales cycle?

Guy Melamed -- Chief Financial Officer and Chief Operating Officer

We haven't seen any change on the sales cycle. And our focus on companies with more than a 1,000 employees, the strategy has been working very well.

Erik Suppiger -- JMP Securities -- Analyst

Very good. Thank you.

Guy Melamed -- Chief Financial Officer and Chief Operating Officer

Thank you.

Operator

Our next question is from the line of Mark Schappel with The Benchmark Company.

Mark Schappel -- The Benchmark Company -- Analyst

Hi, thank you for taking my question. Just one question Yaki to you. With respect to your earlier comments on your Federal business that it could have done better, could you just go into some of the challenges that you're seeing in your Federal sector? I know it's relatively new, but still is it more or less or an educational sales still in the federal sector unlike the commercial sector.

Yaki Faitelson -- Chief Executive Officer

No, it's not educational. We definitely had several wins that validated that, they need the products, they need all the products and we can have very nice deal. Its just to make sure that we have no more maturity and we are in the programs and moving the business along, but it's just -- at this point, it seems small and it's not like a material growth driver for us. But we believe that with time, there are all the indicators that it should be a very good business for us.

Operator

Next question is from the line of Rishi Jaluria with D. A. Davidson. Please proceed with your question.

Rishi Jaluria -- D. A. Davidson -- Analyst

Hey, guys, thank you for taking my questions. Yaki, I wanted to touch on the integration, that's coming you had bounced with Box. I just wanted to dive a little bit more into that, is that something that you've got feedback from customers as a functionality that they wanted. And what is the sort of customer overlap between you and Box tend to look like? And then I've got a follow-up.

Yaki Faitelson -- Chief Executive Officer

It's another repository that some of our customers use. And as the time will go by, we wanted anything that's starting to be commercially viable and we see that enterprise is putting data there. We want to make sure that we are protecting it. We want to make sure that we taking a security telemetries and we can classify the data. This is just another repository. So we saw -- definitely, we saw enough customers saying that there is a need and we are catering to this need.

Rishi Jaluria -- D. A. Davidson -- Analyst

Okay, great that's helpful. And then Yaki again for you, you mentioned ramping up or increasing spending in research and development. And you mentioned the cloud was one area. I was wondering if you can expand specifically, is that just having it build and having more integrations like the Box one and having more hook us with cloud infrastructure and cloud applications or is it something else? What's the right way to think about where the priority and product development on the cloud side looks like. Thanks.

Yaki Faitelson -- Chief Executive Officer

No, Rishi, I can't provide all the details, but it's everything. The cloud is here, the cloud is real, there are a lot of data repositories definitely a infrastructure. The world is completely hybrid and data protection, cybersecurity and classification, big pain point for these new brave world. And we believe that we can capitalize on.

Rishi Jaluria -- D. A. Davidson -- Analyst

Wonderful. Thank you.

Operator

Thank you. Thank you. We've reached the end of our question-and-answer session. I will now turn the floor back to management for closing remarks.

Yaki Faitelson -- Chief Executive Officer

Before we end the call I would like to thank all of our employees and for their hard work contribution to our success this quarter. I also like to thank all of our customers and partners for their continued support. Thank you all for joining us today and we are looking forward to speaking with you again soon.

Operator

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

Duration: 52 minutes

Call participants:

Unidentified Speaker --

Yaki Faitelson -- Chief Executive Officer

Guy Melamed -- Chief Financial Officer and Chief Operating Officer

Saket Kalia -- Barclays -- Analyst

Matthew Hedberg -- RBC Capital Markets -- Analyst

Alex Henderson -- Needham & Company -- Analyst

Gur Talpaz -- Stifel -- Analyst

John DiFucci -- Jefferies -- Analyst

Melissa Franchi -- Morgan Stanley -- Analyst

Shaul Eyal -- Oppenheime -- Analyst

Chad Bennett -- Craig-Hallum -- Analyst

Daniel Ives -- Wedbush Securities -- Analyst

Erik Suppiger -- JMP Securities -- Analyst

Mark Schappel -- The Benchmark Company -- Analyst

Rishi Jaluria -- D. A. Davidson -- Analyst

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