Please ensure Javascript is enabled for purposes of website accessibility

Varonis Systems, inc (VRNS) Q3 2021 Earnings Call Transcript

By Motley Fool Transcribers – Nov 2, 2021 at 3:00AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

VRNS earnings call for the period ending September 30, 2021.

Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Varonis Systems, inc (VRNS 0.70%)
Q3 2021 Earnings Call
Nov 1, 2021, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the Varonis Systems, Incorporated Third Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, James Arestia, Director of Investor Relations. Thank you, James. You may begin.

10 stocks we like better than Varonis Systems
When our award-winning analyst team has a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.* 

They just revealed what they believe are the ten best stocks for investors to buy right now... and Varonis Systems wasn't one of them! That's right -- they think these 10 stocks are even better buys.

See the 10 stocks

*Stock Advisor returns as of October 20, 2021

James Arestia -- Vice President, Investor Relations

Thank you, operator. Good afternoon. Thank you for joining us today to review Varonis' third quarter 2021 financial results. With me on the call today are Yaki Faitelson, Chief Executive Officer; and Guy Melamed, Chief Financial Officer and Chief Operating Officer of Varonis. After preliminary remarks, we will open the call to a question-and-answer session.

During this call, we may make statements related to our business that will be considered forward-looking statements under Federal Securities Laws, including projections of future operating results for our fourth quarter and full year ending December 31st, 2021. Due to a number of factors, actual results may differ materially from those set forth in such statements. These factors are set forth in the earnings press release that we issued today under the section captioned forward-looking statements, and these and other important risk factors are described more fully in our reports filed with the Securities and Exchange Commission. We encourage all investors to read our SEC filings. These statements reflect our views only as of today and should not be relied upon as representing our views as of any subsequent date. Varonis expressly disclaims any application or undertaking to release publicly any updates or revisions to any forward-looking statements made herein.

Additionally, non-GAAP financial measures will be discussed on this conference call. A reconciliation for the most directly comparable GAAP financial measures is also available in our third quarter 2021 earnings press release, which can be found at www.varonis.com in the Investor Relations section. Also, please note that all common stock and per share data have been retroactively adjusted for the impact of the three-for-one stock split effective March 15th, 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?

Yaki Faitelson -- Chief Executive Officer, President, Co-Founder and Chairman of the Board

Thanks, Jamie, and good afternoon, everyone. Thank you for joining us to discuss our strong Q3, which was a major milestone for Varonis, our first quarter to surpass $100 million in revenues. As companies around the world became more aware of the need to protect sensitive data, we see this achievement is just scratching the surface of the enormous opportunity ahead of us. I want to thank the entire Varonis team for their efforts, which led to the success.

With that, let's jump in as I provide an update on our business. I want to focus on the security problem facing all organizations and why our data-first approach continue to resonate with new and existing customers. I will then turn the call to Guy to discuss our Q3 results and updated financial guidance.

Let's start with the current operating environment, where our world is more reliant on data than ever before, and the ultimate objective of security efforts is to protect it. The global digital transformation has led to many collaboration benefits, but it has also fundamentally changed how companies must approach security. As we have said, sensitive data is now stored in and accessed from more places; the perimeter is hard to define, and even harder to monitor and protect and endpoints now serve mostly as access points to large data stores on prem and in the cloud. Organizations using these sanctioned data stores and critical business applications so that their employees can more easily collaborate and extract more value from data. However, the ease and speed of collaboration has made securing data far more challenging, and we continue to see that without the right protection, it is getting harder and harder for enterprises to manage security without impacting productivity.

As the sprawl of data continues, the attack surface grows, and behind it, critical digital assets are woefully unprotected. The potential for damage from just a single compromised user, which we define as the blast radius is tremendous, and this doesn't need to be the case. We see this with our customers on a daily basis, especially with ransomware.

With Varonis, CISOs have better visibility into risks that are growing by the day. In addition to these fundamental data protection concerns, we see misconfigurations exposing sensitive data to many people, and the interconnectivity of SaaS applications increasing the risk that attackers can utilize these connections to move laterally in the cloud. The sophistication of today's hackers cannot be overstated, as state actors lead the efforts, and their techniques spill over into the commercial world. At the same time, we see how cryptocurrency makes it easy to monetize crime without any trace.

Nearly every organization faces these problems, and the need to solve them aligns perfectly with the primary use cases we are addressing; data protection, threat detection, and privacy and compliance. We have discussed the data protection and threat detection, and companies can no longer ignore regulations like the GDPR and CCPA, when we are beginning to see enormous fines for non-compliance. In short, we are unleashing the potential of our platform as companies think more strategically about data-centric security and we do not expect this momentum to slow down.

Let me provide a few examples of some key customer wins for this quarter. One of Europe's most recognized international organizations with nearly 20,000 employees became a Varonis customer in the third quarter. In addition to other threat detection needs, they sought to secure Active Directory, prepare data for migration to the cloud, and ensure compliance with GDPR. After we revealed where they were at risk and showed our ability to remediate overexposure to sensitive data, they purchased multiple licenses, and we are currently discussing additional licenses that will

Broaden the coverage we provide.

As we have said, we believe all Varonis customers should be at a double-digit number of licenses based on the current and growing threat landscape. The higher upfront value we provide through our subscription offering consistently leads to healthy expansion and upsells. A strong example is a utility company serving a major US city, which first became a Varonis customer several years ago under our perpetual model, purchasing three

Licenses. In 2020, they took advantage of our subscription offering to secure data in the cloud, as well as monitor the perimeter and remediate open access issues. In Q3 of this year, they further expanded their deployment to cover additional data stores and easily migrate data across platforms. In less than three years, this company went from three Varonis licenses to 20, and this does not include our recently introduced cloud licenses, which leaves room for additional expansion in the future.

These examples illustrate the continuation of strong adoption and engagement trends we are seeing. Coupled with healthy pipeline, we are well positioned to close the year strong. As we have said, we believe our position in the market is unmatched, and the team is relentlessly focused on continued execution and capitalizing on the enormous opportunity before us.

With that, let me turn the call over to Guy. Guy?

Guy Melamed -- Chief Financial Officer and Chief Operating Officer

Thanks, Yaki. Good afternoon everyone. Thank you for joining us today. We are pleased with our third quarter results, which demonstrate the power of our platform and continued need of our customers to secure their sensitive data.

Financial highlights in Q3 include 31% total revenue growth year-over-year to surpass $100 million of revenue, for the first time in our history. This was driven by 36% growth in ARR to $354.2 million. Our continued execution against our targets resulted in another strong quarter of growth. The confidence we have in our business is reflected in our Q4 guidance, which is the highest growth we have guided to since 2014. That year, our total revenues for the year were approximately $100 million, which is the revenues we delivered this quarter alone.

Looking at our results, we continue to see a healthy balance of new customers making substantial upfront commitments, and existing customers expanding their Varonis deployments after we demonstrate the value of our platform. We are pleased that the number of licenses purchased by new customers has increased over-time, as this reflects a meaningful increase in customer lifetime value.

As of September 30th, 2021, 70% of our total customers with 500 or more employees purchased four or more licenses, up from 60% a year ago and 50% two years ago. At the same time, 37% of our total customers with 500 or more employees purchased six or more licenses, up from 26% a year ago and more than double the 17% in Q3 2019. The rapid growth in these metrics demonstrate the strong customer engagement we see, and also illustrates the ongoing opportunity we have to get all Varonis customers to a double-digit number of licenses.

Turning now to our third quarter results in more detail. Total revenues grew 31% to $100.4 million. Subscription revenues grew 59% to $70 million, and Maintenance and Services revenues were $30 million, as our renewal rates remain strong at over 90%.

Looking at the business geographically, revenues in North America grew 32% to $75.6 million or 75% of total revenues. In EMEA, revenues grew 28% to $22.8 million or 23% of total revenues. Rest of World revenues were $1.9 million, or 2% of total revenues.

Turning back to the income statement, I'll be discussing non-GAAP results going forward. Gross profit for the third quarter was $88.3 million, representing a gross margin of 88%, compared to 87.2% in the third quarter of 2020. Operating expenses in the third quarter totaled $80.2 million. As a result, third quarter operating income was $8.1 million, or an operating margin of 8.1%. This compares to operating income of $3.1 million or an operating margin of 4% in the same period last year, as we continue to drive operating margin leverage. During the quarter, we had financial expense of approximately $908,000, primarily due to interest expense on our convertible notes.

Net income for the third quarter of 2021 was $5.7 million or income of $0.05 per diluted share, compared to net income of $2.1 million or income of $0.02 per diluted share for the third quarter of 2020. This is based on 119.1 million and 106.1 million diluted shares outstanding for Q3 2021 and Q3 2020, respectively.

We ended Q3 with $813.4 million in cash, cash equivalents, marketable securities and short-term deposits. For the nine months ended September 30, 2021, we generated $6.8 million of cash from operations, compared to negative $13.5 million used in the same period last year.

We ended the third quarter with 1,969 employees, an increase of 99 net new employees from the second quarter of this year. We continue to invest across departments and geographies, as we believe these investments in innovation and capacity will allow us to capture the opportunities we see in the market.

Moving to our guidance. We believe the strength of our Q4 financial guidance, especially against our outstanding performance in Q4 2020, reflects our ability to continue capitalizing on the growing demand for our platform. For the fourth quarter of 2021, we expect total revenues of $120 million to $123 million, representing growth of 26% to 29%. We expect non-GAAP operating income of $16.5 million to $18.5 million, and non-GAAP net income per diluted share in the range of $0.12 to $0.13. This assumes 119.8 million diluted shares outstanding.

For the full year, we are again meaningfully raising our guidance, and now expect total revenues of $383.5 million to $386.5 million, representing growth of 31% to 32%. We now expect non-GAAP operating income of $19.5 million to $21.5 million, and non-GAAP net income per diluted share in the range of $0.10 to $0.11. This assumes 118 million diluted shares outstanding.

In summary, we are pleased with our third quarter results, as the ongoing execution of our go-to-market strategy continues to drive topline growth, operating margin expansion, and cash flow generation, while also resulting in our first quarter with $100 million in revenues. We are proud of this milestone, and we know that continued outperformance and investment in the business positions us for a strong close to the year, and the next milestones to come.

Thanks for joining us today, and with that, we would be happy to take questions. Operator?

Questions and Answers:

Operator

Thank you. We'll now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question comes from Sterling Auty with JPMorgan. Please proceed with your question.

Sterling Auty -- JPMorgan -- Analyst

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

Guy Melamed -- Chief Financial Officer and Chief Operating Officer

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

Sterling Auty -- JPMorgan -- Analyst

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

Yaki Faitelson -- Chief Executive Officer, President, Co-Founder and Chairman of the Board

Hi, Sterling. We keep hiring. There's just a tremendous market opportunity in front of us. And as Guy said, there is a very strong understanding from our customers that they need to protect data and data is really concentrated in the assumption data repositories on-prem and in the cloud, and we are benefiting from it tremendously, but we need to enable them, and you know we need to make sure that we give them the right sets of the counsel, the total available market in terms of what we can -- how it can grow in the base and just the market opportunity which is captured is huge, and we're just going to grow the sales force, but we're just going to do it in the right way to make sure that we can support them. We have enough management in place. We have very diligent enablement programs, and we need to make sure that when people come here, we support them in the overall success.

Sterling Auty -- JPMorgan -- Analyst

Makes sense. Thank you, guys.

Guy Melamed -- Chief Financial Officer and Chief Operating Officer

Thank you.

Yaki Faitelson -- Chief Executive Officer, President, Co-Founder and Chairman of the Board

Thank you.

Operator

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

Matthew Hedberg -- RBC Capital Markets -- Analyst

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

Guy Melamed -- Chief Financial Officer and Chief Operating Officer

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

Matthew Hedberg -- RBC Capital Markets -- Analyst

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

Guy Melamed -- Chief Financial Officer and Chief Operating Officer

I think there's a lot of confusion out there on kind of the convergence of ARR and revenue. And I'll start by saying that we're very happy with ARR growing at 36% and revenue growing at 31%. And as part of kind of the expectation that we have and when we analyze the ARR and the revenue, so obviously, one metric is an annual metric, the ARR and the revenue is a quarterly one. So there could be some sort of discrepancy. But when you look at the recurring revenue, the subscription and maintenance on a 12-month trailing basis and analyze that growth, you see how the revenue and ARR have actually converged. They're both at 36% growth. And it really -- it doesn't matter how you look at it. On a quarterly metric or an annual metric, I think those results are very strong and an indication of the strength of the business. And as you mentioned, as we enter next quarter -- in the next earnings call, we'll provide more color for 2022.

Matthew Hedberg -- RBC Capital Markets -- Analyst

Got it. Thanks, guys.

Guy Melamed -- Chief Financial Officer and Chief Operating Officer

Thank you.

Operator

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

Brent Thill -- Jefferies LLC -- Analyst

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

Guy Melamed -- Chief Financial Officer and Chief Operating Officer

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

Brent Thill -- Jefferies LLC -- Analyst

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

Yaki Faitelson -- Chief Executive Officer, President, Co-Founder and Chairman of the Board

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

Brent Thill -- Jefferies LLC -- Analyst

Great. Thanks.

Operator

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

Saket Kalia -- Barclays -- Analyst

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

Yaki Faitelson -- Chief Executive Officer, President, Co-Founder and Chairman of the Board

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

Saket Kalia -- Barclays -- Analyst

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

Guy Melamed -- Chief Financial Officer and Chief Operating Officer

Saket, I think when we look at kind of the numbers of ARR out there and some of the talking points that we have heard about ARR, we feel that there's some confusion in how to model those numbers. And one of the things that we have thought of is providing more color on ARR as we enter the next earning call toward 2022. So I think the right metric -- the leading metric for us right now for this year is revenue. But as we sell more DA cloud licenses and because we will recognize DA cloud on a ratable way, ARR will become kind of a leading indicator for us. And therefore, we feel that we should provide more color to that as well.

Yaki Faitelson -- Chief Executive Officer, President, Co-Founder and Chairman of the Board

Saket, and one thing from my end. There are these high-level breaches, but the way that usually demand builds for us is that there is high-level breaches, emergency spending, organizations are doing lot of reactionary stuff. But then they restarted very thoughtful process, where are my assets, what I need to do, I'm drowning in alerts, what is the best ROI, how I'm going to protect my enterprise with just the scarcity of stuff, and this is what we are benefiting from. So I just think what happened is that when the dust is settling, this is where we are benefiting more and more and just becoming more mainstream and the customers are standardizing around us and really looking for a solution with us.

Saket Kalia -- Barclays -- Analyst

Got it. Very helpful, guys. Thank you.

Guy Melamed -- Chief Financial Officer and Chief Operating Officer

Thank you.

Yaki Faitelson -- Chief Executive Officer, President, Co-Founder and Chairman of the Board

Thanks, Saket.

Operator

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

Rob Owens -- Piper Sandler -- Analyst

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

Yaki Faitelson -- Chief Executive Officer, President, Co-Founder and Chairman of the Board

We've not seen material contribution this year, but the customer conversations are very positive. We started to build pipeline. We believe that it's a massive opportunity and really well contemporary risks are going to the site. These are the business applications that are running your business. So we believe the 365 is a good indicator of what we can do with DA Cloud and the initial indications that it can be very strong [Indecipherable].

Rob Owens -- Piper Sandler -- Analyst

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

Guy Melamed -- Chief Financial Officer and Chief Operating Officer

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

Yaki Faitelson -- Chief Executive Officer, President, Co-Founder and Chairman of the Board

Rob, you need to understand that the basis is automation. Once they have more customers, they get much more automated value. So this is what you see, it's really one plus one equals five and just the sheer progress in automation when they have more licenses is [Indecipherable].

Rob Owens -- Piper Sandler -- Analyst

All right. Thanks for the color and it almost seems like it's time for another license category, given the success you're seeing in the four and the six. So, thanks guys.

Guy Melamed -- Chief Financial Officer and Chief Operating Officer

Thank you.

Operator

Thank you. In the interest of time, we ask the participants limit themselves to one question. Thank you. Our next question comes from Roger Boyd with UBS. Please proceed with your question.

Roger Boyd -- UBS Financial Services Inc. -- Analyst

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

Yaki Faitelson -- Chief Executive Officer, President, Co-Founder and Chairman of the Board

So 365, which is the the whole suite is geared toward collaboration. What we see is that customer capacity to create and share data far exceeded the capacity to protect. And it's just -- it's designed to collaborate and not to protect. And this is just -- it exposes a lot of risk to every organization that is using it. And with COVID, you see a lot of adoption there and a lot of adoption we've seen, and our ability to protect data and show the risk is just very effective.

So once a customer gets to a critical mass in 365, they almost always see a lot of value in what we are doing, and this is a tremendous growth area for us. But in the same token, we also believe that the other SaaS services are also designed more toward collaboration and very hard to do data protection, and it's constantly we have the extension between productivity and security is just presenting a tremendous opportunity for Varonis and we are just uniquely positioned to solve these challenges. It's very hard. We need our Metadata Framework and just a lot of very efficient visibility and remediation and classification feature set in order to serve this multiple.

Roger Boyd -- UBS Financial Services Inc. -- Analyst

Okay, thank you.

Operator

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

Andrew Nowinski -- Wells Fargo -- Analyst

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

Guy Melamed -- Chief Financial Officer and Chief Operating Officer

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

Andrew Nowinski -- Wells Fargo -- Analyst

So those customers that are buying more licenses, are they buying on a subscription basis or are they just -- does your perpetual license [Technical Issues]

Guy Melamed -- Chief Financial Officer and Chief Operating Officer

No, we're not selling perpetual, that's the de minimis number, the perpetual licenses. We're selling additional licenses as subscription.

Operator

Thank you. Our next question comes from Mike Cikos with Needham and Company. Please proceed with your question.

Michael Cikos -- Needham and Company -- Analyst

Hey guys, thanks for taking the question here. I had a -- just trying to get more familiar with the sales cycle. And what I'm trying to do is if I'm thinking about the overall environment, the sense of urgency in the heightened threat environment we're currently in, I'd imagine that, that has some impact maybe in compressing your current sales cycles. But on the other hand, are you seeing sales cycles, in fact, elongate as customers are being more thoughtful in their approach and taking on more licenses upfront? Would just be curious if you could help me think about those two differences when I'm putting that all into one bucket for sales cycles. Thank you.

Yaki Faitelson -- Chief Executive Officer, President, Co-Founder and Chairman of the Board

Overall, if you look at the overall deals, sales cycles stay the same. Obviously, on a case-by-case basis, there is a bridge. It can accelerate somewhat the closing process. But what we see mainly is that our sales motion becoming much more strategic. So with [Indecipherable] simpler and with customers are just buying more licenses and over-time, buying additional licenses. This is really what we see. We see a better conversion rates on the pipeline. We see that the sales process is much more predictable. We see that we can go to larger accounts, sometimes have access on to the CSO and have larger deals and with that, our relation -- the overall relationship with our customer base is becoming more and more strategic.

Operator

Thank you. Our next question is from Hamza Fodderwala with Morgan Stanley. Please proceed with your question.

Hamza Fodderwala -- Morgan Stanley -- Analyst

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

Yaki Faitelson -- Chief Executive Officer, President, Co-Founder and Chairman of the Board

We definitely see a lot of interest. Just thinking about how many customers with critical data, Salesforce, Google, Box, GitHub, how many customers are using a stuff like Okta and FSA, AWS sees a huge part of the world information is there and contemporary risk, this is where they are going. They don't have a lot of data on endpoint. When you compromise an endpoint in order to get to the central repository, the business application, 365 through [Indecipherable] and big data, this is exactly what you see.

The other thing that these -- all these SaaS applications are interconnected. So really easy to do lateral movement. So once you are in, the ability to hit massive damage in the organization is just -- it's huge. And today, what we are doing in the world, that we are solving data protection problems, business applications, we are uniquely positioned to do. We are the only one at this point that can do this. So we believe that what we saw in 365 is just that we can add a lot of value, and this is a big part of our business, can be with DatAdvantage Cloud. But as we said, this year, we are not going to see material contribution. But definitely, we believe that with that, we can be the company that really protects your data and the foundation for the digital transformation.

Hamza Fodderwala -- Morgan Stanley -- Analyst

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

Guy Melamed -- Chief Financial Officer and Chief Operating Officer

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

Operator

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

Chad Bennett -- Craig-Hallum Capital Group -- Analyst

Great, thanks for taking my question. So just in terms of -- with the introduction of your new cloud products and the cloud data store coverage you have with Polyrize and now that's been rebranded, do you have any indication whether it's -- I guess, split in two different ways, whether it's kind of Microsoft-based cloud products penetration or coverage within your base or it's non-Microsoft cloud applications or data stores, kind of where your penetration is or maybe asked differently, kind of what the opportunity is there in your base now that you've rolled out these new data stores in cloud data products?

Yaki Faitelson -- Chief Executive Officer, President, Co-Founder and Chairman of the Board

We believe that the opportunity is massive. Most of the cloud platforms that we protect with DA Cloud with Polyrize acquisition co-exist with 365 and Microsoft and others co-exist with all of them. This is the beauty with the cloud and I just think that this is one of the strengths moving forward. Everything on SaaS and always you get to a lot of these SaaS applications once we reach critical mass, a lot of them becoming standard and need to protect them. And as I said before, there are much more deal growth, collaboration, API connectivity, then security, which is a massive opportunity for us. We see huge opportunity in the base to be the standard for data protection, threat detection and response and privacy and compliance for all of those set ups, critical setups.

Chad Bennett -- Craig-Hallum Capital Group -- Analyst

Got it. Thanks for taking my question.

Operator

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

Shebly Seyrafi -- FBN Securities -- Analyst

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

Guy Melamed -- Chief Financial Officer and Chief Operating Officer

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

Operator

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

Shaul Eyal -- Cowen and Company -- Analyst

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

Yaki Faitelson -- Chief Executive Officer, President, Co-Founder and Chairman of the Board

At this point, Shaul, it's not relevant for us. No. And we don't have anything in light to say about it.

Shaul Eyal -- Cowen and Company -- Analyst

Thank you.

Operator

Thank you. Our next question comes from Jonathan Ruykhaver with Baird. Please proceed with your question.

Jonathan Ruykhaver -- Robert W. Baird -- Analyst

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

Yaki Faitelson -- Chief Executive Officer, President, Co-Founder and Chairman of the Board

Yeah. We have very strong capabilities that we are constantly adding. The way that we are looking, really looking at the world is from the data outside. So everybody are looking at the endpoints and then the network, and they're trying to -- and all of these efforts are in order to protect data. We are coming from the data itself. We have the most reliable stream of data, which is to analyze, which is access to the data store itself, and from there, we're building user profiles that we can understand very well where you have deviation and really classifying the users, regular users, service accounts, VIP in the organization and reach it with specification of data and the infrastructure that is the closest to the data itself. And from there, we are able to generate very, very accurate alerts, if there is any problem. Not only that, we can really generate it where you are -- where the attack is damaging the organization and you are accessing data in the wrong way [Indecipherable] data and this works extremely well. And in this part of threat detection and response, we are almost there.

Jonathan Ruykhaver -- Robert W. Baird -- Analyst

That's helpful. Thank you.

Operator

Thank you. Our next question comes from Andrew Smith with Berenberg Capital Markets. Please proceed with your question.

Andrew Smith -- Berenberg Capital Markets -- Analyst

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

Yaki Faitelson -- Chief Executive Officer, President, Co-Founder and Chairman of the Board

Yes. The hybrid obviously is definitely a big advantage, but the other advantage is just the focus on data. So CASBs here and there generates confusion. They are not really competition because when you take just a large data set and want to visualize who can access these ones, critical and the sense of abnormal behavior and not just be with the mentally active offer, just completely different offer. So once we just install the product and we just show you the risk, remediate the risk, classify the data at scale, just visually, it's a very visual sell, the customer immediately understands that it's a completely different offering. So just the amount of competition or confusion that we see so far with DatAdvantage Cloud is the same that we see with our enterprise DatAdvantage offering, which is [Indecipherable].

Andrew Smith -- Berenberg Capital Markets -- Analyst

Great. Thank you.

Operator

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

Joshua Tilton -- Wolfe Research, LLC -- Analyst

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

Guy Melamed -- Chief Financial Officer and Chief Operating Officer

Well, I think when we built the guidance, we took into consideration slightly higher travel, I'm talking about the expense side, slightly higher travel, but still below pre-pandemic levels. From a revenue perspective, the guidance kind of speaks for itself and is indicating how we feel going into the quarter. If you think about 2020, we obviously had -- in Q1, we had the hiccup just because when COVID hit and then Q2 was a better quarter. Q3 was even better than that, and then Q4 was an outstanding quarter and we're providing kind of a strong guidance against that outstanding number. So we feel good about kind of how we're entering the end of the year, and we feel that we can execute on all cylinders.

Joshua Tilton -- Wolfe Research, LLC -- Analyst

Thanks guys.

Operator

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.

James Arestia -- Vice President, Investor Relations

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

Operator

[Operator Closing Remarks]

Duration: 49 minutes

Call participants:

James Arestia -- Vice President, Investor Relations

Yaki Faitelson -- Chief Executive Officer, President, Co-Founder and Chairman of the Board

Guy Melamed -- Chief Financial Officer and Chief Operating Officer

Sterling Auty -- JPMorgan -- Analyst

Matthew Hedberg -- RBC Capital Markets -- Analyst

Brent Thill -- Jefferies LLC -- Analyst

Saket Kalia -- Barclays -- Analyst

Rob Owens -- Piper Sandler -- Analyst

Roger Boyd -- UBS Financial Services Inc. -- Analyst

Andrew Nowinski -- Wells Fargo -- Analyst

Michael Cikos -- Needham and Company -- Analyst

Hamza Fodderwala -- Morgan Stanley -- Analyst

Chad Bennett -- Craig-Hallum Capital Group -- Analyst

Shebly Seyrafi -- FBN Securities -- Analyst

Shaul Eyal -- Cowen and Company -- Analyst

Jonathan Ruykhaver -- Robert W. Baird -- Analyst

Andrew Smith -- Berenberg Capital Markets -- Analyst

Joshua Tilton -- Wolfe Research, LLC -- Analyst

More VRNS analysis

All earnings call transcripts

AlphaStreet Logo

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

The Motley Fool owns shares of and recommends Varonis Systems. The Motley Fool has a disclosure policy.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.