Good day, and welcome to the Varonis Systems First Quarter 2015 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Staci Mortenson, Investor Relations. Please go ahead.

Thank you. Good afternoon. Thank you for joining us today to review Varonis' First Quarter 2015 Financial Results. With me on the call today are Yaki Faitelson, Chief Executive Officer; and Gili Iohan, Chief Financial 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 second quarter and fiscal year ending December 31, 2015. Actual results may differ materially from those set forth in such statements. Important factors such as risks associated with the anticipated growth in our addressable markets; 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 engineers and sales personnel; general economic and industry conditions, including expenditure trends for data governance and data security software; risks associated with the closing of large transactions, including our ability to close large transactions consistently on a quarterly basis; our ability and to build and expand our direct sales force efforts and reseller distribution channels; new product introductions and our ability to develop and deliver innovative product; risks associated with international operations; and our ability to provide high-quality service and support offerings could cause actual results 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 risks 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 (sic) [obligation] 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 on our first quarter 2015 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?

Thanks, Staci, and good afternoon, everyone. Our results of the quarter was driven by strength in the U.S. as we continue to see strong demand for our solutions. However, our business in EMEA this quarter was weaker than expected. We experienced a more difficult selling environment in some countries. In addition, we faced some seller execution challenges in the U.K., and we are dedicating additional senior attention as well as middle management support to work with improving pipeline development in our closed process. Our expectation is that it will take few quarters to correct itself. Despite this, we achieved our guidance, with Q1 revenues coming at $23 million, an increase of 32% year-over-year, and also an increase of 35% on constant currency basis. During the quarter, we added 189 new customers and saw an increase year-over-year in the percentage of customers who purchased more than one product. We continue to have success selling our online business, which is based on high volume and low ASPs. Over the last month, we had nearly a dozen Varonis connect events globally, interacting with several hundred attendees. These events were designed for IT leaders across North America and Europe to learn about new Varonis product innovations and share experiences and success stories. I was able to attend several of these events and it seems globally we're the same. New and existing customers need solutions to help them manage their human-generated data on-premise and in the cloud, and they look to improve productivity while managing security risks, and they are looking to Varonis as the long-term partner based on our focus on innovation. On the security use cases, our goal is to minimize the damage any single user account can cause by reducing their access to need-to-know data and putting into place sophisticated detective controls…

Thank you, Yaki. Total revenues for the first quarter increased 32% to $23 million. Growth was driven by strength in the U.S., the success we have seen with our land-and-expand strategy and consistently high maintenance renewal rates is over 90%. The movement in foreign currency from when we provided guidance in February negatively impacted our revenues by approximately $80,000 during the quarter. License revenues were $10.2 million. This represents a 26% increase from the first quarter of 2014. Our maintenance and services revenues were $12.8 million, increasing 36% compared to the first quarter of 2014. Looking at the business geographically. U.S. revenues increased 44% to $13.1 million, or 57% of total revenues. EMEA increased 15% to $8 million, or 35% of total revenues and rest of world increased 31% to $1.9 million, or 8% of total revenues. For the first quarter, existing customer license and first year maintenance revenue contribution was 36% versus 33% in the first quarter of 2014. Our land-and-expand model is delivering results, and we will continue making investments to broaden our relationship with existing customers as well as increase new customer additions. As of March 31, 2015, 43% of customers have purchased more than one product family, up from 40% as of March 31, 2014, further validating our focus on innovation and expanding the use cases for our products. Before moving onto the profit and loss items, I would like to point out that there will be discussing non-GAAP results going forward unless otherwise stated, which for the first quarter of 2015 excludes a total of $1.7 million in stock-based compensation expense. Please note that the detailed GAAP to non-GAAP reconciliation can be found in the tables of our press release, which is available on our website. Gross profit for the first quarter was $20.2 million,…

[Operator Instructions] And our first question is from John DiFucci with Jefferies. We'll move on to our next question from Keith Weiss with Morgan Stanley.

So while I'm looking at the guidance for Q2 and assuming that you continue to see, I mean, minutes businesses is going to roll off the balance sheet. It seems to imply a even steeper deceleration in license revenue going into Q2. I'm getting somewhere between an 8% and 10% type growth rate in overall license revenues. So that kind of opens the question of sort of what exactly is the nature of the problem going on in Europe? And is it something that is getting worse? Something I think that you guys picked up at the end of the quarter, that would lead to that further deceleration and I was hoping that you could better sort of detail sort of what's going to reverse that downward trend line? What are the fixes that you guys are putting into place to get that curve, what will be that trend line heading back up?

Hi Keith, so just to explain the business in EMEA, so the bulk of the business in EMEA is coming from the U.K. and France. And it's fairly unusual but we sold several million dollars in Russia last year. So early on, we picked some good talent in Russia and we have a good business there. So what we saw is -- and this is really where most of the business concentrated, so with all the economic conditions that started in Russia, Q4 was viable and from the beginning of this quarter, it just was completely frozen. And regarding the U.K., we just -- it's a team that performing in the past very well and also last year, don't forget the last year, our EMEA business grew at 77% year-over-year and it's -- we have a good management there, but we have some growth pains there and some execution problem that we are addressing with a senior management attention and bringing in a strong middle management, we have several hundreds of loyal customers there. So we believe that we'll fix the problem, but to fix it completely will take us a few quarters. And France is unusually big for us. They are performing very well, but the economy there is not ideal and it's a big bit how to close business. They performed very well in Q1, so what you see in the guidance for Q2 and for the year is regarding Russia, it's all bets off. Regarding the U.K., it will take several quarters to solve the problem. And last year, we had several large deals in the second quarter, so it's a bit hard to compare. So we believe in this kind of situation, this is the right way to give guidance for the quarter and for the year.

Got it. And then, in terms of the competitive environment, we've always talked about you guys having pretty much the market opportunity to yourselves. No one is really coming into the market with a solution quite like yours. It sounds like Symantec at the most recent Analyst Day, were talking about solutions that sound a lot more similar to what you do. Microsoft is talking about solutions that sound more similar. Are you guys seeing anything in the marketplace in terms of the competitors at least trying to message more similar to what you do and trying to put up another layer of controls on top of the human-generated data?

No, not at all. We measure everything -- every evaluation, as you know, and every competitive situation. So in terms of percentages of the -- percentage of competitive situation from overall eval, we don't see any change whatsoever.

Got it. And then just one last question for me. And this is in terms of the cost structure. You talked about sort of adjusting the spending for sort of what's going on in Europe. But the overall -- I mean, I believe the operating margin targets for the full year still look for operating margins to be down for the year. So what's the philosophy behind those adjustments? Is it -- that you guys are looking to get to profitability faster, or is it just better matching up sort of the current rate of spend to what you're seeing in the market that still is sort of you're in investment low key[ph]? Help us understand sort of what this sort of overall? Is there a philosophical change is sort of how you're thinking about spending, or is it just a minor adjustment because of some of the hiccups, if you will, you're having in Europe?

It's a minor adjustment. It's very important to explain that we are always focused on profitability, but on profitability at scale, if you look at the sales people there is more than 2 years, the renewals, the upsells is quite a profitable business and the reps are very productive, so just we need to make sure that we are investing in the right places and we are going to do it in a bit of a more moderated way but we just -- we're going to capture the massive market opportunity ahead of us. But in some place, in the U.K. that we have a operational, we have execution problem. We are going to solve it before we are putting a lot of capacity there, and we're just going to be just a bit slower in the way that we are hiring and see that everything is working. But Keith, it's very important for us to isolate what's going on in Russia with radical economics condition. In the U.K. that we have a problem to the other areas of the business. Most of the businesses performing very well. The U.S. did a 44% growth, both many new customers. All the key metrics says, and all the -- upsells and new customers and you can look at the attach rates. We are selling all the products. We're doing this for 10.5 years, and we know very well how to solve problems. So this is really what you see from us. We are focused on some pockets on a case-by-case, some pockets that we have problems to solve them. We are also investing in the other markets in Europe to make sure that EMEA in general is more diversified for us, but most of the investment that we put in the business are working really well for us.

We'll take our next question from Raimo Lenschow with Barclays.

It's Andrew. So again, a nice uptick in the percentage of customers with multiple products and just generally looking like your newer products are continuing to see increased adoption, so my question is are you at this point seeing any sales to new customers that are being led by your newer products that aren't DatAdvantage, and do you see the potential for this to happen?

Yes, we definitely see that. But you need to understand that most of the time, people starting with DatAdvantage. Interestingly, we see that the downloads of DatAnywhere, sometimes, the free downloads generate good leads for other products because if someone is downloading it, obviously, they have unstructured data that they need to manage and protect. But overall, we are pleased with the adoption of -- with the adoption of all the products, and we also believe that the cloud is just a huge opportunity for us. Customers are very much concerned about security in the cloud and taking the data to the cloud, and how much is going to cost and we can really help them. So we are pleased with the adoption of the current product. At times we see that we don't need to lead with DatAdvantage, and we're also very excited about the new innovations that we introduced this quarter for supporting the cloud and also the enhancement to the current portfolio.

Our next question comes from Matt Hedberg with RBC Capital Markets.

I'm curious about sales cycles, Yaki. You guys obviously have a large number of products and I'm wondering if it's costing deal cycles to potentially elongate, or is this mainly a European issue right now of just tougher macros?

It's European. In Russia, definitely tougher in macros and in the U.K., some execution problems, but you know we maniacally measuring everything in the business and sales cycle, they almost always stays fairly the same.

And coming off of 4Q, 1Q saw some -- saw obviously some nice growth. I'm curious how much of that -- of the growth in Q1 was due to Q4 deals that slipped into the quarter, and maybe what are your thoughts about the U.S. market heading into Q2?

So in terms of -- every quarter, we have some deals that are slipping. But you ask us about the first, you asked us about the first quarter in last earnings call and well, I said that it's not a marking a trend. The U.S. performed well, and we have a lot of confidence in the U.S. business. We had -- in Q4 2013, we had several large deals and this is why no license can fluctuate, but we build good pipeline in the U.S. and the team executed well against this pipeline and the same trend continued to Q1 and the team overall, executed well. So we feel comfortable with the U.S. market and other markets, and we feel comfortable with most of the investments we put in place and the way sales management is running the business.

Great. And then maybe one last one. Can you talk about how the Sony breach might benefit future results? Is that -- specifically the nature of that breach and what was exposed?

You know Matt, it's hard to predict. I think that people understand the consequences of not being secure. I think that there is also -- I think that there is a lot of noise in the security market today, but when everything said and done, I think people starting to understand what they need to protect is the data itself, and making sure that only the right people can access the data, and to know who is accessing the data at all time and alert on abnormal behavior. This is the first frontier and in unstructured data, no one is doing it better than Varonis. So I think that overall, security is very important for most enterprises and something that we are going to benefit from. But how it's going, exactly in a tangible way, how it's going to benefit the future, it's just hard to know.

Our next question comes from Srini Nandury with WR Hambrecht Summit Research.

Yaki, can you talk about the deal pipelines in various geographies? Have the pipelines have been harvested in Europe, and if that's the reason, you need more time to build out pipelines, particularly in U.K?

No, I think that except the flash, the overall sentiment there is not to do a lot. The pipelines are growing well and also growing well in the right categories. The key is to make sure that you have enough density and you have things that are executing the programs in running up their new business, engaging the channel and having a competent middle-management that help directs in building the pipeline to close the deals. So overall pipeline, we feel very well. We also feel very well, we saw hundreds of hundreds of customers in the connect is the excitement of our customer base to buy more product and the way that we cater to more and more use cases. So the way that the pipeline is building, we feel very comfortable, but you also just -- in the U.K., we need to make sure that you have the right people to execute on this pipeline and to do it in a very consistent way. And in our business, one of the main keys is not to lean on large deals, to have just consistent business for many deals. But overall, we are very pleased with the pipeline development.

Okay. What about the sales cycles in general, I mean, have they -- have you seen any changes in geography there? Or they've been consistent, just other issues you've been dealing with?

Except of the issues that I mentioned we are dealing with, they stay fairly consistent.

Okay. Finally, one question. Keith kind of mentioned this earlier in the call. I mean, rather touched on this. Symantec and Microsoft had some similar solutions. You said that you are competing against them and some of the solutions are expensive in prior conference calls. For example, your e-discovery solutions, when you go back to your customer base and talk to them, what do the conversations look like? I mean, are they using some other solution? If they're using some other solution can you get them to replace their solution with your solution? What are those conversations like?

No, at time we see a Symantec and usually the way we sell is with the evaluations and when we are evaluating against them, competition is vanishing extremely fast. And regarding Microsoft, they are pushing -- they are helping us because when we are talking about the cloud and they are giving feeds of audit events and the keys to build them up, the Metadata and they provide this Metadata for solutions like ours to provide a better control is just emphasize how important it is and mainly how important it is in the cloud, and it's pushing the need for the product in the cloud and on-premise, so everything that Microsoft is doing is helping us tremendously. Regarding e-discovery, we have data unserved that caters to a enterprise search and some e-discovery, so somebody had an e-discovery product, they are not coming to replace it, so we are not going to compete with it. It's just a very effective secured enterprise search, primarily for SharePoint sites and mainly for file shares and when we introduced this product, what was mind-boggling, if you will, is that most of our customers don't have enterprise search or don't have e-discovery, and we just saw the void because of the economics and because it's not secure. So for us, it's just a big opportunity. We are -- in most times, we are introducing this product, we are not conflicting with competition. This wasn't the intent when we introduced this product. We just understood that there is a need but it's just very expensive or it's hard to scale and with our technology, we're able to fix the economics to deliver this value and also make sure that it will be very secure.

Our next question is from John DiFucci with Jefferies.

A couple of -- 2 quick questions, and one, I don't want to keep beating this thing, this one topic but it's something that we're all going to be addressing tomorrow with investors. And this execution in the U.K, that's going to take a few quarters to improve on, how do you plan on correcting this? Is it as easy as replacing some personnel and then, that's sort of you alluded to that, or is it also a process issue? And is there something you're changing along those lines which you may or may not be able to get into in detail?

No, it's not replacing personnel. It's just bringing the right people and just executing our processes. So Jim O'Boyle, our head of sales and I were doing it for a long time, and Jim is going to take it as his personal project, and we just want to make sure that the team -- the group quite beat last year. Can execute the programs effectively and the new people that we're bringing on board are the right people that can execute the Varonis go-to-market strategy. When we are executing our strategy of building the right evaluations and demonstrating the value, the result is very predictable. So our business for deals that entail 300, 350k is a volume business, very predictable business. And the team has some challenges, some challenges to do it at scale, so at times, they are doing very well when they are closing large deals, but we just need to make sure that we have enough density, enough pipeline and we're touching our customer or customer base in the right way and then this business becoming a very predictable business. So the main thing is that Jimmy will get in and just make sure that they are executing the program, and the right people are coming on board and right off the bat, they are doing it in the Varonis way and not deviating from the way we take the products to market. But the reality is, as I said, we are doing it for 10.5 years and we know how to solve problems. You don't solve problems in 1 quarter. It takes a few quarters to solve it, but you can do it in a systematic way quarter-after-quarter.

I appreciate that. So it sounds more like it's just more focus with the things that have worked in the past that is tried and true. Okay, we get it. And I guess, and my second question is another one, I know we're giving you a lot of -- you're bringing, it looks like when I look at your guidance for revenue and then for non-GAAP net income, you're bringing OpEx down a little bit with revenue coming down some. But it's still elevated for investment, which makes sense because the opportunity seems compelling here. But given what we're seeing a little bit, well, this quarter was sort of in line, well, was in line. But lowering the guidance for the year, is it possible or have you thought that maybe it's possible you're still too early in the spend? Because a lot of this is as you know it's sort of an evangelical sale and could it be that you're just spending but people just aren't quite ready yet? Does it -- I mean, is that something you've thought about at all?

Yes, we're always measuring the adoption curve of our customers and how it works. When you have it on 3,500 customers, you have a lot of empirical evidence how it works and how the evaluation working and how the close work is working. When we have the right people that are executing our program that works very well and evidence what is going on in the U.S. and going on in France and in other markets, the program is working very well. And at times, you need to do also brute force, and when you get to a critical mass, the other thing that we see is a lot of interest from a channel partner that will help us to carry to market. So we just see that the way. We are -- it's a very good question because what you said, because the new market is different dynamics. But there is the right balance between productivity and capacity, and we think that we are balancing it in the right way. And I also -- we thought a lot about it and I also think that we are managing it in the right level. And the other thing that is very important to emphasize is Russia. It was a blessing early on. We find good people in Russia, and it did very well for us. And we're still not a big company. We sold several million dollars there last year and then you have a business that is just completely frozen. And when you are small, it has an effect but by and large, all the investments are working very well and we are measuring them very well, and we have a reliable margin of error in the way that we are doing it. And we are bringing more and more customers that we can sell to them and when you have more customers it's becoming more earmarked in terms of budget, so we feel confident in the way that we are investing in the business.

[Operator Instructions] We'll take the next question from Scott Zeller with Needham & Company.

Could you help us understand how much of last year's revenue approximately was from Russia, as we think about calendar '15?

Several million.

Several. Okay. I guess, we'll leave it at that. And Yaki, when you think about the sales methodology that each of us, as analysts, have heard you talk about, how different is that outside of the U.S. versus what you've described us about your domestic sales operations and the various parts of that high-volume strategy, low ASP and developing people from within, how similar is that outside of the U.S.?

It's the same. It's the same, and Scott, don't forget that we grew the business 37% in EMEA last year. And it is working very well. The key is when we -- when you are scaling the business, you can bring everybody from inside, you bring some people from outside and they need to be the right people and they need to buy in very fast that we live and die by evaluations and this is how we are building the pipeline, and know how to do it together with the channel partners. But with Varonis, the first rule, the iron rule is everything starts and ends with an evaluation and just the front end of the panel, the way that we're working with partners, with inside sales to generate this evaluation and also need to be evaluation in the right sizes.

And lastly, on the differences between domestic versus international, could you refresh us on how much of business domestically versus business internationally is touched by channel partners?

We're doing almost everything through channel without high touch of the Varonis rep. We are going to market the same in the U.S., EMEA and the other markets in the world.

Our next question comes from Greg McDowell with JMP Securities.

My first question, I just want to focus on the lowered full year revenue guidance and hopefully try to get a more meaningful breakdown of the roughly $6 million that you lowered revenue by. I mean, how much of that $6 million would you attribute to currency movements versus just taking down your EMEA sales plan? And to that end, is the U.S. still on sort of the sales plan that you originally envisioned for the U.S. at the beginning of the year?

So Gili will talk on the currency in a second. So yes, the U.S. is on the same plan. We took into consideration the frozen Russia, the problems that we have in the U.K. and just in the margin may be somehow you pull in an another end market seen in EMEA and we bake it into the guidance, and we feel that this is the responsible way to guide. Regarding the currency, Gili will give you the information.

So the annual guidance was negatively impacted from the strengthening of the dollar by approximately $500,000. Since the last time we gave guidance in February, and on a constant currency basis compared to the average currency rates from last year, the impact is approximately 2.5%.

Okay. And one quick follow-up. I want to focus on the moderating headcount commentary. Is that across all geographies, or is that mainly on the geographies where you're seeing some softness? And I guess, part B of that question is you added 23 people in the quarter, should we think about employee growth sort of being flattish for the rest of the year, or just more moderating growth?

Just more moderated growth. We'll keep investing, but it's just a more moderated growth for the year. And this is -- in some parts of EMEA, we are not going to invest, and we're just going to invest under the right managers in the right markets and make sure that we have the right attention to make them productive. But this is not a major change from our plans from the beginning of the year.

Our next question comes from Michael Kim with Imperial Capital.

Coming out of the RSA conference, curious if any feedback you can share on changes in spending priorities towards protecting data versus perhaps protecting perimeters? And if you're starting to see maybe an opportunity to gain a larger share of the budget, so whether it's discretionary or if it's maybe even more formalized on a go-forward basis?

I think that definitely there is more focus on security and I can't talk about the perimeter, but more and more people talking about protecting the data, and we believe that more security budget will be available for Varonis. But what is also very exciting, and we saw in RSA that people are talking about security but it's a security conference. But our team this week are at EMC World. And what they experienced is that storage people talk about security. I think that security is going to be something called inherent in the infrastructure and every part of computing will need to deliver good security, and I think that Varonis is going to benefit from it in a big way.

And on this call, you talked quite a bit about sales execution in EMEA, but are you seeing any divergence between the North American customers and the European customers, especially U.K. in their use cases, maybe their demand profile and their receptivity to these types of solutions now?

No, the customer in North America and the U.K. are the same. We have amazing customers in the U.K. People there are very advanced in the way that they are adopting technology. It's -- we know what we need to do, it will take us a few quarters. We are going to solve this.

Great. And then just real quickly on North American Q1. Was there any particular benefit from some new budgets at the early part of the year, or was it a pretty normalized budgetary cycle for the quarter?

Completely normal Q1. This team executed well on the -- the team executed well on the pipeline and as I said before, you asked me in Q4, what's going on with North America? And we told you that it's just licensed revenues sometimes fluctuate. The team executed well also in the fourth quarter and then just carried the momentum to the first one.

And at this time, there are no further questions in the queue. So at this time, I'll turn it back to Yaki Faitelson for any closing or additional remarks.

I would like to thank all of our employees, customers and partners for their continued support. Thank you for joining the call today, and we are looking forward to speaking with you again soon. Thank you.

Thank you for participation. This does conclude today's call.