Good day, and welcome to the Varonis System, Incorporated Third Quarter 2016 Earnings Conference Call. Today’s conference is being recorded. At this time I’d 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’ third quarter 2016 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 the call for 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, 2016. 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 market; competitive factors, including increased sale 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; or our ability to build and expand our direct sales efforts and resell our distribution channel; 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 to 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 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 of the most directly comparable GAAP financial measures is available in our third quarter 2016 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. This was another strong quarter for Varonis. For the fourth quarter in a row, both license and total revenues grew more than 30% year-over-year. We also exceeded our guidance from both the top and bottom line. Demand for our solutions increased, and our efforts to reach customer with more than 1,000 employees who can make larger commitments to us over time are showing good results. Total revenues for the third quarter were $40.9 million, an increase of 31% year-over-year. We are encouraged by the positive momentum we see in the business driven by growing awareness of the insider threat and Varonis’ role in protecting data. Look no further than Richard Spires, the former CIO of the IRS and DHS who announced a recent breach and the failure to take data centric approach to information security, and I quote. “If I’d walked in there as a CIO, I’m speculating a bit, I saw the kinds of lack of protections on very sensitive data. The first thing we would have been working on is how we protect that data. Not even talking about necessarily the systems. How it is we get better protection and then control access to that data.” And the quote speaks directly to an insider threat, which is a problem across enterprises worldwide. Attacks start with an insider, like with the NSA twice now, or outside attackers hijacked the credential of an insider, as was the case with Sony and OPM. Ransomware also works by hijacking the credential of an insider and the number of ransomware infection per day 100,000 according to malware analyst Kevin Bowman proves how easy it is to get inside. Every vector seems to be working at scale, phishing, hijacked website, and cloud file sharing. If ransomware, which is…

Thank you, Yaki. Total revenues for the third quarter were $40.9 million, an increase of 31% year-over-year. We are pleased with the consistent, high levels of growth we’ve achieved over multiple quarters as we increase awareness of our product, capitalize on healthy demand from a maturing market, benefit from our focus on innovation, and effectively leverage our sales investment. Our consistently high maintenance renewal rates remain at over 90%. License revenues were $22.6 million. This represents a 34% increase from the third quarter of 2015. Our maintenance and services revenues were $18.3 million, increasing 28% compared to the third quarter of 2015. Looking at the business geographically, we achieved strong performance in the US, which increase 41% to $25 million, or 61% of total revenue. EMEA increased 15% to $12.7 million, or 31% of total revenues. And rest of world increased 31% to $3.3 million, or 8% of total revenues. For the third quarter, we added 224 new customers compared with 241 last year. As Yaki mentioned, we are having particular success focusing our efforts on targeting customers with more than 1,000 employees who have a greater customer lifetime value. The result is that we continue to add meaningful number of new customers while also expanding relationships with existing customers. In the third quarter, license and first year maintenance revenue contribution from existing customers was 46% versus 37% in the third quarter of 2015. We also closed one deal greater than $1 million with an existing customer. As of September 30th, 2016, 47% of our customers had purchased more than one product family, up from 44% as of September 30th 2015. We are pleased with the increasing traction we are building as new and existing customers grow their relationships with us across multiple product families. As a result, we believe…

Thank you. [Operator instructions] We’ll pause for just a moment to let everyone have an opportunity to signal for questions. And our first question comes from Greg McDowell with JMP Securities.

Great, thank you very much. Two quick questions. I guess the first question is if you can comment on sort of sales capacity additions, you know the way you’ve thought about sales capacity expansion in 2016 and maybe how you’re starting to think about it in 2017. And the second part of that question is just around sales productivity, and maybe some of the trends you’ve seen so far in the first nine months of the year. Because at this point you’ve had four quarters in a row of 30% license growth, so obviously something is going right over there. So anyway, just the capacity and productivity, would just love to hear your thoughts on that.

Hi, Greg. Thanks. First, this is a massive market. We literally can sell to everybody that files and e-mails are important for them and active directory and file system are a critical part of their infrastructure. And we need coverage, but you know we’re starting to have more tenured sales people and sales team and overall in this flywheel and we are balancing very well between capacity and productivity. So what you see, you see definitely increasing productivity gains because of three things. There’s number one more tenured sales people. The second thing is the market is definitely coming to us. It’s a gradual process but more people are aware and more organizations that they need to deal with insider threat. And if you look at the whole spectrum, you know look at every big bridge, files and e-mails and active directory and taking credentials and we’ve been solving the lion’s share of these problem. So this also works very well for us. We also are doing very well with customers that are a bit bigger. Because of this market condition, the sales staff are becoming more predictable and DatAlert is also helping, you know just immediate time to value of very accurate alert and very sophisticated attacks. So it’s many things that are coming together, so it’s just working well for us.

Great. And a quick second question. You know, we’ve talked for the last three or four quarters about how strong cross sell has been and specifically with DatAlert. And was wondering if you could just share any sort of attach rates that you’re seeing with DatAlert so far, maybe how it’s improved year-over-year or quarter-over-quarter. Because certainly it feels like that’s become a significant material product for you guys.

So we can’t share attach rates, but maybe I will explain what it’s doing to the overall value proportion and the sales motion. So go from the DNC to WikiLeaks to what happened now in the NSA and even at OPM that they tried to go after I think – I heard somewhere to go after the mainframe or different systems. They all come for files and e-mails and this is really front and center to what we are doing. And the key, the first key is very intelligent alert, and this is what DatAlert is doing. It’s coming in, hitting on the most critical, vulnerable information and infrastructure, and give you very sophisticated, accurate alert. You don’t need to be just a very savvy analyst in order to get these alerts and this works extremely well for us. The second thing, once you have DatAlert inside, it’s dragging the other DatAdvantage and directory services because you come in and it’s also we’re sell it to the CISO. Before we sold it silos in the infrastructure and what is changing is that it’s more and more security budget and becoming a top priority for the security, for the CISO, for the incident response people, for the business people. So the overall sales motion is changing and we see less friction in the sales process only to come in even though critical. But once there, the budgets are there and if you know how to position it well, and it’s primarily it’s a visual sell. We are leaning on the value of the product, it’s much easier for us to get budget.

Thank you.

Thank you. Our next question comes from John DiFucci with Jefferies.

Hey guys, this is Zack for John. Thanks for taking the question. You’ve often said that you don’t really have a true competitor for what you’re helping customers do as it relates to security against internal threats. But, you know, naturally attractive opportunities like this typically draw interest from others that might be able to solve the problem. Has anyone emerged yet or someone that says that they’re going to get there that you guys are tracking or that you’re starting to see? Thanks.

Thanks for the question. You know, as a percentage of overall evaluations and deals we see less competition. And it’s very interesting how the problem is also evolving. In the rare occasions that someone bought a competitive product because now they really want to solve a problem, they really need to know who attached the data, to do remediation, have sophisticated alerts, a lot of them a year, two years later are coming to us and buying the product. You know, thankfully we started when the data volumes were small and we have very strong engineering organization. And this trend going at 160 miles an hour and it’s just very, very hard to catch up. And every customer that we have makes us better and better. So on top of the – we support more platform and we have more innovations and we have this tremendous people group from the market. So far the only thing that I can say is that I think the barriers to entry and our competitive advantage is just increasing and increasing every day.

That’s great. Thanks a lot, Yaki.

Thank you. Our next question from Melissa Gorham with Morgan Stanley.

Hi, this is Josh Baer in for Melissa. Congrats on a nice quarter, and thanks for taking my question. Wondering to what extent is ransomware leading your sales conversations? How much of a driver is ransomware in winning new business for Varonis? Thanks.

Thanks. You know, ransomware, we see ransomware on one of ten, one of eleven evaluations. So with so much infections every day, it’s front and center. But what it does, not ransomware in and of itself, but what it’s doing it’s showing you that all the perimeter defense are failing and once they take your computer, they can go after critical data. So what it’s doing, it’s making the threat very real to everybody. So if many people get it, or many people heard about someone that gets it, and every person that is technology savvy and understand the dynamics of this malware, understand how easy it is to take this code and manipulate it to do whatever they want. So just in the overall threat environment, not just ransomware, all of these malwares that are coming, taking your credentials and behalf of you trying to access and steal a lot of critical information, the marketplace understands that we are very relevant. And one of the – maybe and uniquely positioned to solve this problem once this malware is in.

Thanks. And one more. EMEA growth decelerated to 15% in the quarter. I was just wondering if you could address the macro environment you’re seeing, anything else going on in EMEA specifically? Thank you.

Yes. You know, just during the course of our history, growth always fluctuates. You can only understand Varonis if you take a multi quarter view. EMEA growth for the year, year-to-date is 24% is a strong growth. History, in terms of seasonality, the slowest quarter in Europe due to the summer holiday. And we believe that Europe will be solid contributor for Q4 and the full year. And overall it’s just a very good market for us and regulations like GDPR are helping us a lot to create C-level level awareness and budget allocations. So, you know, it fluctuates a bit. You have a lot of holidays and we really believe that the overall performance for the year in Europe will do very well.

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

This is Matt Swanson on for Matt. Thanks for taking my questions. Yaki, you talked about being able to add in more companies with the CISO's or the C-level. Has this done anything to affect the initial deal sizes? And if not, does it aid in expanding in a customer once you land having that higher entry point in the company?

Hi, this is Gili. We do think that over time ASP can go up, but the most important for us, as always, as we always said, is the customer lifetime value. We know that our efforts to target organizations with more than 1,000 employees are paying off. But the most important thing is the land and expand because customers are coming back. They purchase more of what they have. They purchase more product families. So the overall trend from existing customers continue to grow. The portion continues to grow. It grew this quarter from 36% to 47%. So for us, this is the most important trend.

And maybe just to shed some light regarding the overall sales motion, before we were selling a lot in the infrastructure, and you know in even mid-sized organizations storage and Windows is big and the exchange, e-mail is – messaging is a big thing. Now we’re much more selling to the CISO. So we have one person that first and foremost is interested about the sophisticated alert. So in terms of the friction, it’s much easier for us to do the repeat sales. So in terms of what I said in the last call, the overall sales process becoming simpler and more strategic.

Yes. And then just touching on that simpler sales process. I know DatAlert obviously has a great value proportion. You talked about the usability for less sophisticated users. Is that these shorter sales cycles than some of your other products?

I don’t want to comment in terms of sales cycles. You also need to understand, you know at the end of the day it’s enterprise sales. You need to come in. You need to install an evaluation. We need to build consensus. You need to go through legal and purchasing and all of the stuff that’s coming with purchasing software, what it does it makes the sales process much more predictable. We know today that we are bringing C-level people, business people and CISO's to a room, doing a data review and show you that, you know, you don’t know that an administrator is changing permissions and reading your e-mail. You don’t know that someone took five social security numbers, credit card numbers and put it in a folder that opened to everybody in the company. You don’t know that someone came at midnight and tried to access many folders that they shouldn’t access. And before you even start, that 70% of the data in the company that users can access is not relevant for them whatsoever. And now the icing on the cake, you also have the ransomware makes the overall sales process much, much more predictable.

All right. Thanks for the time. And congratulations on another great quarter.

Thank you. Our next question comes from Srini Nandury with Summit Redstone Partners.

All right, thank you for taking my question. I have a question on the upsells. You know, I would have expected your upsells would have been much higher. For example, it is 47% versus 44% last year, meaning more than one product being bought. Can you comment what’s driving this? Do you have enough inside sales people to attack the upsells? And can you comment on the upsell process in general a little bit? Thank you.

Yes. Thanks for the question. We feel that the overall upsell is very healthy. We’re also balancing between upsells and acquiring new customers, that both are critical for us. And you know customers are buying in cadence. The other thing is, you know to upsell many times, you need to upgrade the system, you need to put in new licensing. It’s just a process. And regarding the product family, you see the families but don’t forget that you have many licenses under the DatAdvantage, the DatAdvantage family. So we believe that our overall upsell and customer lifetime value is very strong and overall getting stronger. And we also feel that 224 customers in the third quarter is a very good addition of new customers. So from where we sit, we believe that the trends are very strong.

All right. Thank you so much for taking my question.

Thank you. [Operator instructions] And our next question comes from Yun Kim with Brean Capital.

Great. Thank you. And congrats on another strong quarter, Yaki and Gili. Following up on the last question, Gili mentioned the existing customer mix accelerated over the past couple quarters. Is that because the follow-on sales are becoming more meaningful? Is this an inflection point in your business as the follow-on deal sizes get larger and can we expect this trend around the existing mix – positive trend around the existing mix to continue?

I think that this overall solution becoming more strategic to customers. And because now the security is such a strong driver, many times when you’re doing things for government you decide, I will do it now for my Window estate, or for my Unix estate. And when the security use case with DatAlert, you want to make sure that with detective controls you have it across all of your infrastructure so it’s a bit easier to upsell. And most of our customers are candidates for most of our SKUs, most of our licenses, so overall we believe that the customer lifetime cycle is increasing.

And also in the last 12 months we added 1,100 new customers. So it’s a very large number of new customers. We’re always focused on both new and existing. And in some quarters this metric can move in favor of one segment versus the other, but the important thing to look at is the overall trend and it’s strong for both. We see very good demand from new customers, and also expansion with existing customers. So we are very pleased with both trends.

Yes, give us an update on the product side of the business? Obviously the [indiscernible] is driving your business. Is there an opportunity for you to continue to expand your product strategy to address that concern? And then also just if you can give us your thoughts regarding how your platform becomes – remains more relevant or it becomes more relevant as more and more data moves to the cloud, such as evaluate obviously Office 365? Thanks.

Yes. So you know we have just so much innovation ahead of us and not just with DatAlert, with everything what we are doing, you know, and at our core we are innovators. And regarding the cloud, the cloud is a huge opportunity for us. We support now 365 and we have many installations on Azure and AWS. It’s completely transparent for us. But most ways data is more distributed among most systems and users can access more data stores. It’s increasing the problem that we are solving. And not only that, we are charging but users that can access to a platform, it’s also increasing our license base. So we are big believers on the cloud and we believe that the cloud is a big opportunity for us. And in the cloud, access control auditing and sophisticated alerts is what is guarding the data in the system more than anything else.

Okay, great. Thank you.

Thank you. Our next question comes from Michael Kim with Imperial Capital.

Hi, good afternoon, guys. Sorry if you covered this earlier, but with kind of the growing awareness for insider threat, are you starting to see a shift on the part of the enterprise customers where it becomes less as part of the discretionary budget and more a line item and a persistent budgetary spend for a lot of enterprises?

Yes, definitely. And you know, it’s a work in progress. What we see is that much more budgets are allocated to insider threat and much more budgets are allocated to security analytics. It’s still not like very established market that you know budget that is allocated to storage or to firewall or to a switch or things of this nature, it’s more an umbrella of budget and you need to get in and to position, make sure the budget will go your way. But definitely, there are earmarked budgets and not small chunk of budget for insider threat and data protection.

Great. And then are you starting to see some activity or opportunities with mid-market enterprises and crossing multiple verticals within that area?

Yes, definitely. Yes, we have a big focus on 1,000 plus, so 1,000 to 10,000 we see very strong customer lifetime value and nice initial deals, and just believe that it’s a great market for us.

Great. Thank you very much.

Thank you. It appears there are no further questions at this time. I’d like to turn the conference back to management for any additional or closing remarks.

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

Thank you. This does conclude today’s presentation. We thank you for your participation.