Greetings, and welcome to the Varonis Systems Fourth Quarter 2016 earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to your host, Ms. Staci Mortenson. Thank you, you may begin.

Thank you, operator. Good afternoon. Thank you for joining us today to review Varonis's fourth quarter and full year of 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 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, our first quarter and fiscal year ending December 31, 2017. Actual results may differ materially from those set forth in such statements. Important factors, such as risks and uncertainties associated with anticipated growth in our addressable market, competitive factors, including increased sales cycle time, changes in the competitive environment, pricing changes and increased competition. The risks that we may not be able to attract or retain employees, including sales personnel and engineers, general economic and industry conditions, including expenditure trends for data security solutions, is associated with the closing of our transactions, including our ability to close large transactions consistently on a quarterly basis. Our ability to build and expand our direct sales efforts and retailer distribution channels. New product introductions and our ability to develop and deliver innovative products. Risks associated within our national operations and our building provides 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. 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 of any forward-looking statements made herein. Additionally, non- GAAP financial measures will be discussed on this conference call. A reconciliation for the most directly comparable GAAP financial measures is also available in our fourth-quarter and full-year 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 would like to turn the call over to our Chief Executive Officer, Yaki Faitelson. Yaki.

Thanks, Staci, and good afternoon, everyone. Q4 was a strong finish to 2016, with license revenues increasing 23% and total revenues increasing 24% year-over-year, exceeding our projections. On a constant currency basis, revenue growth was 26% for the full-year license revenue goals were 30% and 32% on a constant currency basis, demonstrating that our efforts towards that market awareness and acceptance for our data security solutions are working. We believe we have a long runway ahead of us, and are excited about the opportunities we see for 2017. Total revenues for the fourth quarter were $54.4 million, and growth in the U.S. was particularly strong, increasing 77% in both Q4 and the full year. As we've discussed, we focus more on the sales and marketing investment in the U.S., as this market is a bit more mature as it relates to insider threats and particularly the adoption of data alert. In Europe, the opportunity remains very large. With this portion of our business, we did not perform as well as we were hoping. With fourth-quarter revenues increasing 4% year over year, and 8% on a constant currency basis. For the full year, EMEA revenues increased 16% and 19% on a constant currency basis. During the fourth quarter, several of these took longer to close than expected, but in the first quarter, we've already closed many of them. In Europe, the market and our sales teams are maturing, and we believe we will have enduring success over time. In upcoming regulations, such as GDPR and the growing problem of insider threats are also helping to guide awareness and adoption. We will continue to make investments in our go-to-market themes to support the opportunity. When we entered 2016, we were focused on several key objectives, including increasing awareness and adoption of our…

Thank you, Yaki. Total revenue for the fourth quarter were $54.4 million, an increase of 24% year –over-year and 26% on a constant currency basis. Our strong growth is a direct result of the healthy number of new customer wins, our ability to expand our relationships with our existing customers and our consistently high maintenance renewal rate, which again, came in at over 90%. License revenue was $34.7 million. It represents a 23% increase for the fourth quarter of 2015, and 25% on a constant currency basis. Our maintenance and services revenues were $19.7 million, increasing 26%, compared to the fourth quarter of 2015, and 27% on a constant currency basis. Looking at the business geographically, U.S. revenues increased 37% to $23.5 million or 61% of total revenue. In Europe revenues, were 33% of total revenues or $17.4 million, an increase of 4% and 8% on a constant currency basis. Rest of World increased 36% to $3.5 million or 7% of total revenue. During the quarter, we added 366 customers and ended the year with approximately 5,350 customers. For the fourth quarter, existing customer license and first year maintenance revenue contribution was 43%, up from 36% in the fourth quarter of 2016, and for the full year it was 42% versus 37% in 2015. We've also been executing on our footprint strategy of broadening our relationship with existing customers, as well as increasing new customer additions. As of December 31, 2016, 48% of customers have purchased more than one product family, up from 45% as of December 31, 2016, 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 we will be discussing non-GAAP results going forward, unless otherwise stated, which…

Thank you. [Operator Instructions] Our first question comes from Matt Hedberg of RBC Capital Markets. Please proceed with your question.

Hi guys, thanks for taking my questions, and for Gili, it's been great working with you, best of luck in retirement. Yaki, it sounds like your cross-sell commentary seemed to improve versus where we were last year, we continue to hear good things, I guess, in particular about DatAlert from the channel, can you give us a sense for how penetrated DatAlert is in your base, and what kind of ASP uplifts you're seeing, when you combine it with DatAdvantage?

Hi, Mike, thanks for the question. Many of our customers have it, but we definitely underpenetrate with DatAlert. And the other thing to understand with DatAlert is to teach the group. Natural changes to the sales motion, we can sell more through CISOs and it gives the early immediate time to value. And the other thing to understand, in terms of security analytics, if you take today, each one of every major reaches that really has a huge impact on the whole, like WikiLeaks, like Snowden, the DNC, the Parliament documents, if they had Varonis, each say it wouldn't happen or the magnitude of the damage would've been very, very, very small. So DatAlert has definitely changed the game. The other thing that it did, primarily in North America, when we are going through these 1,000-plus customers, the sales portion became much more predictable. When we are there and we're getting to sea levels, we're just closing these deals. So you see the basic buying more and more and we just find everything from once in a while to extremely sophisticated low and slow hacks by administrators or disgruntled employees and it works very well. The other thing that it's doing, the integration with DCF is tremendous, with the data specification framework. Finding critical data and understanding if anybody is doing something with it. So overall, it's just working very, very well and we see tremendous opportunity to innovate in this direction. It was a very good also, big kind of innovation for us. It sparked the way, show us where we want to go. And we believe that we send that what we put in R&D will leave very good results because we have very good visibility where we add value to this environment in security analytics and security operation with the detection and the mediation of the risk.

That's great. And then on your full-year guide, it looks like you're targeting kind of 21% growth at the midpoint. I'm curious, what sort of growth in sales capacities are you planning to support that sort of outlook?

Matt, we always have the same philosophy. When we sit here today, we see how we can get through our strategic milestone, being $0.5 billion in sales. And then believing, with our innovation to be a $1 billion business, for us we need to extend the sales force. But we are doing it in a very measurable way. First, we're building the infrastructure, making sure that the managers are there. And then we are doubling down, as we did in the U.S., the current productive and profitable – and profitable fairly fast. But the philosophy is the same philosophy, to manage very well growth and growth investment back in the business and profitability. We saw nice leverage in 2016 and we believe that we are going to continue in this way.

Great, thanks a lot, guys.

Our next question comes from Raimo Lenschow of Barclays. Please proceed with your question.

Perfect, thanks for taking my question. Gili, I will miss you as well, and for the whole team, congratulations on a great finish to the year. Yaki, you talked about the DatAlert and the much more predictable sales motion you get in the U.S. Can you talk a little bit about Europe? Remember like a couple of years we had some worries around the UK and Russia, this quarter wasn't like the ideal quarter for you, there maybe will, for the whole company look good. Can you just kind of talk on that a little bit? I mean, you mentioned it earlier, but I was hoping for a little bit more detail.

Thanks, Raimo. So, we definitely see very good opportunities for growth in Europe, and overall we are starting to go from a constant currency basis, it was close to $0.24. Unfortunately, [indiscernible] and we closed many of them at the beginning of Q1. We also closed them at the right part. We just saw some more scrutiny at the end of Q4. The U.S. market is more mature and most of our sales and marketing investments were in the U.S. What we did in Europe, and you know, we have a historic good execution in Europe. We built the infrastructure that can drive growth. But we finished rebuilding the UK team, and we feel that we have a very good team in place. We have a very strong country margin for France, to free up the Regional Vice President that is dealing with continental Europe to deal with other markets. We're doing the right strides in Germany. The pipeline is definitely expanding. We believe that GDPR is tailored for Varonis and we see a very good long-term driver. Don't mistake a multi-quarter view to look at this market, but we strongly believe that this is a very good opportunity and insider threat is front and center. And also, all the olden and new regulation now working for us, and we believe that we've seen [indiscernible] in this market.

Okay, perfect, thank you. And then, one more on the overall setup for the Company, Yaki. So you remember like we kind of do all this number crunching and sometimes we get results that kind of might make sense or might not make sense. So you correct me if I'm wrong. So I was looking at the number of customer adds that you got this quarter, and that was kind of slightly down towards the second quarter here, where it's slightly down. But then the percent of revenue you get from new customers was actually up, if I look at Q3 and then Q4. So does that mean you kind of target the new customers better and the deal size is then bigger, or how do I have to think about that whole dynamic there?

It's exactly that. We just – Raimo, the market is coming to us. We are almost alone in this market and the market is coming to us. It's not the problem, we just see that we are targeting larger accounts and doing very well. In the 1,000-plus we had a nice addition. So we grew in the new customers. We also brought many new customers, relatively to the additional sales capacity in the last three years, so we need to cater to them. We need to add them, we need to give them DatAlert and the Data Classification Framework, but it's primarily – we're just going up in the market. And you see it in the ASPs and the customer overall customer license value. We really we are very proud that it was the biggest strategic initiative that followed, and I think we did very well.

Perfect. Thank you, well done.

Thank you.

Our next question comes from John Tecuci of Jefferies. Please proceed with your question.

Hi guys, this is Joe on for John. Thanks for the question. Just a follow-up for that new customer and deal size question. What is the trend you guys are seeing with the sales cycle, is there an increase there or are you guys still maintaining the same?

It's really the same, enterprise sales, it's always been involved with just the process. What we see is that the business is becoming much more predictable. Primarily North America is just front and center in the business discussion. CFO is a bigger department, CISO is talking to both. And the other thing we are benefiting from tremendously, is the fact that the Company's invested so much in security and growth so little and this gate. So there is a thoughtful process around it. So we get to these larger organizations and we are doing well. And most of our effort this Company between 1,000 to 20,000 users. Our main focus, obviously with certain case, but the main focus is the overall customer license value, and we are doing very well and it is trending very well.

Thanks, it's thoughtful and it's good to hear. And then, you guys have always been well-positioned in the on-prem space. I know the lion's share of data is still there. I was hoping you could comment on the cloud opportunity and how that business is tracking?

We believe that the cloud opportunity is tremendous. When the customers are all going to 365, and we just see SharePoint and OneDrive, but the problem is even bigger. The other problem is to classify the data, whether it stays on prem, whether it's going to the cloud, what service it comes from, doing from us, the landscape is more dynamic. Its hybrid, we are going to benefit. And we have a lot of investments in the cloud and we just want to protect data, wherever it is.

Okay, thanks guys, and congrats on the results.

Our next question comes from Srini Nandury of Summit Redstone Partners. Please proceed your question.

All right, thank you for taking my question. Yaki, again, going back to the customer additions, like my prior two callers. As you look at the customer additions in 2017, approximately how many customers are you targeting to add? And if the relevant metric you actually track, I have a follow-up please.

Sir, can you please repeat the question?

As you look at the customers additions, I would expect more customers additions because now you are more mature than a couple of years ago. Is it a relevant – is that customer additions are relevant metric to track at all?

It's relevant but you also need to understand that we have a really nice goals in the 1,000-plus. I think that not the goal – it is not just the actual goals. We brought many customers. And the number of customers that we brought for the quarter and for the year is significant. And the 1,000-plus customers that we brought is significant, so it's always relative to the quarter, relative to how many reps we have, but I just believe that our focus and overall market penetration is going well.

Okay. You've been – I read your CISO report, which was alerted by the Forrester. Who is your natural buyer now, within the enterprise? Is it CISO, are you guys still selling to the IT department? How does it work now?

There is more and more to CISO now. Definitely mainly North America changed to a CISO sell. CISO becoming more powerful and the other thing from the CISO, you can also enforce policy on the infrastructure people, so its most of the time now – we definitely see a change in the sales motion.

All right, thanks.

Thank you.

Our next question comes from Melissa Gorham of Morgan Stanley. Please proceed with your question.

Great, thanks. Thanks for taking my question and Gili, best of luck to you and it was great working with you. I'm just wondering, Yaki, if maybe you can perhaps give a little bit more color on the areas in which you're investing for next year, for 2017? Whether it's going to be focused on products or if there is additional – magnitude of additional sales and marketing investments that we should expect for 2017.

We're always investing in products and now it is everything that related to security analytics. We just see that we can do so much in security analytics and the remediation and that's related to all the platforms and adding more data sources. So we have a lot of our investments are going there. In many places in the U.S. we are not penetrated. We've seen that the federal can be huge for us. Definitely we can invest a lot in big markets like Germany, and also add sales capacity in places that we have coverage behind very good momentum. So we're really balancing the investments and overall resource allocation, and we are doing it in a very measured, careful way.

Okay, great. And then just one quick one for me in terms of competition, I think previously you've talked about a competitive environment being very favorable and you're not really going up against other vendors per se, but I'm just wondering if there's been any change as we think about kind of the broader data protection opportunity, if you are seeing any new vendors in your space?

No. So far, I can say in overall evaluation as a percentage, we see less competition. And we also see that the customers purchase poly-solutions that are coming back to us and buying our products. The only thing that we are benefiting is, just there's so many vendors are talking about user behavior analytics, and it was a completely different solution and value proposition than ours, but educating the market. So what we are seeing is that we are really benefiting from other companies' marketing and our ability to take care of multiple budgets within the security buckets. From seam and manual detection, to privilege accounts and just things that are under the inside of threat umbrella. Definitely the market and the budget is coming to us.

Great, thank you very much.

Thank you.

[Operator Instructions] Our next question comes from Gur Talpaz of Stifel. Please proceed with your question.

Okay, great, Yaki, insider threat's been a great theme for you in 2016. I guess as you look into 2017, are you seeing other emerging themes here that are serving as catalysts? And would you put ransomware and data privacy in that list, as we think about the growth trends going forward here?

Yes, definitely. I think that there are several things. One is just, ransomware is one, data privacy is one, GDPR is another big one. But the main thing grew in this spend and the value equation, when you put us in, we are adding a lot of value. We're catching a lot of big stuff, we can remediate and make sure that your more sensitive data is locked and the right people who can access the right data. We're balancing very well between productivity and the value that you're getting in the organization are getting it, they understand that they can spend a lot of security and get very little and they understand that Varonis is very dynamic and needs very sophisticated analytics. And sophisticated analytics with the right ingredient, and this is where Varonis benefiting the most. Because the market is coming to us, success breeds more success, partners are pushing more – customers are talking about us and the DatAlert gives such an immediate time-to-value and just many great success stories. So we're just adding value in the right place and I think we are very, very advanced from certain environment.

That's helpful, and maybe following up on that point, with DatAlert, would you say that with new customers it's effectively close to an automatic purchase here, or am I being a bit too aggressive in my assessment? Then maybe one follow-up to that, what should we look out for at RSA next week? Thank you.

Customer wants it, but they want many of our products. You see [indiscernible] it depends nothing is automatic, but I will say that over one-third of the customer is interested in this very sophisticated intensive controls they are saying that you are going to see a lot of demonstration. Many customer introduction and I think that we are going to just present our value with presence in the show.

Great, thank you.

Our next question comes from Greg McDowell of JMP. Please proceed with your question.

Thank you very much, and Gili, I also extend my best wishes. Over a decade as CFO is a pretty amazing run. Yaki, I have a question about attach rates of DatAlert, and maybe if you could walk us through how the attach rates went up throughout the year. And maybe if you could discuss sort of some of the assumptions about the attach rates for DatAlert in 2017 and beyond?

We're not disclosing the actual attach rates, but without a doubt, it's the fastest growing product in the Company history. And we added so much capabilities to it that we several times increased the prices and it's working very well. But it still works. You're coming in and you want to see DatAlerts on you unique state, on your Office 365 in the cloud, you want to see where the critical data is, you want to see it from your archive directory. So you've got one of the data advantages in DatAlert, immediately, once you buy the other product, it will give you immediate value. And not only that, it's going to marry the telemetry, the metadata from the other sources and make the analytics so much better. As you have more of our products, the analytics will be much better, and your ability to detect very sophisticated attacks is just constantly growing. So it's definitely changing many things for us.

That's helpful, thanks. And one follow-up question, just on sort of operating margin framework. And I know we discussed it a little bit earlier in the call, but as I look at last year, 2016, you had both accelerating revenue growth and I think about 700 bps in operating margin expansion, and as we look at sort of the implied operating margin expansion in 2017, it certainly moderates. And I guess just high-level, why step on the gas now in terms of investments? And are we in sort of more of a normalized operating margin expansion? Is the normalized level more like 100 to 200 basis points for the next couple of years as you guys step on the gas to take advantage of the market opportunity?

I think Greg, we are guiding in a responsible way and starting the year, this is a responsible way to guide. But our philosophy and this is exactly what we did do, investing in the business and marching towards profitability, and gradually showing more leverage, and this is what we are planning to do.

That's fair, thank you.

The next question comes from Michael Kim from Imperial Capital. Please proceed with your question.

Hi, good afternoon guys, sorry if you covered this earlier, but can you talk about the progress that you've been making with the regional partners in being able to drive greater channel leverage, and to the extent that you're investing in channel folks within your own organization, where you're starting to see the most opportunities or adoption?

We definitely see that most of our demand is coming from the channels. And we see that the infrastructure partners looking for new ideas and a different secular trend and security is definitely one of them, now that infrastructure is fairly fast getting commoditized and Varonis is very early ones for them. And we're just doing very well with original partner of selling some security solution, an infrastructure solution, a storage virtualization and others. A big part of our overall go-to-market focus is making sure that we get more from the channel partner, that's all.

And then in terms of customer evaluations, are you seeing the same pace in recent quarters, and kind of in that sort of 30-day timeframe or less, and any change in conversion rates?

It depends on the sales capacity. It depends on the term we just see various pipeline developments in terms of the way that we're introducing the value. It's always the same, see it how to buy it, we show we are coming, we're showing a demo. We're pushing for the POC and many of the POCs we are converting into peers.

Great, thank you very much.

Thank you.

There are no further questions at this time. I'd like to turn the call back over to Yaki Faitelson for closing remarks.

We'll end the call. I would like to thank all our employees for their contribution to our success in the past year. All of our customers and partners for their continued support. Thanks everyone for joining the call today and we're looking forward to speaking with you again soon.

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