Greetings. Welcome to the Varonis Systems, Inc First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note, this conference is being recorded. I will now turn the conference over to your host, James Arestia, Director of Investor Relations. You may begin.
Thank you, Operator. Good afternoon. Thank you for joining us today to review Varonis' First 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 would be considered forward-looking statements under federal securities laws, including projections of future operating results for our second 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 first quarter of 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?
Thanks, Jamie, and good afternoon, everyone. Thank you for joining us to discuss our first quarter 2021 results. Our Q1 performance was strong, continuing the positive trajectory of 2020 and highlighting the ongoing critical need for companies around the globe to protect their sensitive data. You have heard me say many times before that our platform is relevant now more than ever. This quarter demonstrates that the momentum in our business is a result of a significant value we provide our customers. Our subscription offering allows to deliver on their immediate requirements and long-term needs, and when taken together, the result is substantially higher customer lifetime value. Let me take a step back and talk about the trends we have been seeing.
Over the last few years, and especially in 2020, several trends have accelerated and converged, putting the focus on complex data security challenges, which have been our mission to solve since inception. Whether companies are reacting to breaches, complying with regulation, or simply being responsible, our approach protecting sensitive data from the inside out resonates with new prospects and existing customers more than ever. As the digital transformation gains traction across almost all industries around the globe, it changes the way we live and work and impacts how data is stored, managed, and accessed. This transformation has fueled, and we expect will continue to fuel, the secular trends that drive demand for our products, including the shift to the cloud, which highlights the need for a zero-trust approach protecting sensitive data.
Cybercrime, where hackers and insiders targeting sensitive data are more sophisticated than ever, compliance with data-driven regulation, which is a serious challenge that creates enormous risk to companies all over the world. We have always believed that perimeter defense is not enough and limited. Recent breaches in the news, yet again, bypass the perimeter and endpoint protection by design. With attack surface larger and more open than ever before, we believe the way to address these risks and protect sensitive data is through the data-related insights and automation that our platform is uniquely positioned to provide. Our subscription model makes it easier for customers to see greater automated value by making larger initial purchases while leaving room for meaningful expansion over time. As a result, our customer lifetime value has increased significantly.
Looking ahead, we expect that continued expansion with our customers as well as ongoing innovation will further extend our reach and increase our addressable market. Let me provide a few examples of some key customer wins from the first quarter. One example of a new customer is a large U.S. financial company. Within hours of a risk assessment, we detected a brute force attack in progress and found sensitive data open to a large percentage of employees. After showing them how they were at risk, both on-prem and in the cloud, they purchased DatAdvantage, Data Classification Engine licenses, DatAlert, Automation Engine, and more. While we've seen meaningful increases in adoption rates by new customers, our existing customer base continue to represent a substantial growth opportunity for the company. A prime example is a nationwide professional services company with over 5,000 users that first purchased two perpetual licenses in 2018.
In 2019, they added subscriptions for Data Classification Engine and support for SharePoint Online. In Q1 of this year, they again expanded their deployment with a focus on privacy and compliance, adding Policy Pack for GDPR and CCPA, Automation Engine to find and fix broken access controls, and Data Transport Engine to enforce their data governance policies. In total, this customer now has nine licenses. Like many of our customers that go through similar route of purchasing over time, we are already discussing with this customer the additional Varonis licenses that will further strengthen their data protection and take them to the next level of their operational journey. These are just few examples of how every day we are helping our customers solve some of their biggest data protection problems, which will only continue to become more urgent.
In summary, we are extremely well-positioned to continue our momentum and further expand our market leadership, and we believe we are just scratching the surface of a very large growing opportunity. With that, let me turn the call over to Guy. Guy?
Thanks, Yaki. Good afternoon, everyone. Thank you for joining us today. We're extremely pleased with our first quarter results. Our continued execution on our go-to-market strategy powers our ability to capitalize on both the short and longer-term opportunities available to us. First quarter highlights include 38% total revenue growth, 120% subscription revenue growth, ARR growing 39%, and record operating cash flow generation of $20.4 million. Demand for our platform continues to be driven by both new customer acquisition and existing customers expanding their licenses, spanning diverse industries. We are seeing meaningful customer engagement as new customers continue to purchase on average more than five licenses.
These larger upfront commitments in turn lead to greater license adoption over time and increased customer lifetime value. As of March 31st, 2021, 66% of our total customers with 500 or more employees purchased four or more licenses, up from 55% a year ago.
At the same time, 32% of these customers purchased six or more licenses, up from 21% a year ago. This rapid increase validates that we are delivering on the growing demand to consume more of our platform. We also see this reflected in ARR growth of 39% year-over-year to $306.9 million at the end of Q1. Turning now to our first quarter results in more detail. Total revenues grew 38% to $74.8 million. Subscription revenues grew 120% to $44.8 million. Maintenance and services revenues were $29.7 million, driven by strong renewal rates, which once again exceeded 90%. Looking at the business geographically, we again saw strong performance across North America and EMEA. In North America, revenues grew 39% to $52.8 million, or 71% of total revenue. In EMEA, revenues grew 38% to $20.2 million, or 27% of total revenue.
Rest of world revenues were $1.7 million, or 2% of total revenue. Turning back to the income statement, I'll be discussing non-GAAP results going forward. Gross profit for the first quarter was $63.8 million, representing a gross margin of 85.4% compared to 83.2% in the first quarter of 2020. Operating expenses in the first quarter totaled $70.1 million. As a result, operating loss was $6.3 million for the first quarter, or an operating margin of -8.4%. This compares to an operating loss of $17.4 million, or an operating margin of -32.2% in the same period last year, as our strong execution and subscription model continues to drive operating margin leverage. During the quarter, we had financial expense of approximately $897,000, primarily due to interest expense on our convertible notes.
Net loss for the first quarter of 2021 was $7.7 million, or a loss of $0.08 per basic and diluted share, compared to a net loss of $17.4 million, or a loss of $0.19 per basic and diluted share for the first quarter of 2020. This is based on 100.2 million and 92.7 million basic and diluted shares outstanding for Q1 2021 and Q1 2020, respectively. We ended Q1 with $824 million in cash and cash equivalents, marketable securities, and short-term deposits. Our cash balance reflects the successful $500 million follow-on offering that we closed in February. For the three months ended March 31st, 2021, we generated a record $20.4 million of cash from operation compared to $3.9 million in the same period last year.
We ended the quarter with 1,794 employees, a 12% increase from a year ago, and an increase of 75 net new employees from the fourth quarter of 2020. With the opportunities we see in the market, we plan to continue hiring, mostly in sales and R&D, to develop both mature and under-penetrated territories and to fuel continued innovation.
Moving to our guidance. For the second quarter of 2021, we expect total revenues of $82.5 million-$84 million, representing growth of 24%-26%. We expect non-GAAP operating loss to range between $2.5 million-$1.5 million and non-GAAP net loss per basic and diluted share in the range of $0.04-$0.03. This assumes 106.4 million basic and diluted shares outstanding. For the full year, we're raising our guidance and now expect total revenues of $365 million-$370 million, representing growth of 25%-26%.
We expect non-GAAP operating income to range between $4.5 million-$8.5 million and non-GAAP net loss per basic and diluted share in the range of $0.01 to non-GAAP net income per diluted share of $0.02. This assumes 105.3 million basic and diluted shares outstanding and 116.5 million diluted shares outstanding, respectively. In summary, as we continue to execute on our go-to-market strategy, we see a clear path to revenue growth, margin expansion, and cash flow generation, capitalizing on the longer-term opportunity available to us. Thanks for joining us today. With that, we would be happy to take questions. Operator?
And at this time, we will be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Our first question is from Sterling Auty with JPMorgan. Please proceed with your question.
Yeah, thanks. Hi, guys. Yaki, I'm kind of curious in terms of a number of security companies have announced new products, acquisitions, et cetera. I'm wondering if anything's changing in the competitive landscape and if you're seeing any other vendors that are starting to move towards the Varonis solution set at this point.
No. At this point, we don't see any change. We are uniquely positioned in the marketplace. The only change that we really see is that the marketplace and organizations from really every industry and the vector starting to understand very well this data first and inside out approach. I think that they understand that we are extremely relevant to all the contemporary risks of cybersecurity and insiders. Without a solution like ours, it's something that it's very hard to protect. At this point, we don't see any change in the competitive landscape, and we just feel that slowly but surely, the market is coming to us. Once we land a customer, they're just buying more and more.
All right. Makes sense. Guy, one follow-up for you. It might be helpful for us for you to put into context the maintenance renewal rate's still above 90%, but seeing the maintenance and services revenue down sequentially and down year over year, how much of that might be customers that are maybe converting fully to subscription versus some other factors that would drive that dynamic?
Thanks for the question. The renewal rates are strong and very much in line with what we've seen. Our renewal rate has been greater than 90%, and that really hasn't changed. What we have been talking about for a pretty long time now is the professional services. I just want to remind everyone, professional services, we've been pushing many of those to be done by channel partners, and our newer licenses are providing more value through automation. PS, professional services, is not a large component of our business. It's low single digits out of total revenue, but we've still seen kind of a significant decline in the quarter, and that's really as planned, so that was no surprise to us.
We're not really converting customers from maintenance of perpetual to subscription. We're seeing existing customers buying more and more licenses and expanding through the subscription. That's really what you're seeing there.
Excellent. Thank you.
Thank you.
Our next question is from Matt Hedberg with RBC Capital Markets. Please proceed with your question.
Oh, hey guys. Great, thanks for taking my questions. Obviously, it was really good to see ARR accelerate versus what was a very strong Q4 and still off difficult compares. I guess, Guy, my question is on the 2021 outlook. You're raising the full year by about the Q1 beat, which it might look a little conservative given really how strong Q1 was. I wonder if you could talk a little bit about the macro expectations that you're building into your 2021 revenue outlook.
Well, when we look at the philosophy of guidance, that really hasn't changed. I think the results of Q1, we're very pleased with them. I think the kind of reflection, of our Q2 guidance shows kind of how good we feel about the business. Like you said, we raised the full-year guidance to 25%-26%. We increased the low end by more than the beat and moved that $6 million beat to that midpoint. I think when we look at that 2021 outlook, one thing to remember is that Q1 is still, from a seasonality perspective, the lowest quarter in dollar terms for the full year. I think that was also taken into consideration in the guidance. overall, we've never felt so strong and positive about the business as we do now.
That's really good to hear. Yaki , Guy noted that you guys are investing heavily in sales and marketing. I'm wondering if you reflect back on the business, how have you altered where you're targeting that spend today versus maybe pre-COVID? Are you looking at security partners, maybe partners that are associated with the Microsoft ecosystem because you seem to be having a lot of success there? Just kind of curious on the philosophy on sales and marketing investments.
Well, it's really everything. It's from our inside sales to the field reps. Obviously, we are going to 1,000 to mainly 2,000 plus organizations. I think two things that are very interesting if you look at the overall ARR growth, that we are going up market and the big customers are buying more and more, but also the smaller customers that are big enough, becoming very significant for us. It's primarily the security partner, and with the move to subscription, we're becoming much more important to them. The mission is very simple, is just to make sure we cover more of these critical platforms, and then we are doing the overall Varonis play from data protection, threat detection and response, and compliance. Customers understand very well that they need everything from just one platform.
In order to do that, we're creating products that are very usable and our customers, thankfully, are just buying. We say it here in Varonis that more is more. You buy more, you get more automated value, and then you buy additional products. We just need to make sure that we have coverage in the market because potentially everybody with this digital asset is a potential customer, but you still need to cultivate and to build the sales force in the right way. We want to make sure that we have the management in place and we are enabling our sellers and SCs, but just expanding the organization to keep innovating, supporting customers, and make sure that we have good coverage in the marketplace, which this is just a big market.
Thanks a lot, and congrats on the continued success.
Thank you.
Our next question is from Brent Thill with Jefferies. Please proceed with your question.
Hey, guys. This is Joe on for Brent. Really appreciate the question. I have two follow-ups to Sterling's questions. Yaki, can you talk about the competitive differentiation, particularly in the cloud, and given you guys have $750 million in cash, are there any tangential areas you need to build out there?
I think that what we are doing, if you're really looking at the data itself, we are the only vendor at this point when you're talking about the 365 support that can go to this massive amount of data, that in terms of the permission structure, because of collaboration and the way that it works, the problem is much bigger in the cloud than on-prem. Just to visualize it and to be able to remediate the problem, and then to understand any abnormal behavior regarding the data is just a very difficult undertaking that we are doing very well. We invested in Polyrize. We believe that the big success that we saw with 365, we can see with several other critical SaaS applications, and this is something that technologically it's very hard to do, and we believe that there is massive opportunity there.
In terms of our cash, we have a very clear, broad, and wide roadmap, and if we see something that can accelerate the time to market, we will consider to buy, primarily tuck-in acquisitions. We know very well where we want to go. We believe that there is so much more ahead of us than behind us. We think that the digital transformation and everything that is happening in the cloud, primarily with SaaS platforms, Varonis can just keep expanding and adding a lot of value, and with a lot of these platforms, you can really do what we have done with 365 and Windows and Unix just to build the whole suite around it. As I said before, I think that this is where you have most of risk.
if you really take a step back in looking at all security solutions, all security vectors are in order to protect data. They are essential, but they are limited in protecting the data. They are very important, but limited many times in protecting the data, and we believe that our platform and our approach are critical to every organization that has unstructured data in the business application, and this is really our vision, that it's very clear, and this is how we execute.
Thanks. That's very helpful. Guy, appreciate the color on the renewal rates for maintenance and that you're not converting, but I think last quarter you said it would be down low single digits this year. It was down 11%, that line, I know it includes professional services in the first quarter. Just kind of curious if you can give some guardrails on how to think about it for 2021.
Absolutely. I think the delta, when you look at the actual decline, is coming from the professional services. Like I said before, it's not a large component of the business. It's low single-digit percentages out of total revenue. We've still seen, as we planned really, the push to partners to perform many of those days, and also the fact that the license that we come out with are geared towards automation, really allow us to do less of those professional service days compared to what we had to do in the past. When you look at the renewal rates overall, we're not getting any new maintenance revenue because of the move to subscription, and that happened so quickly, so there's really no fuel coming in, and the delta is really coming from the professional services.
Okay. Is it fair that that line would go down a little bit more than low single digits this year?
We expect it to go down single digits, yes.
Okay. Thanks. Appreciate the color.
Thank you.
Our next question is from Saket Kalia with Barclays. Please proceed with your question.
Hey, guys. Thanks for taking my questions here. Yaki, maybe for you, just to start off, can you just talk about what products in the platform you feel like are seeing the most incremental demand as the pandemic starts to abate? There was a great example that you gave of a professional services firm and all the products that eventually got them to, I think, nine. If you look broadly across the customer base, what are those one or two incremental products that are taking a customer from, say, five up to six or seven on average?
Hi, Saket. Thankfully, almost everything is working in terms of the way that our customers are consuming the platform. What I told before, that more is more, it's something that is very consistent. If you get to five licenses, there is much higher predictability that in a reliable way, you are going to get to 15. This is something that we are very excited about. In general, we see a lot of success with 365. We add tremendous value there, and when you put a lot of data in OneDrive, SharePoint, and on top of it, you have Teams, the data protection problem is just growing exponentially. And be cause customers getting to this critical mass of data, we see a l ot of growth there.
But, it's very interesting also to see in the customer base, while you see this very strong adoption in the cloud and with 365, the on-prem data is not going anywhere. The data on-prem is still going and going, and everything is interconnected, which is really extending the attack surface that our customers and prospects have. everything is working, and it's also very interesting to see how data protection and cybersecurity collide. There is also a very strong understanding that you need to comply with all the regulations that are related to data. There is a very just organic understanding within the customer base that they really need to expand the platform for these three use cases.
Got it. That's very helpful. Guy, maybe for my follow-up for you. Nice acceleration in ARR this quarter. I think the growth was 39%, up from about 37% last quarter. Is there anything that you would call out as a driver beyond clearly good execution and strong demand? Whether that's timing or FX or just anything very open-ended, anything we need to keep in mind around what drove that ARR acceleration. Maybe related to this, how should we sort of be thinking about ARR going forward broadly? Does that make sense?
Absolutely. I think there was nothing really abnormal in Q1 apart from the execution and apart from the market really coming to us. We talked a lot about the three pillars, new customers buying more licenses, and you see that the number of licenses almost doubled in number of licenses compared to what they buy under perpetual. We've talked about the second pillar being existing customers. They're expanding. Not only are they expanding, but the fact that we're selling more licenses to new customers allow us to sell even more in the following years and kind of the path to double-digit licenses on average per customer has never been clearer to us. That's the second pillar. The third pillar is the renewals, and they're very strong. There was really nothing, there wasn't any effects or anything abnormal there.
It was really the strength of the business and the market really coming to us. As we look at ARR for the year, we really don't guide on ARR, but we talked a lot about the fact that this year is kind of the first year that we're apples to apples, in terms of the percentage of subscription, and therefore ARR should be somewhat converged in the percentages to the top-line growth.
Very helpful, guys. Thanks a lot.
Thank you.
Thanks.
Our next question is from Fatima Boolani with UBS. Please proceed with your question.
Good afternoon. Thank you for taking my questions. Yaki, I'll start with you. I wanted to double-click into the competitive environment and maybe ask you more specifically, there's been some consolidation in your end market with some specific vendors, so I'm curious if that's opened up incremental opportunities for you to become more visible. Secondarily, as it relates to competition, certainly other vendors in the cybersecurity umbrella, whether they're identity providers or perhaps endpoint or device security providers, they're starting to talk a lot more about contextual data access. I'm wondering where some of your capabilities start and stop, and if you can compare and contrast what your platform abilities can do relative to some of these other players who are talking about these adjacencies in contextual data access. I have a follow-up for Guy.
I think that sometimes what happen in the security market is that many things sound the same, and in actuality, they are fundamentally different. With that, as I said, we don't see any change to the competitive landscape. What is happening in reality with Varonis is that we are the only vendor that can take a lot of data and really digest it and visualize the potential of access in this, and do it in an ever-changing environment. This is massive amount of data, then have this automated remediation and understanding abnormal behavior to data. We are starting with the data, and then we are going more to what we call edge telemetries, like DNS and proxy and VPN. We're also doing a lot with Active Directory and Azure AD and other LDAP repositories.
Everything for us, it's starting from the data, and then we also see abnormal behavior, like we have with users, we see it with devices. We're just in a situation that all the cybersecurity vendor and the identity vendor, we coexist with them. We together with them, usually it's one plus one equals three. In the core competency of what we are doing in terms of data protection, threat detection, response to all data, classifying the data in an actionable way, we are usually alone. The only thing that you see is just confusion. In terms of consolidation, when you have these small players that have the same messaging at times. They are not creating the market, and when they are consolidating and they are moving, they are also not creating a lot of opportunity.
This point is just the market understand much better what we are doing. As you said, there is just a very good understanding that everything we are doing is protecting data. When data is going to the cloud, and many times traditional security is not really working there. Just making sure that the right people can access the right data, you understand what is important. You can have these high fidelity alerts on any abnormal behavior with the right signal-to-noise ratio. If something happen, any CISO can dive in and immediately understand what happened, and this is what Varonis is doing. We have this gradual process of just the market that is shaping and just the problem that every business needs to solve.
I hope that I was clear, but this is what we see in the marketplace, and this really, I think, these are really the dynamics of the market, the way it's shaping. With it also, you see more and more budgets.
I appreciate that detail. Thank you. Guy, maybe for you, I want to drill in on the subscription growth performance in the quarter as well as the ARR performance. If I take a step back, the magnitude of acceleration we saw in the subscription business from the fourth quarter, that magnitude of acceleration is quite a bit healthier than the acceleration we saw in the ARR metric. I'm wondering if there's any observations or any items that we should be mindful of, because I'd imagine that the subscription revenue growth performance would have directionally, in terms of magnitude of the upside, would've tracked the subscription line item. If there's anything there, to help us better understand some of that divergence, that would be helpful. Thank you.
Absolutely. Well, ARR is really comprised of the subscription, the ACV, annual amount of the subscription, plus the maintenance portion of the perpetual. Obviously, when you combine those together, that's part of the reason that we talked about the fact that, as we move through the transition and get to this, to 2021, where it's truly apples to apples, ARR should match much closer to the revenue top line growth, and that's actually what we've seen this quarter.
Very helpful. Thank you.
Our next question is from Rob Owens with Piper Sandler. Please proceed with your question.
Great, and thank you guys for taking my question. I think you've spoken around it, but if we look at the ARR outperformance and the acceleration, can you give us some color whether that was driven more by lands or expands? Any comments around pipeline would be appreciated. Thanks.
I think when you look at kind of the ARR and our kind of performance this quarter, obviously, there's the land which we've seen customers consume more of the platform, and that's been very helpful for us and obviously helpful for the customers as well because they're consuming the platform. Therefore, the ability for them to get value and come back and buy more increases significantly. Now, obviously, we have a large base of customers, and we've talked a lot about the fact that we are under-penetrated, so existing customers should contribute more. That's obviously better for us because it costs less to generate revenue from our existing customers, so they kind of drive. We were happy with both new customers and the existing customers consuming and buying more of the platform.
Maybe a little bit around your confidence in the use case of Polyrize and how that's evolving as we come out of the pandemic and see digital transformation and cloud acceleration.
We are happy with the way that the development is progressing, but we believe that everything we experience with 365, will translate into the platforms that Polyrize support. We believe there is tremendous opportunity there. If you think about a lot of the SaaS applications from Salesforce to Google Drive and others, and Box and GitHub, these are the platforms that you want your organization on. Access control is very hard, understanding of normal behavior, what data is important, just to demonstrate compliance. These things are very challenging, and we just believe that we can add tremendous value there and to be uniquely positioned the way we are positioned on the on-prem data and everything that we are doing for all the 365 platforms. We are very excited about it.
And as we are moving forward with the development and talking more with customers, we just think that this is just a tremendous opportunity to add a lot of value to our customers and to increase ARR drastically for our Varonis customer.
Thank you.
Our next question is from Alex Henderson with Needham & Company. Please proceed with your question.
Hi, team. You have Mike Cikos on the line here for Alex Henderson. Congratulations on the strong quarter and the strong subscription and ARR growth. Was curious, can you comment on this growth in the context of this greater market awareness from this collision of data collection and cybersecurity you're talking to? Just because it really sounds like the market is increasingly aware of these issues and the value prop you're delivering. Building on that, can you also talk to whether you're seeing any uptick in spending or demand, where maybe budget is finally coming to the market following the SolarWinds or Microsoft Exchange server hacks we were talking about earlier this year?
I think that if you're really going to dissect the anatomy of a lot of attacks, so when you have just this sophisticated malware or APT, it's using the user credential and trying to go after data. You see this more and more, so customers understand that something like that can happen, and they really need to think about how they are protecting the data. Once you have this kind of conversation and realization, you understand that you need a platform like ours. Regarding the awareness, it's hack by hack, and a lot of it is just the insiders. If you want to go all the way back to Snowden and WikiLeaks, the biggest damage happen when you have an insider. You have your own employee that is deciding to do something that is malicious.
In this kind of situation, we are uniquely positioned to help the customers. It's everything. Just every day, something is happening, and you see the digital transformation and CISOs becoming very strong in the organization, and they also get the responsibility to protect data, boards and management departments, legal departments understand that they need to protect the data. When you really evaluate your digital assets, you understand that you need to protect your data and critical information in a way that the organization can digest. What's happening today in the world is that organizations' capacity to create and share critical information is significantly increasing the capacity to protect it. I just think that in order to be able to protect this data, you need something like Varonis.
But, just every day, we're just inching forward, and what is happening is that you have this big market, and we have a lot of technological moat and massive feature set on top of our platform, and just benefiting our customers. So, it's everything. You have the breach, you have a problem with insider, regulation is coming, you have another platform, you get to critical mass of data. This is really what you see with Varonis. It's a very gradual process, but every three, four months, you're just raising your head and you are usually in a much favorable market.
Thank you. That's very helpful. For my follow-up question, I did want to touch on the investments that you guys are making. I understand we called out about 1,800 employees was the headcount figure exiting the quarter, up 12% year-over-year. To the extent you can with these investments, how are you guys planning on exiting calendar 2021 from a headcount perspective? For those investments you're making in both R&D and sales and marketing, can you provide any additional detail for the split within those different investment line items? Thank you very much.
We don't really guide on headcount, and we don't really kind of guide on the breakdown of the different departments. I'll give you some color that will show how strong we feel about the business and kind of how we're thinking about this, and acting, really. When you look at kind of the growth of the headcount, most of it has been in the R&D and sales and marketing department. Sales, really to develop kind of the mature and under-penetrated territories. In R&D, really to continue to fuel the innovation. Nothing has changed apart from the fact that we talked a lot about the fact that we want to continue to put the foot on the gas when we feel good about the business.
When you look at kind of the net new growth in headcount, we grew 75 net new in Q1, and we grew 90 in Q4, so 165 net new employees in the last six months. That's really an indication of what we've seen from a market perspective and our desire to capitalize on the long-term opportunity. We always try to tie the level of expenses to the level of revenues we plan to achieve, and that philosophy hasn't changed.
That makes a lot of sense. Terrific. Thank you, guys.
Thank you.
Just in the interest of time, we do ask that everyone who's to ask a question to only ask and limit themselves to only one question. Again, please limit yourself to one question. Our next question comes from Hamza Fodderwala with Morgan Stanley. Please proceed with your question.
Hey, guys. Thank you for taking my question. For Yaki, I had a question around sort of the investments in pipeline that you're seeing on the federal side of the business, going to the back half. I know that you had some announcements recently, particularly on sort of Microsoft's Government Community Cloud, I'm curious if you can give us some more color there and what the pipeline looks like going to the back half as we go into the federal budget flush. Thank you.
Overall, we feel that for the company, the pipeline is very healthy. For the federal specifically, there is a lot of need for a solution like ours, and we feel comfortable with the pipeline. Overall, for federal and for the company, we feel good with the pipeline. We feel very good with the conversion rates, and we also feel that if we spend the right time with the customer, there is very high probability that they will buy. This is another thing that really change in a significant way because they're getting a lot of value, and they are buying more. They're getting more automated value than they buy additional licenses. We have such a deep and wide platform. It makes sense for us and makes sense for our partners to spend a lot of time with our customers.
It's not just the pipeline in terms of opportunity, it's just the way that they're converting the pipeline. This is something that we also feel that gradually it's getting better and better.
Thank you.
Our next question is from Nick Mattiacci with Craig-Hallum. Please proceed with your question.
Hi, this is Nick Mattiacci . I'm for Craig-Hallum. Thanks for taking our question. I'm just curious if there are any other third-party cloud applications that are driving the most growth currently in the pipeline, specifically outside of the Microsoft ecosystem. Thanks.
Can you repeat the question, please? We just couldn't hear.
Yeah. Are there any other third-party cloud applications outside of the Microsoft ecosystem that are growing in terms of pipeline?
Today in the cloud, with Microsoft, we have a lot. From Azure AD to Exchange and SharePoint, OneDrive and Teams. As you know, we bought Polyrize in order to expand our footprint for mainly SaaS applications. We have a very good clarity of the critical SaaS application for organizations and the way that they are interconnect. We are going to release in the second half of the year our support to many additional SaaS applications, and we believe it can be a very good opportunity for the company.
Thank you.
Our next question is from Jason Ader with William Blair. Please proceed with your question.
Yeah, thank you. Hey, guys. Do you expect reopening to be a catalyst for the business in that when people are back in the office, it will reduce friction in the selling process and maybe allow you to meet more new customers?
No, definitely opening will help. Selling enterprise software is a full-contact sport. It's always we were able to be very productive working remotely, but, we always believe that real life human interaction can benefit in many ways. We also feel that if we will need to function remotely for a while, we're still positioned to do it.
Has there been any disparity across geographies where there has been some economic reopening, in the sense of, those that have had more reopening have performed better?
No, it's a bit hard to tell, this whole COVID situation. You need to take it every day as it comes. Overall, thankfully, we were able to do very well, and there were some things in COVID with all this digital transformation that really benefiting Varonis. We also believe that for us, these are stationary trends. This is the only thing that I can say, and the way that it's going to develop, it's hard to say. We believe that either way, if we're going to open very fast or, God forbid, we are going to have more delays, from the overall world and the economy, we will be able to do very well. Also, we see that also organizations that got hit by COVID and they have critical information, they are buying Varonis and buying Varonis in a big way.
We have a high level of confidence, and we really believe that we can do well, even if the situation will stay like that for a while.
Thank you.
Our next question is from Shebly Seyrafi with FBN Securities. Please proceed with your question.
Yes, thank you very much. I believe that you said that the professional services line within maintenance and services was the big driver of the year-to-year decline. My question is: if you exclude professional services, did that segment grow? Secondly, I think you said that segment's going to decline this year. Do you think it will grow starting next year?
Maintenance and services line item is really comprised of maintenance of perpetual and the professional services. Because we moved to subscription so quickly, and we're not going back to our existing customers and trying to convert the maintenance of perpetual to subscription licenses, we're just selling additional licenses with those existing customers on top. We're really not getting any new fuel on that maintenance line item. As I said before, the professional services was really kind of the biggest impact there because of the significant decline in professional services that is coming from us letting partners do more of the professional services, and also the fact that the licenses are geared towards automation. We really don't expect that line item to increase. There'll be obviously some punctuations with the professional services.
To be clear, even next year, you don't think it'll increase, right?
Correct. We're not selling any new...
Thank you.
... Perpetual licenses.
Okay, thank you.
Thank you.
Our next question is from Erik Suppiger with JMP. Please proceed with your question.
Yeah, thanks for taking the question. I wanted to come back to Office 365. Can you talk a little bit about how much of your business is associated with Office 365? Did the Exchange hack, did that create a catalyst for your products related to it, or was that an impediment for your products that provide additional security there?
Our offering is mainly associated with data. We have a lot of critical data in 365 applications and servers that are residing in Azure. Regarding the Exchange breach, what is happening with Exchange and SolarWinds and many others, every week you have something. It's just that organizations understand that you have these very sophisticated skills, and today with cryptocurrency and other means, the ability to very easily monetize cybercrime. If you have critical data, someone wants it. Even a big company that protecting its intellectual property can get hacked, and the consequences are really bad. I just think that what happens now is that almost every organization is starting to realize that this is something that they need to do. They need to protect their data.
They need to protect their data in a very effective way, and the perimeter security is essential, but at the same time, very limited.
It sounds as though the Exchange hack was somewhat of a catalyst. Can you comment in terms of how much of your business with Office 365 is customers expanding the modules associated with the different applications within Office 365, versus how much of it is customers that are just migrating to Office 365?
We talked a lot when we announced the transition to subscription, that a lot of it was driven by the fact that customers are consuming more of the platform, and many of them buying Office 365 licenses. That was really kind of the driver, because as you remember, when we went public, we had 10 licenses, and between 2015 to 2018, we came out with significantly more licenses, and many of them geared towards automation. Really, the Office 365 licenses have been a driver for us in the last couple of years. We're seeing customers that are buying many of those licenses. It's still, when you look at kind of the attach rates, the DatAdvantage and the DatAlert and the Data Classification are really kind of the top three. Office 365 has been a significant component, and we're very pleased with that.
Just in terms of the breaches, we also talked a lot about the fact that a breach doesn't necessarily generate a spike in our revenues immediately after that breach. We're much more of that thoughtful process where customers try and understand how they can better protect their data. I wouldn't say that any of the breaches is driving, in the short term, any of our revenue, but it's definitely part of that longer-term discussion that we can benefit from.
Very good. Thank you.
Now our next question is from Shaul Eyal with Cowen. Please proceed with your question.
Thank you. Good afternoon, guys. Congrats on the healthy performance. Yaki, your vision views Varonis as a $1 billion revenue company, ARR company, actually, in a number of years. With the ARR further accelerating, we can run some assumptions that would get us to $1 billion, probably anywhere between five to seven years. Now, I know you've never committed to a specific timeframe, but does that five to seven years timeframe, does that make sense?
No, with your permission, Shaul, I don't want to comment about, just to talk about the timeline. What I want to talk about is just platform market fit and the probability to get there. The hardest thing to get to lofty goals is with products that you don't have, customers you never met, and people that you haven't had a chance to hire. If you really see, we can grow so much within our customer base. We have a substantial sales force, and you just see what's going on with all these SaaS applications that we can really run the Varonis playbook, and all of them are interconnected. As I said before, this is where contemporary cybersecurity risk resides, and this is where we believe that the risk will grow. If you want to protect your digital assets, you need something like Varonis.
From where we sit, we strongly believe that it's inevitable. The customers buying more, I think that there is one thing that I hope that folks can understand that with us more is more. When you get to critical mass of licenses, you get this automated value and these free use cases, and customers are buying more. We believe that the vision to get to billion-dollar ARR is materializing, and we also believe that every day that goes by that we have more licenses, bring additional customers, expanding the base, it increase our probability to get there. A lot of the investments to get to this billion-dollar number and beyond are already in place.
Got it. Thank you so much.
Thank you.
Thank you.
We have reached the end of the question and answer session, and I'll now turn the call over to James Arestia for closing remarks.
Thank you everyone for joining today. We appreciate the interest, and we look forward to speaking to you this quarter. Thank you.
This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.