Greetings and welcome to the Varonis Systems, Inc. Q1 2020 Earnings Conference Call. At this time, all participants are on 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. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, James Arestia, Director of Investor Relations. Thank you. You may now begin.
Thank you operator. Good afternoon. Thank you for joining us today to review Varonis' Q1 2020 financial results. With me on the call today are Yaki Faitelson, Chief Executive Officer, and Guy Melamed, Chief Financial Officer and Chief Operating 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 will be considered forward-looking statements under Federal Securities laws, including projections of future operating results for our Q2 ending 30 June , 2020. 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 Q1 2020 earnings press release, which can be found at www.varonis.com in the investor relations section. 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. I'm happy to speak with you today and discuss our Q1 results and our current operating environment in more detail. First and foremost, I hope that everyone and their loved ones are safe and healthy. COVID-19 has rapidly evolved to a global crisis with a clear human and economic impact, and our thoughts are with everyone who has been affected. Obviously, this earning call is being held under circumstances different from any we have encountered before. I'm very proud of the global Varonis team, which has been both resilient and adaptable, and our leadership, which is committed to running the business for the long term. Before we discuss the quarter and current operating environment, I first want to outline some of the measures we have taken over the past two months.
Our top priority is the safety and welfare of our employees. Our offices have been closed since mid-March, and our colleagues are working remotely. A good number of our employees already operated this way, so the adjustment has been as smooth as a change like this can be. It is the same for interactions with customers and prospects. All meetings are taking place virtually. In many instances, particularly with existing customers, this is nothing new. A risk assessment, which includes a 90-minute installation of our software, can easily be done virtually, and while we would certainly prefer face-to-face meetings, the power of our findings as well is what we are able to reveal about the spread in today's environment are just as compelling when conveyed remotely.
Lastly, in addition to keeping our people safe and quickly adapting to the new working conditions, we are taking thoughtful and prudent steps to manage the business. Like everyone, we don't know when or exactly how we can expect life to return to normal or what the new normal may look like. As we have always said, we seek to tie our level of investment with the revenues we plan to achieve. Given the greater uncertainty we face, we are actively managing expenses across the business. This includes implementing a hire freeze, with the exception of key sales positions. At the beginning of April, we reduced employees' salaries across the organization, with senior management and the highest compensated employees seeing the largest reduction. The board of directors also believes it is appropriate that the cash retainer be reduced.
In addition, we have taken further measures to examine all projects and activities and are taking cost-saving actions. These were not easy decisions, but I'm inspired by the collective response from our colleagues, which reflect the strength of our culture and the team's commitment to the company. Despite these challenges, business goals continue, and I'm pleased to announce that after one year, our transition to a subscription company is complete. 98% of our licensed revenues in the Q1 were from subscriptions, and today more than 95% of our revenues are recurring, compared to less than 40% at the end of 2018, before we formally started the transition. Specific to the Q1, we had a strong start in January and February and saw a continuation of the momentum we showed throughout 2019.
In mid-March, however, as the impact of the pandemic became more pronounced, closing deals became more difficult, which led to the shortfall in our revenues versus guidance we provided in February. This trend was across the board and was not specific to a certain customer size, vertical, or geographies. Given how much the world changing day to day, I think it is most relevant to discuss our current operating environment and why I believe we remain well-positioned to capitalize on the substantial market opportunity we see. Let's start with the current environment. As you know, we founded Varonis to help customers protect their sensitive data, and today this is more critical than ever. We know that crises create optimal conditions for cybercrime, and we protect data and infrastructure against hackers and rogue employees who want to take advantage of companies when they are most vulnerable.
In addition to these potential threats from bad actors, companies around the world now have the majority of their employees working from vulnerable home networks and sometimes even unsecured home computers, accessing critical on-prem data stores and infrastructures through the VPN, as well as cloud stores like Office 365 and Teams. Our customers and prospects understand the elevated risk associated with so many employees working remotely, which is driving strong interest in our unique capabilities around threat detection and protecting data and infrastructure. Simply put, we believe our platform is a must-have in this new environment, providing unparalleled data protection, alerting, and investigation capabilities.
Security is one of the most dispensable areas of technology spend, and our solution to help mitigate the spread of a breach or even a total shutdown are one of the most important parts of the security stack, and we are encouraged by what we see in our pipeline. First, our sales reps have conducted an unprecedented number of remote risk assessments and evaluations over the last few weeks. As organizations are eager to improve visibility into what remote workers access, we have also seen a significant increase in traffic to our website, driven primarily by organic search, as well as tremendous uptick in the use of our platform by existing customers. At the same time, we have had record numbers of participants in our webinars and other online activities.
Lastly, our system engineers, as well as our forensics and incident response teams, which help customers protect their data and investigate alerts and potential threats to their data and infrastructure, have never been busier. Our ability to help organizations address challenges with remote work has prospects and customers more attentive than they have ever been. While it is hard to predict the timing of when this increased pipeline will be monetized, given the near-term disruption, we are cautiously optimistic and believe that the demand for our solution remains as strong as ever. Before I turn the call over to Guy, I want to talk about the enormous opportunity we have in front of us and how it has been further accelerated by the subscription transition that has made it easier for customers to consume more of our platform and be better protected.
We continue to see new customers buy on average between four to five licenses in the initial deal, compared to two or three licenses under the perpetual model. Equally important, the number of licenses being upsells is increasing. As our existing customers continue to buy more, adoption of the greater number of licenses drives much better outcomes for our customers, and the growth in these numbers over the course of 2019 and Q1 is further evidence of the value of consuming Varonis as a platform play. Even with this meaningful increase in adoption rates, we remain significantly under-penetrated within our customer base, which represents a significant go-forward opportunity for the company. Given that we have completed our subscription model transition, our risk assessment can be done virtually, and because all our licenses are under a common code base, it is now more frictionless than ever for customers to add licenses.
We closely analyze the risk exposure and license usage for all of our customers, and we see a path for each of them to materially increase the number of licenses they purchase to get optimal protection from our platform. We started Varonis to help customers solve some of their largest data protection problems, and these problems have only intensified with COVID-19. We know that this pandemic has made life challenging for everyone, for both our customers and our employees. The past few weeks and months are a reminder that we are all in this together. I'm proud of the dedication of our employees, particularly their willingness to go above and beyond for our customers in this unprecedented time. With the value we continue to provide our customers and the trust they place in us, I'm fully confident that we can emerge from this stronger than ever.
With that, let me turn the call over to Guy. Guy?
Thanks, Yaki. Good afternoon, everyone. I want to thank you all for joining today and echo Yaki's opening comments, that I hope everyone is safe and well. I plan to spend the majority of the prepared remarks today discussing how we are managing the business during this turbulent time. After that, I'll recap our Q1 results and discuss our financial guidance for the Q2 before we open Q&A. It's clearly a different world from when we spoke with you 12 weeks ago and outlined our expectations for 2020. Our view for the last couple of years, which was reiterated in the earnings call in February, was that growth and profitability are equally important to us. The balance of those two pillars was at the forefront of any strategic decision we made as a company.
Although we expect to ultimately return to that philosophy, simply put, things have changed for now, I want to provide a bit more color on how we think about the business. Let's start with revenue. On that side, three components drive the business. One , lending new customers. Two, expanding with existing customers. Three, recurring revenues, which this year includes subscription renewals in addition to maintenance on perpetual licenses. On the first point, while the pipeline from new customers is healthy, at the end of Q1, we saw it become more challenging to monetize, and we expect that to continue in the near term, which is reflected in our Q2 guidance. As mentioned earlier, we continue to see new customers adopt four to five licenses on average, as we did throughout 2019.
On the expanding side, the level of engagement we have seen over the past month from our existing customers is unprecedented. As you know, we have a land and expand model, and to give you a sense of the opportunity with our installed base, here are a few data points. As of 31 March , 55% of our customers with 500 employees or more had purchased four or more licenses, compared to 45% a year ago, and 21% purchased six or more licenses, compared to 14% a year ago. The strong growth in these metrics confirms how we are unleashing the potential of the platform, in addition to demonstrating the remaining opportunity we have within our base.
Please keep in mind that this is different than the product family numbers we reported regularly, and instead focusing on the number of individual licenses out of the 26 licenses we currently have to offer our customers. Finally, the recurring portion of our revenue base, which has significantly increased as a result of the completion of our subscription transition, allows us to move through this time of uncertainty from a much stronger position than even a year ago. ARR at the end of Q1 grew 59%, and renewal rates of maintenance of perpetual licenses continue to be above 90% and remain healthy.
To provide additional color this quarter, our dollar-based net retention rate, which is calculated based on using a denominator of ARR from all subscription customers as of the same prior year period, and the numerator of that same set of subscription customers as of the end of the current period, is more than 105% and higher still when looking at the important subset of our enterprise customers. Taken together, our recurring revenues have more than doubled over the last five quarters to more than 95% in Q1 2020. To say that these results exceeded even our most aggressive hopes when we initiated this transition in 2019 is a huge understatement. Given the near-term change in our expectations regarding top-line growth, we have acted quickly and thoughtfully in the last several weeks with a greater focus on the bottom line.
Doing so will allow us to continue to operate efficiently at lower expense levels while strategically positioning us to quickly re-accelerate growth when the time comes. Yaki discussed some of the measures we have implemented as part of our expense reduction across the board, which include opportunistic hiring, salary reduction, and challenging our teams to innovate and be as effective as possible given current operating constraints. We believe that successfully navigating a dynamic environment requires decisiveness and adaptability, the same skills that were critical in taking this business from a subscription mix of 7% to 98% in just five quarters. I'll now turn to our results. Total revenues for Q1 were $54.2 million. Q1 license revenues were $20.8 million, which included $20.4 million of subscription revenues or a 98% subscription mix. Maintenance and services revenues were in line with our expectations at $33.4 million.
Looking at the business geographically, North America revenues were $37.9 million or 70% of total revenues. In EMEA, revenues were $14.6 million, representing 27% of total revenues. Rest of World revenues were $1.7 million or 3% of total revenues. Turning back to the income statement, I'd like to point out that I'll be discussing non-GAAP results going forward. Gross profit for the Q1 was $45 million, representing a gross margin of 83.2% compared to 86.5% in the Q1 of 2019. This reflects the impact from the coronavirus as well as higher mix of subscriptions revenue. Operating expenses in the Q1 totaled $62.5 million. As a result, our operating loss was $17.4 million or an operating margin of negative 32.2% for the Q1, compared to an operating loss of $11.1 million or an operating margin of negative 19.8% in the same period last year.
I'd also like to point out that despite the shortfall in revenues, our Q1 operating loss came in just below the low end of our guidance. This is a result of our generally lean operations, moderately lower expenses due to COVID-19, and our disciplined and proactive approach to operating in this new environment that we discussed above. During the quarter, we had financial income of approximately $214,000, primarily due to interest income. Our net loss was $17.4 million for the Q1 of 2020, or a loss of $0.56 per basic and diluted share, compared to a net loss of $11.1 million, or a loss of $0.37 per basic and diluted share for the Q1 of 2019. This is based on 30.9 million basic and diluted shares outstanding for Q1 2020 and 29.8 million basic and diluted shares outstanding for Q1 2019.
We ended the quarter with $126.3 million in cash equivalents, marketable securities, and short-term deposits, which despite the impact of the transition last year, are at healthy levels. The strength of our balance sheet provides meaningful support in the current business environment. For the quarter, we generated $3.9 million of cash from operations compared to generating $14.1 million of cash from operations in the same period last year. As a reminder, we are collecting on annual contract value amounts under subscription, and therefore, we continue to see a short-term impact on cash flows. However, once we begin to see a subscription renewal contract ramp, which have a lower cost, we expect to generate significantly more cash from operations. We ended the quarter with 1,605 employees, an 11% increase from the Q1 of 2019.
As already mentioned, we expect headcount to remain approximately constant or to decrease slightly in the near term. Moving to our guidance for the Q2. We expect total revenues of $56 million-$58 million. We expect our non-GAAP operating loss to range between negative $11 million-negative $10 million, and non-GAAP net loss per basic and diluted share in the range of $0.36-$0.34. This assumes a tax provision of $400,000-$600,000 and 31.5 million basic and diluted shares outstanding. The low end of our Q2 revenue range assumes that the government-mandated or recommended shelter-in-place orders currently in effect will remain in place for the remainder of the quarter. Here are some additional points to consider.
First, while the front-loaded revenue recognition aspect of our business is a current headwind, it should also allow us to rebound more rapidly compared to ratable revenue recognition models. Second, please keep in mind that the Q2 2019 subscription mix was 56%, and the higher subscription mix we anticipate this year will result in a headwind to revenue. Third, we expect that CapEx in 2020 will be slightly lower than what we provided in the last earning call in the range of $8 million-$12 million as part of the measures we discussed above. Lastly, we handle foreign exchange rate by entering into hedging contracts. While 2020 is already fully locked, we took advantage of the currency volatility and locked in our hedging for most of 2021 at more favorable rates.
In summary, we have not shied away from challenges in the past, and this time is no different. The company is thoughtfully, decisively, and actively responding to the near-term volatility, which will not only allow us to weather the storm, but will also prepare us to re-accelerate growth when the time comes. Thanks for joining us today, and we hope you and your loved ones remain safe and healthy. With that, we would be happy to take questions. Operator?
Thank you. At this time, we will be conducting a question and answer session. If you'd like to ask a question, you may 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 key. In the interest of time, please limit yourself to one question and one follow-up question so we may get to everyone's questions. Our first question comes from the line of Brent Thill with Jefferies. Please proceed with your question.
Great. Good afternoon. I was just curious if you could give us a view of what is happening in April, and are you seeing things stabilize from demand at the end of March? Just secondarily, if you could just comment on the renewals from last year as you entered your first big renewal cycle in the new model. Thank you.
Thanks for the question. We had a very solid April, and we saw completely different purchasing patterns than we saw in March. What happened to us is that in the last two weeks of March, we saw a tremendous uptick in pipeline, but customers were slow to buy because they were trying to set up working remotely, adding more VPN capacity and configure applications in the cloud that they can work, but they needed our software. We saw a lot of usage of the software, and as I said, massive amount of pipeline. After adding the capacity of the VPN and they have the cloud environment, they had what we call it just this acute stationary risk. People accessing these VPNs from unsecure networks, sometimes compromised machines, completely different access patterns. The cloud is great with 365 and Azure, we
A rush to configure these application and workloads introduces tremendous amount of risk. This environment is just heaven for cybercrime. After these two weeks, we started to enter April, we keep seeing these records in pipeline. Our customers started to buy. They just bought more and more as the months progressed. As I said, we had a very solid April. Overall, we saw a very healthy and strong renewal rates.
Just to add on that, I want to give some color and data points on what Yaki just said. When you look at the shelter in place, it really couldn't have started at a worse time for us, because similar to other enterprise software companies, we're back-end loaded. Around March 15th, everyone kind of switched to work from home, which caused disruptions. As a result, we didn't see the typical quarter-end purchasing patterns. At the same time, as Yaki said, there was a huge disconnect because our pipeline was significantly increasing. April came, customers started signing POs. We closed some of the March slip deals, and business was up for the month. Renewal rates, we provided this quarter, kind of for the first time, NRR, and we wanted to provide a sense of the expansion within our base.
This is kind of a theme we've been discussing for a long time. We wanted to give as much information about the business as possible, given kind of the operating environment. We mentioned that NRR was greater than 105%, and while this is a small sample, we're pleased with what we're seeing.
Thank you.
Our next question comes from the line of Matt Hedberg with RBC Capital Markets. Please proceed with your question.
Oh, great. Thanks for taking my question, guys. Given the higher levels of work from home, I imagine your support of collaboration products like Microsoft Teams in particular, is super relevant these days. Can you talk a little bit about how that might be a demand driver for you guys? I guess that product in particular, it seems like it's the right product at the right time or the right support or the right product.
Hi, Matt. Yes. Teams is massive for us. It's a product that pushes collaboration, but essentially it works like a client on top of OneDrive and SharePoint Online, so it's very hard to manage permissions. You are overexposed, a lot of critical data. Everything in 365, so SharePoint Online, Exchange, OneDrive, and Teams are huge for us. Teams really, it's opening up critical data right and left. The other thing that works very well is everything that related to Azure. What you see is that there are many workloads and a lot of these machines are connected to the on-prem and to the on-prem domain, and you have this RDP open for the world, and you see a lot of attacks from there that's going from the cloud to the on-premises.
Everything that's going with 365, Team is a huge driver, and also the workloads in Azure are very strong demand driver for Varonis. We just see more demand for our cloud support than ever, and we just feel that we are even more relevant in the cloud than on-prem data.
That's great. Maybe just kind of along the same line of question, but taking a step back. Looking high level, I have to imagine, obviously COVID is a terrible situation, but out of this, I have to imagine CIOs, executives, board members, et cetera, all have a new importance on data governance in particular. It sounds like you've had record virtual meetings, but have you seen a lot of net new inbound from folks that maybe you never even thought would call? It just seems like your product overall is well suited for this environment.
The product overall in these three use cases is working extremely well. What we see is that just massive increase in traffic to the website, primarily from organic search. This is something that people understand. I think what is happening every time in this kind of environment, people looking at the overall security and data protection, processes and technologies that they have. They're thinking, what we really need to do in order to be protected. If you look at it, there are record amount of ransomware and attacks. This is heaven for cybercrime. Everybody are very nervous and online, clicking on things they shouldn't click. There are a lot of configurations that people are doing very fast, new technologies that they need to adapt. We are extremely relevant in this environment.
Everything that we see is this data on-prem and in the cloud, regulation with very sharp teeth, and a lot of very sophisticated cybercrime that it's very easy for them to bypass traditional security, and then you need very advanced analytics in order to be protected. This is something that we really benefit from. We just see, it will be in the short term, it will be hard to know how long it will take us to monetize this pipeline, but we see record of pipeline, and also we see tremendous uptick in the usability of the product. The other thing that we see clearly is that customers with many licenses get a lot of automation and a lot of benefits, and they really realizing it.
For us, in the short term, we don't know how long it will take to monetize it, but so far, we had a very positive April. We also see that. Every deal has a lot of scrutiny, but our champions, the people that using Varonis, they take it through the approval process, and we see that many times, even with a lot of scrutiny, they know how to justify it, and the customers are buying.
Our next question comes from the line of Saket Kalia with Barclays. Please proceed with your question.
Okay. Hey, great guys. Thanks for taking my questions here. Yaki, maybe first for you. You talked a little bit about how the pipeline was building here, particularly with so many risk assessments done. Could you just maybe shed a little bit more light on what products you're seeing particular interest in, and maybe just broad brushes, what percentage of the time does a risk assessment actually ultimately result in driving business?
Hi, Saket. First, it's very important to understand that in Varonis, what we count as pipeline is always risk assessment. Most of our deals coming through risk assessment, through these POCs. Thankfully, all the products are working, but we definitely see a big uptick in everything related to 365 and Edge. Edge is supporting the Edge streams, which VPN, proxy, and DNS, and they are extremely critical from working remotely, from everything that related to the key chain in terms of how you access remotely, how you're doing reconnaissance, infection, and exfiltration of data and everything that's related to 365 and protecting data and accessing and everything else that Varonis is doing. It depends on the teams, but a lot of our veteran teams closing very high percentage of these risk assessments.
As I said, in the short term, in this COVID-19 crisis, I don't know how we are going to monetize it in the short term, but I can tell you that this is a record amount of POCs and customers are using it. Also, in the three use case studies in data protection, privacy and compliance, and threat detection and response, they are looking for quality and a lot of automation, and this is something we are doing. We understand that they don't have visibility. Everybody experience just a lot of attacks. There is a lot of configuration and data spoil. Data is all over the place. We just see that not only they are testing it, they are using the product extensively, and there is a lot of appetite to expand.
Got it. That makes sense. Guy, maybe for my follow-up for you. Listen, the 98% mix was great to see. I guess the question is, could that number perhaps ebb and flow in the future as the perpetual business perhaps returns, or maybe not? Do you sort of expect it to stay in this range going forward? If I could sneak in a housekeeping question as well, Guy, just because I'm getting it from some investors, can you also just talk about what the customer count was this quarter and how you're thinking about disclosing that metric going forward? Thanks.
Sure, Saket. I'll start from your second question on the customer count. We have more customers now than we did at the end of 2019. While attrition is not an issue, as we mentioned last quarter, we're no longer disclosing the new customer adds simply because it's not helpful in judging kind of the progress against our strategy of engaging large enterprises. That's in relations to that. In terms of the subscription mix, coming in at 98% in Q1 was a great number for us. We guided at the beginning of the year for 90%+ . We said at the beginning of the year that we won't change kind of the guidance from quarter to quarter, so we're leaving that at 90%+ .
Kind of as you can see, the perpetual license is really becoming insignificant for us, and that's how we plan for it to continue.
Our next question comes from the line of Melissa Franchi with Morgan Stanley. Please proceed with your question.
Thanks for taking my question, and good to hear from everyone. Yaki, you said April was a pretty solid month, and you did say that there were some deals that slipped from March. For the deals that weren't just the slipped deals, did you see any sort of emergency spending as enterprises were looking to shore up maybe their threat detection capabilities to secure remote workers? Was this healthy activity in April really just projects that were kind of already in the pipe and budgeted for?
First, it's important to remember that April is still a small sample, but it was both. It was both, but a lot of projects that were budgeted, they decided to add 365 or the TLS capabilities, some Edge. Definitely, the risks that's coming from working from home with this increased VPN capacity and a lot of traffic in 365 with all the applications and workload in Azure, they just want to make sure that they are protected. It's everything.
Melissa, I just want to add on that. When you look at April, one thing to remember is that even with a significantly higher subscription mix, kind of going from approximately 30% subscription mix in April 2019 to really close to 100% in April 2020, we still saw year-over-year growth in license sales. Just like Yaki said, it's still a small sample, it's still a small number for the quarter, but we're very pleased, particularly in this environment.
Okay, great. A follow-up for you, Guy. You mentioned that there is going to be a hiring freeze in place. I'm just wondering if that is just contingent on the shelter-in-place requirements happening, and if we should return to normal at the end of the year, H2 of the year, is that hiring freeze, would that potentially be lifted?
In the prepared remarks, we talked about opportunistically hiring, and we're thinking of hiring quota-carrying reps, because we want to be ready to re-accelerate growth when the time is right. We've always tried to kind of tie our level of expenses to the level of revenue that we expect to achieve. We're very focused on the top line, but we're also focusing on the bottom line, but ready to re-accelerate when the time is right.
Our next question comes from the line of Alex Henderson with Needham & Company. Please proceed with your question.
Hey, thank you very much. This is Roger Boyd on for Alex. I was wondering, you made some various comments on risk assessment activity and a remote upsell of the platform to existing customers. Can you talk a little bit about your shelter in place and your ability to close and implement new business remotely?
Yeah. For us, most of the risk assessment being done remotely, so this is nothing new. This is business as usual for us. Installed, on-prem or in the cloud, in Azure or AWS. This is really how we run our risk assessment, and it doesn't change anything. So far, we prefer many times to meet customers face-to-face, but so far we also find that the remote meetings are also very effective. For us, by and large, it's business as usual.
Okay, great. Quickly, looking at EMEA, I'm just wondering what the effects of the current macro environment were on that geography. It seemed like they were kind of delayed in their adoption of subscription. I'm wondering if that's just a continuation of that headwind or more the effects of COVID or anything worth calling out in Europe.
As Guy said, we are close to 100% subscription, and it's also happening in EMEA. We are now a subscription business. This is how we sell, and the EMEA teams are adapting it. So far, in April, we also saw very good results in EMEA.
Our next question comes from the line of Gur Talpaz with Stifel. Please proceed with your question.
Okay, great. Thanks for taking my questions. Yaki, you mentioned the notion of a frictionless deployment and upsell in the prepared remarks. I was hoping you could expand a bit on that. I mean, what are you seeing in terms of your ability not just to deploy initial sale here, but to actually upsell in this environment?
No, we just see that on everything that we are doing, the customers want to have everything. Just think about the enrichment that we are giving, with our alerts. You want to understand what is critical data, and you want to understand if they're coming from VPN and how they are surfing the internet after, and if they want to download a payload. You see attacks coming from on-prem to the cloud, from the cloud to the on-prem. Same with data protection and compliance. You have files on file shares and NAS devices, but the same content is on your OneDrive and SharePoint Online and in your inbox. We just see that in order to make sure that you want to have one standard, so to be protected and to have very good detections and to be in compliance, you need to be on all the platforms.
For us, with the subscription, it's much easier to sell the platform, and we just see, we think that, over time, we believe that we are going to have tremendous results with the overall customer lifetime value. We can say that we have all the evidence that this is a full-blown platform play now, and customers are buying, and they have a clear path how they are going to buy more and more. Also, it makes sense to spend much more time with our customers, just the conversation. They are much more attentive. The solution becoming just more strategic, and we have a very good ability to demonstrate what we call automated value. Without a lot of effort, bring a lot of value to key data protection and cybersecurity initiatives for our customers.
That's helpful. Guy, given the mix of business and where we're at today, have you contemplated a pathway for legacy license customers to migrate to subscriptions? Have you thought about what that migration path might look like over the next three quarters or years?
If you're talking about existing customers buying kind of additional licenses, they're doing that already as part of the subscription transition. We don't go back to our existing customers and try and convert their legacy license to subscription. What we simply do is offer them the additional licenses, and they just continue to buy. One of the KPIs that we introduced this quarter, is the number of customers, 500 users and above, that have four or more licenses and six or more licenses, and the numbers have increased really nicely over the last year. On the four-plus licenses, it went from 45% in Q1 2019 to 55% this quarter. On the six-plus licenses, six licenses or more, it went from 14% to 21%.
That's really a nice increase. That shows how customers are utilizing and really unleashing the potential of the platform, but it's also showing how much more we can sell within our existing customer base.
Our next question comes from the line of Shaul Eyal with Oppenheimer. Please proceed with your question.
Thank you. Good afternoon, gentlemen. Hope everybody's fine. Yaki, ASP trends, solid, any unusual discounting worthy of note or steady as she goes?
No. At this point, no. We see a lot of scrutiny for deals. They're getting up and within the organizations. Many times we win. When we win, we feel that customers are realizing the value. Obviously, in the day-to-day, you feel the COVID. There is nothing special that we need to report.
Shaul, just one thing to note. In the beginning of 2019, we introduced a concept from a commission perspective where the reps can make significantly more towards their quarter retirement if they sell it at better discounts, but they get penalized if the discount is higher. That's definitely helping in having the reps do the right thing, both for them and for the company. Just to give that color.
Got it. Fair enough. Thank you for that, Guy. While, Guy, on maybe on foreign exchange. For this quarter, did you have a little bit of a gain or probably a little bit of a headwind, given some of the really swings that we have seen, some of the stake in second, third week of March, specifically the US dollar versus the shekel? I think, were you able to lock down some of those three seven, three eight rates for the H2 of the year?
The answer is yes. We locked, and that was part of the prepared remarks. We were able to take advantage of some of those spikes in currency and the volatility that was taking place there. We actually locked 2021. Our 2020 foreign exchange, our hedging was already closed when we kind of entered the year, and it was part of our guidance already in the first place. The volatility helped us in some favorable rates for 2021.
Our next question comes from the line of Chad Bennett with Craig-Hallum. Please proceed with your question.
Great. Thanks for taking my questions. Guy, just going back to the NRR% to make sure we're clear on it. The 105%, that's a combination of both maintenance and subscription recurring on a dollar basis?
First of all, it's higher than 105%, but let me start by the definition. The definition is that we use the denominator of ARR from all subscription customers as of the same prior year period, and a numerator of that same set of subscription customers as of the end of the current period. This number doesn't include maintenance of perpetual.
This is purely a metric that tries to show kind of the expansion within our base of selling subscriptions.
I'm just curious, when we've highlighted, over the last year, the penetration and attach rate of different product families, and you introduced, obviously, another metric today. I guess I would have thought that percentage would be a heck of a lot higher than 105%.
One thing you need to remember, Chad, is that the NRR number, as it is right now, is a very small sample. It only includes really one full quarter of rolling this globally, which was Q1 2019, and part of the pilot that we did in the second part of 2018. While it's a small sample, we're pleased with what we're seeing.
Follow-up. Just in terms of the weakness you saw in the last couple weeks of March. I think you mentioned it was a combination of slipped deals. I guess, what was the other piece of that equation? Were there customers, whether it was net new or existing, that are just pulling back spend in general and that hurt you also? Thanks.
Like I said before, I think the problem that we had with kind of the last two weeks of March really had to do with kind of the shelter in place coming at really the worst time for us. The end of Q1 wasn't a typical quarter-end purchasing pattern for us. There was a disconnect between the pipeline that we saw that was growing and really the purchasing patterns. As we discussed before, in April, we started seeing things come back, and customers started signing, and we saw some of the slipped deals close.
The customer was struggling just to make sure that they are set up to work remotely. At the same time, this working remotely introduced tremendous amount of risk, and as we got deeper and deeper into April, we bought more. Some of the slipped deals, some just projects that were set up to buy in April. Some customers just rushed to buy because they needed to be protected. It was all kinds of purchasing patterns.
Our next question comes from the line of Jason Ader with William Blair. Please proceed with your question.
Yeah, thank you. Guys, work from home clearly creates a lot of compliance holes, but with organizations in crisis mode, do you think we could see some of these companies push compliance down the priority list in the short term, even if they view it in the long term as a more strategic priority?
It's hard to tell now, a lot of what we are doing is around the cybersecurity and data protection. Compliance, sometimes what it does, it just highlights the risk that you have, and you need to mitigate. What's happening in this environment is that there are just so many cyber crimes. You have hackers, you have a lot of APTs and malware. I think that you can see the tremendous uptick in ransomware. Another thing that you see is that many rogue employees, people are afraid that they will get fired, so they are going and accessing data that they shouldn't and doing things that sometimes doesn't make sense with the organization's data. Everything is high in demand.
Still, if you have data that belongs to your employees, to your business partners, to your customers, you need to protect it in order to be in business. We don't think that postponing any compliance with a regulation will soften our demand because the merit behind it, the reason that customers are doing it, is more evident than any other time.
Okay, great. The sales cycles at this point, Guy, as you contemplate guidance, did you assume a longer sales cycle or just maybe a little bit more background on how you came up with the forecast this quarter? Because obviously you have a good pipeline.
Yeah, when we took into consideration building the guidance, we did take into consideration the higher scrutiny that's taken place with every deal, and slower sales cycle. We didn't see anything in Q1. Obviously, there were some of the deals that moved to Q2. We're closely monitoring it, and we did take that into consideration in our Q2 guide.
Our next question comes from the line of Erik Suppiger with JMP Securities. Please proceed with your question.
Yeah, thanks for taking the question. How has COVID-19 affected your ability to work with channel partners? Has it made much of a difference there?
No, I think that most of our partners can work remotely, doing the meetings remotely. We are doing the installations remotely, so there is no change there.
Very good. Thank you.
Our next question comes from the line of Mark Schappel with Benchmark. Please proceed with your question.
Hi. Thank you for taking my question. Most of my questions have been answered. Just one. Yaki, what can we expect on the product development front this year as far as new releases?
We are not talking about what within the capacity of the call, but we are constantly innovating and thematically, we just want to make sure that we're bringing more automation, have coverage of more platforms, and reducing friction with the ability to provide value to our customers. This is very interesting environment for us that we see that now there is almost just direct correlation with the value that we bring to customers and the time we spend with them and their ability to buy more and more and expand with us to new streams, to the cloud, to classify all the data and to do all the compliance reporting. What we are doing is just make sure that they can realize more value with less effort.
Okay. Thanks, man.
Our next question comes from the line of Daniel Ives with Wedbush Securities. Please proceed with your question.
Yeah, thanks. In this environment, maybe just talk about going after existing customers and just in terms of from a license perspective, from four to six to eight versus new logos. Obviously, it's so much more challenging, new logos, dispersed terms, and all base. Can you just talk about that, just tactfully?
Yeah. Both are a top priority for us, there are several things that happen. One, everything we are doing in the last two years became significantly more relevant in the next two, three years. We changed the subscription, so we give a path to our customers really to consume significantly more licenses. We also build very strong and deep customer success practices to make sure that customers can realize value. We call it these value three bi-hours every three months to understand where the customer is, to map all the organization, make sure that we provide value to all the stakeholders. It's everything. We have this big install base that is under-penetrated that needs to be protected in the cloud, and we need to make sure that we are protecting them from APTs and stable time.
It's making a lot of sense to spend time with the base and take them to six, 10, 15 licenses. At the same time, it's also very important for us to bring new customers. We want it to be the right customers, thousands and above employees with good factors that, in terms of the overall customer lifetime value, make a lot of sense for us to spend time with them. Both strategies are working very well for us, but it needs to be the right customer, and we are aiming for very high customer lifetime value.
Okay. Just a quick follow-up. Just from, like, a day-to-day as a management team in this unprecedented environment, do you find that just sort of rolling up the sleeves, walking customers through on Zoom calls is just accelerating? Can you maybe just talk about, from your perspective in terms of this environment, like just day-to-day when it comes to customers getting over the goal line, especially when you can't do in-person meetings? Thanks.
I think that it's all come to delivering value to our customers. Our first priority is to make sure the team and everybody is safe. Then it's all about giving value to the customers and making sure they understand what we do, and then once they buy it, to make them very successful. This is what we are doing, and so far we doing it remotely, and it's working very well.
Dan, we got some very nice notes from customers during the crisis, during the shelter-in-place time, where customers said that they've been 20 years in IT, and they've never seen a supplier walking so closely and helping. We're really trying to help as much as we can.
Our next question comes from the line of Rishi Jaluria with D.A. Davidson. Please proceed with your question.
Hey, guys. Thanks so much for taking my questions. Two quick ones here. First, wanted to maybe touch on the dialing back of investments on the hiring freeze. Maybe if you can help us better understand why you're making that decision, given you're well-capitalized, there's a big opportunity ahead. I think kind of general thinking is once offices start to open and things start to return a little bit to normal, you should be able to bounce back quickly. Why not keep the foot on the accelerator, invest at the very least in product on the R&D side? Just as a quick follow-up, wondering if you're seeing any changes in behavior from customers, be it looking for extending payment terms or restructuring of contracts. Thanks.
In terms of the hiring, as Guy said, on a case-by-case basis, we hire. We have good capacity within the company. This is a business practice and a management philosophy. You always need to make sure that your expenses are tied to your revenues. There are some unknowns here, and we just want to see what's going on. We just want to see that we understand what's going on, that we have the right productivity gains. Once we have more clarity, we are going to expand, and we believe that in the short term that we are going to do it's not going to harm anything, not the investment in the product, not the productivity gains and our ability to take a market share or develop a new product.
We just want to really understand how the top line is going to work and how this COVID situation is going to play out. I think that there is just a lot of unknown, and we have very good and strong capacity within the company, and we feel that this is the right decision. In places that we feel that we need to hire, we are going to hire. We're just going to be very prudent.
In terms of your second question, really, the partnership with our customers is really at the forefront for us. There's also a need to balance with running the business. I think we're doing a good job of trying to work with customers when needed without impacting the business and keeping the partnership the right way.
All right, great. That's helpful. Thank you, guys.
Thank you.
There are no further questions in the queue. I'd like to hand the call back to James Arestia for closing remarks.
Thank you, all, for your interest today. We hope everyone stays safe and well, and we look forward to speaking with you soon. Have a good night.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.