Greetings, welcome to the Varonis third quarter 2018 earnings conference call. At this time, all participants will be in listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero from your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to Jamie Arestia, Investor Relations. Please go ahead.
Thank you, operator. Good afternoon. Thank you for joining us today to review Varonis' third quarter 2018 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 would be considered forward-looking statements under Federal Securities laws, including projections of future operating results for our fourth quarter and fiscal year ending December 31, 2018. Actual results may differ materially from those set forth in such statements.
Important factors such as risks associated with anticipated growth in our addressable market, competitive factors, including increased sales cycle time, changes in the competitive environment, pricing changes, and increased competition, the risk that we may not be able to attract or retain employees, including sales personnel and engineers, general economic and industry conditions, including expenditure trends for data and cybersecurity solutions, risks associated with the closing of large transactions, including our ability to close large transactions consistently on a quarterly basis, our ability to build and expand our direct sales efforts and reseller distribution channels, new product introductions, and our ability to develop and deliver innovative products, risks associated with international operations, and our ability to provide high-quality service and support offerings could cause actual results to differ materially from those contained in forward-looking statements.
These factors are addressed in the earnings press release that we issued today under the section captioned Forward Looking Statements, these and other important risk factors are described more fully in our reports filed with the Securities and Exchange Commission. We encourage all investors to read our SEC filings. These statements reflect our views only as of today and should not be relied upon as representing our views as of any subsequent date. Varonis expressly disclaims any application or undertaking to release publicly any updates or revisions 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 third quarter 2018 earnings press release, which can be found at www.varonis.com in the investor relations section.
Please note that a webcast of today's call will be available on our website in the investor relations section. With that, I'd like to turn the call over to our Chief Executive Officer, Yaki Faitelson. Yaki.
Thanks, Jamie. Good afternoon, everyone. We had solid performance in the third quarter of 2018. Total revenues were $67.1 million, an increase of 26% year-over-year and ahead of our guidance. North America revenues increased 27% in the quarter, while EMEA revenues increased 20%. To drill down a bit more on North America, we were pleased with the region performance and the contribution from the West Coast. As we discussed with you last quarter, we felt confident in our ability to drive growth in North America, where the demand for our products is very strong. This is exactly what we saw in Q3. I would like to discuss a few examples of how we are executing on our growth strategy. Let's begin with our customers. I'm pleased to report that we added 188 new customers in the third quarter.
As you know, we made strategic decisions several years ago to focus on customers with more than 1,000 employees. Larger customers yield larger initial deals and strong upsell opportunities and offer greater customer lifetime value. As an example, a global manufacturing company based in the U.S. with approximately 1,500 employees wanted to ensure it was doing everything it could to protect its valuable intellectual property and lock down employee data protected under GDPR. A Varonis data risk assessment revealed the customer's worst fear, exposed intellectual property and personally identifiable information covered by GDPR. The company purchased DatAdvantage to map and monitor their data stores, Data Classification Engine to locate their sensitive data, and Varonis GDPR Patterns to identify GDPR data in their environment. The customers also purchased Automation Engine to speed up remediation to expose data.
With Varonis, they will have a turnkey approach to finding and securing overexposed data throughout their enterprise. This is another reminder that GDPR regulations are not just relevant to our EMEA customers, but to all multinational companies doing business in the EU. This example is only one of many where we are seeing of customers making bigger initial commitment to us, validating that our operational approach to detect, prevent, and sustain is working. Our customers see the value we provide as they think more critically and comprehensively about their businesses and their data protection efforts. It's not just new customer acquisition that is driving our business. It is upselling as well. We continue to have success with our journey of value. We are confident that once our customers use our products, they will then buy more.
Our sales teams continue to make progress helping our customers understand the value they can derive across the platform. This quarter, we continue to see number of customers who purchase 2 or more and 3 or more product families increase year-over-year. At the same time, the percentage of licenses and first-year maintenance from existing customer increased to 53% from 49% in the prior year period. By way of example, a large accounting firm began using DatAdvantage in 2016 to control access to sensitive client files and avoid potential risk and loss of business resulting from exposed data. Every year since, they have continued to add Varonis products, including Data Classification Engine and DatAlert to identify sensitive information and monitor and alert on threats. In the third quarter, the firm once again turned to Varonis with the purchase of Automation Engine.
Thanks to the visibility control and automation provided by Varonis, the firm can automatically identify and classify data and remediate suspicious activity as it unfolds. This is yet another example of what we are seeing across our customer base, where customers see the value of our Data Security Platform and the strength of the combination of DatAdvantage, Data Classification Engine, and DatAlert. This makes perfect sense. DatAdvantage provides a map, who can access data. Data Classification Engine identify which data is critical. DatAlert analyzes the access activity and provides real-time alerts of abnormal behavior. The combination of risk reduction, sophisticated alerting, and simplified compliance offers our customers a unique value proposition. The alerts are compelling when customers are monitoring 1 type of data store, more so when they monitor multiple data stores.
In today's hybrid world, the alerts and the investigation capabilities behind them are invaluable. We have seen attach rates for DatAlert grow steadily and now are just below 50%, which emphasize the potential to continue to sell DatAlert to our existing customer base. Across all our offerings, the years we have spent working with customers on remediation projects has made our products and methodology better, and we are now using same approach with cybersecurity. As an example, North America Aerospace Company was recently under an active phishing attack, where the attackers were successfully able to compromise several user accounts. They reached out to us, and we were able to help them determine where additional machines were compromised and whether any GDPR information was affected. I'm also pleased to note the adoption of our Office 365 solutions continue to be very strong.
Our strategy remains to help customers manage and protect data anywhere, whether it's stored on-premises or in the cloud. As an example, an international educational organization with students and faculty around the world turned to Varonis to secure their hybrid on-premises and cloud environment. DatAdvantage will map and monitor the data stores. Data Classification Engine will give them visibility into sensitive files. Data Transport Engine will allow them to create rules and automatically migrate, archive, or delete files. DatAlert will analyze behavior to detect internal or external threats. With GDPR Patterns , they can run country-specific rules to locate and lock down files containing personal data. Thanks to Varonis, the organization is taking a proactive approach to protect their hybrid data stores and will be prepared as they continue to migrate to the cloud.
To further our cloud strategy, in July, we announced the upcoming integration with Box to secure enterprise content in the cloud. Box will be supported part of our Data Security Platform, tracking user activity and providing customers with the ability to manage risk and secure their enterprise data wherever it lives. In short, our financial and operational results this quarter reaffirm our belief that we are building durable and scalable company that can reach $1 billion in sales. I'm excited as I look forward to the fourth quarter and beyond, and I'm confident that our strategy and team position us well for long-term profitable goals. With that, let me turn the call over to Guy. Guy?
Thank you, Yaki. I'll begin by discussing our quarterly results and then move on to discussing our outlook for Q4 and the full year 2018. Total revenues for the third quarter were $67.1 million, an increase of 26% year-over-year and above our guidance. License revenues were $35.8 million, which represents a 23% increase from the third quarter of 2017. Maintenance and services revenues were $31.2 million, increasing 28% compared to the third quarter of 2017. Our maintenance renewal rate in the third quarter was again over 90% and continues to increase as it has over the past several quarters. From a geographic viewpoint, we saw growth in both our major regions in the third quarter. We were pleased with the strong growth we saw across all regions in North America, where revenues increased 27% to $44.9 million or 67% of total revenue.
EMEA revenues increased 20% to $19.8 million or 29% of total revenue. Rest of world revenues, which represents 4% of total revenues, were $2.4 million. For the third quarter, existing customer license and first-year maintenance revenue contribution was 53% compared to 49% in prior year period. As Yaki mentioned, we added 188 new customers during the quarter compared to 208 in Q3 of 2017. The decrease in net new adds year-over-year is in line with our strategy to focus on companies with 1,000 or more employees, which continues to result in customers making larger initial commitments to us. At the same time, we continue to see increased revenues from our existing customer base, which serves as a strong source of additional revenues given the broad platform of products we have and the growing volumes and complexity of enterprise data that they have.
We ended the third quarter with approximately 6,350 customers. As of September 30th, 2018, 72% of our customers purchased two or more product families, up from 68% as of September 30th, 2017. 39% of our customers purchased three or more product families, compared with 34% in Q3 of 2017. These percentages, which have continued to grow over the last few quarters, are evidence that our strategy of ongoing investments in R&D is working as we are seeing customers buy more licenses than ever. As we innovate and expand our product offering, we expect to have an even broader suite of products to offer our customers, further driving our land and expand strategy.
Before moving on to the profit and loss items, I would like to point out that I'll be discussing non-GAAP results going forward, unless otherwise stated, which for the third quarter of 2018 excluded a total of $8.4 million in stock-based compensation expense and $430,000 of payroll tax expense related to stock-based compensation. We report non-GAAP results in addition to, and not as a substitute for, financial measures calculated in accordance with GAAP. A detailed GAAP to non-GAAP reconciliation can be found in the tables of our press release, which is available on our website. Gross profit for the third quarter was $60.5 million, representing a gross margin of 90.2%, in line with our gross margin in the third quarter of 2017.
I want to remind everyone that embedded in our 2018 financial guidance was our desire to continue to grow revenues while improving our non-GAAP operating margin, excluding the 300 basis points headwind related to FX. We continue to execute against our plan. Operating expenses in the third quarter totaled $65.1 million, compared to $51.4 million in the third quarter of 2017. As a result, our operating income was $2 million, or an operating margin of 3% for the third quarter, compared to operating income of $1.9 million, or an operating margin of 3.6% in the same period last year. During the quarter, we had financial income of $99,000, primarily from interest income, compared to financial income of $622,000 in the third quarter of 2017, primarily due to foreign exchange gains. As you know, foreign exchange gains and losses can fluctuate.
Our guidance does not consider any additional potential impacts of financial and other income and expense associated with foreign exchange gains or losses, as we do not estimate movements in foreign currency rates. Our net income was $1.5 million for the third quarter of 2018, or income of $0.05 per diluted share, compared to net income of $1.8 million, or $0.06 per diluted share for the third quarter of 2017. This is based on 32.5 million and 30 million diluted shares outstanding for Q3 2018 and Q3 2017, respectively. Turning to the balance sheet, we ended the quarter with approximately $158.1 million in cash equivalents, and short-term investments. During the first nine months of 2018, we generated operating cash flow of $16.3 million, compared to cash flow generated from operations of $10.8 million in the first nine months of 2017.
This year-over-year improvement is keeping with our strategy to scale our business, improving our non-GAAP operating margins while delivering increased levels of cash flow from operations. We ended the quarter with 1,386 employees, a 16% increase from 1,199 at the end of the third quarter of 2017. Moving now to guidance. For the fourth quarter of 2018, we expect total revenues of $86.5 million to $88 million, representing year-over-year growth of approximately 18%-21%. We expect our non-GAAP operating profit to range between $11 million and $12 million, and non-GAAP net income per diluted share in the range of $0.32-$0.34. This assumes a tax provision of $600,000-$800,000 and 32.6 million diluted shares outstanding. For the full year 2018, we are raising both our revenue and profit guidance.
We now expect total revenues in the range of $269.5 million-$271 million, representing year-over-year growth of approximately 25%-26%. We now expect our non-GAAP operating income to be in the range of $5.5 million-$6.5 million, and non-GAAP net income per diluted share in the range of $0.11-$0.13. This assumes a tax provision of $2.3 million-$2.5 million and 32.4 million diluted shares outstanding.
We also expect our cash flows from operations for the full 2018 year to be greater than full year 2017. In summary, the need for companies to monitor and protect critical data has never been more important, and the continued demand for our solutions confirms that our strategy is working. We are selling more licenses to both new and existing customers, and renewal rates are increasing. At the same time, we continue to scale our business, improving non-GAAP operating margins while delivering increasing levels of cash flow from operations. We look forward to continued financial and operational success in the fourth quarter as we build towards a billion-dollar business. With that, we would be happy to take questions you have. Operator?
Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star one on your telephone keypad, and 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 that are 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. Thank you. Our first question will be coming from the line of Saket Kalia with Barclays. Please proceed with your question.
Hi, guys. Thanks for taking my questions here, and nice bounce back. First, maybe for you, Yaki. You touched on this in your prepared remarks, but now that we have another quarter under our belt on the West Coast performance from last quarter, did the team learn anything new about what contributed to the result last quarter, sort of a postmortem analysis?
No, not really. No, it was as expected. We just ran our playbook. We have a leader that is with the company for many years. He just came in and made sure that we are doing just the fundamentals that brought us here in terms of pipeline development, closing, enablement, time management, and it works exactly as we expected.
Got it. Maybe for my follow-up for you, Guy. Obviously, the quarter is very clear, and it's still early to talk specifically about 2019, but of course, we're all in the planning process. I guess the question is, with the hiccup that we had in the West Coast last quarter, and with maybe the differing views that the market has on the overall macro going into next year, the question is, how do you balance some of those things with the secular growth that you have in your market, again, as you start to plan for next year?
Hi, Saket. First of all, we have Q4 ahead of us, so we'll talk about 2019 after Q4. We do feel very strong about the market. I think, the West Coast performed very well, and we were very happy, and we weren't surprised with that. More customers want to buy more and more licenses, and we see that all the time.
Got it. Very helpful. That's it for me. Thanks very much.
Thanks, Saket.
Thank you. The next question is from the line of Matt Hedberg with RBC. Please proceed with your question.
Hey, thanks, guys. Yaki, congrats on getting the West Coast back on track. I wanted to dig down into that market a little bit more, I guess the U.S. in particular. Can you talk about how the federal vertical did this quarter and just how the overall momentum feels there? I know it's still early for you guys, but just a little more commentary there would be helpful.
Yeah. Federal could have done better, and the growth driver was our regular commercial business. In terms of the long-term expectation from the federal market is unchanged. We just started to invest in the market two years ago and build the pipeline, build on the programs, do the certification. It's just the early innings. Just the commercial business in North America worked very well, and I'm just telling you what I'm saying for you. With this business, you need to take a multi-quarter view.
That's great. Then it's great to see the number of customers with two or actually three or more products. I think they were at an all-time high. You mentioned upsells are strong. I guess, digging into that a little bit more specifically, are you guys doing anything to improve the overall sales motion? I think I've asked this in the past, but are you getting more customers asking for more ELA type contracts that want to consume even more Varonis?
At this point, not ELAs, but we really see that what we are doing in data protection works extremely well and also on the cybersecurity. Definitely Office 365 and the cloud, Azure compute works extremely well for us. They are very strong building blocks and a very deep and broad value proposition. We can spend more time with our customers, we can really take them for this journey of value. The way that they're using the product, the way that they are getting the value, our effort economy, if you will, how much time we spend with them, and what is the results becoming, with time, more predictable. It makes sense to spend more time with larger customers.
Great. Congrats again.
Thank you.
Your next question comes from the line of Alex Henderson with Needham & Company. Please proceed with your question.
Thanks. Just a quick one. Can you give us a headcount? I guess, as you're starting to see the number of accounts buying two or more, getting close to 100% or approaching it. Are you going to start to add four or more, something of that sort, to the list? My primary question, though, is really on the European business. Obviously slowed down quite a bit from the 60% growth rate last quarter. I assume that that's primarily a reflection of, A, a strong 2Q, and B, the summer pattern of vacations in Europe. Could you talk a little bit about what transpired there? Because I would expect that to be a little bit on the front side.
Hi, Alex. It's exactly as you said. We always need a multi-quarter view, with a very strong Q2 and the summer that can make the European business a bit unpredictable, we saw these growth rates. For the year, it's 45% growth in Europe. The business is very strong. We have good teams, good coverage. We see good demand across the board, we believe we can do very well in this market.
Alex, just to address Sorry, go ahead.
Is the 45% kind of the rate that you would expect as we're looking into the fourth quarter?
No.
Would you expect it to be something above the company average?
No. The way that we guide it, I just said that we are at 45% year to date. You always need to take multi-quarter view. You can't analyze the business on a quarter-by-quarter basis. We just feel comfortable overall about the European business and believe that it will do well.
Alex, just to answer your first two questions, we ended the quarter with 1,386 employees. In regards to the number of customers buying two or more products and three or more products, this is the first year we actually added the three or more products. We have provided more color because not only the change with DatAlert and the Edge but we have provided more color to investors and analysts in basically showing how customers are buying more and more products from us. The fact that we've gone up to 72% from 68% last year on the two and more products, and 39% from 34% in the three or more products, is a great indication that we really see customers buying more and more products from us, and we're very happy with that.
Great. Thank you.
Thank you.
Thank you.
Next question is from the line of Gur Talpaz with Stifel. Please proceed with your question. Caller, please go ahead with your question.
Apologies, I was on mute. Sorry about that. You talked about a pipeline for a broader suite of products heading into 2019. With that in mind, can you give us some high-level indication about where you plan on taking the portfolio? Should we expect more in the way of cybersecurity products like Varonis Edge? How are you thinking about the evolution of the business and the suite of solutions heading into next year?
Just constantly expanding on the building blocks of the value proposition. Cybersecurity is one of them, I think that we are doing things that are extremely innovative and very unique in everything that's related to insider threat and APT, also the way that we are doing in-reach conclusive forensics. This is something that works very well for us, there's a lot of streams there on the data protection, automation, and the reporting, and a lot of effective remediation. Obviously, the cloud. There is a lot to do. We see a lot of pipeline, we believe that there is, in terms of innovation, more ahead of us than behind us.
That's helpful. Then, Guy, you talked about selling more licenses and improving renewal rates. How much of this would you attribute to sort of the push upstream into customers with more than 1,000 employees, versus just better understanding of your value prop in general across the install base?
Hi, Gur. I think we see customers across all sizes buying more licenses. I think it's really an indication of the market and how there's a problem that we are there to solve. Our focus on customers with more than 1,000 employees has helped us with not only generating larger initial commitments, but also on the customer lifetime value. That's been working very well, we see more licenses across the board.
In terms of, Gur, in terms of the overall economics of the deal and the customer lifetime value, just makes more sense to spend more time with them. We spend more time, and this solution becoming more mainstream and budgeted and board-level problem, we know that if we're doing the right things, we have a higher probability that budget will come towards us, and then we can also have the right coverage model that will support the sales motion. Again, for us, large customers is 1,000 users and above. In terms of number of customers, we're talking about tremendous available market.
Okay. Thank you. Congrats on the bounce back.
Thank you.
The next question is from the line of John DiFucci with Jefferies. Please proceed with your question.
Thank you. I have a question for Yaki, and then maybe a follow-up for Guy. Yaki, you talked about the cloud more recently, and I know you're agnostic to where Varonis is deployed, but can you talk about what you're seeing out there as far as your deployments in cloud-based environments or hybrid cloud environments? Are you seeing any shifting happening in your customer base? Is there any change at all right now?
Hi, John. No, definitely, we see more adoption for Office 365 and Azure. That works very well for us. As you see, we have now Box support, so you see these repositories. Unstructured data still primarily is growing and resides on premises. With Active Directory and Azure AD and everything that we are doing now with DNS and proxies and VPN and geolocation, the cloud is extremely relevant for us. In terms of customers, we are agnostic. We see some customers running our main servers, the IDU in AWS, some in Azure, and some on-prem. It's just more data repositories, more workload, more infrastructure, more complexity with regular users attacking from everywhere, and DevOps just creating better opportunity for Varonis.
Okay, great. That's good to hear. You don't care where it is, you're going to be there. I guess, for Guy, listen, these results, it is nice to see a nice bounce back here. They're strong across the board. I don't want to nitpick too much, but looking at cash flow, because that's going to drive your valuation over the long term. It was a bit below our expectations, and I guess when I look at it and I see a big uptick, usually you get an uptick in accounts receivables, but there's a real big uptick in accounts receivables. Can you talk a little bit about that? I guess I would assume that we'll see that benefit cash flow next quarter because you'll collect those receivables. Is that?
Hi, John. I'll address those two points. From a DSO perspective, our DSO was lower in Q3 2017. When you look at the cash flow from operations over the last nine months, the numbers that we have for 2018 are greater, and we've seen a nice improvement compared to last year. There obviously is some timing issues from one quarter to the other, but the overall trend, and if you take the multi-quarter view, we've seen great improvement on the cash flow, and we plan to continue to show improvements on the cash flow as we continue to grow the business and show the non-GAAP operating margin leverage.
Well, we do look at it over time, is it accurate for me to think about collecting those receivables, the bigger jump this quarter within the next quarter or so?
Well, just to give you some color, if you remember, our strongest collection quarter for the year is Q1.
Right.
The seasonality is that the Q4 is still a good collection quarter. We expect to continue to show improved cash flow from operations for the year. Should be at better levels from 2017. Again, there is some timing from one quarter to the other.
Okay. Okay, great. Thanks a lot, guys. Nice job.
Thank you.
Thank you.
Next question comes from the line of Melissa Gorham Franchi with Morgan Stanley. Please proceed with your question.
Okay. Thank you. Thanks for taking my question. I just wanted to follow up on EMEA. I appreciate the lumpiness and the difficult comparable, but I want to know to what extent GDPR is driving conversations. Obviously, that's something that is probably material in that region, but just wondering if there was a change in the quarter, if it's becoming more relevant in the conversations over the past few quarters. If you're comfortable with the level of investment that you've put in that region, or do you feel like you need to ramp up investment?
Hi, Melissa. No, we feel comfortable overall with the level of investment. GDPR is definitely front and center in terms of the conversation and the criticality of data protection and cybersecurity and incident response. It's definitely driving a lot of awareness, but for us, it's like a very effective marketing campaign. I think overall in EMEA, there is a good awareness for data protection, for cybersecurity, for privacy. The overall condition for a solution like ours are very good, and we believe that it will be the situation for a long time.
Okay, that's helpful. Thanks. I just wanted to follow up on the sales force efficiency. Naturally you're going to get some leverage as more of the business comes through the existing base, but I'm wondering if you're seeing better leverage in new customer acquisition just as you're getting greater scale and you're becoming more well-known in the marketplace.
Definitely, we have more reps in the productivity curve. The brand is known, the problem is known. Gradually, as you can see, we get nice productivity gains. It's just, I think, exactly the way that we explain that we are investing in the business, and we believe that it will grow and gradually will improve overall margins. This is what we are doing. As the company becoming bigger and more reps are in the productivity cycles, and we have more customers that are willing to buy more. We see gradual productivity improvement in the sales.
Okay, great. Thank you.
Thank you.
The next question is from the line of Shaul Eyal with Oppenheimer. Please proceed with your question.
Thank you. Hi, good afternoon, Yaki, Guy, and Jamie. Congrats on the quarter.
Thank you.
Yaki, we all understand the focus on company with greater than 1,000 employees. Thank you for this incremental color and examples in your prepared remarks. Can you also share with us, talk to us about the high-end enterprise and dynamics surrounding this segment and as it relates specifically to Varonis?
It's definitely a segment that we are attacking. We have outstanding, very large enterprises, but it's still a relatively high-volume business. We want to make sure that we are benefiting from the market size in terms of units of economics, and we can do very nice deals and very impressive customer lifetime value with these customers within 1,000 to 10,000 customers. That's it. The focus is all over. The sales force, slowly but surely becoming bigger, and we have the right coverage. We just want to make sure that we are covering all the segments of the market in the right way, but we don't want to put too much resources, because we can sell to everybody, on parts of the market that the economics doesn't make sense.
We just want to make sure that we have enough volume, we can cater to the customer, give them enough attention, take them to what we call the journey of value, and make sure that they will use the product in the right way, that we'll go with them to the cloud, that we'll address all the regulation and compliance needs that they have, and it caters well to very large enterprises, and also to 1,000 plus. We are doing a lot of our revenues in this 1,000 to 15,000 user shop. This is overall, when we are talking about multi-quarter view, what makes this business over several quarter very predictable and very doable.
Understood. Anything new to update us on the boring, yet I got to ask it, competitive landscape? Any newcomers, private startups, some of the big guys attempting to take a stab at the market you guys are addressing and product stack?
No. This one, the competitive situation is the same. David and team analyzing diligently all the competitive situation and where we see them. From overall evaluations, we see even less competition than ever. We are selling well over 90% of our deals via POC and evaluation, and if we are evaluating on a lot of data, we are almost always alone. In terms of the competitive landscape, it's better than ever in the presence of other competitors or ankle biters in any of our sales company.
Thank you for that. Good luck.
Thank you.
Next question is from the line of Chad Bennett with Craig-Hallum. Please proceed with your question.
Great. Thanks for taking my question. Maybe for Yaki, if you think about the strategy towards 1,000-plus employee enterprises and in conjunction with that kind of growing products per enterprise or per customer, if we think about those two metrics and the customers that fit in that bucket, when you look at the customers that are at three-plus, four-plus, five-plus products and maybe they're 2,000-plus employee type customers, are you being asked to be part of a broader security solution at that point? I guess what I mean, are you integrating with other security vendors and maybe in particular, are you asked to, particularly the data that you guys get and gather, which I think is really valuable, are you asking to kind of feed that into any other systems? Thanks.
Hi. Yes. We're definitely integrating with as many solutions, as many as we can. We feed our alerts to SIEM systems. We're working with identity and access management. We're working with e-discovery solutions. There is just a lot that is going on in terms of our integration with other security solution. We want to make sure that for our customers, one plus one will equal three. Any time that we get there, one of the things that works very well for us is that we are coming in and with the cybersecurity and the classification and the data protection, we make some of their previous investments and sometimes investments that it's hard for them to realize, so much more productive. Yes, it's definitely one of the things that we are doing.
We want to make sure that our customers will utilize their other solutions better and that the whole ecosystem will work together well.
Okay, great. Maybe a quick follow-up for Guy. Guy, as you look at the December quarter updated guidance that you gave, I wouldn't believe this was the case, are you thinking about the seasonality into the end of the year any differently heading into this year versus last year? Maybe talk about any drivers or incremental drivers this year that you didn't have last year. Thanks.
Thanks for the question. Our philosophy on guidance hasn't changed. When you look at the guidance that we provided, the fact that we not only beat but also raised for the full year is an indication of how strong we feel going into the quarter. In terms of the philosophy, we're kind of guiding in the same way, the same manner. I think we feel very strong about the business and the results, and the guidance is an indication of that.
Thanks, guys.
Thank you.
The next question is from the line of Daniel Ives with Wedbush Securities. Please proceed with your question.
Yeah, thanks. Yeah, congrats again on this bounce back West Coast. My question is in regards to sales force and just feet-on-the-street partners. How are you looking about ramping that, especially in Europe, just given some of the strength you've seen on GDPR?
Can you repeat the question?
Yeah. In terms of increasing your feet-on-the-street as well as partnerships in Europe, just given the strength that you're seeing there, how are you thinking about that over the next 6 to 12 months?
The market is so big, virtually we can sell to everybody. The key for us is, it's a proprietary sales force. We really work almost from first principles, we have a unique sales motion, you need to understand how to explain and demonstrate our value proposition. The way that we are increasing the sales capacity is just in the right way that we can digest the people, we can really cater, enable them, and give them the right management with the right account. The market is so big, we can have a large sales force, we really need to make sure that we are doing it in the right way. For us, the market demand or the market size is not the problem in the way that we are bringing people in.
We just want to bring them responsibly, that we can enable them, make sure that they will be successful, make sure that we are serving our customers in the right way, and also gradually improving our margins. This is the leading indicators, not market conditions or market size.
Gotcha, just a follow-up. Just given the West Coast bounce back, is there anything that you've done now differently looking ahead to make sure in your pipeline process, sales process, at least things that you could control, that there's not maybe going to be another speed bump on the horizon? Anything that you've instituted on this just impressive sort of bounce back?
It's a business. You will always have some kind of speed bumps, this is why we said that you always need to have a multi-quarter view. If you have a multi-quarter view, everything work very well. We have very strong sales leaders in the company and many that are with us for a long time. For us, it wasn't a surprise. There was a problem. We are coming with playbook. We have a lot of management capacity. We can inject the right people in place. They will give air cover and also when needed, will be in the trenches and make sure that the team will be successful. The business is very doable. If you look from the time we went public, you see that the business is very doable. There is any issues, usually we are bouncing back fast.
I really think that we are good operators, we know how to tackle problems and solve them systematically, and this is what you saw here. Sometimes we'll have problems. This business is a living organism, we have a very good immune system most times, and we know how to tackle it fast. This is why we are saying always have a multi-quarter view. In multi-quarter view, I don't think that we had a problem.
Yeah. Great job. Thanks.
The next question is from the line of Erik Suppiger with JMP Securities. Please proceed with your question.
Yeah. Thanks for taking the question. Your new customer license revenue was under 50%. I presume that's because you're targeting larger customers. Can you comment on what that shift is doing in terms of your sales cycle? Do you expect the new customer licensing revenue to remain below 50%?
I think that it will move from time to time. It so much depends, customers are buying and then deploying. There is different level of usage for cybersecurity, for remediation, for classification. Thankfully, the platform is doing very well, and the new customers are very important for us, and then expand the upsell is very important for us, and it's just a balance. This is also can fluctuate from quarter to quarter, but the two growth drivers are very important for us. Just to add on that, though, the license from existing customers over time, we expect that percentage to continue and increase. I think, last quarter, one of the questions that we got was, why is the license and first-year maintenance from new customers, why did that kind of go up? We said, take a multi-quarter view.
As you can see in this quarter, license and first-year maintenance from existing customers continue the trend. Like Yaki said, we're very focused on both the new customers and the existing, and I think we're doing a very good job on both.
Can you just comment exclusive of the new versus existing customers? Can you comment on how the focus on larger accounts is affecting sales cycle? Has it made any difference in terms of the length of the sales cycle?
We haven't seen any change on the sales cycle, our focus on companies with more than 1,000 employees, the strategy has been working very well.
Very good. Thank you.
Thank you.
The next question is from the line of Mark Schappel with The Benchmark Company. Please proceed with your question.
Hi. Thank you for taking my question. Just one question, Yaki, to you. With respect to your earlier comments on your federal business that it could have done better, could you just go into some of the challenges that you're seeing in your federal sector? I know it's relatively new, but still, is it more or less an educational sale still in the federal sector unlike the commercial sector?
No, it's not educational. We definitely had several wins that validated that they need the product, they need all the products, and we can have very nice deals. It's just to make sure that we have more maturity and we are in the programs and moving the business along. At this point, it's small and it's not like a material growth driver for us. We believe that with time, there are all the indicators that it should be a very good business.
Okay, thank you.
Next question is from the line of Rishi Jaluria with D.A. Davidson. Please share with your question.
Thanks. Hey, guys. Thank you for taking my questions. Yaki, I wanted to touch on the integration that that's upcoming that you announced with Box. Just wondering if you could dive a little bit more into that. Is that something that you got feedback from customers as functionality that they wanted, and what is the sort of customer overlap between you and Box tend to look like? I've got a follow-up.
It's another repository that some of our customers use, and as time will go by, anything that's starting to be commercially viable, and we see that enterprise is putting data there, we want to make sure that we are protecting it. We want to make sure that we're taking security telemetries, and we can classify the data. This is just another repository. No, we saw enough customers saying that there is a need, and we are catering to this need.
Okay, great. That's helpful. Yaki, again for you mentioned ramping up or increasing spending in research and development. You mentioned cloud was one area. I was just wondering if you could expand, specifically, is that just having it built and having more integrations like the Box one and having more hookups with cloud infrastructure and cloud applications, or is it something else? What's the right way to think about where the priority in product development on the cloud side looks like? Thanks.
Obviously, I can't provide all the details, but it's everything. The cloud is here. The cloud is real. There are a lot of data repositories, definitely infrastructure. The world is completely hybrid, and data protection, cybersecurity, and classification are big pain points for this new brave world, and we believe that we can capitalize on it.
Wonderful. Thank you.
Thank you.
Thank you. We've reached the end of our question and answer session. I will now turn the floor back to management for closing remarks.
Before we end the call, I would like to thank all of our employees for their hard work and contribution to our success this quarter. I'd also like to thank all of our customers and partners for their continued support. Thank you all for joining us today, and we are looking forward to speaking with you again soon.
This concludes today's conference. You may disconnect your lines at this time. Thank you.