Q3 2020 Tenable Holdings Inc Earnings Call
[music].
Greetings and welcome to the channel third quarter 2020 earnings Conference call. At this time, all participants are in a listen only mode.
It shouldn't matter session will follow the formal presentation.
He wants you require operator assistance started conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
It's now my pleasure to have you heard your host Andrea Demarco, Vice President well, then that's relations and strategy. Thank you you may begin. Thank you operator, and thank you all for joining us on today's conference call to discuss Tenable third quarter 2020 financial result.
With me on the call today are Mitterrand, pinnacles, Chief Executive Officer, and Steve Becker, Chief Financial Officer.
Prior to this call we issued a press release announcing our third quarter financial results you can find the press release on the IR website, a tenable dot com.
Before we begin let me remind you that we will be making forward looking statements. During the course of this call, including statements relating to <unk> guidance and expectations for the fourth quarter and full year 2020.
Quote and drivers and chemicals business.
Changes in the threat landscape and the security industry and our competitive position in the market growth.
Growth in our customer demand for and adoption of our solution kind.
<unk> expectations regarding long term profitability the impact of COVID-19 on our business and the global economy, and planned innovation and new products and services.
These forward looking statements involve risks and uncertainties some of which are beyond our control, which could cause actual results to differ materially from those anticipated by these statements.
You should not rely upon forward looking statement as a prediction of future events.
Forward looking statements represent our management's beliefs and assumptions only as of today and should not be considered representative of our views of any subsequent date, we disclaim any obligation to update any forward looking statements or outlook.
For a further discussion of the material risks and other important factors that could affect our actual results. Please refer to those contained in our most recent quarterly report on form 10-Q, and subsequent reports that we file with the FCC, which are available on the FTC website and FTC dockets.
In addition, during today's call we will discuss non-GAAP financial measures. These non-GAAP financial measures are in addition to and not a substitute for or superior to measures of financial performance prepared in accordance with GAAP.
There are a number of limitations related to the use of these non-GAAP financial measures purchase the closest GAAP equivalents.
Our earnings release that we issued today include GAAP to non-GAAP reconciliations for these measures and it also available on the Investor Relations section of our website I'll now turn the call over to me.
Thank you Andrea and thank you for joining US today I Hope you and your families continue to be healthy and safe.
I remain incredibly pleased to see the technical team come together to support our customers in this unpredictable macro environment. We continue to remain laser focused on our mission to help customers measure and manage cyberisk, especially in an environment of increased risk and accelerated digital transformation.
The current environment has for so many organizations to rapidly shift to cloud commit to productivity for most employees, allowing them to securely connect and collaborate with colleagues.
Additionally.
As web and App traffic surge organizations are looking to modernize and strengthen their cloud security posture.
Digital transformation journeys and shift to the cloud or accelerating across the globe.
All this innovation is occurring in the midst of a threat environment that remains elevated.
We believe tunnel is well positioned to help customers navigate this environment and invest in the cloud confidently and securely we empower customers to take a risk based approach to vulnerability management across all of their systems, what do I promise for the cloud.
We believe our results helped to underscore the mission criticality innovative vulnerability management they had its traditional important managing risk in the enterprise.
Today <unk>.
Our strong Q3 results.
Cloud security strategy, the only exciting innovations, we announced a tumble edge and our continued leadership position in the public sector.
I'm very pleased with our results for the third quarter, which include attractive top line growth and expanding operating and free cash flow margins revenue grew 22% year over year in the third quarter and our operating margin continued to expand we also generated record free cash flow since our IPO again this quarter.
Results are evidence of the strong growth and profitability in all model.
The vast majority of our business is generated from large enterprise companies. We saw a healthy number of new and six figure out with an emphasis on 500 Capex plus deals partially aided.
By more cross sells contributing to larger deals including momentum with women.
For second quarter ROE, we're seeing an increased demand for securing cloud workloads, which has resulted in an accelerated adoption of trying to boil and cloud security modules, such as what application security.
Container security add a little bit.
Total is helping companies around the world identify and manage cyber risk as they accelerate their shift to the cloud.
A great example of this is a new six bigger competitive displacement with one of the largest telecommunications companies the APAC region.
This customer purchased John Boy ill add a little bit to manage vulnerabilities for devices and their service cloud deployment.
This is continued evidence of our cloud solution gaining traction globally. This.
This customer wanting to increase the security of their infrastructure can help grow public trust after a cyber breach.
The kids they chose cannibal because of the quality and reliability of our data.
The acceleration of digital transformation and big cloud security more critical than ever.
Both the enterprise and the public sector.
Oh strikes across many industries, including technology Telecommunications health care financial services, we continue to enjoy a very strong position in the federal sector and a growing presence in state local government.
The Best example of this is a six figure win and one of the largest local government entities on the West Coast. This customer was the new enterprise platform win for US there were placed and outdated VM solution with our full cloud offering which includes data Bordeaux what about security.
Container security and lumen, notably in the quarter. In addition to seeing increased demand for securing cloud applications were pleased to achieve several large competitive takeaways, we attribute to our best of breed strategy.
As you can see from our customer highlights this quarter, we continued to see a market increase in the customers, who subscribe to our SaaS platform and use us to secure their cloud environments.
Security structure with a complete continuous understanding you attack surface, including the <unk> cloud infrastructure growing remote workforce or customers expect holistic visibility of their entire attack surface and that's what's securing cloud assets has been a core part of our technology platform for years.
With that I want to call out some of our cloud centric security product announcements recently highlighted at our user conference double edged 20 twond.
We unveiled a new cloud security capabilities frictionless assessments that empowers customers to instantly continuously.
Valuate, the cloud assets without interruption.
Analysts assessment.
Customers can have complete visibility of their assets in the cloud I could quickly detect new vulnerabilities of their barmy changes without having to schedule, a skid or deploying agent.
Frictionless assessment.
Would you expect to be available in the fourth quarter creates an opportunity for customers to easily expand asset coverage in the cloud with no additional deployment.
Scanning no rest from downloading an agent no performance impact it's frictionless.
Frictional assessment is the word cloud centric and cloud native way of operating and an important part of our growing cloud story.
This is another in a series of ways, which tunnel is revolutionizing vulnerability management for modern assets deliver on or cyber exposure vision.
During the outage, we also announced exciting enhancements to tons of alumina, including new capabilities to assessment benchmark organisations remediation maturity and inventory the endpoint security controls and predictive scoring for more comprehensive insights into an organization cyber exposure we expect.
Isn't hats minutes will also be available in the fourth quarter.
In addition to our new frictionless assessments, illumina enhancements and not an announcements total has been integrated each and every major public cloud vendor as many of our customers maintain a hybrid environment across multiple cloud providers.
The combination of our cloud native conductors frictionless assessments comprehensive web app scanning and dual Bops integrated container security provides extensive visibility into the security of our customers cloud deployments.
Increased adoption of cloud and hybrid I T digital transformation expanding attack surface is I've been driving our business for the past several years and will continue to drive our business well into the future.
Trends resonate now more than ever we believe a leadership position going into this crisis will further enhance as we expand our presence and product offerings.
We believe the club represents a huge business opportunity.
But just to build new business models, but to build up with security first strategy expect to hear a lot more about these and other cloud security capabilities in the coming months and quarters. We're excited about our ability to advance a customer's cloud security as we continue to focus on exciting new product announcements.
As the shift to cloud accelerates in the commercial sector. We're also seeing increased focus on cloud in the public sector. We remain very pleased with our strong market share in the public sector and highly value our partnerships across the federal government.
We're excited about our fed ramp in process designation as a public sector increasingly shifts to cloud we're seeing success in the public sector domestically and abroad and up leverage the success to grow our state local business.
In the third quarter, we announced a new partnership with the center for Internet security that will.
Bolster cyber hygiene for both public and private sector organizations.
This partnership is an important step.
And making foundational cyber security more tangible for organizations of any size.
Total solutions are now the only comprehensive risk based vulnerability management offering available in the C.I.S. cyber market.
Going forward, we believe that our best of breed VM strategy.
Strong presence securing cloud environments, Oh, Gee capabilities, and advanced analytics do little bit well continue to fuel attractive growth and profitability.
With all the trends we outlined the dynamics that have been propelling our business remain robust and we believe well continue to strike then over time.
Well, we're excited about our current and future prospects.
We understand that we're in the midst of an uncertain economic environment that millions of people in businesses around the world are facing difficult times.
They focused on managing through the current situation as we benefit from the significant financial and operating strength of our recurring revenue and the natural leverage in our business.
I'll now turn the call over to Steve.
Thanks to me as I commented earlier, we're very pleased with our results for the third quarter highlighted by attractive top line growth continued momentum with large enterprise deals and strong profitability and free cash flow.
I will discuss our results for the quarter momentarily, but first please note that all financial results. We will discuss today are non-GAAP financial measures with the exception of revenue.
Andrea mentioned at the start of this call GAAP to non-GAAP reconciliations may be found in our earnings release issued earlier today and posted on our website.
Now onto our results.
Revenue for the quarter was $112.3 million, which represents 22% growth year over year.
Revenue in the quarter exceeded the midpoint of our guided range by approximately $3 million.
Our percentage of recurring revenue remained high at 94%, which is a result of our annual pre paid subscription model.
Revenue was aided by better than expected demand not only in terms of flow and the number of new enterprise deals, but also the number of large six figure wins.
Typically we had a 335, new enterprise platform customers and 56 net new six figure customers in the quarter.
This brings the total number of customer spending in excess of $100000 annually. The 771.
Provide some context here 56 was one of our best quarters ever for net new six figure customers with particular strength in the 500, K. plus category, including another quarter of strong competitive takeaways.
Well, we continue to see a healthy number of wins from Greenfield opportunities some of our largest deals in the quarter were displacements, which we believe is a testament to our cyber exposure value proposition and our best of breed strategy.
Another important highlight for the quarter is the growing demand for our solutions that help secure the cloud.
Which has resulted in an increased adoption of tenable, while other cloud security modules, such as lumen web application security container security.
This trend is an expansion beyond the traditional asset VM use case and Pam as customers are increasingly trying to manage the risk and complexity and made it to digital transformation and hybrid cloud deployments.
To summarize we continue to add a healthy number of new customers and six figure customers in an uncertain macro but with more favorable market and competitive dynamics on the backs of higher cloud adoption. This demonstrates the relevance of our offerings in the current environment.
Calculate a current billings defined as the change in current deferred revenue plus revenue recognized in the quarter grew 21% year over year to 133.7 million.
She's up markedly from last quarter.
A follow up from last quarter I want to briefly discuss our short term related performance obligation.
Short term RPL, which we defined as deferred revenue and backlog expected to be recognized as revenue over the next 12 months also grew a little over 20% in the third quarter.
As we discussed on our last call there can be natural variation in growth between CCB and short term RPL due to deal timing early renewals and multiyear prepaid deals cross both metrics. Its clear we have a strong sales quarter in Q3.
Real strong in the quarter and came in better than expected, which was reflected in our dollar based net expansion rate of approximately 110%.
As discussed last quarter dollar base net expansion rate is also experiencing some impact from larger initial land and a more moderate pace of asset expansion in the current environment.
I'll now turn to expenses, where we continue to demonstrate leverage in our financial model highlighted by record profitability and free cash flow.
I'll start with gross margin, which was 84% and consistent with Q3 last year, but up slightly from 83% last quarter.
Our gross margin continues to be very healthy and reflects increased investment in our public cloud infrastructure related to the growing demand for our cloud based kind of bio platform.
Partially offset by efficiencies and storage and compute we continue to scale.
Also we continue to benefit from improved resource utilization in the delivery of professional services as a result of increased virtualization of training and implementation.
Let's turn to operating expenses sales.
Sales and marketing was 48.2 million compared to 53.2 million in the third quarter last year and 50.1 million last quarter.
Sales and marketing expense as a percent of revenue was 43%, which.
Which improved from 58% in Q3 of 2019 and 47% last quarter.
We're very pleased with the significant leverage we've demonstrated and sales and marketing over the past year, which we attribute to the maturing investments. We previously made in sales overhead.
In markets where were critical mass.
[noise], we're also enjoying better than expected levels of productivity as a result of a more tenured sales organization that can sell an increasingly broader solution set to address cyber exposure.
For example, we have more sellers today with a tenure of a year or more.
And any time since our IPO.
Further the current environment has resulted in some savings and sales and marketing spend most notably in the areas of field marketing and travel, which we estimate to be approximately $2 million to $3 million again, this quarter as well as a more moderate rate of hiring due to the uncertain macro environment.
That said our expectation for the fourth quarter is that sales and marketing spend will trend sequentially higher due in part to the early investment in expanding quota capacity for the upcoming year.
R&D was 21.2 million.
Her to 18.6 million in the third quarter last year, and 21.4 million last quarter.
As a percent of revenue R&D expense was 19%.
Fair to 20% in both Q3 2019 and last quarter.
The increase in R&D expense over the prior years due to incremental investments to support growth initiatives in cloud and OTI as follows data science to maintain our leadership and vulnerability coverage and accuracy.
GNS expense was 12.5 million compared to 13.3 million in the third quarter last year and 12.3 million in Q2 2020.
As a percent of revenue <unk> expense was 11% this quarter flat with last quarter and down notably from 14% in Q3 last year, which reflects our ability to more fully absorbed public company costs and improve.
Deficiency and automation and many of our back office functions.
Non-GAAP income from operations was 12.4 million compared to a loss of 7.7 million in Q3 last year and a profit of 5.7 million last quarter.
Non-GAAP operating margin was positive 11% compared to negative 8% for the third quarter last year and positive 5% last quarter.
We're very excited to continue to see operating leverage in the model play out as we expand our non-GAAP operating income.
All of this translated to significant EPS upside as our non-GAAP earnings per share was nine cents this quarter, which was 67 cents better than expected.
Now, let's turn to the balance sheet, we finished the quarter with 269 million in cash and cash equivalents and short term investments.
Turning to cash flow, we achieved 16.7 million a positive free cash flow in the quarter up from 6.6 million sequentially.
This compares favorably to a free cash flow burn of 9.6 million in Q3 last year.
As I commented earlier, we saw strong sales flow in the quarter, which either collections and consequently free cash flow in the quarter.
Looking ahead, well Q4 is seasonally our largest quarter, we expect free cash flow to be flat to modestly higher as a result of more normalized pace collections and payment timing.
With the results of the quarter behind us I'd like to discuss our outlook for the fourth quarter.
We've developed our fourth quarter guidance under the realization that certain geographies are starting to experience a second wave of the pandemic.
Given the uncertainty and fluidity of the current environment, we will continue to manage the business closely and plan to make additional growth related investments in areas such as go to market.
Putting a head start on 2021 hiring levels, which is reflected in our guidance.
With that as a backdrop for the fourth quarter, we currently expect right.
Revenue to be in the range of 113 to 115 million.
Non-GAAP operating income to be in the range of eight to 9 million.
Non-GAAP net income to be in the range of six to 7 million.
Non-GAAP diluted earnings per share to be in the range of five to six cents, assuming 113 million fully diluted weighted average shares outstanding.
For the full year 2020, we currently expect right.
Revenue to be in the range of.
435.1 million, a 437.1 million.
Non-GAAP operating income to be in the range of 18.4 million a 19.4 million.
Non-GAAP net income to be in the range of 12.4 million to 13.4 million.
Non-GAAP diluted earnings per share to be in the range of 11 to 12 cents, assuming 110.6 million fully diluted weighted average shares outstanding.
In summary, we're pleased with the results of the quarter, which gives us increasing confidence we remain well positioned to deliver compelling growth and profitability over the long term.
We've developed a comprehensive foundational cyber exposure platform that provides significant value to customers.
And we are actively managing throughout.
Throughout the current challenging macro environment, while continuing to execute and invest in the long term opportunity.
And now I'll turn the call back to me for some closing comments.
Thanks, Steve regardless of the macro environment, we believe vulnerability management will continue to grow and probably hard.
For tenable or course corrected VM has driven our success and aided in our natural expansion across the attack surface, it's a cloud and OTI deployments.
Strictly product portfolio positions us for long term success as our customers shift to the cloud and maintain hybrid environments.
I hope to see many of you virtually at the Gartner invest virtual conference <unk> you asked Reinvests ended the Barclays Stifel, Yes, and Wells Fargo Tech conferences in the coming months.
We'd now like to open the call up for questions.
Thank you we will now 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.
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Our first question comes from the line of Sterling Howdy with JP Morgan. Please proceed with your question.
Hi, guys. This is Matt on for Sterling. Thanks for taking the question was wondering if you guys could give a little bit more color on the new customers. You know what was the average deal size for new customers and how has that kind of changed from previous trends. Thanks.
Well first and foremost we're very pleased with the velocity of new customers that we continue to add even during the pandemic. We added over 300, new enterprise platform customers in the quarter.
Let me comment earlier, but we have particular traction on larger deals not just one okay opportunities, but we called out the 500 K. plus category.
So not only guilty to attract new logos during the pandemic, which is increasingly difficult and you know and an uncertain macro but also transacting and closing larger deals and we also saw strength was competitive take away. So overall I think we're very very pleased with the traction new logos. We think all of this really underscores the growing importance of.
More specifically cyber exposure.
And.
A good part of this is a tribute to our ability to to to secure the cloud as well with a higher mix of I O sales and increasing adoption of our cloud based applications such as web apps container security, even Norman so very pleased overall with C.L. King.
New business that we're closing.
Great. That's very helpful. And then one one follow up you talked about some of the success you saw that in the federal space. This quarter, what's really been driving you know that that those trends that you've been seeing.
Oh this is a I'm thinking this is Steve on the fed.
Okay got it.
No <unk> I think the federal market is incredibly strategic sector for us I think we've got a very sizable footprint very strong market leadership and terrific relationships in and across the federal government and we're seeing some of that.
Demands performance and relationships translate directly into momentum building in our state local and some notable wins there I think I mentioned Oh wonderful Bobby.
On the call earlier.
We saw seasonally strong sort of uptick in Q3, and this quarter was no different from kind of seasonally strong Q threes than in previous years.
And we continue to invest in the market, we're excited about our fed rep.
In process, Oh, you know being in process with that with that rapid and see that there was additional I believe that there's additional opportunities for us and.
The cloud a blood based.
The opportunities in the federal space.
Great. Thanks, so much guys.
Our next question comes from the line of Haendel portal Walla with Morgan Stanley. Please proceed with your question.
Hey, guys. Thank you for taking my question.
My first question for.
For you. So it seems like mobility management, you know clearly growing and priority, especially as you know we remain in a more distributed work environment. I was wondering if you could expand on that a little bit because obviously you talked about the prioritization of VM for quite some time and and you talk to your.
Our customers on their spending priorities.
You know into 2021 right. What are you seeing as far as you know vulnerability management, a tenable in particular are becoming a more strategic.
Strategic focus for for Chief Security officers and are you seeing customers who perhaps.
Yeah, Matt nice to have that and now it's becoming more of a month.
In the current environment.
Yeah, I think there's really a great maturation happening in the security market I think our folks in years past may have looked at the as you know a requirement for some compliance driver some compliance needs that they have some regulatory driver I think people are start.
To understand the market starting to appreciate the fact that.
Yeah, you know vulnerability management.
And understanding your asset base understanding your compute based understanding.
Your level of exposure.
And what that means to you from a risk perspective, or just fundamental building blocks for security and so you know over the last.
You know three years, we've seen vulnerability management, you know security you know spend remained strong, but weve see vulnerability management last two or three years rise to the you know number one two or three position in just about every single.
See I asked so survey and in many instances, even even you know rating extremely high in CIO surveys. So I think that's a very strong trends in the end. It you know candidly I still think we're in the early innings, we looked at the number of new.
Customer lands that were achieving out on enterprise platforms, we're looking at the.
Greenfield accounts in analyzing our larger transactions, which ones are probably just some greenfields and we believe there's still you know great opportunity in the market both from a greenfield perspective as well as in an expansion in the existing customer base is great opportunity.
More broadly outside of yen or traditional the I'm looking at new.
A modern parts of the attack surface the cloud based infrastructure the web applications analytic topic.
Opportunities to create additional value the operational technology. So we believe strongly that we're still in the early innings of this market.
Got it thank you.
Our next question comes from the line of Rob Owens with Piper Sandler. Please proceed with your question.
Great. Thank you for taking my questions.
With the emphasis on cloud is remote work in digital transformation and all the cloud adoption mezzanine debt Bob standard container security I think it begs. The question does this require any type of channel adjustment or changing go to market motion relative to how these technologies are adopted versus security has traditionally.
Been purchased and deployed.
Yeah, I I <unk>, you know as you unpack the security requirements in Def ops environments and container environments.
There are large and complex and changing.
Quite rapidly as you know.
And as the way people develop changes and false right.
And Weve seen us even in just the last two or three years.
What I would say about the opportunity for tenable isn't trying to be all things to treat you all people what we're laser focused on its helping our customer base and the security community understand.
What their asset base looks like.
What that means and how that asset base is exposed and how they can efficiently manage remediate or or or lower.
That risk level so.
When it comes to container security, we think it's an integral part of our cloud story, we're not going to try to do every aspect of container security, we're going to help our customers assess what exposures those container and in but those containers are not devops environment is introduced into their cloud deployments.
Could you talk to their out to their enterprise and so we think we can do that very efficiently. We think we can do it without introducing.
A a whole lot of a drag or friction into the devops processes. We can do it for existing security users. The the enterprises that already trust us with their P.M. requirements and understanding.
The level of risk. So if we can do it without impacting the Def ops and do it in a frictionless type away and we think that's a that's the approach that works for our customer base and will fit nicely with our go to market motions.
So were not insulate ending a radical change in who were who we'd be bringing that product you are how we bring it to market.
And then Steve you mentioned, the 110% renewal rates due to size land getting bigger and then after that expansion.
The current environment.
It continues to ramp and you brought in the portfolio is there any potential inflection point in this metric moving forward.
Oh, Yes, we think so and as previously noted were knows.
Were strong in the quarter and came in better than expected but.
Larger initial land, which we talked about earlier and you know a more moderate pace of ethics bench in the current environment we.
We did see the dollar based net expansion rate tempered that although it continues to be healthy.
We don't manage the business to any one single metric, but its more workloads move to the cloud and less frictionless assessment.
We believe customers may want to expand coverage of cloud deployed assets. This quarter. We're pleased with the number of new logos, we added and the number of large deals we close the mix between new and upsell can vary from quarter to quarter.
However, because we're adding a healthy number of new logos.
I think this bodes for bodes well for expansion long term.
Great. Thank you.
Our next question comes from the line of Gur Talpaz with Stifel. Please proceed with your question.
Okay, great. Thanks for taking my questions I mean this is the second.
I had a drinking competitive takeaways. My question is this do you think the current environment has placed a greater emphasis on best of breed B M and if so why.
Well it it's I definitely think that we're growing.
As a result of our best of breed strategy.
I think the enterprise always emphasizes best of breed or historically has emphasized best of breed in a pretty meaningful way and our ability through native integration into a very rich ecosystem of strategic infrastructure industries.
And so that our customers have already made I think allows them to drive significantly more value from a tenable one at the same time have tremendous confidence in the results that they're seeing.
From from a from our product so we.
I think that in these tough economic you know markets, there's a there's a real flight to quality.
And and I think were the quality provider in the space and.
Correct, we're consistently proving that a in the evangelism and proof of values and in the lab testing of the various products.
That's a that's helpful and Steve maybe maybe one for you last quarter. You noted some a late period seasonality did you see anything noteworthy this quarter or would you classify it as more linear and more typical of a Q3 here.
No.
No not to the degree in which we saw it in Q2 and specifically talk about CCB as we mentioned earlier CCB during the pandemic may not be a good leading indicator of future revenue because.
It's really predicated on a multitude of factors, including overall deal timing multiyear prepaid deals and.
And even early renewals, which can have more variability in an uncertain macro in Q3, you know deal timing wasn't consideration, but more over we saw fewer multiyear prepay deals, meaning less customers elect.
The pay their subscription 300 advance which is something.
We knew could be a possibility headed into the pandemic something discussed on prior calls we did not see it in Q2, but it certainly it surfaced in Q3.
And just to clarify here and connect the dots with multi year prepaid deals the long term portion.
Current deferred revenue automatically runs off into the current portion of deferred revenue each and every period, thereby positively impacting TCV.
So now that said, it's too early to tell if this is a persistent trend the CCB and something that will certainly continue to monitor during the pandemic. So again TCB may not be a good leading indicator that said we are delighted with the performance in the quarter TB growth over 20% and even TCB aside short term our peer group.
His over 20%, so well see phebe as a metric we continue on track closely by any measure I think it's clear we had a good result for the quarter and we're very pleased.
That's great. Thank you.
Our next question comes on the line of Jonathan Ho with William Blair. Please proceed with your question.
Hi, Good afternoon, just wanted to start out with some of the lumen enhancements that you talked about and perhaps understand a little bit better you know what the Oh, I guess differentiators could mean and how that can potentially impact the pace of adoption of a berman.
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I mean were having trouble with the comp line.
Oh, sorry, well I, just like take myself off mute that would help greatly loom in has a.
Hi, Jerry walk on a sort of vision of where we can go with that product and I think we're still.
In the early innings, showing great progress in showing tremendous value through analyzing.
You know the vote.
Vulnerability <unk> asset criticality translated to risk introduces benchmarking you know some real innovative capability across a very large customer base. When you start looking at how.
People and enterprises assess risk even beyond.
Levels of exposure, there's all sorts of other controls in place and so we started inventory.
And and assessing those security controls compensating controls.
Adding those capabilities and insights to lumen. We've also added a things like ER assessment maturity, which we think is really important because it's not just hey, how exposed at my how at risk in light. It's also a question of how confident in my in the answer to that so if I.
Have large swaths of my environment, where I don't have visibility, where it don't have understanding where I'm not able to assess risk when I assess risk and they're doing it in a real in depth way what is done in a real cursory type of away and have had all those compare to peers like we think that type of.
Understanding of assessment maturity of compensating controls are you know in like very strategic steps steps forward in what lumen brings to the table and there's just a long runway of other innovative capabilities that we're super excited to be added to the product going forward.
Fantastic and then just one for Steve given the current uncertainty how are you thinking about balancing your investments in sales capacity expansion. It can you give us a maybe a sense of how you're thinking about the puts and takes there just given the the environment.
Thank you.
Sure well, that's important to us and something Weve talked about for some quarters now I mean that the takeaway here is that we are actively balancing growth with profitability cash flow, we announced almost 17 million Cashel. This quarter nighttime sleep you asked whats, which is an outsized beat for the quarter all with attractive top line growth.
Yeah, we think during the pandemic, it's important to maintain that balance but.
I will say this that first you know were we also want to lean and make sure we invest invest and go to market in the nation, specifically with regard to ladder, we talked about a number of new exciting enhancements to woman sales frictionless assessment for.
Oh, you know our ability to go deeper and wider into the cloud and then on the sales and marketing line, where we're seeing a lot of leverage you know that narrative there with leverage in sales and marketing started you know probably three or even four quarters ago last you're spending over 60% of our revenues and sales and marketing this quarter I think it was in the low 40% range one of them.
Reasons, why we're seeing leverage is because of the maturity of the sales organization, if more reps that I've been here, a year or more than ever.
Oh also management I have a lot of depth to the management team, which we believe now is in there we have been there so a deeper and wider bench in terms of sales leadership. We've also been able to optimize sales overhead and markets, where we have critical mass.
Which is really important so lean into quota carriers and less so on some of the associated overhead that goes with those but those sales. So as as a result, we've been able to drive a lot of leverage in sales and marketing we did acknowledge or do you acknowledge that you know there are some cobot related savings here in the way of field marketing and travel, which we estimate to be you know.
A little less than 3 million a quarter you know, but some of these savings to be honest with you probably will endure even post pandemic as we're demonstrating an ability that not only transact larger deals virtually here. You know this is not just 100, k., but 500 K. plus deals are virtually still requires a lot of intimacy still requires a lot of touch with our customers.
And partners alike, we're also going to deploy them virtually here. So we're really proud of this trend from the billions here the team here and how we've come together.
Also speaks to the value of the and at a market like this so you know that's a well continue to balance growth and profitability. We are going to continue to invest it's one of the reasons, we talked about that in a in the fourth quarter. It's reflected in our EPS guide. It's we're getting really starting 2021 and we'll we'll provide an update on 2021 in our February call.
And we look forward to closing the quarter on a good note and updating you on our results in February.
As a reminder, ladies and gentlemen, it is star one to ask your question. Our next question comes from the line of Daniel Ives with Wedbush Securities. Please proceed with your question.
Thanks So.
So my question a little on the <unk> side.
But are you getting the sense in talking to the team they've been whether its sales and partners ms. women changing the conversation with customers who tenable.
Oh absolutely.
When you know when we think about.
The future of the or the direction of the and how enterprises arm.
Our maturing there the.
Programs, the vulnerability management programs, it's not just about scanning their systems or.
Deploying agents your understanding.
You know all of these different vulnerabilities it it all.
Is there all data points trying to answer these foundational questions how secure Mike how at risk My and My Act exercising a reasonable standard of care with my systems and the data that's interested too to me is an as an organization and so lumen.
It is able to really drive at those answers.
What do you have how is it exposed.
What does it mean from a risk perspective, how are you raising relative to peers. How confident are you in your answers and so it is allowing us to move from conversations with users about the efficiency of the of our products about the accuracy and the differentiation there to have a much more strategic conversations.
She is with enterprise leaders and enterprise decision maker so.
It's driving radically different conversations and we couldn't be more pleased about that.
Great and just in terms of federal or state and local government put together are you sensing that deals are just getting larger in terms of the pipeline as you look out the next.
234 quarters, just given some of the cloud shifts going on with me as government agencies in remote environment, which has never even on there on the table for many of these organizations you know called once a month to huh.
Yeah, we're definitely seeing new and more opportunities that are sort of web based that are cloud based and certainly excited to be in process with our fed ramp designation.
The two to align with those requirements, but more broadly you know federal government is.
Continue to mature their cyber security and risk management practices and go through the same digital transformation that we're seeing in the private sector and then to some extent.
I had the influencer and leading leading the way for a lot of these large enterprises. So we think we have a.
A position of grid strengthen our relationships and customer base in the federal space and as those compute bases continue to expand and evolve we think it's going to lead to a greater and more opportunity for us.
Thanks.
Our next question comes from the line of John well Tilton with Birenberg. Please proceed with your question.
Hi, guys. Thanks for taking my questions.
Just wanted to a follow up on the comments about profitability maybe from a different perspective. So if we look at the guidance.
Implied incremental non-GAAP operating margin of 75% for upwards 40, and I believe this is up from 7% in 2019, so even if you back out the cobot tables that you mentioned are still around 65% incremental margin and I understand that you know there are cobot savings, but should we expect this metric will meaningfully.
Revert in 21 as you invest in more sales reps, maybe sales and marketing starts to grow again.
Well.
As I mentioned earlier, you know, we'll talk more about 20 or 21 in February but what I will say this that.
I believe the leverage that you are seeing today is really a natural reflection on the model we are not.
4% recurring revenue, we have over 80% gross margins, we have high renewal rates until we have a lot of confidence in both the cash flow and the operating margins of this business long term.
And over the course of a over the past few years, we've been able to successfully trade points of margin for points of growth the company and very profitable path and.
And we know will be very profitable in the future we have confidence in that we have confidence in our long term margin to the business, 25% plus free cash flow margins, our ability to become a <unk> role for the company and our goal is to try to strike the right balance there's lots of opportunities to invest here, there's a lot of confidence in the market.
We talked about phasing into monthly investment for 2021 in the fourth quarter, you know and adding continuing that capacity the sales and obviously you're seeing so many investments in innovation.
On the product side today, but some some of the more recent announcements so.
So yeah. Our expectation is we're going to continue to try to walk this I'll try to walk because often the margins in a very careful way try to balance that with grouse.
You know in terms of the macro there's a lot of uncertainty there's cold cases resurging.
You know some parts of the economy shutting down, but you know weve demonstrated resilience here to close new business I think that's the one major surprise for US is the success, we're having in closing new logos. So we're just going to have to continue to watch. This we're heading into the fourth quarter, which is our largest quarter and then you know on our February call. We'll we'll talk about what this.
And potentially for.
For for for 2021, but yeah. We're excited about our ability to do this do this in a very balanced by it's really a reflection of the model itself.
That was helpful. And then just a follow up you guys highlighted some deals in the prepared remarks that included lumen could you just possibly comment on the increase in the deal size that you saw from those customers by lumen and then maybe just more broadly when you say that the $500000 deal that you saw was that a function of more assets under coverage or more.
Public purchases.
Hi, This is Steve I'll talk a little bit about limit on the deal sizes. So yeah. We're illuminants patch, we're seeing a notable uptick in ASP and the impact on Asps can range anywhere from 30% to 40% plus so we're certainly having success there raising the S.P. women's attached and obviously our focus here given the fact that.
It's a new product is to drive the attach rates, even more and we think over the course of many years here. You know we think the attach rates can be 50% plus or more that's not unusual it was with the SaaS companies were successful I don't modules.
And then I think your questions pertaining to the 500 K. plus category.
It's a combination of both its cross sell we.
We are delighted to cross sell and this quarter, it's up all over last quarter and we continue to have success selling more and we think it's a compelling long term opportunity the ability to secure the cloud not yet not just sell 10, a bio but tell it with a web application security with little New container security, we know our close rates go higher when we actually sell.
But we have more add on products.
So I think it's a function of both the cross sell in the 500 K. plus category, but also more asset expansion that's companies.
Undergo digital transformations spend more money on technology more assets are coming on line more heterogeneous types of devices and assets creates complexity would compute and we have an ability to be able to assess its cover all that and as a result, it's having an impact on on asked fees and [noise] and a larger deals.
Thank you me if I could sneak one more in any chance you guys could comment on how investors should think about the calculated card growth going into Q4.
Next our there.
No we don't.
Well, we don't give guidance as you know in CCB on a quarterly basis and during our Q1 call. This year, we suspended or full year CCB hour for reasons I discussed CCB is influenced by you know a lot of different factors I may not be a good leading indicator of the underlying performance, we talked about deal timing, a multiyear prepaid deals for the quarter and everyone else.
So given these factors in the macro uncertainty surrounding the resurgence of Covance cases, there is the potential for a wider range of outcomes in CCB as we head into what is seasonally our largest quarter for sales.
Despite the potential for for variability we feel good about the overall health and momentum of the business. So the shorter answer here is that you know there's the potential for a wider range of outcomes. We don't good about the business delighted with the print for the quarter and you know we have a weaver with big quarter had.
Thank you so much congrats on the quarter guys.
Okay. Our next question comes from the line of Brian Essex with Goldman Sachs. Please proceed with your question.
Great. Thank you and thank you for taking the question maybe a me a quick question for you on.
On the competitive displacements, you mentioned or is there anything we could tease out there with regard to a little more detail maybe trends that you're seeing where these the usual suspects or legacy solutions, maybe their projects, where you got to the stage of technical evaluation, So you're able to win on the merits of the technology, a little bit more effectively or maybe they were.
Driven you know, perhaps they're driven by partnerships, where they may have best of breed soon and patch management technology in those deals maybe just trying to get understanding if there are any kind of trends, we can kind of point to for you know the the strong competitive displacement activity in a quarter and a quick follow up.
Yeah, it's definitely a trend and it's something that it's been picking up.
In recent quarters, I think we called out competitive displacements last quarter as well and we have certainly seen that continue to to accelerate in the third quarter.
We believe very strongly in our best of breed strategy and in the enterprise. The procurement decisions are being driven by the V. program or a program officer or you know Vice President director senior or whatever the the sort of level and a and they have a.
Mature understanding of what they're looking for in the program. They are testing the products that are evaluating the capabilities and to the extent that they are using a competitive product and I would say it is predominantly the usual suspects is very.
Sporadic use of.
You know other legacy solutions in the enterprise market its own it's almost entirely you know the sort of primary competitors that are you know ourselves qualified not rapidseven and so.
In the enterprise were seeing folks using competitive products, allowing us or are doing evolved with us and and the ability to convert those into a.
Competitive displacements that we're really excited about it.
And we're also seeing I'd say just yesterday, a hand in glove with that a continued very healthy level of greenfield.
Adoption or Greenfield accounts, you know we were trying to be transparent about this we measure it quarter in quarter out as well well north of 30% of our larger transactions coming to us and the other larger enterprise transactions coming to us from a greenfield accounts I mean, they're not using us Wallace rapidseven and they have no organic VM.
Capability to just to speak up so that's a that's also very exciting.
Got it Super helpful. And then maybe if I could you know circle back on another trend I think we have them you know kind of buying the potential for this kind of second derivative spend on the you know now that enterprises are the spend to like you know spend on access and and collaboration tools. You know it is there any insight you can.
To offer in terms of the way that Ceos are csos are thinking about this as maybe like up.
Reactionary spend after they've already expanded those platforms or is this maybe an enabler for digital transformation that they have to pursue just trying to understand you know their crop.
Mr. easily as they're trying to like manage their networks.
Yes, it's definitely a strategic enabler I think what we're seeing in the business are consistent in Q3 as we called it out in Q2 is a heavier shift from our SaaS based platform for some time to play out I think in the current quarter.
An acceleration on a continued adoption of our cloud based capabilities in modules. The increased use of the cloud native connectors for for all the major cloud infrastructure providers or acceleration of adoption of of the web app scanning capability.
Container security.
And looming aluminum as well so we're definitely seeing that and we try to get that part to the digital transformation I would just.
Stop short of or be a little bit hesitant to call. It a you know a second order.
You know uptick as a result of increased assets or remote assets. The load then well deployed over over the last couple of quarters. If you look at our business I think we're still.
Ah you know behind where our original plans were going into the year.
From from a growth perspective, and so I don't look at the current market or environment and say Hey, you know, there's there's some sort of coated.
Oh, good tailwind for us or we're expecting any meaningful sales.
And.
Got it that's super helpful. Thank you very much.
Our next question comes from the line of Andrew Nowinski with D.A. Davidson. Please proceed with your question.
Alright. Thank you. Thanks for squeezing me in so just two quick ones first I want to start a clarification. I think you said you saw a higher mix of cloud solutions and your large deals, but could you provide the actual mix of cloud versus on Prem revenue within those 56 large deals you mentioned.
Yeah, We don't Hi, this is Steve we don't disclose a.
Tells bye bye bye product, but clearly until oil as it's been a catalyst of growth for us and it certainly is the enabler to the large deals.
Okay very good and then I know you said vulnerability management as a higher priority now and attributable to the work from home trend, but I was wondering if you're seeing that evidenced by growth in your pipeline relative to what it was last year. So just wondering if you could provide any more color.
What's your pipeline on a year over year basis. Thanks.
You know pipeline, it's something we continue to track very closely you know Joe.
During the pandemic.
What we know something that we've talked about previously is just to provide a level of transparency, we weren't sure headed into the pandemic, what we're going to get in terms of close rates and youve and our ability to generate pipe and I think it's fair to say that we've been pleased and we've exceeded what our expectations.
You know we monitored by two ways number one the only the covers but also the maturity of the pipe so much of the activities around the pipeline. So I think our ability here to to.
Demonstrate real momentum in closing new business is a reflection of that pipe.
We're pleased with our close rates were pleased with the attach rates that we're seeing on the cold on the cross sell products, obviously, our ability to secure the cloud is you know it was one of the you know it is.
As a tailwind behind a lot of lessons with both the growing importance of VM, but.
Pipelines and something we continue to track very closely and it can move from you know from quarter to quarter and from month to month, but our success here and new logos reflects our ability to not only drive leads an opportunity at the top of funnel, but also the ability to qualify it and pull it through where we're spending a lot of time.
Having success.
Got it thank you.
That was our final question in queue. This does conclude today's teleconference. Thank you all for participating you may disconnect. Your lines at this time and have a wonderful day.
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