Q2 2021 Tenable Holdings Inc Earnings Call

July 27, 2021

[music].

Greetings and welcome to Tenable second quarter 2021 earnings conference call. At this time, all participants are in a listen only mode.

And answer session will follow the formal presentation, if anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded I would now like to turn this conference over to your host Ms. Erin Karney Senior director of Investor Relations and Thank you Ma'am you may begin your presentation.

Thank you operator, and thank you all for joining us on today's conference call to discuss the tenable second quarter 2021financial results.

With me on today's call are of meet your and Tenable, Chief Executive Officer, and Steve and Chief Financial Officer. Prior to this call we issued a press release announcing our financial results for the quarter.

And you can find the press release on the IR website at Tenable dotcom.

Before we begin let me remind you that we will make forward looking statements. During the course of this call, including statements relating to tenable as guidance and expectations for the third quarter and full year 'twenty 'twenty 1.

Rose and drivers and.

And tenable business changes and the threat landscape and and the security industry, and our competitive position and the market growth and our customer demand for and adoption of our solution plans of innovation and new products and services and.

<unk> expectations regarding long term profitability and the impact of Covid.

COVID-19 on our business and on the global economy.

These forward looking statements and.

All right 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 statements of the prediction of future.

Future of you bought forward looking statements represent our management's beliefs and assumptions only as of today and should not be considered representative of our views as of any subsequent date, we disclaim any obligation to update any forward looking statements or outlook for further discussion of the material risks and the other important.

Important factors that could affect our actual results. Please refer to the contained in our most recent quarterly report on form 10-Q, and subsequent reports that we file with the SEC, which are available on the SEC website at SEC Dot Gov.

In addition, during today's call we will discuss non-GAAP.

<unk> financial measures. These non-GAAP financial measures are in addition to and not a substitute for or superior to the 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 versus their closest GAAP equivalents.

Our earnings release.

We issued today includes GAAP to non-GAAP reconciliations for these measures and is also available on the Investor Relations section of our website.

I'll now turn the call over to me.

Thank you Ed and thank you all for joining us today.

I'll highlight our strong Q2 results and continue.

And we shipped and the market.

The traction, we're seeing and cross sell.

And how our differentiator approach to cyber exposure of successfully addressing a critical lead the market.

With that let me first touch on our Q2 results.

We've continued to build on the strong momentum in Q1 as reflected in all.

And you alluded to the Q2 results are calculated current billings accelerated growth to 23% year over year driven in part by the shift to cloud.

Growing cross sell opportunities and persistent threats and cyber incidents across it and Ot environments.

We also had strong cash flow and the quarter.

On the press furniture and of our non-GAAP operating margin and it had a for penni beat.

And EPS from the high end of our guided range.

Finally in July we entered into a credit agreement consisting of $375 million secured term loan and $50 million secured revolving credit facility take advantage of historically.

So on the global interest rates and bolster our balance sheet to support growth.

Steve will discuss the quarter and greater detail, but we're incredibly excited about where we are and our ability to fuel the business going forward.

We're seeing an increased focus on cyber security across all areas, including the presidential executive orders.

The rational attention focus from private industry, and corporate leadership and board of directors.

Increased security budgets and desire to understand the cyber risk of being driven by high profile of cyber incidents and business impacting outages and the importance placed on prevention and risk management has never been more.

A prominent.

The holistic strategic VM program as fundamental to proper risk management. The provenance of VM continues to drive growth opportunities for tenable, we're very optimistic about what we're seeing and the core VM market.

We continue to see good greenfield opportunities of surprisingly many large enterprises still.

And not have a formal VM program. In addition, we believe that the tax what goes against Microsoft and colonial pipeline continue to elevate the discussions about risks at the board level and drive the adoption of our cyber exposure solutions.

The strong growth and our core VM offerings in the quarter, particularly of our cloud platform Tenable Io.

Our pipeline remains healthy of customers grapple with how to get continuous visibility into their assets and understand their exposure to emerging threats.

Our competitive differentiation continues to strengthen as we execute on our best of breed strategy. We're continuing to see very strong win rates. We believe our technology is considered more accurate.

Oh covers a broader set of asset types with more insightful analytics and reported for example, according to third party.

And the company research, we have more than 20 plus percent greater coverage of Cvs than our competitors and test our products of 6 Sigma accuracy, we believe our technology.

Margin leadership and best of breed focus it's 1 of many reasons why we continue to drive market share gains and competitive differentiation of grid.

For example of this is the 7 figure win in the quarter. That's a reflection of the market desire for differentiated technologies of large government agency was looking to expand their asset coverage as well as meet continually.

Accurate evolving internal compliance policies and regulatory requirements.

By combining our paths of sensing and active scanning and continuously identify new assets coming on line and monitor the network for a variety of sensitive security related information.

Our strategy.

Has been the leverage our foundational understanding and expertise of VM and expand around tightly aligned use cases.

It is important to our core portfolio is the ability to scale our solutions as digital transformation continues to broaden the attack surface. This holistic cyber exposure approach is resonating with customers.

As of the continuous dynamic assessment of assets and user permissions, along with the means to prioritize remediation based on risk, which has never been more important than it is today with.

We saw continued strength across all of our cross sell motions, including EP.

And.

Particularly around the growing opportunity with a D.

Starting with our cloud offerings, we continue to help our customers secure their cloud environments.

This remains.

And the area of focus for our business as it is increasingly important to our customers IL has grown faster than etsy for several quarters in a row.

ROE, which we expect to continue to be a common theme we.

We saw continued traction with frictionless assessment and we're excited about the long term outlook for enabling customers to assess assets across public cloud environments without the need to perform active scans or install agents.

<unk> continues to see strong traction.

Traction, which we think validates the importance of our holistic approach.

A great example of the benefit of EEP is Ontario health.

And where they have multiple unique solutions across a number of acquired organizations. They chose tenable EP for standardized and provide complete coverage across all of their entities.

Another area of importance for tenable is operational technology for industrial control systems and <unk>.

Assets and utilities manufacturing and data centers come online the convergence between Ot and it is accelerating while these environments are extremely complex understanding is hybrid environments has become a priority.

Given the recent examples of high visibility of breaches and corresponding outages.

The sales cycles can be more lengthy however, early deployments have been successful and we see expanded business opportunities as customers deploy and more programmatic fashion across the global facilities.

In the quarter, we had a great 6 figure of cross sell win with large.

The ability provider looking to gain visibility into the entire attack surface their positive experience of the current tenable customer and trust them and the tenable partnership help give them the confidence the tenable Ot.

Meet their needs.

Finally, while we're still in the early stages with tenable the.

The important role of this.

Public place and identifying risk cannot be overstated, Microsoft active directory is incredibly complex and exceedingly susceptible to compromise, making it 1 of the most targeted assets within the enterprise. The vast majority of ransomware attacks go after active directory, including many reached the high profile breaches of the headlines.

<unk> provides insights into the weaknesses of and active attacks against active directory deployment and identifies miss configurations, making of foundational to securing cloud workloads securing remote work.

And adopting zero trust architectures.

We're seeing very strong early traction.

Product vision, and and excited pace of pipeline creation and example of this is large transportation and logistics company that has an existing tenable Io customer.

Given our track record with the IL and their need to increase the visibility of intimates configurations, they looked into tenable to help them secure the AAD.

And of our limits.

Yeah.

This is a reflection of our strong reputation and the size of the active directory security opportunity, which remains almost entirely unaddressed.

We are aggressively growing pipeline across both tenable customers and other organizations, noting however, and we expect tenable and <unk> sales to play out.

And <unk> longer enterprise sales cycles.

Our platform provides a holistic view of cyber risk across the various technologies and compute environments. The now make up the corporate attack surface and this enables customers to continuously and confidently managed cyber risk based on business risk.

Helping.

The organization's answer fundamental questions such as how exposed of my how at risk of my and what should I be doing about it continue to drive our focus and investment.

And the answering those key questions enterprises have to grapple with everything from policy and compliance to early detection of vulnerabilities to securing their cloud infrastructure.

And by leveraging our core strength, we have earned the trust of our customers to broaden our product set and help them solve for increased risk associated with digital transformation of.

<unk> experience and broad platform allow us to integrate tremendous amounts of data and 1 place to holistically assess cyber risk.

Our long history, and vulnerability management combined with this vast data set and experience and managing risk differentiates us from our competitors.

Against the backdrop of persistent threats and systems outages, causing business disruption enterprises today are not looking for good enough security.

Solutions decades of companies trying to launch subpart platforms are and part responsible for the catastrophic situation that as security today. We believe enterprises are looking for best in class independent audit capabilities, which can tightly integrate with the security enterprise infrastructure investments, which they've already made.

Leveraging the best of free platform to perform this independent audit of security can achieve the required checks and balances that enterprises are looking for.

We're starting off to a great start and the first half of the year and are excited.

About our outlook.

Foundation of drivers like shift of cloud and Zero Trust.

Combined with ransomware and high profile breaches and increased budget and prioritization of cyber security and cyber risk management.

In summary, we're very pleased with our Q2 results and we believe they reflect continued momentum across all areas of our business, which fuels our enthusiasm for the long.

Term ill now turn the call over to Steve.

Thanks for me as Hamid mentioned earlier, we're very pleased with our results for the second quarter highlighted by an acceleration and topline growth due to the strong cloud adoption and a sizable increase and the number of large deals and on the bottom line. We're very pleased with the substantial beat.

Non-GAAP EPS and strong free cash flow.

We also recently completed of debt issuance in July, which bolsters, our balance sheet and provides us with the added flexibility to continue to invest and growth.

I will discuss the impact of our $425 million term lumpy and revolver and greater detail during my remarks about our outlook for the year.

And please note that all financial results, we will discuss today.

On a non-GAAP financial measure basis with the exception of revenue.

And as Aaron mentioned at the start of this call GAAP to non-GAAP reconciliations may be found on our earnings release issued earlier today, which is posted on our website.

Now on to our results for the quarter.

Revenue for the quarter was $133 million, which represents 22% year over year growth.

Revenue in the quarter exceeded the midpoint of our guidance range by approximately $5 million.

Visibility remains high as a percentage of our recurring revenue was 94%.

Which is primarily a result of our annual prepaid.

True model.

In terms of the trend line, we saw a sequential uptick in revenue for the quarter notwithstanding the contribution from all said, which is a very important milestone for tenable revs.

The revenue in the quarter was aided by strong demand for both new and renewal business.

In terms of new business, excluding the customers added from the all set of.

Subscription and we added 399, new enterprise platform customers, which is up from the 341, we added in Q2 of 2020.

While we are consistently adding hundreds of new enterprise customers each quarter.

Equally impressive is the momentum with large deals.

We added 67.

Acquisitions, net new 6 figure customers and the quarter, including Allstate customers, which is up from the 29 and the prior quarter and 50 and the same period last year.

Large sales grew 30% year over year as organizations are increasingly turning to us the secure a wider range of network connected device types and associate it user.

Demand was broad based but our momentum and the U S. Public sector is certainly of note as we closed over a dozen 6 figure deals and the quarter across civilian and defense agencies as a result of a better spending environment.

We also saw continued outperformance and the mid market and we believe the appeal of.

Of our risk based platform has been heightened on the recent threat landscape.

In terms of renewal business, we saw continued expansion and our net dollar renewal rate aided.

Aided by both strong renewal rates and the cross sell of additional modules as customers seek to understand the broader view of their cyber exposure.

Our strong results are also.

For a permission debt and our calculated current billings.

<unk> defined as the change in current deferred revenue plus revenue recognized in the quarter grew 23% year over year to $136.8 million.

It was better than expected.

While our offset acquisition closed on the recently in late April.

The addition of our identity and user permission vulnerability assessment to our cyber exposure platform was well received by our customers and prospects, leading the outperformance of our early expectations for the business.

Although the revenue and TCE contributions for the quarter of modest given deal timing and sales cycles.

I'll.

I'll now turn to operating expenses, which include incremental investments and 2 months of all said costs offset in part by continued efficiencies and our business.

I'll start with gross margin, which was 82% this quarter and 83% last quarter.

As discussed during our last call our gross margin reflects increased investment and our public.

Cloud infrastructure of the support a broader set of predictive analytics and a more expansive data lake.

Looking ahead, we expect gross margin to remain at current levels and the second half of the year, despite the incremental cloud investments and the impact from all set.

Sales and marketing expense for the quarter was $58.1 million.

Which is up notably from the $52.3 million last quarter.

Sales and marketing increased sequentially, primarily due to an increased head count and related cost, including all said as well as an increased number of quota carrying sales reps.

In addition, there was incremental investment and demand generation activities.

All of this reflects.

Flex continuing trend of higher sequential quarterly spend and responds to a better macro and stronger demand environment for our cyber exposure solutions.

And marketing expense as the percentage of revenue was 45% compared to 42% last quarter.

Given our performance and the first half of the year and increasing confidence of our.

We will continue to invest and sales and marketing and the second half of the year.

R&D expense for the quarter was $23 million, which is up from $22.7 million last quarter the.

The change reflects the incremental engineering resources related to the all set acquisition, partially offset by lower payroll taxes due to the FICA limits.

Business lower PTO accrual.

As a percentage of revenue R&D expense was consistent with last quarter at 18%.

Given our best of breed approach innovation remains a top priority and we plan to continue to invest throughout the year.

G&A expense was $13.8 million compared to 13.

$13.7 million last quarter.

As a percentage of revenue G&A expense was 11% this quarter, which is flat compared to last quarter.

We expect to see higher G&A expense and the second half of the year as we return to the office and make investments and infrastructure to support our growth.

Income from operations was.

The $11.5 million compared to $13.9 million last quarter.

Operating margin was positive 9% for Q2 compared to positive 11% last quarter as.

As previously discussed.

Q2 reflects 2 months of incremental expense from all set.

It was approximately $3.5 million and total.

And <unk> offset by a de minimus revenue contribution, including the write down of the acquired deferred revenue.

All of this resulted in significant EPS upside and the second quarter as our non-GAAP earnings per share was <unk>, <unk>, which is $4.05 better than the midpoint of our guidance range.

Let's turn.

And to the balance sheet, we finished the quarter with $261 million and cash and short term investments, reflecting the $98 million of consideration paid in connection with the <unk> acquisition.

However, this does not reflect the $360 million of proceeds net of credit of your fees from our debt issuance, which closed on July 17.

Current deferred revenue of June 30th was 334 million given us a lot of visibility into revenue heading into Q3 and the remainder of the year.

Turning to cash flow, we generated $15 million of positive free cash flow and the quarter. This compares quite favorably to free cash flow of $6.6 million and Q2 last.

Last year over the last 12 months, we've generated $86 million of positive free cash flow.

And with high recurring revenue high gross margins and high renewal rates, we feel confident that we can continue to generate attractive levels of free cash flow, while continuing to invest and the business.

With the results of the quarter behind Us I liked.

To discuss our outlook for the third quarter and full year 2021.

Our strong start to the year continues to give us greater confidence and the business environment.

That said for the third quarter, we currently expect revenue to be and the range of $133 million to $135 million.

Non-GAAP income from operations and the range.

$7 million to $8 million.

Non-GAAP net income to be and the range of 1 to 3 million assuming the provision for income taxes of $2.3 million.

And non-GAAP diluted earnings per share to be and the range of 1 penny to 3 pennies, assuming a 115 million.

Diluted weighted average shares outstanding.

And for the full year. We currently expect calculated current billings for me and the range of $590 million for $595 million.

Revenue to be and the range of 528 million to $531 million.

Non-GAAP income from operations.

<unk> is in the range of $40 million the $44 million.

Non-GAAP net income to be and the range of $29 million for $33 million, assuming the provision for income taxes of $3.5 million.

And non-GAAP diluted earnings per share of the being the range of 25 to 29.

I mean of 115 million fully diluted weighted average shares outstanding.

And the matter of clarity the guidance, we're providing today reflects our outperformance in Q2 as well as of notable raise for the year for both GCB and revenue.

Also our EPS guidance for the full year includes $7 million.

According to 6 cents per share associated with our new credit facility.

In summary, we're pleased with the results for the quarter, and which gives us increasing confidence that we remain well positioned to deliver compelling growth and profitability over the long term.

And now I'll turn the call back from me for some closing comments.

Of interest thanks, Steve the profile of cyber exposure continues to elevate the digital transformation and recent events highlight the importance of cyber security Zero Trust.

Further these effects of proven that we can't rely on strong perimeter defenses the need to assess risks across the entire enterprise our message has been.

Consistent for comparable our core strength and understanding cyber risk has driven our success. It's aided in our natural expansion across the surface of the attack improving the security posture of cloud Ot.

Deployments and now the D.

We believe our strengthening.

Very platform of capabilities positions us for long term success as our customers continue to shift the hybrid and cloud environments. We hope to see many of you virtually for the da Davidson Piper Sandler and Jefferies conferences in the coming weeks.

We'd now like to open the call for questions.

At this time, we'll be conducting a question and answer session. If you would like to ask the question. Please press star 1 on your telephone keypad, a confirmation tone will indicate your line is and the question queue. You May Press Star 2 if you would like chair and move your question from the queue for participants using speaker equipment.

And may be necessary for you to pick up the of handset before pressing the star of keys.

The moment, while we poll for questions.

First question comes from the line of Brian Essex with Goldman Sachs. You May proceed with your question.

Hi, good afternoon.

And grants and the results and thank you very much for taking the question.

Okay.

I guess, Steve I was wondering if maybe if we could start with the.

The results and the quarter really nice subscription revenue growth and.

Could you talk about maybe attach rates were you seeing contribution there and maybe a little bit of insight around perpetual license growth is not just renewals and and how to think about that going forward.

Sure Brian Thanks for your question.

And as I commented on earlier and we're very pleased with the results for the second quarter and we saw our performance and both GCB and and revenue are.

We believe our risk based platform is resonating with customers Q2 was what's wrong.

With regard to demand and we got a lot of new enterprise platform costs.

199 to be exact we are seeing momentum with larger deals.

They're up 30% approximately on a year over year.

And as organizations are increasingly turning to us to secure a wider range of network connected devices and.

Associated with user permissions.

We also talked about momentum and the U S public sector here.

And as we closed over a dozen 6 figure deals from the quarter across civilian and defense in terms of the attach rates.

And 1 thing I will note here is that our newly launched tenable and <unk>, which brings together vulnerability management web application security container security and lumen into a single offering.

Has it been of catalysts of growth here and for larger deals.

And <unk>.

Validates our holistic approach to assessing the rest of this is just 1 example of where we're having success both with the attach rates and.

As well as on the expansion side.

We saw.

Continued traction with our net dollar renewal rate.

So I think this quarter given the.

The growth and the top line and demonstrates our ability to see higher attach rates for for newly launched products.

And we're having we're having success there.

And obviously pleased with the with the print for the quarter.

Got.

And maybe if I could follow up.

In terms of revenue growth by Geo how did that play out in the quarter. I mean, we had conversations and of course that seem to imply that things are much much worse in Europe and they are domestically here in the U S. So I was wondering if youre seeing the same and how you may position, maybe positioning and that market relative.

As for where we.

It might have a little bit more of a visibility in the U S with good visibility of the government and what's going on here, but how does how does how does the <unk> outside the U S with Korea.

We're very pleased with the results and and in Europe, and specifically in particular, if you look at EMEA and the Middle East. So we continue to have traction there and we're seeing outperformance.

<unk>, specifically and that theater.

And I think 1 of the reasons why we saw the acceleration of the growth is because we're also seeing acceleration and new business that comes on.

In terms of both new customers as well as upsell from from existing customers.

Larger deals traction with tenable dot.

Okay.

The ability to have higher attach rates and cross sell of some of the products that we've launched really of the past couple of years has been instrumental there. So I'm pleased with.

EMEA athletes with Middle East and particular, obviously also seeing good traction domestically here in the U S and.

Overall was a pretty pretty balanced quarter.

Got it and when I say worse and in Europe.

Threat environment not from your performance of just wanted to make sure.

Right.

And that's very helpful.

Thank you. Thank you very much alright.

Our next question comes from the line of Hamzah and part of Waller with Morgan.

Dot evenly you May proceed with your question.

Hey, guys. Thank you for taking my questions and it really seems like the demand environment is improving.

And even even versus sort of recently quarterly trends.

Curious if you could sort of stack rank some of the drivers for us between you know.

Existing customers kind of expanding the asset coverage rate I don't know, if I caught and exact sort of net dollar retention rates.

And then also.

That vs.

New perhaps greenfield opportunities and the mid market or elsewhere, how would you kind of raised the 2.

Is there more net expansion versus net new customer adoption or vice versa, and any color you can give us there.

Well in terms of the mid market and it's approximately 25% of our total sales, which is I think the number that we disclosed earlier so.

And we're continuing to see outperformance there which is the good news.

As a reminder.

Reminder, we have a pretty compelling and go to market model, where we have of product and assets that has broad adoption and use across the mid as well as the large market ubiquitous creates a cost effective on ramp to a larger platform sale. So we saw some really good pull through and the mid market and the flywheel of Nessus continues to help us.

And that comes on the heels of more investment and the sales organization as well not just in the mid market, but also the large.

But werent enterprise software company, so a little more than 50% of our sales comes from large market customers and that is.

What's creating the inflection point for us and.

And I would tell.

In terms of Greenfield.

Every quarter, we survey our largest deals and ask what we're.

And what products and what solution for the using before and it's still about a third of our largest deals on greenfield opportunities using no enterprise VM.

The program.

And so.

That's remained fairly constant for us.

So I would tell you the combination of new deals and up sell our probably the biggest catalyst obviously with contributions in the mid market, which continues to do well for us and.

And.

And I think what's driving all of this is probably digital.

The transformation the need for assessing the risk holistically, and just complexity and compute and.

And our ability to assess risks across the entire attack surface and weather.

It's.

The web applications cloud infrastructure and operational technology, and I think this is resonating well with customers.

Got it if I could just sneak in a follow up it seems like really strong early traction on the federal side I mean I was wondering if you could give us maybe for you.

Obviously that being sort of the federal fiscal year close are sort of the pipeline trends looking.

For for Q3.

Yes, I think.

The pipeline for Q3 looks healthy.

And we've had and continue to have a very strong federal year, perhaps more linear than we've seen in previous quarters.

And thats sort of evidenced by itself with over a dozen and 6 figure deals and the quarter across both civilian and defense.

And then obviously a lot of momentum with the.

Calling for key initiatives around visibility and early detection of all of our abilities, we think that bodes very well for the opportunity for us and federal.

Also extremely excited about the attention being paid to zero trust initiatives, where and this has recently selected tenable.

As 1 of the 18 technologies that they are demoing as part of the Zero Trust initiative concepts and demos and the lab so.

We think there's tremendous opportunity for continued growth and federal.

Exceptionally well positioned to.

To capitalize on that.

Great. Thank you very much.

Our next question comes from the line of Rob Owens with Piper Sandler You May proceed with your question.

Yeah.

Great. Thank you for taking my question I guess, just to just to cut to it and given some of your comments are you actually seeing budgets increase as a result of the environment or.

Do you think that this.

This is playing out kind of as you would have expected with the.

A better second half so are we seeing I mean, we've seen a lot of these.

Major breaches historically and I think few of led to and.

And the increase from spending but I think your prepared comments seemed a little more bullish. So at this point and time are we seeing wallets open up even more for security and security.

Of the budget budgets increase or is it more of a typical second half.

I think the secured the budgets and the market has never been hotter and more open to security spend.

Decorative level of awareness from the president of board of directors.

<unk> audit and risk committees cyber is front and center to the thinking cyber risk and the interval.

Integral part of their calculus of risk more broadly.

I think that perhaps and part while we've seen an acceleration in the.

And the commercial market for us.

And we anticipate that and the enterprise market, where those longer sales cycles.

Budget is available.

Resources are available, it's just the amount of going through the prioritization and the timing of transactions and deals on the enterprise sales cycles, and I think we remain extremely bullish about.

The opportunity and given the increased awareness of visibility and priority of cyber security and more broadly.

Great and then and then second around your active directory solution and how much market education is required here do you does the end customer understand all of the vulnerabilities.

And with active directory and so it's more of an easy sales cycle or is there a lot of education that still having to happen up from both the customers and with the channel.

And you know I haven't been and the enterprise security market for almost 30 years. This is 1 of them what are the weirdest dynamics to describe that ive ever ever seen I think there is incredibly broad awareness that active directory is a critical gap and security programs.

Amy.

Per cent of ransomware, specifically targets active directory, when you see things like colonial pipeline and and other breaches, causing significant business outages that translates directly to 2 active directory and I think most cfos and most security teams recognize that they have a significant issue with active directory.

Configuring it properly in any large and complex environment.

Is an incredibly difficult task.

And there is a and incredible GAAP or lack of mature capabilities and tools available to them. So youll see sophisticated organizations turning.

And 2 a consultant to look at their environment and see if it's well configured on it and some kind of periodic audit basis and that's just it's just not acceptable it's not getting the job done. So our sales team is having great success engaging with customers and they know the have issues.

They want and they're having a good.

Hit rate.

And getting meetings getting proof of concepts deploy and having conversations around budget and again. This is the solution and acquisition and went to close.

Midway through last quarter, so it will take time and.

And our Pos sales cycle, but we're extremely excited about.

About our position and the market and the capabilities that we're bringing to the table.

With the market that has great need and does not have great alternatives available.

Great. Thank you.

Our next question comes from the line of share.

Audi.

<unk> with Jpmorgan you May proceed with your question.

Yeah. Thanks, Hi, guys, so I want to be absolutely clear the 399 platform customers.

And did not include the 91 from all sit is that correct.

That is correct.

I think that makes it the largest.

And just Q2 net adds that you've had since coming public.

So I'm kind of curious in terms of how much of that productivity is coming direct versus some of the channel programs that you've had and any comments that you might have about the durability of those net adds into the back half of the year.

Well.

And then in short we are pleased with the results for the quarter. We saw some of our highest achievement rates and many years. This quarter. So acumen of rates and productivity continues to go higher and it comes on the heels of more investment and sales and marketing we had of quota capacity and the second half of the year, we plan to continue to add quota capacity per quarter.

Quota capacity and Q2 and expect to continue to add critical capacity and the second half of the year. So we are certainly.

Making the kinds of investments that we think are necessary to sustain attractive long term growth, we feel really good about our business. So given the fact that productivity levels are high achievement rates are high and we're adding sales capacity.

And given the backdrop of the heightened threat environment. We felt we feel really good about the business, but yes, it's 1 of our strongest quarters and whats underpinning that we called out.

Earlier, but a few things number 1 we continue to see strength from the public sector.

And the.

I think some of the investments and product.

Of happening and where we're seeing higher attach rates and we're seeing the expansion rates increase as well and tenable dot EP and certainly playing playing the role of that.

And then we're hard at work and building pipeline opportunities, we have more 6 figure deals and our pipeline now than perhaps and anytime George.

During our history.

We're also so look for.

We're pleased with our ability to add new customers. We think it speaks of the growing demand and importance of VM and the customers the ability to assess.

Risk Holistically.

And.

We're excited about the about the second half of the year.

Sounds good thanks, guys. That's it for me.

Okay.

Our next question comes from the line of the pockets.

With Barclays. You May proceed with your question.

Hey, guys. Thanks for taking my questions here.

And maybe maybe for you and me.

1 thing we didn't talk about.

Is capital allocation.

Kind of curious how are you and the board sort of thinking about capital allocation, particularly with the new credit facility, and where I'm going there specifically as M&A I mean, it feels like tenable has always been thoughtful in terms of M&A and the past how do you think about the M&A strategy sort of going forward does that makes sense.

It is.

Absolutely I think the capital is certainly a major portion of the us to continue to invest and the business with increased confidence and the momentum that we're seeing and the opportunity that's in front of us and the market so you'll see that.

Occur both organically.

Through continued innovation at a new feature function.

Sense.

The ability of differentiation in our core market as well as adding new asset types and greater visibility improved analytics to the products you'll also see.

I think our continued focus on inorganic.

Moves.

We're really excited about the position that we have with OTT.

The.

The pace of with which that market is starting to wake up and recognized especially in light of the outages caused by the convergence of it and Ot around colonial pipeline.

I talked a little bit earlier about our active directory solution and the incredible.

And kind of opportunity that exists there and make no mistake about it it is of bear to secure and we have market leading technology, there and there is great market awareness and those securing those identities is absolutely core to the cloud based <unk>.

Deployments, it's absolutely core to remote.

The purpose is absolutely core to zero Trust initiative. So there is phenomenal opportunity around there and we think that theres other.

Key areas of technology, where we can make very exciting acquisitions and continue to position the company for long term long term growth.

Got it that's really helpful. Steve maybe for my follow up for you you touched on EPS, a little bit and realizing it's still early can you just talk about any sort of early observations on.

How it sort of impacting and average deal size.

Anything else that youre sort of seeing and bundling generally anything.

And sort of bundling with the.

Would be helpful. Because it sounds like it's off to a good start.

Well it is and what we're excited about it addresses the larger problem for our customers our ability to assess risk holistically as the.

It includes VM, whereas and container security.

Anything on and lumen.

On the 1 thing that I'll say about EVP of that and is driving higher deal sizes, It's no surprise that.

And we're announcing really strong 6 figure deals I talked about the pipeline that we're building even specifically for EEP.

I, only and a 100, K, but 250 K plus deals.

And the average deal size is about 55% to 60% higher than if we would sell core VM on a standalone basis. So over the past few years, we made of a lot of investments and R&D with the new product to market the pricing and the packaging on those products. We think are going to continue to be of good catalysts and enabler of growth.

And our sales team is having success selling that into the account base and also winning new opportunities as well so.

And you'll see that continuing to evolve EP does not include active directory and does not include the OTT.

And some other things so we think there is.

And we'll demonstrate an ability.

<unk> to monetize some of the investment and R&D and we think there is also ample opportunity to continue to.

And see further monetization and even higher selling prices.

Very helpful. Thanks, guys.

Our next question comes from the line of Mike <unk> with Needham.

And you May proceed with your question.

Hey, guys. Thanks for taking the time and the questions here I really appreciate it.

First question I wanted to tap into I know that you guys are making these investments you're calling out and the sales and marketing arm.

And kind of magnitude and which youre growing the head count there and then the I guess the build on and so that would be how long does it take for these new hires to become fully productive. What is it you guys are doing to ensure that these new hires or maintaining and improving the productivity reached the tenable, it's usually delivered.

Yes. This is Steve so we are adding quota carrying sales reps and something we talked about at the beginning of the year, we continue to add quota capacity in Q2.

And our plan is to probably and the second half of the year of all of our expectations that will add more quota capacity and the second half and even in the first half.

So just given.

Given the quality of the print and the confidence of the business. We can feel like debt is the right thing to do and we're doing this and a way of there's still allows us to generate the kinds of margins and free cash flow of that.

That are necessary and the company and the average ramp is about 10 months.

And I will give you a sense of when and when we expect reps.

2 to be fully ramped and contribute.

And on the last thing that I would say there is not it's not all about just direct investments and direct expansion of the sales force.

We are the only company and our space that it made of 100% commitment of the channel and the channel continues to bring us more inbound opportunities.

Perhaps and any other time so.

And.

And notwithstanding the investments that we made and channel. We're also continue to make investments and MSP.

So the combination of adding quota capacity and the expansion of the sales force containing the optimized and tune the channel to drive higher levels of performance and then.

All.

Open doors and to opportunities that.

And we probably wouldn't otherwise see and then also of the investments and doubling down of MSP, which is even though it's on a small base of business as 1 of the fastest growing areas of our company and at the new route to market for US. We're trying to we're pulling all of those levers and that's what's flowing through and the spend for sales.

And our study and we expect that the tick up sequentially and the second half of the year.

Very helpful. Thank you for that and if I could just tack on 1 more.

And I'm trying to think about tenable and <unk> and I understand it's a much more strategic holistic decision, making process for your customers, especially with the board members.

And Marc Jean top of minor of the C suite getting and Bob could you help me tie all that back into what you guys are seeing on sales cycles and I'm just trying to parse of course through those 2 items. Because obviously your results are telling us something different but I would have expected that the more strategic decisions would be extending your sales cycles to.

On the spin.

I think thats, probably a fair observation that there is the more strategic decision and there.

And maybe some impact to sales cycles, because youre seeing and is a more strategic procurement from from the customers hopefully that also results in and yearly indication is resulting in significantly larger.

<unk> transactions.

And probably stickier relationships with the customer from our perspective.

EPS.

On just hey, Theres and enterprise licensing component to it and it really is a platform based sale.

And aligning.

Our Cape.

And <unk> across the platform with our customers' desire for increased visibility and increased understanding of the cyber risk. So again, we're no longer.

Focused on this web application scanning of versus outlet of application scanner, it's really being able to bring together and understanding of web app scanning.

<unk> container security and cloud security and.

And other IP asset.

Visibility and understanding what the.

Correlation is between those and how those translate into enterprise risk. So.

As <unk>.

<unk> becomes a more strategic conversation between the <unk>.

On board, we think the this platform based approach is.

And is critical and the sales team has gravitated toward it and embraced it and I think in part because customers understand it and seem to be embracing this concept as well.

Very helpful. Thank you guys.

As a reminder, if you would like to ask the question. Please press star 1 on your telephone keypad, 1 moment, while we poll for questions.

Our next question comes from the line of Jonathan Ho with William Blair. You May proceed with your question.

Hi, good afternoon, and congrats on the strong results.

And I think you indicated in the prepared remarks that Io was outgrowing S C.

And inflection point here and is there any sort of potential impact of either billings or revenue that we should be thinking about if we do see maybe of faster shift over to I O.

Okay.

Yeah Jonathan.

And I think the work from home movement of certainly created day.

Amanda and pull through for our IL platform.

And.

But 1 of the things that customers really like it.

Flexible deployment. So we can go of on Prem and Macleod.

The often customers choose both and its ease of use use so for us.

We're continuing to.

To grow the top line of very healthy levels, and we continue to see.

The customers increasingly.

<unk> Io.

And so we've had and standardize on Io as their VM platform versus on Prem, but often we sell both.

And then sometimes we foreshadowed a couple of years ago, even when we went public we just said and if you're a few years that the.

And just given how workloads are moving to the cloud and just buying preferences that will continue to see.

Ex of business for IL <unk>.

Relative to on Prem offerings and the good news is that were flexible in terms of how we deploy and how we serve customers some markets customers have a bias towards.

Towards towards on Prem.

And the other markets clearly there is a bias towards.

The higher mining and then delivering from the cloud.

Got it and got it and then can you maybe give us a little additional color around sort of your comments with Ot and.

How do we think about sort of the colonial pipeline breach and maybe and specifically the timing of it.

The company start to increase their spend or when the company start to fall into the pipeline.

Are you seeing your phones ringing off the hook and I'm, just trying to understand sort of how to think about the the timing of when that maybe translates into bookings or revenue. Thank you.

Well I think that there is a number of things great question, Jonathan and I think theres, a number of things happening.

And then T World, which.

The characterize as a broader awakening certainly colonial pipeline front.

Front and center and the thing that colonial pipeline really highlighted was the convergence of it and Ot, it's something that we've been vocal about for years.

But you cannot assess.

The security of the.

The pipeline without also understanding the Iot environment that is integral to that to.

2 of those control systems and to the operational environment. So we think we're coming from a position of strength and customers.

Certainly and prospects certainly understanding of that so it has increased aware.

Ernest.

A number of and not just for your pipeline with the water treatment facilities and the.

Attacks against Pharmaceuticals, and folks on the health care industry recently really highlight.

The convergence and the opportunity in front of us.

These are.

And not overnight conversations these are processes that are and sales cycles that are very deliberate and what we're seeing now is a lot of pilots of lot of evolves. We're seeing early deployments. So a facility or an organization, which may have 250 facilities around the world is deploying and 15 facilities first.

And are using the products and understanding.

What is the most efficient path for deployment the.

And the most efficient method for managing a larger architecture like this and over time with success, we believe we're going to see.

And theyre going through the budget cycles, we believe theyre going to translate into much larger.

On your opportunities down the road.

Outside of the high profile breaches and.

And the attacks that have also been and addition to the cyber Eo.

The administration has also released and.

The other executive order specific to the energy sector, the and Youre seeing 100 day sprint first and the energy sector and then.

And then and soon to be and other sectors really looking for capability and trying to jumpstart our focus on cyber security and some of these industries, which historically have lagged.

The behind and progress around fiber and certainly lagged well behind the the threat that theyre dealing with.

Excellent. Thank you.

Yeah.

Our next question comes from the line of Joel Fishbein with choice. You May proceed with your question.

Hi, Thanks for taking my question and not just for you.

I wanted to see if you can maybe expand on the Deloitte partnership and.

And some of the.

The system integrators, and some of the programs that youre doing with them and how that might be driving some of the larger deals.

Yes, Joe good to hear from you.

Highlighting.

The partnership with Deloitte, specifically around and initiatives they have.

And for smart cities, and smart infrastructure, where we've deployed our Ot solution alongside other capabilities.

But they're showcasing and touring customer through and prospects of the expense.

Educate them on the full.

Imagine.

Of what technologies can bring to the table. So we're excited about that partnership and in particular, but the systems integrators more broadly.

<unk> and their customers understand cyber risk and we.

We are and we are an integral part of that understanding so both on the Ot side as well as on.

On the it side.

Great. Thanks.

Our next question comes from the line of the Brad Reback with Stifel. You May proceed with your question.

Thanks very much on the.

The growth and quota carrying capacity any reason, we shouldn't expect that to expand at least in line with revenue of Nox.

Okay.

And while its different reps have different quotas and there are different geos. So while there is some relationship it takes time and the ramp and there's not a perfect corollary and as I also mentioned earlier some of this it's going to be on the commercial side, which is our mid market.

Business, we're applying some of the lessons and best practices and we learned during Covid, which is our ability to continue the close and transact.

The deals here remotely and even larger deals 2 of our go to market motion, but there is obviously the relationship is 1 of the reasons why we called it out and we're continuing to.

Make investments and add capacity.

In addition to that is continuing to get traction with the channel and doubling down on our MSS our efforts via MSP.

Okay. Thanks very much.

Yeah.

Our next question comes from the line of Kingsley Crane with Banbury and you may.

Proceed with your question.

And so much of the congrats on the great quarter with customer of even excluding also the if you look at revenue growth and PCB drilling and you're providing more clarity on those figures.

I'm, sorry, you broke up and we're.

And the auto book can you repeat the question. Please.

Yes could you provide any more color on revenue growth and CCP ex the also of the acquisition.

So also had closed late April so the results that we're reporting today only reflects about 60 days of activity and really during that time, we've been.

Work on integrating the businesses.

And creating the enablement programs for our sales team and are hard at work on building pipeline and opportunities.

1 thing I will say is that the gate, where we have some really good momentum.

At pipelining activity and pipeline activity led.

Levels are high and we're excited about the setup for the second half of the year.

And.

Keep in mind as well just given sales cycles youre more likely to see a greater contribution from all said Q4.

Vs Q3.

Okay, That's fair and just 1 quick follow ups the great to hear the traction with 10 of.

Hard it will be at the public utility company.

As a result of a cross sell so when you look at the revenue base for Tenable Ot today helped and our customers cross selling and so that product and then how often are you landing.

With <unk>.

Yes, I don't know the I have a percentage of the cross sell.

Or how off for lending with Ot, but certainly our sales motion contemplates that we've got a very large customer base 35000, plus customers around the world and.

Of those on the enterprise platforms and and.

For the very strong degree of trust and confidence in the.

All of the minimal brand and also come to rely on tenable for helping them understand their cyber risk.

And increasingly over the last 18 to 24 months, we've seen <unk>.

<unk>.

And being given more and more responsibility for operational technologies and operating environments.

And so.

And having a mature capability in that segment of the market allows.

Them to expand the relationship with us into those environments and again the visibility that they are looking for.

And that they're used to consuming it and processing it and understanding it so we feel.

No.

We have a very strong go to market motion, we're getting a fair number of at bats, and the and.

And then differentiating ourselves with the ability to assess both Iot and Ot in these operating environments, which have both.

Platforms.

And that we can be susceptible to both forms of.

Of risk and exposure, so we think thats.

A key differentiator for us and it seems to be playing itself out.

Pretty pretty consistently with the past, it's just a matter of these are slow moving markets.

And.

And all of their adoption cycles, and we anticipate the b.

The much stronger long term growth there.

The overtime.

And this is Steve the 1 thing and I will say looking at the investments in the second half of the year and we're absolutely focused on.

Of investing more on Ot.

Penetration is still relatively modest and market.

And of these large and we do know that when the first thing on the opportunity.

That success rates and close rates tend to go up so youre going to be seeing incremental investment from us to focus on greater coverage.

And greater focus on this market.

So given the strength of of what we saw the first half of the year.

Earlier, Iot is helping drive the expansion of the 1 dollar and alright, you can see incremental investments the second half of the year, specifically and the Ot side of the business.

Thank you Beth so helpful.

So again.

Our next question comes from the line of Gray Powell with <unk> you May proceed.

And with your question.

Great. Thanks for thanks for work on the end of the call here and congratulations on the on the good numbers.

So I wanted to follow up on an earlier question you mentioned, the cloud adoption and tenable Io of couple of times as the driver of upside can you maybe give us a sense.

And by the even a ballpark sense, it's just sort of the mix of new and add ons and tenable Io or maybe just how much faster and it's growing versus the overall business and sort of the low 20% range.

So today, we're and we're reporting TCP growth of roughly 23% and I think it's fair to say just.

Given the mix.

The change and mix that we're seeing greater growth and Nio and related cloud products.

And so that's something that.

We anticipated over the last couple of years, so kind of reflects how workloads are moving to the cloud.

So yes, we're seeing higher growth I think it's fair to say on on in terms of cloud.

Also of corresponds with greater investment and greater focus for us, but absolutely unequivocally our on Prem and SC offering is paramount.

Net cash success, where we have high renewal rates and high customer satisfaction rates. So I think it's.

The combination of both together and our ability to deploy both in terms of on Prem and and the cloud that's really resonating well with customers.

Understood. Okay, and then just last 1 and it was great to hear the positive commentary on U S. Fed can you remind us of ballpark like the the mix of revenue drive there and.

And do you see that changing significantly in the next 6 to 12 months.

And the ballpark plus or -15%.

And it's been a high performing segment of the market for us for some time, we think we have.

A significant position of strength from that market and we see that.

The continuing.

And I don't think at this point we can.

Point of any specific indicators and say this we expect this percentage of too dour year changed significantly in the near term.

Understood Alright, thank you very much.

Our last question comes.

From the line of Shelby Day Raffi.

SDN Securities You May proceed with your question.

Yes, thank you very much so and so.

Terms of.

Do you think the upside here both on the revenue and the number of enterprise customers added I think you called out of public strength and.

Our investment and products I think you meant tenable EP ramping.

And it came out in February.

So which of those 2 factors public or tenable dot EP with the larger factor would you say in terms of driving the upside.

I would take public sector, and just only because the.

The deal sizes tend to be much much larger I mean, they're very sizable and not just 6 figure, but also of 7 figure deals we've always had.

A very strong foothold and when the U S public sector, we serve most.

3 letter of federal agencies, both from the deal of.

The defense and the civilian side. So certainly that was of note that's 1.

1 of the reason of why we called it out.

And our momentum and large deals is certainly apparent here and.

Given the strength and the quarter.

But.

But theres also sizable opportunities and we've had success with tenable that EP and this is a product that we launched and the end of February and we were able to close some deals and the first quarter, but now.

Okay.

Full quarter under about even even its only been just a few months. We are pleased with the success and it's helping us with in terms of sales cycles as well, yes. There are larger asps, there's a clear corollary between selling prices and sales cycles.

Larger of the deal of the longer the sales cycle tends to be.

But we.

And now have with EEP, we have a.

As a single integrated offering and it's a much smarter way for customers to consume technology as opposed to selling our card and separate skus on a purchase order, which often comes with more scrutiny and more review so.

Notwithstanding the higher selling prices were actually having success.

And with selling and EEP.

To larger enterprises.

Yes.

And in a way debt, allowing us to impact our growth here of short term.

Okay and last 1.

You said your gross margin you expect to be a similar and the back half.

From Q2, Q2s gross margin did tick down.

And that ticked down due to ramping Io or were there other factors and when do you think you can return the gross margin back to like last year's levels of like 83% plus.

Yeah, I think just the direction in terms of gross margin for US 1 of the things we've talked.

And half from years ago, and we expect gross margin and sat on the low 80% of high 70% range and just given the mix of business and the shifts that we're seeing we do we think that's fairly consistent I think we of confidence will be at the higher end of that range versus the lower and I think what youre seeing in terms of of gross margin and the second quarter or is that.

About the also the acquisitions now reflects 2 months of incremental expenses associated with with all said and a lot of these costs here and not just all set but also on our business as we continue to expand our geographic and international footprint a lot of the cost.

For the for these public cloud.

Platforms are semi fixed so they're not variable so recall.

The investment upfront and then those are costs that you will fully absorbed over time as you as you achieve scale and and growth and this GL. So for now, we're saying hey, it's going to be for.

The second half of the year.

Just given the the.

And the growth and the investments that we're making but.

Even the also feel good over the past couple of years debt, our gross margins have exceeded our own expectations and the guidance that we gave on public.

Thank you.

This concludes today's conference you may disconnect your lines at the time. Thank you for your participation and drove the rest of your evening.

Okay.

And.

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Greetings and welcome to Tenable second quarter 2021 earnings conference call at this time.

And I'm all participants on a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. As a reminder of this conference is being recorded I would now like to turn this conference over to your host Ms. Erin Karney senior director of Investor Relations.

<unk> and thank you ma'am you may begin your presentation.

Thank you operator, and thank you all for joining us on today's conference call to discuss the tenable second quarter 2021financial results.

With me on today's call are of media and tenable as the Chief Executive Officer, and Steven Chief Financial Officer prior.

Call, we issued a press release announcing our financial results for the quarter you can find the press release on the IR website at Tenable dotcom.

Before we begin let me remind you that we will make forward looking statements. During the course of this call, including statements relating to tenable as guidance and expectations for the third.

Third quarter and full year 2021.

Growth and drivers and tenable business.

<unk> and the threat landscape and in the security industry, and our competitive position and the market for.

And our customer demand for and adoption of our solutions planned innovation and new products and services.

Tenable expectations regarding long term profitability and the impact of COVID-19 on our business and on the global economy.

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.

And then you should not rely upon forward looking statements of the 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 as of any subsequent date, we disclaim any obligation to update any forward looking statements or outlook.

For further discussion of the material risks and the other important factors that could affect our actual results. Please refer to the contained in our most recent quarterly report on form 10-Q, and subsequent reports that we file with the SEC, which are available on the SEC website at SEC Dot Gov.

<unk> tradition 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.

And there are a number of limitations related to the use of these non-GAAP financial measures for.

And of the closest GAAP equivalents our earnings release that we issued today includes GAAP to non-GAAP reconciliation for these measures and is also available on the Investor Relations section of our website.

I'll now turn the call over to me.

Thank you Eric and thank you all for joining us today.

And so I'll highlight our strong Q2 results and continued leadership and the market the.

The traction, we're seeing and cross sell.

And how our differentiator approach to cyber exposure of successfully addressing the critical lead the market.

With that let me first touch on our Q2 results.

We continue to build.

First on the strong momentum in Q1 as reflected in our impressive Q2 results are calculated current billings accelerated growth to 23% year over year driven in part by the shift to cloud.

Growing cross sell opportunities and persisting for us and cyber incidents across it and Ot environments.

We also had strong cash flow of the quarter. So on expansion of our non-GAAP operating margin and the had a for penni beat and.

And the EPS from the high end of our guided range.

And finally in July we entered into a credit agreement consisting of $375 million secured term loan and $50 million secured.

On the credit facility take advantage of historically low interest rates and bolster our balance sheet to support growth Steve.

Steve will discuss the quarter and greater detail, but we're incredibly excited about where we are and our ability to fuel the business going forward.

We're seeing an increased focus on cyber security.

Revolve all areas, including the presidential executive orders congressional attention focus from private industry, and corporate leadership and board of directors.

The increased security budgets and desire to understand and cyber risk of being driven by high profile of cyber incidents and business impacting outages the importance placed on.

On prevention of the risk management has never been more prominent.

The holistic strategic VM program as fundamental to proper risk managers and the provenance of VM continues to drive growth opportunities for tenable, we're very optimistic about what we're seeing and the core VM market.

We continue to see good Greenfield operation.

And it crosses a surprisingly many large enterprises still do not have of formal VM program. In addition, we believe that the tax like those against Microsoft and colonial pipeline continued to elevate discussions about risks at the board level and drive the adoption of our cyber exposure solutions we.

We saw strong growth and our core VM offerings in the quarter.

Particularly of our cloud platform Tenable Io.

Our pipeline remains healthy of customers grapple with how to get continuous visibility into their assets and understand their exposure to emerging threats.

Our competitive differentiation continues to strengthen as we execute on our best of breed strategy.

Continue to see very.

<unk> for the win rates, we believe our technology is considered more accurate and covers a broader set of asset types with more insightful analytics and reporting for example, according to third party.

And company research, we have more than 20 plus percent greater coverage of Cvs than our competitors.

Strong test our products of 6 Sigma accuracy, we believe our technology leadership and best of breed focus is 1 of many reasons why we continue to drive market share gains and competitive differentiation of.

A good example of this is the 7 figure win in the quarter, but is the reflection of the market desire for differentiated technologies and.

And when the agency was looking to expand our asset coverage as well as meet continually evolving internal compliance policies and regulatory requirements.

Combining our paths of sensing and active scanning and continuously identify new assets coming on line and monitor the network for a variety of sensitive security related information.

Our strategy.

And that's been the leverage our foundational understanding and expertise of VM and expand around tightly aligned use cases equally as important to our core portfolio is the ability to scale our solutions as digital transformation continues to broaden the attack surface. This holistic cyber exposure approach.

<unk> sales is resonating with customers.

As of the continuous dynamic assessment of assets and user permissions, along with the minions to prioritize remediation based on risk, which has never been more important than it is today.

We saw continued strength across all of our cross sell motions, including EPS.

Okay, and particularly around the growing opportunity with ABB.

Starting with our cloud offerings, we continue to help our customers secure their cloud environments.

This remains and.

And area of focus for our business as it is increasingly important to our customers.

<unk> has grown faster.

After the FTE for several quarters in a row, which we expect to continue to be a common theme.

<unk> continues to see strong traction, which we think validates the importance of our holistic approach.

A great example of the benefit of EEP is Ontario health, where they have multiple unique solutions across a number of acquired organizations. They chose tenable EPS to standardized and provide complete coverage across all of.

Their entities.

Another area of importance for tenable is operational technology for industrial control systems, and the assets and utilities and manufacturing and data centers come online the convergence between Ot and it is accelerating all of these environments are extremely complex understanding of hybrid environment.

Environment has become a priority given recent examples of high visibility of breaches and corresponding outages.

The sales cycles can be more lengthy however, early deployments have been successful and we see expanded business opportunities as customers deploy the more programmatic fashion across the global facilities.

And the quarter, where the grid.

Cross sell win with a large public utility provider looking to gain visibility into the entire attack surface.

Positive experience of the current tenable customer and trust and.

And the tenable partnership help give them the confidence of the tenable Ot will meet their needs and.

Finally, while we're still on the early stages with tenable.

<unk> the important role of this product plays and identifying risk cannot be overstated, Microsoft active directory is incredibly complex and exceedingly susceptible to compromise, making it 1 of the most targeted assets within an enterprise the.

Vast majority of ransomware attacks go after active directory, including many reached.

And of high profile breaches and headlines.

Tenable I'd provides insights into the weaknesses of and active attacks against active directory deployment and identifies miss configurations, making of foundational to securing cloud workloads, securing remote work and adopting zero Trust architectures.

We're seeing very strong early traction of our solution and and excited pace of pipeline creation. And example of this is large transportation and logistics company that has an existing tenable io customer given.

Given our track record with IL and their need to increase the visibility into the configurations they looked into the tenable.

To help them secure their environments.

Environments.

Yeah.

This is the reflection of our strong reputation and the size of the active directory security opportunity, which remains almost entirely unaddressed.

And we're aggressively growing pipeline across both tenable customers and other organizations, noting however, and we.

We expect tenable and <unk> sales to play out along the longer enterprise sales cycles.

Our platform provides a holistic view of cyber risk across the various technologies and compute environments that now make up the corporate attack surface and this enables customers to continuously and confidently managed cyber risk based.

Based on business risk.

Helping organizations answer fundamental questions such as how exposed to my how at risk and my and what should I be doing about it continue to drive our focus and investment and.

And answering those key questions enterprises have to grapple with everything from policy and compliance to early detection of.

<unk> for securing their cloud infrastructure.

By leveraging our core strength, we have earned the trust of our customers to broaden our product set and help them solve for increased risk associated with digital transformation, our vast experience and broad platform allow us to integrate tremendous amounts of data.

And 1 place to Holistically assess cyber risk, our long history, and vulnerability management combined with this vast dataset and experience and managing risk differentiates us from our competitors.

Against the backdrop of persistent threats and systems outages, causing business disruption enterprises.

The prices today are not looking for good enough security solutions decades of companies trying to launch subpar platforms are and part responsible for the catastrophic situation that as security today.

We believe enterprises are looking for best in class independent audit capabilities, which can tightly integrate with the security.

The enterprise infrastructure investments, which they've already made leveraging the best of breed platform to perform this independent audit of security can achieve the required checks and balances that enterprises are looking for.

We're starting off to a great start and the first half of the year and are excited.

About our outlook.

Foundation of drivers like shift of cloud and zero Trust combined with ransomware and high profile breaches and increased budget and prioritization of cyber security and cyber risk management.

In summary.

We're very pleased with our Q2 results and we believe they reflect continued momentum across all areas.

<unk> of our business, which fuels our enthusiasm for the long term.

I'll now turn the call over to Steve.

Thanks, Amit as the meat mentioned earlier, we're very pleased with our results for the second quarter highlighted by an acceleration and top line growth due to the strong cloud adoption and a sizable increase and the number of.

Sales.

And on the bottom line, we're very pleased with the substantial beat and non-GAAP EPS and strong free cash flow.

We also recently completed of debt issuance in July, which bolsters, our balance sheet and provides us with the added flexibility to continue to invest and grow.

I will discuss the impact of our $425 million term lumpy and bread.

Revolver and greater detail during my remarks about our outlook for the year.

Please note that all financial results, we will discuss today are.

On a non-GAAP financial measure basis, with the exception of revenue and.

As Aaron mentioned at the start of this call GAAP to non-GAAP reconciliations may be found on our earnings release issued earlier today, which.

It is posted on our website.

Now onto our results for the quarter.

Revenue for the quarter was $130.3 million, which represents 22% year over year growth.

Revenue in the quarter exceeded the midpoint of our guidance range by approximately $5 million.

Visibility remains high as a percentage of our.

Revenue was 94%, which.

Which is primarily a result of our annual prepaid subscription model.

In terms of the trend line, we saw a sequential uptick in revenue for the quarter notwithstanding the contribution from all said, which is a very important milestone for tenable.

Revenue in the quarter was aided by strong demand for both new and renewal.

Currently in terms of new business, excluding the customers added from the all set of acquisition. We added 399, new enterprise platform customers, which is up from the 341, we added in Q2 of 2020.

While we are consistently adding hundreds of new enterprise customers each quarter equally impressive.

The momentum with large deals.

We added 67, and net new 6 figure customers and the quarter, including Allstate customers, which is up from the 29 and the prior quarter and 50 and the same period last year.

Large sales grew 30% year over year as organizations are increasingly turning to us the secure.

And there's a wider range of network connected device types and associate it user permissions.

We also.

Our continued outperformance and the mid market, where we believe the appeal of our risk based platform has been heightened by the recent threat landscape.

In terms of renewal business, we saw continued expansion and our net dollar renewal rate.

And by both strong renewal rates and the cross sell of additional modules as customers seek to understand a broader view.

Softer cyber exposure.

Our strong results are also reflected and our calculated current billings.

<unk> defined as the change in current deferred revenue plus revenue recognized in the quarter grew 23% year over year to $136.8 million.

Which was better than expected.

View of both our offset acquisition closed on the recently and late April.

And the addition of our identity and user permissions on ability assessment to our cyber exposure platform was well received by our customers and prospects.

And the outperformance of our early expectations for the business on.

Although the revenue and TCE contributions for the quarter of.

Well I'll skip the deal timing and sales cycles.

I'll now turn to operating expenses, which include incremental investments and 2 months of all said costs offset in part by continued efficiencies and our business.

I'll start with gross margin, which was 82% this quarter and 83% last quarter.

As discussed during our last.

Our model our gross margin reflects increased investment and our public cloud infrastructure of the support a broader set of predictive analytics and a more expansive data lake.

Looking ahead, we expect gross margins remain at current levels and the second half of the year, despite the incremental cloud investments and the impact from wholesale.

Last call sales and marketing expense for the quarter was $58.1 million.

It was up notably from the $52.3 million last quarter.

Sales and marketing increased sequentially, primarily due to an increased head count related cost, including all said and as well as an increased number of quota carrying sales reps.

In addition, there was incremental.

And I spent and demand generation activities.

All of this reflects our continuing trend of higher sequential quarterly spend and responds to a better macro and stronger demand environment for our cyber exposure solutions.

The sales and marketing expense at the percentage of revenue was 45% compared to 42% last quarter.

Rental and given our performance and the first half of the year and increasing confidence of our business, we will continue to invest and sales and marketing and the second half of the year.

R&D expense for the quarter was $23 million, which is up from $22.7 million last quarter.

The change reflects the incremental engineering resources related to the I'll.

Position, partially offset by lower payroll taxes due to the FICA limits and lower PTO accrual.

As a percentage of revenue R&D expense was consistent with last quarter at 18%.

And our best of breed approach innovation remains a top priority and we plan to continue to invest throughout the year.

G&A expense was $13.8 million compared to $13.7 million last quarter.

As a percentage of revenue G&A expense was 11% this quarter, which is flat compared to last quarter.

We expect to see higher G&A expenses in the second half of the year as we return to the office and make investments and infrastructure to support our growth.

Income from operations was $11.5 million compared to $13.9 million last quarter.

Operating margin was positive 9% for Q2 compared to positive of 11% last quarter.

As previously discussed Q2 reflects 2 months of incremental expense from all set which was approximately.

<unk> $3.5 million and total offset by a de Minimis revenue contribution, including the write down of the acquired deferred revenue.

All of this resulted in significant EPS upside and the second quarter as our non-GAAP earnings per share was <unk>, <unk>, which is $4.05 better than the midpoint of our guidance range.

Let's turn to the balance sheet, we finished the quarter with $261 million and cash and short term investments, reflecting the $98 million of consideration paid in connection with the also had acquisition.

However, this does not reflect the 360 million of proceeds net of credit of your fees from our debt issuance, which closed.

By 70.

Current deferred revenue at June 30 was 334 million given us a lot of visibility into revenue heading into Q3 and the remainder of the year.

Turning to cash flow, we generated $15 million of positive free cash flow and the quarter. This compares quite favorably to free.

Cash flow of $6.6 million and Q2 last year.

Over the last 12 months, we've generated $86 million of positive free cash flow with.

With high recurring revenue high gross margins and high renewal rates, we feel confident that we can continue to generate attractive levels of free cash flow, while continuing to invest and the business.

With the results of the quarter behind us I'd like to discuss our outlook for the third quarter and full year 2021.

Our strong start to the year continues to give us greater confidence and the business environment.

With that said for the third quarter. We currently expect revenue to be and the range of $133 million to $135 million.

Non-GAAP income from operations to be in the range $7 million to $8 million.

Non-GAAP net income to be and the range of 1 to 3 million assuming the provision for income taxes of $2.3 million.

And non-GAAP diluted earnings per share to be and the range of 1 penny to 3.

The pending assuming 115 million fully diluted weighted average shares outstanding.

And for the full year. We currently expect calculated current billings and be in the range of $590 million for $595 million.

Revenue to be and the range of 528 million to $531 million.

Non-GAAP income from operations and the range of $40 million the $44 million.

Non-GAAP net income to be and the range of $29 million for 33 million, assuming the provision for income taxes of $3.5 million.

And non-GAAP diluted earnings per share of the being the range of 25.

For the 29.

Assuming a 115 million and fully diluted weighted average shares outstanding.

As the matter of clarity the guidance, we're providing today reflects our outperformance in Q2.

As well as a notable raised for the year for both <unk> and revenue.

Also our EPS guidance for the full.

<unk> 7 million of interest expense equating to 6 <unk> per share associated with our new credit facility.

In summary.

We're pleased with the results for the quarter, which gives us increasing confidence that we remain well positioned to deliver compelling growth and profitability over the long term and.

And now I'll turn the call back from me for.

For some closing comments.

Thanks, Steve the.

The profile of cyber exposure continues to elevate of digital transformation and recent events highlight the importance of cyber security Zero Trust for.

These are that's the proven that we can't rely on strong perimeter defenses the need to assess risks across.

And the entire enterprise our message has been very consistent for comparable our core strength and understanding cyber risk has driven our success. It's aided our natural expansion across the surface of the attack improving the security posture of cloud Ot.

Deployments and now.

J D.

We believe our strengthening platform of capabilities positions us for long term success as our customers continue to shift the hybrid and cloud environments. We hope to see many of you virtually for the da Davidson Piper Sandler and Jefferies conferences in the coming weeks.

We'd now.

Kraft and the call for questions.

At this time, we'll be conducting a question and answer session. If you would like to ask a question. Please press star 1 on your telephone Keypad, Inc.

Information from will indicate your line is and the question queue you May Press star.

2 if you would like to move your question from the queue for participants using speaker equipment and may be necessary for you to pick up the of handset before pressing the star of keys, 1 moment, while we poll for questions.

The first question comes from the line of Brian Essex with Goldman Sachs. You May proceed with your question.

Hi, good afternoon.

And Ah congrats on the results and thank you very much for taking the question.

I guess, Steve I was wondering if maybe if we could start with the.

And the results and the quarter, a really nice subscription revenue growth and could.

Could you talk about maybe attach rates were you seeing contribution there and maybe a little bit of insight around for.

Perpetual license growth is that just renewals and and how to think about that going forward.

Sure Brian Thanks for your question.

I commented on earlier, we're very pleased with the results for the second quarter as we saw performance and both GCB and <unk> and revenue.

We believe our risk based platform is resonating with customers Q2.

And what's wrong.

With regard to demand and we added a lot of new enterprise platform customers 399 to be exact we are seeing momentum with larger deals.

They're up 30% approximately on a year over year.

As organizations are increasingly turning to us to secure a wider range of network connected devices and.

Associated with user permissions.

We also had talked about momentum and the U S public sector here as we closed over a dozen 6 figure deals and the quarter across civilian and defense in terms of the.

The attach rates.

And 1 thing I will note here is that our newly launched tenable debt EEP, which brings together.

The owner building management web application security container security and lumen and to a single offering.

And has been of catalysts of growth here and for larger deals and.

And validates our holistic approach to assessing the risk. This is just 1 example of where we're having success both with the attach rates as well as on the expansion side.

Where we saw.

And traction with our net dollar renewal rate so.

Think this quarter given the.

The growth on the top line demonstrates our ability to see higher attach rates for for newly launched products.

And we're having we're having success there.

And.

And obviously pleased with the with the print for the quarter.

Got it and maybe if I could follow up.

In terms of revenue growth by Geo how did that play out in the quarter. I mean, we had conversations and the core of that seem to imply that things are much much worse in Europe and they are domestically here in the U S. So.

And so was wondering if youre seeing the same and how you may position, maybe positioning and that market relative to where we.

And it might have a little bit more of a visibility in the us with good visibility of the government and what's going on here, but how does how the geo is outside the U S will for Ya.

We're very pleased with the results and.

And.

And specifically in particular, if you look at EMEA and the Middle East. So we continue to have traction there and we're seeing outperformance specifically and that theater.

And I think 1 of the reasons why you saw the acceleration of the growth is because we're also seeing acceleration and new business that comes on.

In terms of both new customers.

And as well as on cell from from existing customers, So larger deals traction with tenable Dot EP.

The ability to have higher attach rates and cross sell of some of the products that we've launched really of the past couple of years has been instrumental there so pleased with them.

I'm pleased with middle East and particular.

And in neuro and obviously also seeing good traction on <unk>.

<unk> here and the U S and overall is a pretty pretty balanced quarter.

Got it and when I say worse and in Europe.

Threat environment not for your performance of just wanted to make sense.

Right.

And that's very helpful.

Thank you. Thank you very much.

Alright. Our next question comes from the line of Hamzah and part of Waller with Morgan Stanley. You May proceed with your question.

Hey, guys. Thank you for taking my questions and it really seems like the demand environment is.

It's improving.

And even even versus sort of recently quarterly trends.

Curious if you.

The background some of the drivers for us between.

Existing customers kind of ex.

Spending the asset coverage right I don't know, if I caught and exact sort of net dollar retention rate Steve.

And then also.

That vs.

New perhaps greenfield opportunities.

From mid market or elsewhere, how would you kind of raised the 2 is there more net expansion versus net new customer adoption or vice versa, and any color you can give us there.

Well in terms of the mid market and it's approximately 25% of our total sales, which is I think the number that we disclosed earlier so well.

And we're continuing to see out.

And the Miss there, which is the good news.

As a reminder, we have a pretty compelling go to market model, where we are of a product and the assets that has broad adoption and use across the mid as well as the large market ubiquitous creates a cost effective on ramp to a larger platform sale. So we saw from really good pull through.

And the mid market and the flywheel of Nessus continues to help us.

And that comes on the heels of more investment and the sales organization.

As well not just in the mid market, but also of the large.

But we're an enterprise software company, so a little more than 50% of our sales comes from large market customers and.

That's what's creating the inflection point for us and.

And I would tell you in terms of Greenfield and.

The quarter, we survey our largest deals and ask what we're.

And what products and what solutions for their using before and it's still about a third of our largest deals on greenfield opportunities using no enterprise.

And the program.

And so thats remained fairly constant for us.

So I would tell you the combination of new deals and up sell our probably the biggest catalyst obviously with contributions in the mid market, which continues to do well for us.

And and.

And what's driving all of this is probably the digital transformation the need for assessing risk holistically and just complexity and compute.

And our ability to assess risks across the entire attack surface.

And whether it's worth.

Web applications cloud infrastructure operational and technology.

I think I think this is resonating well with.

And with customers.

Got it and I could just sneak in a follow up it seems like really strong early traction on the federal side I mean, I was wondering if you could give us maybe.

The Q3, obviously that being sort of the federal fiscal year close.

Our sort of the pipeline and trends.

Looking for.

For for Q3.

Yes, I think the pipeline for Q3 looks healthy.

We have had and continue to have a very strong federal year, perhaps more linear than we've seen in previous periods and that sort of evidenced by itself with over a dozen 6 figure.

A bolus and the quarter across both civilian and defense.

And then obviously a lot of momentum with the <unk>.

Calling for key initiatives around visibility and early detection of vulnerabilities and we think that bodes very well for the opportunity for us and federal.

Also extremely excited about the attention being paid to.

Deal for us initiatives.

And this has recently selected tenable is 1 of the 18th technologies that Theyre demo as part of the Zero Trust initiative concepts and <unk>.

Demos and the lab so.

We think there's tremendous opportunity for continued growth and federal.

Exceptionally well positioned to.

To capitalize on that.

Thank you very much.

Our next question comes from the line of Rob Owens with Piper Sandler You May proceed with your question.

Great. Thank you for taking my question I guess, just to just to cut to it and given some of your comments are you actually seeing budgets increases.

The result of the environment or.

Do you think that this is playing out kind of as you would have expected with the.

Better second half so are we seeing it I mean, we've seen a lot of these major breaches historically and I think few of led to.

And the increase in spending, but I think your prepared comments seemed a little more bullish so.

And so at this point and time are we seeing wallets open up even more for security and security budgets budgets increase or is it more of a typical second half.

I think the secured debt.

Budgets and the market has never been hotter and more open to security spend I think executive level of awareness from the president of boards of directors.

<unk> audit and risk committees.

And fiber is front and center to the thinking cyber risk and is integral part of their calculus of risk more broadly.

I think that perhaps and part while we are seeing an acceleration and the.

And the commercial market for us.

And we anticipated and the enterprise market, where those longer sales.

And useful.

Budget is available.

Resources are available, it's just the amount of going through the prioritization and the timing of transactions and deals and the enterprise sales cycles. So I think we remain extremely bullish about.

The opportunity given the increased awareness of visibility and priority of cyber security.

Cycle more broadly.

Great and then and then second around your active directory solution, how much market education is required here do you does the end customer understand all of the vulnerabilities.

With active directory and so it's more of an easy sales cycle or is there a lot of education.

And having to happen up from both the customers and with the channel.

Yeah, I haven't been and the enterprise security market for almost 30 years. This is 1 of them 1 of the weirdest dynamics to describe that ive ever ever seen I think there is incredibly broad awareness that active directory is critical.

Thats still a gap and security programs.

<unk> plus per cent of ransomware, specifically targets active directory, when you see things like colonial pipeline and and other breaches, causing significant business outages that translates directly to 2 active directory and I think most of <unk> and most security teams recognize.

Oil price.

But they have a significant issue with active directory.

Configuring it properly in any large and complex environment.

And incredibly difficult task.

And there is a and incredible GAAP or lack of mature capabilities.

Non rules available to them, so youll see sophisticated organizations turning to a consultant to look at their environment and see if it's well configured on and some kind of periodic audit.

And that's just that's just not acceptable it's not getting the job done. So our sales team is having great success engaging with customers. They know the have issues.

And they want and the having a good.

Hit rate getting meetings getting proof of concepts deployed having conversations around budget and again. This is the solution and acquisition and want to close.

Midway through last quarter, so it will take time.

This is an enterprise sales cycle, but we're extremely excited about our position and the market and the capabilities that we're bringing to the table.

With the market that has great need and does not have great alternatives available.

Great. Thank you.

And.

Our next question comes from the line of.

Sterling Auty with Jpmorgan you May proceed with your question.

Yeah. Thanks, Hi, guys, so I want to be absolutely clear the 399 platform customers.

It did not include the 91 from all said is that correct.

And that is correct.

I think that makes it the largest Q2.

Net adds that you've had since coming public.

And I'm kind of curious in terms of how much of that productivity is coming direct versus some of the channel programs that you've had and any comments that you might have about.

The durability of those net adds into the back half of the year.

Well.

And I think and short <unk>.

With the results for the quarter, we saw some of our highest achievement rates and many years. This quarter. So acumen of rates and productivity continues to go higher and comes on the heels of more investment and sales and marketing.

<unk> quota capacity and the second half of the year, we plan to continue to add quota capacity for our quota capacity and Q2 and expect to continue to add quota capacity and the second half of the year. So we are certainly.

Making the kinds of investments that we think are necessary to sustain attractive long term growth, we feel really good about our business. So.

And we in fact that productivity levels are high achievement of rates are high and we're adding sales capacity.

And given the backdrop of the heightened threat environment and we felt we feel really good about the business, but yes, it's 1 of our strongest quarters and whats underpinning that we called out.

Earlier, but a few things number 1 we continue to see strength in the public sector.

So given the and.

I think some of the investments and product are also happening and where we're seeing higher attach rates. So we're seeing the expansion rates increase as well and tenable dot EP and certainly playing playing the role of that.

And then we're hard at work and building pipeline opportunities, we have more 6 figure deals.

And our pipeline now than perhaps and anytime.

During the during our history.

So look we're we're pleased with our ability to add new customers. We think it speaks of the growing demand and importance of VM and the customer's ability to assess the risk holistically.

And.

And and.

We're excited about the about the second half of the year.

Sounds good thanks, guys Thats it for me.

Our next question comes from the line of the circuit.

Please you May proceed with your question.

Hey, guys. Thanks for taking my questions here.

Yes.

Maybe maybe for you and me.

1 thing we didn't talk about is.

And as capital location on kind of curious how are you and the board sort of thinking about capital allocation, particularly with the new credit facility, and where I'm going there specifically as M&A I mean, it feels like tenable has always been thoughtful.

Also in terms of M&A and the past how do you think about that M&A strategy sort of going forward does that makes sense.

And occur both organically.

Through continued innovation and new feature function.

The ability of differentiation in our core market as well as adding new asset types and greater visibility improved analytics to the products you'll also see.

I think a continued.

The focus on inorganic.

Moves.

Really excited about the position that we have with OTT.

The pace with which that market is starting to wake up and recognized especially in light of the outages caused by the convergence of it and Ot around colonial.

O'neill of pipeline.

And I've talked a little bit earlier about our active directory solution and the incredible opportunity that exists there and make no mistake about it.

It is of bear to secure and we have market, leading technology, there and theres, great market awareness and those securing those.

Those identities is absolutely core to the cloud based.

Deployments, it's absolutely core to remote work, it's absolutely core to zero Trust initiatives. So there is phenomenal opportunity around there and we think that theres other.

Key areas of technology, where we can make very exciting.

Acquisitions and continue to position the company for long term long term growth.

Got it that's really helpful. Steve maybe for my follow up for you you touched on EPS, a little bit and realizing it's still early can you just talk about any sort of early observations on.

How it sort of impacting and average deal size.

Anything else that youre sort of seeing and bundling generally anything on EP and sort of bundling with the would be helpful. Because it sounds like it's off to a good start.

Well it is and what we're excited about it addresses the larger problem for.

And our customers our ability to assess risk holistically.

<unk> includes VM Wazz container security and lumen.

And the 1 thing that I'll say about EVP of that and is driving higher deal sizes, It's no surprise that.

We're announcing really strong 6 figure deals I talked about the.

And that we're building, even specifically for <unk> for EEP.

Only the 100 K by 250, K plus deals and the average deal size is about 55% to 60% higher than if we would sell core VM on a standalone basis. So over the past few years, we've made of a lot of investments and R&D with.

New product to market the <unk>.

Pricing and the packaging and on those products. We think are going to continue to be of good catalyst of the enabler of growth and our sales team is having success selling that into the account base and also winning new opportunities as well so.

Youll see that continue to evolve.

And does not include.

The pipeline of active directory and does not include the <unk>.

And some other things so we think there is.

And we're demonstrating the ability to monetize some of the investment and R&D and we think there is also ample opportunity to continue to.

To see further monetization and even higher selling prices.

Very helpful.

<unk> guys.

Our next question comes from the line of Mike <unk> with Needham and company. You May proceed with your question.

Hey, guys. Thanks for taking the time and the questions here I really appreciate it.

First question I wanted to tap into I know that you guys are making these investments you are calling.

Out of the sales and marketing arm.

Specific to adding quota carrying reps just curious can you give us a feel for the order of magnitude and.

We're growing the head count there and then the other.

The build on and so that would be how long does it take for these new hires and become fully productive.

And does it you guys are doing.

Thanks, sure that these new hires or maintaining and improving the productivity rate. The tenable is usually delivered.

Yes. This is Steve so we are adding quota carrying sales reps and something we talked about at the beginning of the year, we continue to add quota capacity in Q2.

Our planet's too.

And to probably in the second half of the year of all of our expectations that we'll add more quota capacity and the second half and even in the first half sort of.

And just given the quality of the print and the confidence of the business. We can feel like debt is the right thing to do and we're doing this and a way of there's still allows us to generate the kinds of margins and free cash flow of that.

That are.

The 2 insurers and the company and the average ramp is about 10 months.

And so I will give you a sense of when and when we expect reps to be fully ramped and contribute.

And on the last thing that I would say there is not it's not all about just direct investments and direct extension of the sales force.

Enough to serve the only company and our space that is made of 100% commitment of the channel and the channel continues to bring us more inbound opportunities perhaps than any other time so.

On.

And notwithstanding the investments that we made and channel. We're also continue to make investments and MSP.

So the combination of adding.

We want of capacity and the expansion of the sales force containing the optimized and tune the channels and drive higher levels of performance.

And they will allow us to open doors and to opportunities that the.

And we probably wouldn't otherwise and then also the investments and doubling down of MSP, which is even though it's on the small base of business as 1 of the fastest growing areas.

And of our company and it's the new route to market for US we're trying to we're pulling all of those levers and that's what's flowing through and the spend for sales and marketing and we expect that the tick up sequentially and the second half of the year.

Very helpful. Thank you for that and if I could just tack on 1 more.

I'm trying to think about tenable EP and.

Areas and it's a much more strategic holistic decision, making process for your customers, especially with the board members. The <unk> top of minor of the C suite getting and bulb could you help me tie all of that back into what you guys are seeing on sales cycles.

Trying to parse of course through those 2 items.

And I understood. Your results are telling us something different but I would have expected that the more strategic decisions.

We'd be extending your sales cycles to a certain extent.

I think thats, probably the fair observation that there is the more strategic decision and there may be some impact to sales cycles, because youre seeing and is more strategic.

<unk> procurement from from the customers hopefully that also results in and.

In the early indication is the resulting in significantly larger transactions and probably stickier relationships with the customer from our perspective.

EPS.

And just hey, Theres and enterprise.

Because I have licensing component to it and it really is the platform based sale.

And aligning.

Our capabilities across the platform with our customers' desire for increased visibility and increased understanding of the cyber risk. So again, we're no longer.

Apprised of this.

Web application scanning of vs that web application scanner, it's really being able to bring together and understanding of web app scanning and container security and cloud security and.

And other IP asset.

Visibility and understanding.

And the correlation is between.

Focus on how those translate into enterprise risk so.

Yes.

Cyber risk becomes the more strategic conversation between the <unk> and the board we think the this platform.

And based approach as is.

Is critical and the sales team has gravitated toward it and embraced it and I think in part because customers understand it.

And those and seem to be embracing this concept as well.

Very helpful. Thank you guys.

As a reminder, if you would like to ask the question. Please press star 1 on your telephone keypad, 1 moment, while we poll for questions.

Our next question comes from the line of Jonathan Ho with William Blair. You May proceed with your question.

Hi, good afternoon, and congrats on the strong results I think you indicated in the prepared remarks that Io was outgrowing SC.

The inflection point here and is there any sort of potential impact of either billings or.

Did that we should be thinking about if we do see maybe of faster shift over to Io.

Okay.

Yeah Jonathan.

And I think the work from home movement of certainly created dim.

Demand and pull through for our IL.

Revenue.

But 1 of the things that customers really like it.

Flexible deployment. So we can go on Prem and and the clouds, and we don't often customer shoes, both and its ease of use use so for us.

We're continuing.

To grow the topline it vary.

<unk> healthy levels, and we continue to see.

Customers increasingly.

Choose Io.

On the standardized on Io as their VM platform versus on Prem, but often we sell both.

And then sometimes we foreshadowed a couple of years ago, even when we went public.

And.

And if he few years low.

Just given how workloads from moving to the cloud and just buying preferences that will continue to see a higher mix of business for for IL <unk>.

Relative to the on Prem offerings and the good news is that were flexible in terms of how we deploy and how we serve customers some margin.

We just the customers have a bias towards.

And towards towards on Prem.

And the other markets clearly there is a bias towards.

Volume and delivering from the cloud.

Got it got it and then can you maybe give us a little additional color around sort of your.

Markets and with Ot.

How do we think about sort of the colonial pipeline breach and maybe and specifically the timing of when companies start to increase their spend or when the companies start to fall into the pipeline.

Are you seeing your phones ringing off the hook and I'm, just trying to understand sort of how to think about the the timing of when that.

Tommy translates into bookings or revenue. Thank you.

Yes, well I think that there is a number of things great. Good question, Jonathan and I think theres, a number of things happening and the Ot world, which are characterized as a broader awakening certainly colonial pipeline.

Front and center and the thing that colonial pipeline really.

And maybe highlighted was the convergence of it and Ot and it's something that we've been vocal about for years.

But you cannot assess the security of.

The pipeline without also understanding the key environmental.

And that is integral to that too.

2 of those control systems and to the operational.

And so we think we're coming from a position of strength and customers.

Certainly and prospects certainly understanding of that so it has increased awareness.

And a number of and not just for your pipeline with the water treatment facilities and.

Attacks against Pharmaceuticals, and focusing.

And the health care industry recently really highlight.

The convergence and the opportunity in front of us.

These are these are not overnight conversations these are processes and sales cycles that are very deliberate what we're seeing now is a lot of pilots of lot of evolves we're seeing.

Early deployments, so a facility or an organization, which may have 250 facilities around the world is deploying and 15 facilities first and testing the product and understanding.

And what is the most efficient path for deployment the.

And the most efficient method for managing a larger architecture like.

This and over time with success, we believe we're going to see.

And theyre going through the budget cycles, and we believe they're going to translate into much larger opportunities down the road.

Outside of the high profile breaches and and.

And attacks that have also been and addition to the cyber Eo.

And the administration has also released another executive order specific to the energy sector and Youre seeing a 100 day Sprint's first and the energy sector and then and then soon to be and other sectors really looking for capability and trying to jumpstart our focus on cyber security and some of these industries, which historically.

Of WAC.

Behind and progress around cyber and certainly lagged well behind the the threat that theyre dealing with.

Yeah.

Excellent. Thank you.

Yeah.

Our next question comes from the line of Joel Fishbein with true.

Proceed with your question.

Hi, Thanks for taking my question for me.

For you.

I wanted to see if you can expand on the Deloitte partnership and and some of the.

The system integrators, and some of the programs that you're doing with them and how that might be driving some of the larger deals.

Yes, so great to hear from you so I think highlighting.

The partnership with the void specifically around the initiatives they have.

And for smart cities, and smart infrastructure, where we've deployed our Ot solution alongside other capabilities.

We're showcasing.

And touring customer through a prospect of the extent.

Educate them on the full.

Imagining of what technology can bring to the table. So we're excited about that partnership and in particular, but the systems integrators more broadly.

Helping.

Customers understand cyber risk and we.

And we are an integral part of that understanding so both on the Ot side as well as on.

On the it side.

Great. Thanks.

Yeah.

Our next question comes from the line of.

And their carotid reback with Stifel. You May proceed with your question.

Great. Thanks, very much on the growth and quota carrying capacity any reason, we shouldn't expect that to expand at least in line with revenue if not faster.

Well the different reps have different quotas and there are different geos.

And so while there is some relationship it takes time and the ramp and if there is not a perfect corollary and as I also mentioned earlier some of this it's going to be on the commercial side, which is our mid market business.

Applying some of the lessons and best practices that we learned during COVID-19, which is our ability to continue the.

Clothes and transact.

Deals here remotely and even larger deals to our go to market motion, but there is obviously the relationship is 1 of the reasons why we called it out and we're continuing to make investments and add capacity.

But in addition to that is continuing to get traction with the channel even doubling down on on our.

Our efforts via MSP.

Okay. Thanks very much.

Yeah.

Our next question comes from the line of Kingsley Crane with Banbury and you May proceed with your question.

And so much of the congrats on the great quarter with customer adds even exclude.

MFS and also if you look at revenue growth and the C V Green and you providing more clarity on those figures that's most of it.

I'm sorry, you broke up and we're in the auto book can you repeat the question. Please.

Yes could you provide any more color on revenue growth and CCP.

Excluding ex the also the acquisition.

Yeah. So also had closed late April so the results of reporting today only reflects about 60 days of activity and really during that time, we've been hard at work on integrating the businesses.

Creating and enablement programs for our sales team and.

Work on building pipeline and opportunity.

1 thing I will say is that at the gate, where we have some really good momentum.

At pipelining activity and pipeline and activity levels are high and we're excited about the setup for the second half of the year.

And ER and.

Keep in mind.

The heart of our just given sales cycles, you're more likely to see a greater contribution from all said Q4 versus Q3.

Okay. That's fair and just 1 quick follow ups of great to hear the traction with tenable Ot and the public utility company.

As a result of of cross sell so when you look at the revenue base for Tenable Ot today.

And as Wellington or customers cross selling and so that product and then how often are you landing.

With you.

Yeah.

Yeah, I don't know the I have a percentage of the cross sell or how often for landing with Ot, but certainly our sales motion contemplates that we've got a very.

Large customer base 35000, plus customers around the world and.

Thousands of those on the enterprise platforms and and.

And with a very strong degree of trust and confidence and the tenable brand and also come to rely on tenable for helping them understand their cyber risk.

Recently over the last 18.

Day for 24 months, we've seen.

<unk>.

Being given more and more responsibility for operational technologies and operating environments.

And so having a mature capability in that segment of the market allows.

Them to expand.

The teams relationship with us into those environments and again the visibility that they are looking for.

In a way that they're used to consuming it and processing it and understanding it so we feel like we've.

We have a very strong go to market motion.

Getting a fair number of at.

<unk> and the and then differentiating ourselves with the ability to assess both Iot and Ot in these operating environments, which have both platt.

Platforms, and ultimately can be susceptible to both forms of <unk>.

The risk and exposure so we think thats.

A key differentiator for us and it seems to be playing itself out.

And pretty pretty consistently with what the op asked its just a matter of these are slow moving markets.

And early in their adoption cycles, and we anticipate the to be much stronger long term growth there.

Overtime.

And this is Steve the 1 thing I will say looking at the investments in the second half of the year and we're absolutely focused on.

Investing more on OTT.

Penetration is still relatively modest the market opportunity is large and we do know that when the firsthand and on and opportunity.

That success rates and close rates.

Tend to go up so you're going to be seeing incremental investment from us to focus on greater coverage.

And greater focus on this market.

And so given the strength of of what we saw the first half of the year and by the way Ot is helping drive the expansion of the 1 dollar and all right you can see incremental investments the second half of the year, specifically and the Ot.

The side of the business.

Thank you Beth so helpful and congrats again.

Our next question comes from the line of Gray Powell with <unk>. You May proceed with your question.

Great. Thanks for thanks for work on the end of the call here and yeah. Congratulations on the on.

On the good numbers.

So I wanted to follow up on an earlier question you mentioned, the cloud adoption and tenable Io of couple of times as the driver of upside can you maybe give us a sense, even a ballpark sense. It's just sort of the mix of new and add ons and tenable Io or maybe just how much faster.

It's growing versus the overall business and sort of the low 20% range.

So today, we're and we're reporting CCP growth of roughly 23% I think it's fair to say just given the mix.

The change and mix that we're seeing greater growth and Nio.

<unk> and related cloud products.

And so that's something that.

We anticipated over the last couple of years, so kind of reflects how the workloads are moving to the cloud.

So yes, we're seeing higher growth I think it's fair to say on in terms of cloud that's sort of correspond to the greater investment and greater focus for.

For us, but absolutely unequivocally are on.

The prime and FBA offering is paramount and.

Cash success, where we have high renewal rates and high customer satisfaction rates. So I think it's really the combination of both together and our ability to deploy both in terms of on Prem and and the cloud Thats related.

And resonating well with customers.

Understood. Okay, and then just last 1 and it was great to hear the positive commentary on U S. Fed can you remind us of ballpark like the the <unk>.

Mix of revenue drive there and do you see that changing significantly in the next 6 to 12 months.

And.

And ballpark plus or -15.

And 15%.

Sure.

And it's been a high performing segment of the market for us for some time, we think we have.

A significant position of strength from that market and we see that continuing.

And I don't think at this point we can.

Point to any specific indicators.

Later and say, we expect this percentage of too dour year changed significantly in the near term.

Understood Alright, thank you very much.

Okay.

Our last question comes from the line of Shelby Day Raffi.

SDN Securities You May proceed with your question.

So thank you very much so.

In terms of gauging the upside here both on the revenue and the number of enterprise customers added I think you called out of public strength and investment and products. I think you meant a tenable E. P ramping of it came out in February.

And so which of those 2 factors public or tenable Dot E. P was the larger factor would you say in terms of driving the upside.

And I would take public sector, and it's only because the deal sizes tend to be much much larger I mean, they're very sizable and not just 6 figure, but also 7 figure deals we've always had.

A very strong foothold and when the U S public sector, we serve most.

And 3 letter of federal agencies, both on the.

Defense and the civilians and so certainly that was of note. That's 1 of the recent bought and called it out.

And our momentum and large deals is certainly apparent here and.

And given given the.

Strength in the quarter.

But.

And there's also a sizable opportunities and we've had success with tenable that EP and this is the product that we launched and the end of February and we're able to close some deals and the first quarter, but now with the full quarter under our belt.

The only been just a few months we are pleased with the success and.

And it's helping us with in terms of sales cycles as well, yes, there are larger asps and theres, a clear corollary between selling prices and sales cycles thinking of the.

The larger the deal of the longer the sales cycle tends to be.

But we now have with EP we of.

As a single integrated offering and as for much smarter way for customers to consume.

Analogy as opposed to selling our card and separate Skus on a purchase order, which often comes with more scrutiny and more review so.

Notwithstanding the higher selling prices were actually having success selling and EP.

To larger enterprises.

Yes.

And.

And of.

Debt, allowing us to impact our growth here of short term.

Okay and last 1.

And your gross margin you expect to be a similar and the back half from Q2, Q2s gross margin did tick down was that ticked down due to ramping Io.

Or were there other factors and when do you think you can return the gross margin back to like last year's levels of like 83% plus.

Yes, I think just the direction in terms of gross margin for US 1 of the things we've talked about years ago, and we expect gross margins and sat on the low 80% of high 70% range and just given the mix.

And the shifts that we're seeing we do we think that's fairly consistent I think we have confidence we'll be at the higher end of that range versus the lower and I think what youre seeing in terms of gross margin and the second quarter or is that.

Even though the also of acquisitions no reflects 2 months of incremental expense associated with all said and a lot of these calls.

Of this year and not just all set but also on our business as we continue to expand our geographic and international footprint a lot of the cost.

For for the public cloud platforms are semi fixed so they're not variable. So it requires investment upfront and then those are costs that you'll fully absorbed over time as you as you achieve scale and.

Cost and growth and Theres GL, so for now we're saying hey.

It's going to be.

Flat the second half of the year.

Just given the the.

And the growth and the investments that we're making but we also feel good over the past couple of years debt, our gross margins have exceeded our own expectations and the guidance that we gave on when we went public.

Thank you.

This concludes today's conference you may disconnect your lines at the time. Thank you for your participation and through the rest of your evening.

Q2 2021 Tenable Holdings Inc Earnings Call

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