Q3 2021 Tenable Holdings Inc Earnings Call

October 26, 2021

[music].

Greetings and welcome to the Tenable free Q2021 earnings conference call. At this time, all participants are in a listen only mode.

Yeah and answer session will follow the formal presentation, if anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.

Please note this conference is being recorded.

I will now turn the conference over to your host Erin Karney Senior director of Investor Relations. Thank you you may begin.

Thank you operator, and thank you all for joining us on today's conference call to discuss tenable third quarter 2021 financial results with me on the call today are a meager in tenable, Chief Executive Officer, and Steve Burns Chief Financial Officer. Prior to this call we issued a press release announcing our financial results for the COO.

Order.

You can find the press release on the IR website at Tenable Dotcom before.

Before we begin let me remind you that we will be making forward looking statements. During the course of this call including statements relating to you kind of both guidance and expectations for the fourth quarter and full year 2021.

Rose and drivers and tenable business changes in the threat landscape and the security industry and our competitive position in the market growth in our customer demand for and adoption of our solution the potential benefits of our acquisition, including our recent acquisition of accurate.

Innovation, and new products and services carnival's expectation 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 you should not rely upon forward looking statements as a prediction of future events.

Forward looking statements represent our management's beliefs and assumptions only as of today and should not be considered representative of our views 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 other important factors that could affect our actual results. Please refer to those contained in our most recent quarterly report on Form 10-Q, and subsequent reports that we file with the SEC which are available.

On the ITC website at SEC Gov. In addition, during today's call we will discuss non-GAAP financial measures. These non-GAAP financial measures are in addition to and not a substitute for or superior to measures of financial performance prepared in accordance with GAAP.

There are a number of limitations related to the use of these non-GAAP financial measures versus their closest GAAP equivalents. Our earnings release that 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 Amit.

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

Today, I'll discuss our financial performance in Q3.

Strong execution on our newer products, including O T E N cloud and how our security solutions combine to create a differentiated platform and capabilities.

With that let me first touch on our Q3 results.

We are incredibly pleased with our performance in the third quarter, we delivered accelerated growth at scale highlighted by 25% CTV growth this quarter, which is up from the 23%.

Growth, we reported last quarter.

<unk> results on the top line are also accompanied by a sizeable and EPS and free cash flow.

This growth is being driven by traction across all of our products during the quarter validating our platform approach that said there are a few areas of particular strength that are important to call out.

In the third quarter, we saw notable interest and traction with credible a D. Securing identity is quickly becoming one of the most critical initiatives with respect to zero trust customer implementations.

Identities are also known areas of weakness at our highly targeted by ransomware.

Customers have grappled with how to secure the active directory environments incredibly D is playing out exactly as we had hoped it would.

The door to more opportunities for us.

But it really is a unique solution that combines a security audit of identities and ongoing attack detection lightweight platform.

As mentioned Teleboides outperforms in its first quarter of availability, we believe the traction in the short time since acquisition will continue as we see strong pipelines and great opportunity for tenable and the identity market.

We also saw customers increasing focus on securing their operational technologies the convergence between Ot and Iot is accelerating and understanding these complex environments has become a priority given all the recent examples of converged high visibility breaches and corresponding outages.

Payables native Ot capabilities works seamlessly with our deep understanding of I T, creating dramatically differentiated results.

Customer O T. T systems are increasingly interdependent, resulting in expanded business opportunities to deploy our security solutions and a more programmatic fashion across their global facilities.

While starting from a small base tableau tea is one of the fastest growing areas of our portfolio.

Our recent seven figure win a massive cross sell with a forestry company helps validate these key investments.

They've been using tenable SC and Io and as we're looking to secure both the E and Ot environments total came at the very obvious choice as a unified way of managing cyber risk.

To further serve our customers. We're also expanding our E D and O T ecosystems.

During the quarter, we announced a global strategic partnership with Splunk to secure active directory and converged Ot environments.

The clear takeaway is that we're executing well on our strategic investments in AG and Ot in an era, where securing these technologies is of great importance and in high demand.

We see tremendous traction with our existing cloud capabilities and our acquisition of <unk> augments and extensive capabilities in dramatic ways.

Card usage.

Greatly accelerated and matured.

From a lift and shift virtualization of on Prem infrastructures to one that is cloud native where infrastructure that are defined in code and deployed as needed.

Infrastructure's code allows operations acquired scale with just in time operational efficiency.

Our characters technology integrates into customers' public and private cloud deployments and integrates with their development and build pipelines.

As Curtis Chucked in is assessed to assure that the infrastructure and systems defined comply with the organization's security policies compliance requirements and best practices.

Laws are identified before cloud infrastructure and applications are deployed into production.

Together tenable and <unk> infrastructures called platform cannot only identified the sporting events, but can automatically remediate them before launching them into production.

Once applications and systems are stood up at runtime carnival's container security and frictionless assessment capabilities deliver market, leading assessment of drift and security exposure.

<unk> also provides C S P M functionality.

Our capability to secure cloud environment spans.

Car need spectrum from the left and development preproduction phase through to the right and wrong time and deployment and operational fees.

We believe this is among the most holistic approaches to modern cloud security available in the market.

Sentiment continues to aggressively differentiate our core VM capabilities. We are also starting to bring new products to market and some of the most exciting segments of the security space risk analytics O T identity cloud security.

While these products are demonstrating their compelling value propositions. We're most excited about our ability to integrate these technologies onto a unified platform doing so will deliver increasingly unique capabilities.

We lead the market and our ability to deliver a unified understanding of converged I T O T environments.

We're the only company, which can provide an understanding of 80 security implications in Ot environments.

With the addition of <unk>, our infrastructures code offering leaps to the leading edge of cloud native capabilities integrating this shift left.

Deployment technology with our deep understanding of security at runtime through containers Frictionless assessment and CF P. M Lok accountable to deliver a complete code to cloud experience to the market one that I believe no other company matches.

The strategic nature of our platform approach to our products should not be underestimated.

It comes as no surprise that we continue to see strong demand for tenable E P. Our unified platform.

EP combines tenable Io container web application and lumen into one platform, enabling customers to understand risk prioritize actions I get the benchmarking. They require so they can focus on what's really important we identified key risks and automate the process for what to do about it.

A great example of this is a six figure nessus pro upsell a competitive displacement they purchased tenable E P to consolidate risk analytics for multiple programs into a common platform for holistic visibility and prioritization.

We are seeing strong and we believe sustainable momentum and expanding use cases, as we bolster our platform of products and in the coming periods, we intend to create greater leverage and unique and differentiated capabilities by bringing these products closer together.

Finally, before I turn the call over to Steve I'm excited to invite all of you to a virtual investor day, we'll be holding on December 15, we'll be sending out more detailed information in the coming weeks and hope you can attend.

Thanks, Amit as Jimmy mentioned earlier, we are delighted with our results for the third quarter highlighted by accelerating top line growth due to strength in cloud strong momentum from acquired products and a sizable contribution from our public sector business.

On the bottom line, we are very pleased with the substantial the EPS and the strong cash flow in the quarter.

I will provide more commentary on each of these points momentarily, but first please note that all financial results discussed today are non-GAAP financial measures with the exception of revenue.

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

Now onto our results for the quarter.

Revenue for the quarter was $138 7 million, which represents 23% year over year growth.

Revenue in the quarter exceeded the midpoint of our guidance range by $4 7 million.

Visibility remains high as a percent of recurring revenue was 95%.

It was primarily a result of our annual prepaid subscription model.

The outperformance in revenue as a result of accelerating growth in calculated current billings.

PCB defined as the change in current deferred revenue plus revenue recognized in the quarter grew 25% year over year to $166 9 million.

Which is up from the 23% growth, we reported last quarter and 20% growth we reported in Q1.

Calculated current billings in the quarter was aided by strong demand in both new and renewal business.

In terms of new business, we added 499, new enterprise platform customers, which.

Which is a record for us in any single quarter and up from the 335, we added in Q3 last year.

We also had success with large deals as we added 62 net new six figure customers in the quarter, which is up from 56 in the same period last year.

We attribute this demand and the better than expected <unk> growth to a number of factors some of which <unk> touched upon earlier, but certainly worthy of additional commentary.

First our cloud product such as tenable, Io and tenable that EP continued to gain traction across both the large and mid market.

In aggregate our cloud products now represent over 50% of total new sales and the growth rate for these products as a percentage of total sales, it's much higher than the overall growth rate of the company.

As prospects and customers continue to move critical workloads to the cloud to support work from anywhere other digital transformation initiatives.

We are increasingly looking to tenable to secure their hosted environments.

Our recent acquisition of the Keryx and October furthers, our cloud capabilities.

<unk>, our existing trend and runtime environment by adding the ability to assess and secure critical cloud infrastructure prior to deployment into production.

Second.

Our active directory and operational and technology offerings are starting to make a difference and collectively contributed several points of growth in the quarter.

These newly acquired products have expanded our addressable market by extending our exposure platform to assess new areas of the attack surface that had been exploit it recently and highly publicized attacks.

This traction is notable as these are newly acquired products with also had closing in April and sales of energies O T offering commencing just last year during the pandemic.

Given the compelling market opportunity for a D N O T and strong demand combined threat environment, we've been able to build sizeable pipe for these products throughout the year.

Well the conversion of pipeline for new products was not apparent in the first half of the year given limited history, we executed well in Q3, which contributed to the outperformance in the quarter and provides us with improved visibility heading into the fourth quarter.

Finally, our public sector business is benefiting from a better spending environment driven by executive borders and legislative proposals, which helped lift Q3 sales in this theater to 17% of our total company sales.

Looking ahead, we remain very encouraged with the married up large funded and unfunded opportunities potentially available to us.

The impact of receiving bedroom certification to deliver our cloud products to U S Federal government agencies.

In summary, we're very pleased with the trend on the top line this year, which is benefiting from new products and momentum in the cloud we look forward to providing more insight on product momentum during our investor day in December.

I'll now turn to expenses, which included incremental investments in growth interest expense related to our recently completed debt raise and a full quarter of opex from the <unk> acquisition.

I'll start with gross margin, which was 83% this quarter up a point from last quarter.

I do want to note that even with our success in cloud and investments and a broader set of predictive analytics. Our gross margin has held relatively steady due to the scalability of our architecture.

We are managing this closely and have been very pleased with this trend looking ahead, we expect gross margin to remain at current levels in the fourth quarter, despite incremental cloud investments and the impact from the <unk> acquisition.

Sales and marketing expense for the quarter was $60 7 million, which is up from $58 1 million last quarter.

Sales and marketing increased sequentially, primarily due to higher travel and headcount related costs, including an increased number of quota carrying sales reps.

Adding sales capacity and investing in our go to market efforts has been a major area of focus for us this year, giving us and strengthen our core business.

The Tam and a strong secular tailwind.

Sales and marketing expense as a percent of revenue was 44% compared to 45% last quarter.

Given our better than expected performance to date and upward revised outlook for the year, we plan to increase our current level of investment in sales and marketing in the fourth quarter.

R&D expense for the quarter was $25 1 million, which is up from $23 million last quarter.

The change reflects an increase in personnel costs and the inclusion of all set for a full quarter.

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 15 million compared to $13 8 million last quarter.

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

As anticipated G&A expense was sequentially higher than the third quarter due to increases does that head count related costs.

Income from operations was $13 7 million compared to $11 5 million last quarter.

Operating margin was 10% for Q3 compared to 9% last quarter.

As a reminder, we closed our credit facility in early July So net income in the quarter was reduced by approximately $3 5 million of interest expense, which does skew the comparison to prior periods.

EPS in the third quarter was 7%, which was five cents better than the midpoint of our guided range.

Now, let's turn to the balance sheet, we finished the quarter with $652 million in cash and short term investments.

Which included $336 million of net proceeds from our credit facility.

As a reminder, we used $160 million of cash in October to acquire a correct.

Current deferred revenue at September 30 was $362 million, giving us a lot of visibility heading into the fourth quarter.

Now I'd like to discuss cash flow.

With cash interest payments relating to the term loan b commencing in October we believe Unlevered free cash flow was a useful metric to aid in the assessment of the underlying health of the business.

As such in the press release, we have provided a reconciliation of net cash provided by operating activities.

Unlevered free cash flow.

In the third quarter, we generated $20 1 million of Unlevered free cash flow and for the nine months ended September 30th we generated $72 8 million of Unlevered free cash flow.

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

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

Our strong performance year to date continues to give us increased confidence in the business environment.

With that said for the fourth quarter, we currently expect.

Revenue to be in the range of $143 million to $145 million.

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

Non-GAAP net income to be in the range of $2 million to $3 million, assuming a provision for income taxes of $1 9 million.

And non-GAAP diluted earnings per share to be in the range of two to three.

Assuming a $116 5 million fully diluted weighted average shares outstanding.

And for the full year. We currently expect calculated current billings to be in the range of $602 million and $605 million.

Revenue to be in the range of $535 1 million.

$537 1 million.

Non-GAAP income from operations to be in the range of $46 1 million to $47 1 million.

Non-GAAP net income to be in the range of 35 million to $36 million, assuming a provision for income taxes of $3 1 million.

Non-GAAP diluted earnings per share to be in the range of 30 to 31 cents, assuming 115 million fully diluted weighted average shares outstanding.

As a matter of clarity the guidance, we're providing today reflects our outperformance in Q3 as well as a notable raise for the year for both <unk> and revenue.

I would also like to highlight that our non-GAAP income from operations guide has been increased.

From the beginning of the year, despite the incremental opex associated with two meaningful acquisitions.

Lastly, our EPS guidance for the full year include $7 million of interest expense equating to <unk> <unk> per share associated with our new credit facility.

In summary, we are excited about the differentiated capabilities, we are introducing to the market and I'm pleased with the momentum we are seeing.

The results of the quarter give us increasing confidence that we remain well positioned to deliver a compelling growth and profitability over the long term.

And now I'll turn the call back to Amit for some closing comments.

Thanks, Steve we're helping customers solve their most complex security challenges, including identities critical Zero Trust.

Mission critical operational technologies web applications and critical cloud infrastructure.

We're especially excited about our platform based approach to bring these capabilities together and the compelling differentiation, but doing so represents.

We hope to see many of you virtually at the Stifel and Wells Fargo conferences, as well as our virtual Investor day in the coming weeks.

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

Thank you.

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Our first question comes from the line of Hamzah for Allah with Morgan Stanley. Please proceed with your question.

Hey, guys. Good evening, Thanks for taking my question and really.

Really good color on some of the traction youre seeing with the newer use cases, and that's something I wanted to dig into so first question for you you mentioned.

Seven figure win that you had with the <unk>.

O T product I'm curious.

One was that a seven figure ACB win what was the customer.

Using beforehand and could you give us a sense of what the uplift was when they adopted O T and I think you mentioned.

The AED product as well.

Yeah. Thanks, that's great too great to hear from you. It was a an existing VM customer a great relationship good account team.

And they originally went out to bid for and Ot security requirement. We came in we provide some visibility into how the Ot product works with our VM.

<unk> capabilities and give them holistic visibility they got really excited about and then throughout that process learn more about what we're doing with with a D and ultimately decided to move forward with the.

The AP suite as well as the a D and Ot components. So.

I would call it a textbook, but a super exciting win and an indicator of the types of moves that we'd like to see going forward and it was a several hundred thousand dollar ACP delta between.

Where they were with VM and the added components.

That's super helpful and then.

Steve just a follow up for you you mentioned cloud.

Cloud was over 50% of sales in Q3.

I'm just curious if you could remind us.

What is the general D. C V uplift that you see with the tenable.

Tenable Io product versus the on Prem SC.

Version.

Hi, Amit Great question in terms of Asp's.

Actually tenable Io.

I O.

If it's a.

Subscription, it's generally had commenced relatively the same price points as FTE. It comes with a slightly higher carrying cost.

But what's exciting about tenable Io is that its a pre positioned to selling other products such as whereas in container security and lumen.

On a on average a tenable Io as I called out earlier is one of the fastest growing products for us.

<unk> strength in cloud has helped driving an inflection in demand.

Over 50% of our new sales.

And so I think we couldn't be more pleased with the demand pull that we're seeing.

Move to embrace digital transformation as well as work from home or some of the underlying reasons why we're seeing heightened demand for for our cloud related products.

Got it thank you.

Thank you. Our next question comes from the line of Sterling Auty with Jpmorgan. Please proceed with your question.

Yeah. Thanks, Hi, guys. So when you look at the strength of revenue in the quarter can you give us a sense how much of that was coming from organic kind of tenable products that you've had you know right along versus how much of that upside came from the recent acquisitions that you've done, especially relative to what you may or may not have put into the <unk>.

For the quarter.

Yes, it's a combination of both we're seeing strengthen our core business.

And we're also seeing upside from new product and so if you look at the trend line over the past couple of quarters, 25% <unk> growth. This quarter, that's up from 23% growth last quarter, which is up from 20% growth in Q1.

I think it was notable that some of the newer products works, which are expansionary tam opportunities for us.

It's the fact that active directory is that this is the first full quarter in which we're going to market and selling that product.

That's a deal that closed in late April and even for Ot operational technology, we're really going to market for the first time last year during the pandemic. So we feel like over the course of the year, we've been hard at work building pipeline opportunities and having conversations with customers and while the conversion rates for some of these newer products.

Less certain in the first half of the year given the execution in Q3 is giving us increasing confidence not only in this quarter, but also our outlook for the full year. So in short our newer products are starting to make a difference as I mentioned earlier and it contributed several points of growth this quarter for us.

Yeah.

And then one follow up would be how would you kind of characterize the ramping of the sales resources that you kind of layered in earlier in the year.

Feel like the pace of hiring has been consistent so maybe we don't get any kind of gaps and growth as we look at.

2020.

Yes.

We are that's an area of focus for us and we continue to make investments in sales and marketing you can see that play out in the P&L in terms of higher sequential quarterly spend I think it's fair to say, we're hiring more of the second half of year than the first half in part because we've made investments to improve recruiting and outreach and other efforts and in the third quarter, we saw our high.

It was our largest increase in quota carrying reps relative to any other quarter. This year. So.

And with planned expansion.

Reps that we've hired the first half of the year is certainly contributing theyre.

We're selling not only our core products, but also newer products.

The reps that we're hiring the second half of the year, we will continue to ramp as well and.

Hopefully that will pave the way for good growth not only in the rest of this year, but more so in 2022.

Keep in mind that our average ramp time for full productivity is about 10 months for new sales rep.

That makes sense. Thank you.

Thank you. Our next question comes from the line of Rob Owens with Piper Sandler. Please proceed with your question.

Great. Good afternoon, and thanks for taking my question just one from me today, you mentioned strength in the public sector and thanks for the quantification there how do you see this setting up moving forward, we've heard a lot from folks about probably better linearity and where pipelines are setting up for December and March quarters, and do you think this elevated federal spur.

Ending levels are these elevated federal spending levels will last for some time.

I think we started out with a very strong.

Q1, Q2, and federal space and continue to perform very pleased with our performance in the third quarter, we do have a.

A large number of six and seven figure deals in the federal space or deals in our pipeline in the federal space for the fourth quarter.

We haven't seen candidly any tremendous windfall if you will directly as a result of any of the new programs is just an increased heightened awareness of cyber more broadly, including in the federal government where.

And the executive orders in the executive branch of just start paying a lot more attention to.

Average securities than in previous years.

And just one thing to add.

The demand environment has been strong this year, given a constant drumbeat of high profile data breaches and public sector executive orders as well as other legislative proposals. We are the market leader in public sector and believe there is a compelling long term opportunity for us.

And believe our fed ramp approved Io product in a hard no T product will be instrumental.

And our ability to grow and achieve success in this market over the course of time.

And I guess, just as a follow up there Steve since you mentioned the fed ramp could you maybe articulate how.

Much bigger the opportunity becomes as a result of that.

Well it opens us up to new avenues of growth as more workloads move to the cloud.

Where we offer customers a choice so we can help customers secure.

Their on premise environment, we can help secure now.

Environments in the cloud, including public environments.

And so this is another vector of growth. So tenable Io Ot. These are all newer opportunities for us newer products.

And.

As a result, we think it will continue our hope is that it will continue to strengthen our foothold in the public sector.

Thank you. Our next question comes from Andrew Nowinski with Wells Fargo. Please proceed with your question.

Okay, great. Thank you and congrats on a great quarter.

I just wanted to start off with you know yesterday, obviously, Microsoft announced the detected a large scale attack impacting about 600 other customers I think one element on the attack that stood out was highly compromised active directory.

You said the conversion of your new products like <unk> was it was not that apparent in the first half.

So I guess, what do you attribute that sort of better conversion rates Youre seeing now in Q3 to some of these recent attacks.

Or if not what do you think is driving that.

<unk> conversion.

Yeah active directory has been an underserved segment of the security of the IP and the security market for years and I will call. It kind of has been the dirty little secret that.

Active directory is incredibly difficult to deploy.

In scale in any secure fashion, it's very difficult to audit and monitoring mechanisms for detecting attacks against active directory.

Have been inadequate.

At the same time, given the critical role it plays its really the keys to the kingdom and so youre seeing almost every modern attack or I should say a supermajority of modern attacks going after active directory you saw you see it in a majority of ransomware attacks you saw it in Microsoft's recent disk.

Closure.

As a whole.

Swath of activities. Once you get in you on established persistence you want to expand the reach within the enterprise all of those things.

Leave adversaries to target specifically.

I think security practitioners know it in the headlines are sort of proving proving that out so we see tremendous traction.

In the third quarter with our <unk>.

Product was the first its actually the first quarter. We've had first full quarter. We have had the product in market and pretty pleased with the results and very excited about the pipe that we continue to build going into the fourth quarter and beyond with with Tenable Adie.

And I think notably also.

But the most exciting part is that it can be and is being integrated with other parts of the portfolio. So <unk>.

The issue with <unk> T.

The type of insight that might have prevented a compromise like colonial pipeline or GBS in the food processing and the type of insight that could lead to better protection of cloud workloads and the whole slew of.

Opportunities for leverage.

That's great that's great color. Thank you.

I just wanted to follow up maybe a question on your record number of.

Large deals and new enterprise customers, you talked about I'm wondering.

It just a function of you having more products to sell customers now on that initial purchase or perhaps total E&P, where you're bundling more of those together it's.

If not what do you think is driving this the bigger spend that you're capturing with some of these larger deals now than you were at this point last year.

I think it's Steve I'll just add.

It's a combination of factors one is understanding your cyber risk is more strategic than it's ever been that's playing itself out the high profile breaches. The executive orders all of those things and then understand the attack surface is a lot more complex. If you had a VM program youre, probably expanding it but you also recognize the need for protecting your own.

Environment environment and also all the analytics, so we're seeing tremendous traction with with these.

With some of the newer products that we mentioned, including <unk>, which is a more platform based approach to understanding exposure risk.

And the.

The one thing I would add there too is that we're also seeing continued strength in the mid market, which is something we talked about the beginning of the year right.

Alright, midmarket customers, making investments in digital transformation pairing those with kind of a security first mindset and so we're seeing strength.

Strength in the mid market trends in the mid market usually comes along with more deal volume and more deal flow. So the fact that we're able to add lots of new enterprise platform customers have our best quarter ever in this quarter, along with larger deals that strength.

Strength in new products and public sector.

So we're pleased to see a good high volume of deals as well as our ability to continue to transact larger deals together has created outperformance in the quarter.

Sounds great guys keep up the good work.

Thank you.

Thank you. Our next question comes from Brian Essex with Goldman Sachs. Please proceed with your question.

Great. Good afternoon, and thank you for taking the question and nice to see the acceleration revenues CPB and enterprise platform customers and I guess, maybe on the back of that.

It's clear that new customer growth is is pretty robust and you're landing larger customers.

But what is the experience with your installed base, particularly as Youre rolling out <unk> now and <unk>.

What is the adoption rate within your installed base how much of your growth is.

Expand as opposed to new land.

Well I guess two points one is.

We're still early in the in the cycles with some of these new products products, which has just been released largely this year have just gone through or have not gone through a full quarter.

Since essentially so we're super excited about our ability to hit our expectations or even exceed our expectations.

Our.

Net dollar expansion rates continue to be within the range and I'd say if anything.

Got it.

Third we are trending in a north northerly direction.

So that leads me to believe that it's just a matter of our relationships.

To become more strategic with our customers customers continue to expand their deployments with us and starting to prove out our ability to sell some of these newer products and our platform based approach to to our existing customers and so we have we're in the early innings, but the indicators are extremely positive.

Got it and then maybe just a follow up.

How should we think about SP customers given the traction that you have an Iot P.

The percentage of new sales or are you anticipating that those customers.

Customers just stay on those platforms is there any potential maybe at some point too.

I guess increase the attach with those customers that have both Io and see how how do you think they'll behave as you continue to expand and expand your platform with more features functionality and more cloud focus.

Well.

He is a product with high renewal rates and high.

Very good and high NPS scores.

The product has been in the market for a long time, and it's a beloved product.

We have a compelling glide path for our customers, who currently use our FC offerings, who.

Who want to use cloud and are increasingly choosing our cloud products. So that could come in the way of Io or EP. The one thing that we're not doing is providing where numeration to the sales team. This of one product versus the other and the reason why is that that can have a tendency to create some bad behavior linked customers to make a choice we want to sell the right product to customers give.

Their needs and the one thing that we see is that we see customers often by both looking for products to secure their on Prem environment is looking for cloud based products as well. So I mean, we're one of the few companies that can can cover the attack surface in that regard.

So there is incentive for customers to move.

From pharmacy to IL, but we're doing that in a way that makes sense for them as well as us.

Alright makes sense. Thank you very much that's helpful.

Thank you.

Our next question comes from Seth <unk> with Barclays. Please proceed with your question.

Okay, Great Hey, guys. Thanks for taking my questions here.

Maybe first for you <unk> I mean, we've mentioned EEP a little bit earlier I was just wondering if you could zoom out a little bit what do you hear from customers about bundles like EEP and maybe longer term how do you think about bundling for tenable over the next year or two.

Yeah, we've seen tremendous traction with EP, we're extremely excited about it and it's one of those things where we pull it together based on a lot of feedback our desire candidly too.

So greater leverage not only from a go to market perspective, but how some of these products can work together to create unique value propositions for our customers, but you never know how the sales team and how the market are going to gravitate to.

This offering.

Offerings, we were extremely pleased with how the sales team.

Gravitated towards EP and candidly their ability to drive customers and walk customers through the value proposition and customer willingness to to embracing <unk>, despite a significantly higher.

Asps and price per asset so.

Extremely excited about what we've been able to do with <unk> in a short period of time again, it only came out earlier this year.

And also excited about our ability to continue to add in and bundle new asset types and new analytic methods into.

So.

It's not a great leap of faith to look at some of the other technology assets in the portfolio, where natural leverage can occur.

Add those into the EP licensing so the customers can expand their their their asset base.

With.

Much more smoothly and.

Derive greater value in seeing the correlations between the various data asset types.

Sure.

Got it got it that makes a ton of sense.

Maybe for my follow up for you, Steve I think I think you talked about maybe just a couple or a few points of growth from from inorganic in the quarter and maybe just to ask the question. This way specifically for CCP, how much or how much did organic contribute here in Q3 and how much are you assuming for CCD.

Within the full year CCP guide.

So specifically in Q3 for CTV, what we said is.

Inorganic opportunities, our newly acquired products and specifically a D and I'll put Ot collectively and that's how we look at the business collectively contributed several points of growth and I think it's fair to say if you look at kind of performance in Q3 compared to the first half of the year, where you now have in Q3, the first full quarter of sales associated with <unk>.

We all know that Ot comes with higher selling prices, but also longer sales cycles and last year was our first year in the market selling that product, but given the backdrop of heightened threat environment.

We are seeing tailwind and good growth really.

So that that product line collectively those products contributed contributed several points of growth.

These are quarters in the making for US we think it's a good set up into the fourth quarter.

Which tends to be seasonally strong for us.

And for the full year I think it's fair to say that at least specifically what we talked about.

For our specifically, what we talked about it's going to contribute roughly one point of growth I think we're on pace to do a little better than that in the full year, specifically given the strength in the third quarter.

Very helpful. Thanks, guys.

Thank you.

As a reminder, if you'd like to ask a question. Please press star one on your telephone keypad.

Our next question comes from the line of Mike Seacoast with Needham <unk> Company. Please proceed with your question.

Thanks team.

I ask you if youre seeing any changes here in win rates based on this hoarding broader portfolio that you are now offering and then I guess building on that is it fair to think that EP and Io or the are primarily pulling through these cross sell for a D and O T were or are you seeing.

In situations, where maybe 80 or OTR actually the primary lead which get your 10th under the notes and then you can start selling EEP and I own in addition to that.

Okay.

The.

EP.

So I guess historically the company has led with VM and now increasingly with EP showing a more holistic approach to understanding cyber risk EP includes.

Container web application security lumen, the analytics and core VM capability today.

To date.

Active directory.

Some of the newer cloud capabilities are not yet included in the EP licensing schemes. So there's.

I think a tremendous opportunity.

To make it much easier for customers to adopt us much more broadly.

We do have I think the.

The easiest motion to generate the fastest traction is selling some of these newer products and bringing some of these newer products to our existing customer base, where we have 35000 plus customers.

On our core VM platforms, and as VM customers and there are some natural motion natural ability to upsell them to some of these newer product lines, which can add tremendous value. We've also seen on numerous occasions.

Patients.

Large enterprise customers, which.

I already have a VM solution in place, it's tightly integrated and Theyre not looking at near term swap outs or they're contractually obligated over a multi year period.

But they do have tremendous need for ot or AAD or augmented cloud capability, and that's where we've seen some of the newer products become significant land opportunities for us and expect that those conversations will.

Spanned over time.

Very helpful and if I could just ask one more question on your on your go to market I. Appreciate all the I guess the accelerated sales capacity investments you guys expect to make in two weeks versus <unk>. This year.

But wanted to touch more on your go to market investments in channel specifically with the MSS. Pete could you can you talk to those investments and maybe you can help us better understand is that benefiting you when I think about some of the mid market strength that you guys spoke about earlier in the call.

Anything that would be beneficial thank you.

Well Im SSP remains an exciting long term opportunity for us in this year.

In essence, it's a new route to market.

Which was.

Preceded by changes in product because products are an important part of the MSP market you have to provide certain certain features and access rights and controls.

But over the course of the last 12 months, we've added a number of new partners channel partners in this market.

And as a result, we're seeing good Paul.

From from customers.

Primarily in foreign markets, we're having success here in the states, but in markets that rely heavily on an MSP model. The fact that we're a.

Well to add new channel partners.

Along with changes in products have really made a difference for us we think long term MSP could.

Could generate as much as 10% or more of our total sales. So I think that's not out of the question. We know that's going to take time, but.

But that's a new route to market for us one that we're going to continue to make investments in.

Our partner model.

It is important here and our ability to invest its going to be critical so when we talk about investments in sales and marketing, we often spend more time talking about increases in quota capacity and specifically quota carrying reps, but just as important as the investments that we're making in channels MSP is one of them, but doubling down on the channel.

Generating more channel in business is something that worked well for us over the years.

One of the reasons why we're able to.

Have the success in the market that we're having in it.

And be the best of breed provider.

Thanks again guys.

Thank you.

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

Hi, Good afternoon, just wanted to start out with the accurate Rick's acquisition can you give us a sense of maybe how this acquisition.

Can contribute to maybe at the cloud and shipped left inside of your strategy.

Yes.

Yes of course.

Factors significantly in how we explain expand our cloud strategy. So tenable has been leaning in on cloud for a number of years, we have cloud native connectors to all the major public cloud infrastructure providers.

We've deployed a container security capability.

We've delivered frictionless, which allows us to assess assets in the cloud without deploying agents are conducting scan so some what.

What I would characterize as cloud native capability that is much more focused on assessing state.

While in one time after deployment and operations.

The cure it springs, two additional capabilities to bear one is.

<unk> infrastructure is code kind of shift left approach as you've noted so now looking at Covid check in time.

And looking at violations of policy and security issues in a pre production mode. So somewhat catch their quota. If you look at it you look at the infrastructure, which is being requested and produced and you can identify where problems exist and rather than just accepting the code checking you can provide feedback to <unk>.

The remediation is pulled back to the Dev ops team.

Which really.

Alleviates, a lot of issues from ever making their way into production environment. So.

A lot of cost savings a lot of enhancements and improvements in security in doing that the other capability that <unk>.

It brings to the table is.

Our more traditional SPM functionality, so we believe.

As we integrate our approach integrated across his capabilities and our approach to cloud it's really.

Quite a compelling.

Code Infrastructure's code.

Through.

Preventing issues at a preproduction mode, all the way through run time assessment of drift container.

Frictionless assessment of assets and cloud consideration issues providing customers.

Entire cloud platform based approach to protecting cloud workloads.

Got it got it and I guess when it comes to the Ot space. This is a business that you guys have owned for a period of time and it seems like things are really sort of picking up or accelerating here can you can you talk about any inflection points that you've maybe seen in the business or product or pipeline.

That may be driving some of the stronger activity levels here. Thank you.

Yeah.

It's a good question I think some of it is just a matter of time and blocking and tackling.

<unk>.

In the early stages of the pandemic between supply chain and customers not being able to be on site to do proof of eval and deployments and things of that nature of that business.

Went into a slower growth mode, we did see acceleration over the past year.

Predominantly through.

Being able to deliver a remote hands capability being able to deliver software only.

Distribution I think market increased market appreciation for OTI challenges.

Between issues like colonial.

Pipeline GBS, we saw health care issues in the UK.

There's also been a number of executive orders and other high profile activity really highlighting two those that operate critical infrastructures or ot environments that they've got to protect them and that there's mission critical activity.

Happening in that our approach combining ot visibility with IP is.

Is quite compelling so we're seeing some of those larger transactions occurring and we're also seeing some of our early adopting customers now.

<unk> about larger scale deployments global deployments moving from first.

A handful first dozen slides too.

Significantly broader deployments, which shows that these things are moving into a more operational operational phase.

Great. Thank you.

Thank you. Our next question comes from Gray Powell with BTG. Please proceed with your question.

Great. Thanks for taking the questions.

On my end.

There were some obvious headwinds in 2020, so I guess part of my question is whether or not youre seeing sort of a catch up in spending this year and then just any insight on sort of the sustainability of demand going forward.

Okay.

No I don't think I wouldn't characterize that a catch up in spend.

Last year was.

Does.

<unk> slowed down for a number of reasons, but I think were returned to what I would characterize as still.

A more normal mode of operation if you look at it it's still we still feel like we're behind where we were from a demand environment perspective in the pre pandemic and growth rates and feel like there's still lots of room for us to continue to improve and execute and draw on the backs of our core market in a bunch of new capabilities new markets that we're now <unk>.

We're going to tap into.

Okay. That's really helpful. And then just as I look into Q4 and sort of the implied billings guidance for the quarter.

Does that include any material contribution from <unk> and how.

How should we just think about the run rate of that business, particularly as we try to stick to.

Three things for next year.

Hi, great.

Yes so.

As we talked about earlier with <unk> <unk>.

It's going to be de Minimis in terms of the top line. So it's not going to have a meaningful impact on the top line in the fourth quarter are not expected to will assume about $4 million of opex.

If you look at our guidance for the year, so full year <unk> guided $602 to 605, which depending on where you are in the range of $10 million to $12 million increase driven in part by the strong beat in Q3 as well as our raise for the full year.

This represents about 22% growth for the full year and implies a 20% to 21%.

Growth for Q4.

And look we're over overall, we're very pleased with our growth in Q3. It gives us a lot of confidence in our outlook for Q4, given the seasonality of the business strength in cloud things that we've talked about today, such as contributions were seen from new and expansionary Tam products specifically.

As well as a favorable spending environment public sector. So it's I think a consequence of all these things together that are delivering upside not only in this quarter, but gives us more confidence in our outlook for the rest of the year.

Understood. That's all that's all good to hear congratulations on the good results.

Thank you.

Our next question comes from Daniel Ives with Wedbush. Please proceed with your question.

Yes. Thanks.

So can you just hit in terms on federal with the executive order it feels like.

More and more you're almost getting ratcheted up NOI. These deals given the nature of the threat environment as well as the.

The actual executive order I mean is that true or are you seeing that that youre starting from a pecking order.

Where you stand the solution set that's changing.

We feel like we've got a solution that's.

A solution set that is well understood by the federal government and large enterprises in general.

A core requirement.

From a security operations perspective, and understanding cyber risk.

With lots of room for continued expansion and a number of existing customers across federal civilian especially.

Which which don't have complete coverage of and nor understanding of their vulnerabilities and exposures.

We also have.

A number of our newer products and capabilities.

Things like active directory, which had been plaguing public sector as well as private sector, which I think can become tremendous tremendous opportunities for us operational technologies.

As another example, so we're still early I think the increased awareness in the federal spend starting to come together in terms of.

Programs.

But we're still in the early innings of seeing how this how this will play out.

Yeah, I like the humble answer.

So to.

To that point just.

In terms of its like.

This should be partners and obviously, you've invested a ton but can you just talk about your investment on the public sector you know within.

Within the beltway.

Thanks.

So a couple a couple of things number one.

In terms of investment I think it's fair to say that we're continuing to invest in our go to market efforts and that's really across all theaters domestically and abroad, and whether it's public sector as well as state and local were seeing strong demand.

And federal but also state and local and we know there is compelling opportunities there.

I think the success, we're seeing this year reflects the conversion of some opportunities with shorter sales cycles along with the.

The combination of some longer term projects given our leadership position.

In federal.

This is an important market for us and.

And our success closing recent opportunities in the current budget environment, we're encouraged by.

What we see ahead number of sizable opportunities.

That in front of Us and we think this is going to be potentially a catalyst potential catalyst of growth for us. So.

We are best where we're the market leader in this space and we think this creates a long term complaint opportunity for us in the public sector will be an important part of the story for us going forward.

Thanks, Austin job.

Thank you. Our next question comes from Sublethal Rafi with SPN Securities. Please proceed with your question.

Yes. Thank you very much so if you bundled and Ot into E P.

What would be your average deal size uplift because I think you said before that you or your EPS uplift is about 60% now, but if you add a D and OTT.

To EEP.

How much higher can that be.

Well, it's a great question I'd love to throw some data out there I'm sure Steve.

Not appreciate that but.

The way I think about it is.

But there is two dimensions.

We'd be at play one would be.

An increased number of assets as you include as.

As you include Ot, you simply covering more assets and so there is a natural expansion of Asps, which would occur.

In.

In that along that dimension, there's also a higher ASP.

On a per asset basis.

When we're selling EP because <unk> is not simply just the inclusion of multiple products into a licensing scheme. It's a a platform based approach where the products can interact with one another the analytics that we can deliver on top of those products things like lumen.

And.

Like can can deliver more value for our customers. So they are willing to pay a premium question for.

Getting those product interact and superior analytics, we can deliver so I think it's fair to assume that.

If.

Customers expand asset the asset coverage significantly through the inclusion of Ot and ADM theyre paying a higher price per asset.

Purchasing them as part of the EP bundle as opposed to Standalone products that could have a significant impact on asps.

Okay and my follow on is.

It looks like implicitly in your annual GCB guidance, your Q4 CCP growth Decelerates.

I don't know about four to five points from Q3's growth rate.

And I would say that the comparison actually a little bit easier slightly.

Is there a reason why CTV growth would decelerate by four to five points or are you being conservative.

Yeah.

We we think our guidance is appropriate.

<unk> delivered a sizable beat in Q3, both on <unk> and revenue.

We're getting great traction with cloud momentum with newer products.

And obviously, we talked about strength in public sector as we look out into the fourth quarter. We're encouraged with what we saw in Q3, we're raising our outlook for the full year keep in mind, we have a ton of opportunity in front of us with regard to these newer products. So we talked about the exposure platform, which is a product we launched in.

At the end of March.

Contributing here, notably to the top line, we talked about.

Which is.

An acquisition we closed in late April we talked about.

Hardening, our Ot product and how this is these are longer sales cycles and more opportunities for us. So we're absolutely delighted with the activities in the pipeline opportunities are in front of us notwithstanding public sector, but these are.

Conversions against newer products, we had success in Q3 gives us confidence in Q4 and.

We believe.

No.

Continue to serve as a catalyst for growth for us. So we moved the guidance is appropriate.

And we're encouraged with what we say so overall good quarter beat and raise reflects the optimism.

For the fourth quarter, and we'll look forward to giving you an update in February on our fourth quarter.

Okay. Thank you.

Thank you ladies.

Ladies and gentlemen, we have reached the end of the question and answer session and this concludes today's conference you may disconnect. Your lines at this time and we thank you for your participation.

[music].

Welcome to the Tenable <unk> 2021 earnings conference call at this time, all participants are in a listen only mode.

A question and answer session will follow the formal presentation.

Anyone should require operator assistance during the conference. Please press star zero on your telephone keypad. Please.

Please note this conference is being recorded.

I'll now turn the conference over to your host Erin Karney Senior director of Investor Relations. Thank you you may begin.

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

With me on the call today are meager in Carnival's, Chief Executive Officer, and Steve Burns Chief Financial Officer. Prior to this call we issued a press release announcing our financial results for the quarter you.

You can find the press release on the IR website at Tenable Dotcom before.

Before we begin let me remind you that we will be making forward looking statements. During the course of this call including statements relating to 10 of both guidance and expectations for the fourth quarter and full year 2020 one.

Innovation, and new products and services tenable as expectations regarding long term profitability and the impact of COVID-19 on our business and on the global economy.

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.

On the SEC website at SEC Gov. In addition, during today's call we will discuss non-GAAP financial measures. These non-GAAP financial measures are in addition to and not a substitute for or superior to measures of financial performance prepared in accordance with GAAP.

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

Today I'll discuss our financial performance in Q3, our strong execution on our newer products, including O T E N cloud and how our security solutions combined to create a differentiated platform and capabilities.

With that let me first touch on our Q3 results.

We're really pleased with our performance in the third quarter, we delivered accelerated growth at scale highlighted by 25% CTV growth this quarter, which is up from the 23%.

Growth, we reported last quarter.

<unk> results on the top line and also accompanied by Pfizer will be an EPS and free cash flow.

In the third quarter, we saw notable interest and traction with Carnival a D.

Securing adult disease is quickly becoming one of the most critical initiatives with respect to zero trust customer implementations.

Identities are also known areas of weakness and our highly targeted by ransomware.

Customers have grappled with how to secure the active directory environments incredibly D is playing out exactly as we had hoped it would.

The door to more opportunities for us.

<unk> is a unique solution that combines a security audit of identities and ongoing attack detection and lightweight platform.

As mentioned capability outperforms in its first quarter of availability, we believe the traction in the short time since acquisition will continue as we see strong pipeline and great opportunity for tenable and the identity market.

We also saw customers increasing focus on securing the operational technologies the convergence between Ot and Iot is accelerating and understanding these complex environments has become a priority given all the recent examples of converged high visibility breaches and corresponding outages.

Payables native Ot capabilities works seamlessly with our deep understanding of Iot, creating dramatically differentiated results.

Customer Ot and Iot systems are increasingly interdependent, resulting in expanded business opportunities to deploy our security solutions and a more programmatic fashion across their global facilities.

While starting from a small base tableau tea is one of the fastest growing areas of our portfolio.

Our recent seven figure win and massive cross sell with the Forestry company helps validate these key investments.

They've been using tenable SC and Io and as we're looking to secure both the HD and Ot environments total came at the very obvious choice as a unified way of managing cyber risk.

To further serve our customers. We're also expanding our E D and O T ecosystems.

During the quarter, we announced a global strategic partnership with Splunk to secure active directory and converged Ot environments.

The clear takeaway is that we're executing well on our strategic investments in AG and Ot in an era, where securing these technologies is of great importance and in high demand.

We see tremendous traction with our existing cloud capabilities and our acquisition of <unk> augments and extensive capabilities in dramatic ways.

Cloud usage.

Greatly accelerated and matured.

From a lift and shift virtualization of on Prem infrastructures to one that is cloud native where infrastructure that are defined in code and deployed as needed.

Infrastructure's code allows operations acquired scale with just in time operational efficiency.

<unk> technology integrates into customers' public and private cloud deployments and integrates with their development and build pipelines.

As Covid shut in is assessed to assure that the infrastructure and systems defined comply with the organization's security policies compliance requirements and best practices.

Laws are identified before cloud infrastructure and applications are deployed into production.

Together, tenable and <unk> infrastructures called platform to not only identify these flaws in the VIX, but can automatically remediate them before launching them into production.

Once applications and systems are stood up at runtime carnival's container security and frictionless assessment capabilities deliver market, leading assessment of drift and security exposure.

<unk> also provides CSPI functionality.

Our capability to secure cloud environment spans.

Car needs spectrum from the left and development preproduction phase.

Right and wrong time and deployment and operational fees.

We believe this is among the most holistic approaches to modern cloud security available in the market.

But it will continue to aggressively differentiate our core VM capabilities. We are also starting to bring new products to market and some of the most exciting segments of the security space risk analytics.

<unk> identity cloud security.

While these products are demonstrating their compelling value propositions. We're most excited about our ability to integrate these technologies onto our unified platform doing so will deliver increasingly unique capabilities.

We lead the market and our ability to deliver a unified understanding of converged Iot Ot environments.

We're the only company, which can provide an understanding of 80 security implications in Ot environments.

With the addition of <unk>, our infrastructures code offering leaps to the leading edge of cloud native capabilities integrating this shift left pre deployment technology with our deep understanding of security at runtime through containers Frictionless assessment and CF P. M Lok tenable to deliver a complete code to cloud experience.

The market one that I believe no other company matches.

The strategic nature of our platform approach to our products should not be underestimated.

It comes as no surprise that we continue to see strong demand for tenable E P. Our unified platform.

<unk> combines tenable Io container web application and lumen into one platform, enabling customers to understand risk prioritize actions I guess the benchmarking they require so they can focus on what's really important we identified key risks and automate the process for what to do about it.

A great example of this is a six figure nessus pro upsell and competitive displacement there.

Purchased tenable E&P to consolidate risk analytics for multiple programs into a common platform for holistic visibility and prioritization.

Bringing these products closer together.

Finally, before I turn the call over to Steve I'm excited to invite all of you to a virtual investor day, we'll be holding on December 15, we will be sending out more detailed information in the coming weeks and hope you can attend.

Thanks, Amit as Jimmy mentioned earlier, we are delighted with our results for the third quarter highlighted by accelerating top line growth due to strength in cloud.

Strong momentum from acquired products and a sizable contribution from our public sector business.

On the bottom line, we are very pleased with the substantial the etfs and the strong cash flow in the quarter.

I will provide more commentary on each of these points momentarily, but first please note that all financial results discussed today are non-GAAP financial measures with the exception of revenue.

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

Now onto our results for the quarter.

Revenue for the quarter was $138 7 million, which represents 23% year over year growth.

Revenue in the quarter exceeded the midpoint of our guidance range by $4 7 million.

Visibility remains high as our percent of recurring revenue is 95%.

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

The outperformance in revenue as a result of accelerating growth in calculated current billings.

TCP defined as the change in current deferred revenue plus revenue recognized in the quarter grew 25% year over year to $166 9 million.

Which is up from the 23% growth, we reported last quarter and 20% growth we reported in Q1.

Calculated current billings in the quarter was aided by strong demand in both new and renewal business.

In terms of new business, we added 499, new enterprise platform customers, which is a record for us in any single quarter and up from the 335, we added in Q3 last year.

We also had success with large deals as we added 62 net new six figure customers in the quarter.

It's up from 56 in the same period last year.

We attribute this demand and the better than expected <unk> growth to a number of factors some of which Mitch touched upon earlier.

Certainly worthy of additional commentary.

First our cloud products, such as tenable, Io and tenable <unk> continued to gain traction across both the large and mid market.

As prospects and customers continuing to move critical workloads to the cloud to support work from anywhere and other digital transformation initiatives. They are increasingly looking to tenable to secure their hosted environments.

Our recent acquisition of the Keryx and October furthers, our cloud capabilities.

<unk>, our existing trend and runtime environment by adding the ability to assess and secure critical cloud infrastructure prior to deployment into production.

Second our.

Our active directory and operational technology offerings are starting to make a difference and collectively contributed several points of growth in the quarter.

These newly acquired products have expanded our addressable market by extending our exposure platform to assess new areas of the attack surface.

Floyd It recently and highly publicized attacks.

This traction is notable as these are newly acquired products with also had closing in April and sales of energies Ot offering commencing just last year during the pandemic.

Given the compelling market opportunity for a D N O T and strong demand commodity threat environment, we've been able to build a sizable pipe for these products throughout the year.

While the conversion of pipeline for new products was not apparent in the first half of the year given limited history, we executed well in Q3, which contributed to the outperformance in the quarter and provides us with improved visibility heading into the fourth quarter.

Looking ahead, we remain very encouraged with the myriad of large funded and unfunded opportunities potentially available to us including.

The impact of receiving bedroom certification to deliver our cloud products to U S Federal government agencies.

I'll now turn to expenses, which include an incremental investments in growth interest expense related to our recently completed debt raise and a full quarter of opex from the <unk> acquisition.

I'll start with gross margin, which was 83% this quarter of a point from last quarter.

We are managing this closely and have been very pleased with this trend looking ahead, we expect gross margin to remain at current levels in the fourth quarter, Despite incremental club investments and the impact from the <unk> acquisition.

Sales and marketing expense for the quarter was $60 7 million, which is up from $58 1 million last quarter.

Sales and marketing increased sequentially, primarily due to higher travel and headcount related costs, including an increased number of quota carrying sales reps.

Adding sales capacity and investing in our go to market efforts has been a major area of focus for us this year given the strength in our core business.

And the Tam and a strong secular tailwind.

Sales and marketing expense as a percent of revenue was 44% compared to 45% last quarter.

Given our better than expected performance to date and upward revised outlook for the year, we plan to increase our current level of investment in sales and marketing in the fourth quarter.

R&D expense for the quarter was $25 1 million, which is up from $23 million last quarter.

The change reflects an increase in personnel costs and the inclusion of all set for a full quarter.

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 $15 million compared to $13 8 million last quarter.

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

As anticipated G&A expense was sequentially higher than the third quarter due to increases, but that head count related costs.

Income from operations was $13 7 million compared to $11 5 million last quarter.

Operating margin was 10% for Q3 compared to 9% last quarter.

As a reminder, we closed our credit facility in early July So net income in the quarter was reduced by approximately $3 5 million of interest expense, which does skew the comparison to prior periods.

EPS in the third quarter was 7%, which was five better than the midpoint of our guided range.

Now, let's turn to the balance sheet, we finished the quarter with $652 million in cash and short term investments.

Which included $336 million of net proceeds from our credit facility.

As a reminder, we used $160 million of cash in October to acquire a cure.

Current deferred revenue at September 30 was $362 million, giving us a lot of visibility heading into the fourth quarter.

Now I would like to discuss cash flow.

Cash interest payments relating to the term loan b commencing in October we believe Unlevered free cash flow was a useful metric to aid in the assessment of the underlying health of the business.

As such in the press release, we have provided a reconciliation of net cash provided by operating activities.

Unlevered free cash flow.

In the third quarter, we generated $20 1 million of Unlevered free cash flow and for the nine months ended September 30, we generated $72 8 million of Unlevered free cash flow.

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

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

Our strong performance year to date continues to give us increased confidence in the business environment.

With that said for the fourth quarter, we currently expect.

Revenue to be in the range of $143 million to $145 million.

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

Non-GAAP net income to be in the range of $2 million to $3 million, assuming a provision for income taxes of $1 9 million.

And non-GAAP diluted earnings per share to be in the range of <unk> to three <unk>.

Assuming a $116 5 million fully diluted weighted average shares outstanding.

And for the full year. We currently expect calculated current billings to be in the range of $602 million and $605 million.

Revenue to be in the range of $535 1 million.

$537 1 million.

Non-GAAP income from operations to be in the range of $46 1 million to $47 1 million.

Non-GAAP net income to be in the range of 35 million to $36 million, assuming a provision for income taxes of $3 1 million.

Non-GAAP diluted earnings per share to be in the range of 30 to 31.

I mean 115 million fully diluted weighted average shares outstanding.