Q2 2022 Tenable Holdings Inc Earnings Call

July 26, 2022

Yeah.

[music].

Greetings and welcome to tenable, who to choose off 2022 earnings conference call.

At this time, all participants are in listen only mode.

A question and answer session will follow the formal presentation.

If anyone should your clients, who just joined the conference piece with Tom and Eric on your telephone keypad.

As a reminder, this conference is being recorded.

I will now turn the conference over to your host Evan Connie She's the director of Investor Relations.

Please go ahead.

Thank you operator, and thank you all for joining us on today's conference call to discuss <unk> second quarter financial results with me on the call today are meet year end, our Chief Executive Officer, and Steven <unk>, Our Chief Financial Officer prior to this 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 our guidance and expectations for the third quarter and full year 2022.

Growth and drivers in our 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 solutions.

The potential benefits and financial impact of our acquisition, including our recent acquisition of symptoms and that discovery.

Innovation, and new products and services, our expectations regarding long term profitability and our ability to attract and retain employees and its impact on our business.

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 annual report on Form 10-K, and subsequent reports that we file with the SEC, which are available on the SEC website at SEC Gov.

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

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 me.

Thank you Erez today I'll discuss our strong financial performance in Q2 strong demand.

And the continued progress of our cyber exposure management platform without let me first touch on our Q2 results, we delivered strong <unk> growth for the quarter at 27%, which we achieved despite the macro environment, we believe cyber security and specifically fiber exposure management removed a top strategic focus for.

And we'll continue to be a spending priority against this backdrop. We are also very pleased to deliver compelling top and bottom line results for EPS and Unlevered free cash flow were both notably above expectations for the quarter.

Our business navigated a number of ebbs and flows during the quarter that we believe are a direct result of the complicated environment our customers are operating.

We saw a few dynamics play out during the quarter.

North America delivered above expectations led by Tenable EP platform sales Conversely international business in most regions did not grow as fast as we expected going into the quarter, which Steve will cover in more detail.

As far as the business as a whole deals are going through more scrutiny than they typically do.

Overall demand remains strong even with increased inspection on a customer by customer basis.

Out of the quarter, there were a number of things that substantiated, our conviction around our business even in the short term security remains a key budget priority and a defensible spend for our customers' customers continue to face an expanding attack surface and needs to properly identify their exposure and.

Their understanding of risk.

BP is an incredibly efficient way to consume our products as customers look to a more comprehensive assessment of risks.

We have seen this with the strengthened EEP adoption and exposure solutions more broadly.

A great example of this was a seven figure EP competitive takeout deal with a large international financial institution.

We had another strong quarter for both large six figure deals and overall enterprise customer adds.

We continue to see large deals entering and moving through our pipeline and our confidence in the fundamentals of our business has never been stronger.

Our ability to take advantage of this demand is a direct result of meaningful and critical investments, we have made organic and inorganic to help our customers identify and manage their cyber exposure.

Continuing to enhance our platform we closed the acquisition of bit discovery, a provider for external attack surface management.

Enabling us to cover and assess internet facing assets, such as web applications cloud resources and open gateways.

Following the closing of the acquisition, we delivered a new version of Nessus Nessus expert that includes external asset discovery.

External asset discovery will be included at no additional cost for our enterprise platform customers.

And separately sold context aware external attack surface management offering for continuous discovery and ongoing monitoring is also available today.

Cyber exposure management as a discipline is attracting attention from industry analysts and customers alike.

It is an incredibly important approach to managing cyber risk and it is an approach that we pioneered over the last several years, we believe delivering a successful cyber exposure management platform requires a unified best in class approach across vulnerability management cloud security active directory security Ot security and other.

Parts of the attack surface, which we were successfully executing on we believe our routes and laser focus position us incredibly well to be a market leader.

As we continue to execute on our own vision, we're excited to see industry acknowledgment of the importance of this discipline continued coverage by Gartner talking about exposure management is a disciplined amplifies. This point in particular, the importance of advancing cyber exposure management program as critical to developing actionable posture.

Your improvement plan that can be understood by executives.

As board and executives are pressured to understand their cyber security posture, having a clear view of risk is increasingly critical.

Preventing cyber attacks requires full visibility into all assets and exposures.

Sensitive context into potential security threats and clear metrics to objectively measure cyber risk tenable cyber exposure management platform delivers visibility across the modern attack surface with intelligent analytics to prioritize preventative actions and communicate risks to all levels of the organization.

Sure.

We are building the broadest understanding of cyber exposure spanning ICI asset cloud resources containers web applications and identity services, we're delivering unifying analytics prioritized actions and benchmarking to help our customers truly manage risk more effectively and that's a compelling capability.

I'll now turn the call over to Steve for further commentary on our financial results.

Thanks, Amit as Hamid mentioned earlier, we are pleased with our results for the second quarter highlighted by good topline growth cycle.

Sites will be EPS and strong unlevered free cash flow.

There are a confluence of factors related to the broader market that impacted our results, but we are pleased with our execution in the quarter. Despite a more cautious spend environment.

I will provide more commentary momentarily, but first please note that all financial results. We 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 the results for our quarter.

Calculated current billings defined as the change in current deferred revenue plus revenue recognized in the quarter grew 27% year over year to $174 1 million and.

And benefited from our continued investment in our platform strategy and go to market efforts.

The fundamentals of our business remain very strong and we are pleased with the demand overall in the quarter, but it was mixed across geographies as North America exceeded our expectations, while our international theaters encountered headwinds and fell short of expectations.

As a reminder, we go to market using a two tier channel model with our customer contracts denominated in U S dollars.

During the quarter the.

The U S dollar strengthened compared to other currencies, which made our products more expensive and that combined with other macro considerations impacted our international sales.

In addition on a global basis, we experienced deeper levels of inspection and more approvals with some customers.

Despite that we are pleased with our <unk> growth and had one of our best quarters in terms of adding new customers and transacting larger deals.

Specifically, we added 540, new enterprise platform customers and 79 net new six figure customers in Q2.

This represents 35 and 28% year over year growth respectively.

Underpinning our customer momentum as EP tenable Dot EEP, which continues to see strong demand in both the large and mid market and has resulted in more meaningful deal sizes amplified by the addition of cloud and identity security to our unified exposure platform.

Tenable EP also create a more compelling upsell path for our existing customers and benefited our dollar based net expansion rate in the quarter, which remained elevated in comparison to prior years, and it's well above our 110% threshold.

Revenue for the quarter was $164 3 million growth in Q2 last year.

Revenue in the quarter exceeded the midpoint of our guidance range by $1 3 million.

As discussed earlier, we experienced less than expected international sales, which typically have a higher mix of standalone active directory on premise deployments, which is our only software solution with upfront revenue recognition.

Consequently product mix limited our upside in revenue this quarter that said visibility remains high as our percentage of recurring revenue was 95%, which is consistent with prior periods.

I'll now turn to expenses, which include incremental investments in growth and the operating expenses related to the bit discovery acquisition that we closed in the quarter.

I'll start with gross margin, which was 81% this quarter and essentially flat compared to last quarter.

Despite increased usage of our cloud products or public cloud cost decreased sequentially. As a result of efforts to optimize the efficiency of our product delivery infrastructure, along with our procurement strategy, which resulted in credits in the quarter that reduced our compute costs.

These savings were offset primarily by increased personnel costs.

The support of our products.

In connection with the closing of that discovery, we launched a new external attack surface management offering in July that we will continue to integrate throughout our product portfolio.

Also as a reminder, we plan to release a more expansive set of cyber exposure analytics in the second half of the year.

This will include attack path analysis enhance the unified analytics and improved benchmarking and contextual nation of vulnerabilities.

All of which will help customers better visualize and efficiently manage risk across their hybrid environments.

We expect the incremental investments for bit discovery and symptom a portion of which are upfront cost to modestly impact gross margins in the second half of the year, but provides runway to support future growth.

As I've indicated in the past long term, we still expect gross margins to be in the high 70 to low 80% range.

Sales and marketing expense for the quarter was $75 6 million, which was up from $71 5 million last quarter.

Sales and marketing expense increased sequentially due to higher wages and benefits related to hiring more quota carrying sales reps and associated head count as well as higher marketing spend related to industry and other events.

Sales and marketing expense as a percentage of revenue was 46% in Q2 compared to 45% last quarter.

R&D expense for the quarter was $28 1 million, which was virtually flat compared to $27 8 million last quarter.

It should be noted that we added incremental engineering head count in support of unifying our product architecture, and enhancing our platform and capitalized $2 9 million of software development costs.

R&D expense as a percent of revenue was 17% in Q2, which was consistent with last quarter.

G&A expense was $17 3 million compared to $16 6 million last quarter.

We continue to make investments in our back office functions and systems to support the growth and scale of our business.

As a percentage of revenue G&A expense was 11% this quarter compared to 10% last quarter.

Income from operations was $12 2 million essentially flat compared to last quarter, but $5 7 million better than the midpoint of our guided range, which had contemplated incremental cogs for our public cloud infrastructure increased spend for industry events and higher head count related costs.

However in response to the changing business climate, we were able to achieve greater operational efficiency through more focused efforts on spend optimization.

Which result in upside to op income in the quarter.

It's also worth noting that a stronger U S. Dollar contributed approximately $1 billion of outperformance.

Approximately 40% of our employees are based outside of the U S and.

In short, we incurred less expense in our international locations due to a stronger dollar.

Operating margin was 7% for Q2 compared to 8% last quarter.

EPS in the second quarter was five <unk>, which was three five times better than the midpoint of our guided range due to the same expense trends I just mentioned.

EPS also includes two pennies or $1 8 million of FX Remeasurement losses.

In the other expense net.

As a matter of clarity. This FX activity is due to the re measurement of our non U S dollar denominated cash and other monetary assets and liabilities.

The FX remeasurement losses, more than offset the $1 million of Opex savings from FX I previously discussed.

Now, let's turn to the balance sheet, we finished the quarter with $510 9 million in cash and short term investments.

Accounts receivable was $109 4 million and total deferred revenue was $548 1 million, including $415 4 million of current deferred revenue, which gives us a lot of visibility into revenue over the next 12 months.

Now I would like to discuss cash flow.

We paid $3 3 million of cash interest on our credit facility in the quarter.

Looking ahead, we are assuming a higher interest rate environment with our floating rate debt facility when it resets at the end of July .

Consequently, our full year guidance reflects $17 9 million of interest expense, which is $2 2 million higher than our previously provided guidance.

That said our term loan B continues to provide a very low cost of capital, which has allowed us to fund acquisitions without equity dilution to our shareholders.

Earnings on our cash and investment balance provides a partial natural hedge to interest rate expense as such we expect our full year EPS impact on interest expense net of interest income to be one penny.

As yields on our cash and investments also rise.

We generated $29 1 million of Unlevered free cash flow, which is an 18% margin.

With 95% recurring revenue high gross margins and rental rates, we felt confident that we can continue to generate attractive levels of cash flow, while continuing to invest in the business strike.

Striking the right balance between growth and profitability has always been and will continue to be an area of focus for us.

Last year, we became a rule of 40 company and we are confident we are well on our way to becoming a rule of 50 companies.

Okay.

With the results of the quarter behind us I'd like to discuss our outlook for the third quarter and full year 2022.

In terms of the topline growth our guidance reflects a continuation of the trends we experienced in the back half of the second quarter.

Specifically, we expect the fundamentals of our business and the demand for our cyber exposure solutions remained strong.

However, given the current macro environment, we think it's prudent to expect a similar level of review and scrutiny on some deals that we experience in Q2.

Our guidance also contemplates approximately $4 million to $5 million of less contribution from upfront <unk> on Prem revenue.

Higher levels of adoption of <unk> and Tenable E P. Our unified exposure platform.

Now in terms of expenses our outlook reflects the expected impact of inflationary costs, most notably on wages the absorption a bit discovery and higher interest expense on our floating rate debt.

With that in mind here are the specifics for the third quarter. We currently expect revenue to be in the range of $169 million to $171 million.

non-GAAP income from operations to be in the range of $9 million to $10 million.

non-GAAP net income to be in the range of $3 two to $4 2 million, assuming interest expense of $5 million and a provision for income taxes of $2 3 million.

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

Assuming a $119 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 $768 million to $776 million.

Which reflects a $4 million increase from the midpoint of our prior guidance, including $2 million of the Q2 outperformance and $2 million of contribution from bit discovery, primarily in Q4.

Revenue to be in the range of 673 million to $679 million, which remains unchanged.

non-GAAP income from operations to be in the range of $45 million to $49 million.

Which is a $1 million increase from the midpoint of our prior guidance.

Collecting a $6 million beat over the midpoint of our Q2 guidance offset by $3 million of operating losses from that discovery and 2 million of higher inflationary costs.

non-GAAP net income to be in the range of $19 7 million to $23 7 million.

Interest expense of $17 9 million and a provision for income taxes of $7 6 million.

non-GAAP diluted earnings per share to be in the range of 17 to 20.

Afflicting, the three and a half penny beat from the midpoint of our Q2 guidance offset by approximately three pennies related to pit discovery and one penny of higher net interest expense.

Our EPS guidance assumes a $119 million fully diluted weighted average shares outstanding.

In summary.

We're very pleased with the results for the quarter feel good about the fundamentals of our business and believe we are thoughtfully navigating the current climate to deliver continued growth and profitability.

I'll now turn the call back to <unk> for some closing comments.

Thanks, Steve.

To see many of you at the Canaccord and Piper conferences in the coming weeks.

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

Thank you ladies and gentlemen at this time, we will be conducting a question and answer session.

If you would like to ask Christian piece space and one on these kind of phone keypad.

A confirmation tone will indicate echelon easing the question queue.

You May press star two he would like to remove yourself from the question queue.

For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

In the interest of time, we ask you. Please limit yourself to one question. He may rejoin the queue for additional questions. If time allows.

We will pause the amendments.

Okay.

The first question comes from.

Hamzah <unk> of Morgan.

Sandy.

Hey, guys. Good evening. Thank you for taking my question.

Steve for you I just want to be really specific so it seems like just the negatives in the quarter were.

International It sounds like Europe coming in slower than expected the higher scrutiny nation of deals that was exclusively to Europe , and then FX basically making the products more expensive was there anything in North America or other regions that you saw that that was.

Driving that scrutiny edition as well as or was it just concentrated in Europe .

I would say first of all overall, we're pleased with.

Performance in the quarter, we grew <unk>, 27% and as you know we added a lot of new customers 540, New enterprise platform customers, we transacted a bunch of large deals. So one of our best quarters in terms of momentum as I called out earlier performance was mixed.

We saw significant strength in North America, which is our largest theatre.

But international fell short of expectations for some of the reasons that you mentioned.

In terms of generally we are seeing more levels of scrutiny and review, but we were over able to overcome this because we saw strength in our enterprise business. So we're just commenting on the current.

Environment in terms of what we're seeing.

And by the way I referred preferred internationally broadly, but more specifically in EMEA, which is which is what you had mentioned before.

And I will say that that is not pervasive across all countries.

And our international theaters and specifically in Europe , not across all countries. It's more on a customer by customer basis, It's based on specific company budget dynamics industry Geo.

We saw strength in major sectors, including in Europe . So.

Overall, we're pleased with our results for the quarter.

<unk> guidance for the year end.

And we think we're set up for success for the second half of the year.

Just one quick follow up on that.

When it comes to international are you increasing the level of discounting for your products and is that something that's reflected in the back half guide.

No. We're not we did not see that in the second quarter levels of discounting increase.

Mindful of that as we enter the second half of the year, but we're spending a lot of time looking at pipelines, we feel really good about our pipelines as we head into the second half of the year not just the size, but also the shape of the maturity of it activity levels are high and we're looking at all forecasts lenses, turning a lot of time qualifying opportunities we feel good about the second half of the year It ourself.

Okay. Thank you.

The next question comes from Rob <unk> of Piper Sandler.

Great. Thank you guys for taking my question.

Maybe like Hamzah I'll sneak in one as well, we'd love to better understand this the higher levels of <unk> I guess juxtapose, what youre seeing with your enterprise customers and large deals the success on that front and as we entered the third quarter, just any broad brushes around government. Thanks.

Yeah. Thanks, Great Great question I'll chime in I'll say listen, it's just a tough macro environment and as a result.

Many customers and it's on a region by region basis on a customer by customer basis. Many customers are looking at their spread.

Spend that their expense basis in there.

They are scrutinizing every contract.

Contract every opportunity.

Security remains top of list.

We are not seeing a high level of customers abandoning their position and pipeline deals continue to move forward in the pipeline. There is just additional signatures to get in the process that companies are putting.

In place on a.

On a customer by customer basis, but again pipeline continues to build at a healthy rate.

Never been stronger than it is today, you'll continue to move forward in the pipeline.

We feel.

And we are confident in how we're set up going into the third quarter and going into the year you asked specifically about public sector.

We had a good quarter in the public sector I would say kind of in line with expectations, including a seven figure transaction at the state.

At the state level globally public sector did did really well and we continue to invest with a high degree of confidence in the public sector seeing strong opportunity.

In our pipe seeing more transactions and seeing longer transactions than we've seen.

At any point in recent history, So again, we feel as.

As well set up as we can going into into the third quarter.

Thanks for the color.

The next question comes from second caveat of Barclays.

Excellent Hey, guys. Thanks for thanks for taking my question here.

Steve I'll keep it to one and maybe just for you.

Can you just dig into the dynamic that you mentioned on <unk> a little bit.

Upfront revenue I think you said, it's about $4 million to $5 million less contribution. This year can you just flush that out a little bit is that on revenue is it on PCB and why the change.

Yes.

$4 million to $5 million is on for AAV on Prem.

The second half of the year, specifically the second half of the year. So we're taking a $4 million to $5 million out of our guidance.

And so we're just seeing slightly different mix.

That said, we are very pleased overall with our ability to sell identity security.

As a standalone offering into our customer base, we've demonstrated success doing that and now part of a broader offering and tenable dot EP with regard to the latter I think it is important to note.

We've integrated <unk>.

Security into EP as well as cloud security and we're actually seeing historically, we've seen a 60% uplift.

Tenable dot EEP or five exposure management platform realm.

Relative to our core VM offering and we're now seeing a 70% uplift. So we're having success transacting larger deals specifically because of EEP certainly AED is an important part of that.

But our guidance reflects lower contribution due to <unk>.

As expected <unk> on Prem revenue, yes in fact, just.

To clarify the AED on Prem revenue is all recognized upfront. So it has a disproportionate impact on you.

The quarter and our.

Patients through remainder of the year and it is our only product that has upfront revenue recognition every all of the other products are ratable.

Okay. So just to be clear just so just to put a bow on this topic it.

It doesn't sound like all the CCP expectation for <unk> is going down in totality just the mix of what is cloud versus on Prem is that is that right or are we can be expectation.

Okay.

That is right. That's why you saw the outperformance in <unk>. That's why we're we pass on a beat and we're also raising and CCP.

We have not raised our outlook for revenue, because we're reflecting less upfront revenue related to standalone <unk> on Prem.

Got it very helpful. Thanks for the clarification.

The next question comes from Mike Sekos, Amit <unk>.

Hey, guys. Thanks for getting me on the line here I just wanted to circle back to that increased scrutiny that you guys are seeing can you hope its thinks through when that dynamic really started to come into play with the international market said that increased scrutiny and maybe it would be helpful too to talk through how that trended through the quarter.

Through July .

You'll seeing as a result of the scrutiny are those deals extending with more constituents sitting around the table has that deteriorated further as we've gone from May to June to July or have things been relatively stable. When we start thinking through that scrutiny that you guys were talking to earlier.

Yes, we saw that scrutiny really.

Kick in in June and things have been relatively consistent since then again.

Sales team has a lot of confidence that continue to enter deals into the pipe deals.

Yields continue to move through the pipeline Theres, just more signatures to get in order to close transactions I don't think its specific to.

Tenable and I don't think its specific to <unk>.

Security I think largely speaking we did not hear the sales team tell us the budgets are going away.

Don't hear them, telling us the deals are going away. It's just a matter of some transactions on a customer by customer basis require additional signatures and.

As you note in certain instances that can.

Prolonged sales cycle, but we feel exceptionally confident given the pipe and the progress through the pipe in second half of the year and that's reflected in the increase in.

In CCD.

That's very helpful. Thank you for that and if I could just squeeze one more in when looking at the strength of the new enterprise platform customers added or even the customers over 100000 HCV at period end you guys had some strong numbers, we're looking at those metrics and I just think it would be helpful to frame out for the investment community here, but can you help us think through the segments.

You guys are working through if I think about like enterprise versus mid market versus SMB, if I stratify your customer base. According to those different parameters.

I'm starting to see a different behavior coming out of enterprise versus maybe mid market and maybe a reminder, too as far as your exposure to each of those different stratification, so would be helpful as well.

Thank you.

Yes, so as we commented earlier, we had one of our best quarters in terms of customer demand in terms of new enterprise platform customers and large deals.

Really strong and.

We had what disaggregate that we saw significant contribution from enterprise as well as commercial both are working well in aggregate globally.

The company.

Commercial which we'll say is mid market, it's certainly an area of opportunity for US we're building out our commercial.

Our commercial team in APAC, and we're seeing outperformance there.

But overall, we saw strength in both our large and mid market both.

Commercial as well as enterprise.

Okay.

And of course exceptional strength in North America, and as we commented earlier EPS figuring prominently here were transacting larger deal sizes covering more areas of the attack surface and we're getting are getting now getting a 70% uplift relative to our core VM offering.

Thank you for the color.

Thank you. The next question comes from Brad Reback of Stifel.

Great. Thanks very much.

Steve with respect to the two H guide how should we think about what you've modeled in for international and domestic so I.

I think you talked about international having pockets of weakness. So are you assuming is it just those pockets going forward and that you just domestically. It has been very strong do you expect that strength to continue in the guide whatever type of moderation is put in there would be great to highlight thanks.

Yes, I think some of the trends that we saw in the second quarter, we're expecting to play out for the for the second half of the year.

I will say the secular trends of our business are very strong and we're seeing healthy levels of demand now North America was strong and we expect that to continue to be the second half of the year our guidance reflects.

And what we experienced in Q2, but what we're also what we also saw in July and.

So we're taking everything into account and we have a lot of confidence in our ability to execute.

And so it's really a continuation of trends.

Great. Thanks very much.

The next question comes from Brian Essex of Cozman sacks.

Great. Thank you and thank you for taking the question.

I'm wondering if you could dig in a little bit on the sales side.

<unk>.

I mean, I think you guys last quarter talked about elevated hiring in the front half of the year, how did that Pan out is there is there any way you can parse that out by geography and level of success.

Attracting and retaining talent, where you need it and are we looking at maybe elevated spend in the front half of the year with better leverage in the back half of the year or given the current macro situation is any of that changed at all.

So this is Steve I'll start.

One of the hiring is an area that we called out earlier. So we are continuing to hire and invest so significant levels of higher hires in the first half of the year specifically in Q2.

So, we're adding quota capacity and obviously not.

Not just domestically, but also abroad and thats really important coming into the year, we increased quotas.

Productivity levels continue to be healthy healthy globally, and so my expectation in the second half of the year is that Youll see.

Our leverage in the business and our guidance reflects that so overall, we think we're striking the right balance between growth and investment we do not want to moderate the level of investment right just given what we're seeing outperformance in CCD and sales.

Well performance may have been mixed globally across the board across various theaters, we have a lot of confidence in our business.

And we expect to continue the success the second half for yourself.

We're still continuing to lean in and invest.

Both on the sales side as well as engineering.

Great that's super helpful I'm going to keep it to that one question. Thank you.

The next question comes from Jonathan Ho William Blair.

Hi, Good afternoon can you maybe help us understand or quantify the FX impact in international underperformance on the business this quarter and maybe what youre.

Assumptions are around guidance on the magnitude of that impact going forward.

Okay.

Sure so.

So I think jonathan's questions around FX, I'll start and feel free to interject.

So as a reminder, our customer contracts are denominated in U S. Dollars in terms of operating expenses, there was a $1 million benefit sequentially from the stronger dollar are impacting expenses in local currency impact.

The impact was primarily due to fluctuations in the euro and we'll say the British pound.

Further the remeasurement of cash and other monetary balances in local currency that means outside of the U S resulted in a $1 $8 million loss, which isn't reflected in <unk>.

Other income so below the line.

Average rate in Q2 was like 107 for the Euro of $1 26 for the pound, we're expecting something similar for.

The second half of the year.

Yes, I guess, the only thing I would add to that is.

Broadly speaking strong demand and including in international markets and Thats reflected in the <unk>.

Kris and CCP and confidence in the business that you are hearing on the call.

The primary of discrepancy is probably the the.

Recognition of on.

On Prem revenue and so for that reason not not raising the revenue guide from here, but more broadly speaking feel really good about the business.

The rate of growth.

Deals entering the pipeline and our ability to continue to move deals through the pipeline and increased GCB guide as a result.

Got it thank you.

The next question comes from Gray Powell of beta.

T J.

Great. Thanks for thanks for taking the question just before I ask that I guess I just want to say thanks for the transparency.

Just on the headwinds that you're seeing in the international business I'm not sure how long everybody other companies would deal with that.

You May have said this before but just roughly speaking.

<unk> can you help us think through.

How much the softness on the international side impacted billings in Q2 was.

Was it a small miss was a big notes just just any any sort of order of magnitude it would be really helpful. There.

I think it's fair to say that we would have seen a couple points of additional growth in the second quarter. So order of magnitude, we're not talking about something that's sizeable we're talking about something that's just different than what we've experienced.

In prior quarters.

So that's why we're calling it so and of course, they have a procurement bias towards upfront revenue.

It.

It did have an impact on revenue so that's why we're.

We're being providing the transparency.

Got it so a couple of additional points of Grace on Q2 total billings.

Had it not been for international just make sure I got that correct.

Yes, I think Thats, a fair characterization, yes.

Awesome alright, thank you very much.

The next question comes from Joshua Tilton.

Research.

Hey, guys. Thanks for taking my question.

Assuming that you had some deal slipped.

EMEA this quarter have you been able to close them since the quarter closed.

Yes, we have closed some of those but obviously, it's very early in the quarter and.

And that's one of the reasons why we feel really good about our guidance for the second half of the year and why we are providing.

Fashion through the beat and also increasing.

But we also know there is more deals to close right in our pipeline, we talked about the quality of the shape and the size of the pipe. There is there are a lot of large deals as we head into the third quarter.

No.

We're going to continue to focus on moving these deals through the pipeline and closing deals.

And obviously we.

We're set up well for success.

And just to maybe sneak one more in there.

It is not you don't think its specific to tenable, but I kind of want to ask the question a different way from your conversations with customers as a family.

A VM issue or is it just a broader scrutiny issue.

No I think this is a broader scrutiny issue and again I don't think it has anything to it.

I don't think it has anything to do with security customers.

Our changing their procurement processes as they look at their operating expenses.

Yes.

I'll start with a number of <unk> over the last couple of weeks in.

The security budgets are not changing.

Procurement processes require additional hoops and jumping and not just us.

It is in certain instances a number of.

A number of delays to transactions that are in process. So.

We don't think it's specific to VM.

Think it's specific to security and I don't want to say were previous to it but I think to a large extent is just feel process not so much.

Change in budget.

Thank you very much.

Yeah.

Our next question comes from routine testing.

D a davidson.

Hey, guys. Thanks for taking my question I guess I'm curious if you look at the increased level of scrutiny, obviously, North America outperformed relative to EMEA in the quarter, but as the increased level of scrutiny kind of similar across geographies and just more deals are getting pushed to cross the finish line in North America or.

Or just what's the dynamic there and then secondly, if you look at the new deals in the quarter did you have maybe some customers that started the quarter were considering maybe going with EP and then maybe they downsized their deal that maybe just going with Io.

Curious if you saw any of that as well.

So we certainly haven't seen that AEP continues to do very well for us it's Doug.

Double digit percentage of new sales is higher this quarter than it was last quarter penetration back into our customer base has been strong, but it's still modest in terms of the opportunity single digit penetration and we're getting even more of an uplift so absolutely not on the EP side and.

And you broke up a little bit the first part of your question in terms of North America.

Yes again.

Yes.

No go ahead.

I would just say with regard to deals.

It really varies now clearly North America.

<unk> exceeded our expectations and there is just really strong momentum there.

Generally speaking, though there is more there are more level.

A review of across the board now the good news is we were able to overcome that and what we don't want to lose sight of is really the bigger picture here, which is we had a great outcome for CCP grew 27% customer momentum has never been better as one of our best quarters for closing deals new enterprise customers one of our best quarters for closing large deals we're getting.

Lift from EEP.

A lot of areas of our business continue to be very very strong providing just additional color commentary on how performance varied across the board because it did have an impact on revenue, but we have I want to make sure we don't lose.

We have a lot of confidence in our business and hopefully our guidance today reflects that.

We're just providing additional color commentary for because we think it's necessary.

Yeah.

Thank you.

<unk> comes from Mike Okay.

Canaccord Genuity.

Great. Thanks for taking my question just.

Just a follow up to that with the EPA.

And at single digit penetration.

How should we think about the dollar based net retention should remain above your 110 threshold for for quite some time are you seeing any kind of slowdown in terms of larger deal momentum with increased scrutiny.

R R.

I'll, let him chime in here, but in terms of the metrics itself, which is our dollar based.

Spansion.

Very healthy well above the 110% threshold.

And as we commented earlier, it's elevated EP certainly are playing a big part of that because we're having success selling it back into the base as well as other products too. So yes, absolutely healthy in terms of the expansion within the customer base, yes. The only thing I would add to EP as Steve noted this 70% higher asp's so the differentiation.

In Asps as customers move to EEP.

Is actually increasing which is a phenomenal sign and hopefully signal the comment about singles. So it's a double digit percentage of new customer growth I think Steve's comment that it's a single digit percentage of our existing customers that are on <unk>. So when you look at the size of the ASP increased and our.

<unk> success that we're showing going back into the base and upselling them to repeat it just speaks to the opportunity for net dollar expansion rate moving from individual products to EP as well as asset expansion.

Great. That's helpful. Thank you.

Uh huh.

The next question comes from Andrew Nowinski.

No.

Okay. Thank you for squeezing me in.

I don't think you guys mentioned.

<unk> in the prepared remarks, this quarter and I know last quarter, you talked about it potentially only having an impact in Q1, but then a few weeks ago I think DHS put out a report that said longboard, Jay would remain a risk to organizations for the next decade.

Do you think it may have pulled in any deals into Q1 and what impact you did have in Q2 and then how are you thinking about it as it relates to your pipeline going forward. Thanks.

Yes, I think there is there is no doubt we saw some tailwind from log for Jay.

Top of mind for customers and prospects at the end of Q4 and going into Q1 launch.

<unk> for Jay will be with us for years to come.

I think over time folks will be and are integrating log for Jay activities into the more standard operating.

Pes and procedures and less of a hey, there's an emergency spend we really need to get visibility around this particular key issue.

It's not to say that.

So im issue might not raise it said in the in the current or next quarter that would cause a similar buying behavior, but we don't.

I think it's fair to say.

<unk> vulnerability management is strategic and we will continue to be but I don't think there is the type of.

Urgency around log for Jay procurement that we saw late last year beginning of this year.

Got it thanks.

The next question comes from cheaply.

If the insecurity.

Yes, Hello. Thank you remarks, do you expect your federal and public segment business to outgrow your overall business by a larger margin in this current fiscal Q3 than say last year's fiscal Q3 because of the funding.

Can you provide us with an update on roughly what your current federal and public percentage of revenue. Thank you.

It's approximately 15.

Percent of our total sales.

And Thats, a public sector as a whole.

Going into Q3 weeks, we think our pipelines are stronger there's a lot of opportunities. So we feel good about public sector. As we commented earlier, we saw our areas of strength globally within public sector and specifically at the state and local level, that's been an area of investment for us.

Our guidance, we didn't really break out growth rates by theater.

What we're expecting.

But I will say.

We're expecting certainly a sequential uptick in.

And sales of our <unk> from our public sector theater.

Thank you.

Thank you ladies and gentlemen, we have reached the end of our question answer session.

This concludes today's conference. Thank you for your participation and you may now disconnect your lines.

Okay.

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Yeah.

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Okay.

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Yes.

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Yes.

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Greetings and welcome to Tenable quarter, two of 2022 earnings Conference call.

At this time, all participants are in listen only mode.

A question and answer session will follow the formal presentation.

If anyone should your clients during the conference. Please press Star and then Karen on the telephone.

Telephone keypad.

As a reminder, this country's is being recorded.

I will now turn the conference over to your host Erin Connie.

Okay.

Sure.

Please go ahead.

Thank you operator, and thank you all for joining us on today's conference call to discuss second quarter 2022 financial results.

With me on the call today are meet your in our Chief Executive Officer, and Steven <unk>, Our Chief Financial Officer. Prior to this 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.

And drivers in our 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 solutions the potential benefits and financial impact of our acquisitions, including our recent acquisitions of symptoms and best discovery.

Planned innovation and new products and services, our expectations regarding long term profitability and our ability to attract and retain employees and its impact on our business.

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.

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.

Hello.

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 me.

Thank you Erin today I'll discuss our strong financial performance in Q2 strong demand.

And on the continued progress of our cyber exposure management platform without let me first touch on our Q2 results, we delivered strong <unk> growth for the quarter at 27%, which we achieved despite the macro environment, we believe cyber security and specifically fiber exposure management remains a top strategic focus for.

<unk> will continue to be a spending priority against this backdrop. We are also very pleased to deliver compelling top and bottom line results with EPS and Unlevered free cash flow were both notably above expectations for the quarter.

Our business navigated a number of ebbs and flows during the quarter that we believe are a direct result of the complicated environment our customers are operated.

We saw a few dynamics play out during the quarter.

As far as the business as a whole deals are going through more scrutiny that make typically do.

Overall demand remains strong even with increased inspection on a customer by customer basis.

BP is an incredibly efficient way to consume our products as customers look to a more comprehensive assessment of risks.

We have seen this with the strengthened EEP adoption and exposure solutions more broadly.

A great example of this was a seven figure EP competitive takeout deal with a large international financial institution.

We had another strong quarter for both large six figure deals and overall enterprise customer adds.

We continue to see large deals entering and moving through our pipeline and our confidence in the fundamentals of our business has never been stronger.

Continuing to enhance our platform we closed the acquisition of bit discovery, a provider for external attack surface management, enabling us to cover and assess internet facing assets such as web applications cloud resources and open gateways.

Following the closing of the acquisition, we delivered a new version of Nessus Nessus expert that includes external asset discovery.

External asset discovery will be included at no additional cost for our enterprise platform customers.

And separately sold context aware external attack surface management offering for continuous discovery and ongoing monitoring is also available today.

Cyber exposure management as a discipline is attracting attention from industry analysts and customers alike.

Parts of the attack surface, which we were successfully executing on we believe our routes and laser focus position us incredibly well to be a market leader.

As we continue to execute on our own vision, we're excited to see industry acknowledgment of the importance of this discipline continued coverage by Gartner talking about exposure management is a disciplined amplify this point in particular, the importance of advancing cyber exposure management program as critical to developing actionable posture.

Your improvement plan that can be understood by executives.

As board and executives are pressured to understand their cyber security posture, having a clear view of risk is increasingly critical.

Preventing cyber attacks requires full visibility into all assets and exposures.

Sensitive context into potential security threats and clear metrics to objectively measure cyber risk incredible cyber exposure management platform delivers visibility across the modern attack surface with intelligent analytics to prioritize preventative actions and communicate risks to all levels of the organization.

Sure.

We are building the broadest understanding of cyber exposure spending IC asset cloud resources containers web applications and identity services.

We're delivering unifying analytics prioritized actions and benchmarking to help our customers truly manage risk more effectively and that's a compelling capability.

I'll now turn the call over to Steve for further commentary on our financial results.

Thanks, Amit.

<unk> mentioned earlier, we are pleased with our results for the second quarter highlighted by good topline growth our sites will be EPS and strong unlevered free cash flow.

There are a confluence of factors related to the broader market that impacted our results, but we are pleased with our execution in the quarter. Despite a more cautious spend environment.

I will provide more commentary momentarily, but first please note that all financial results. We 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 on to the results for our quarter.

Calculated current billings defined as the change in current deferred revenue plus revenue recognized in the quarter grew 27% year over year to $174 1 million.

And benefited from our continued investment in our platform strategy and go to market efforts.

As a reminder, we go to market using a two tier channel model with our customer contracts denominated in U S dollars.

During the quarter.

The U S dollar strengthened compared to other currencies, which made our products more expensive and that combined with other macro considerations impacted our international sales.

In addition on a global basis, we experienced deeper levels of inspection and more approvals with some customers.

Despite that we are pleased with our CPB growth and had one of our best quarters in terms of adding new customers and transacting larger deals.

Specifically, we added 540, new enterprise platform customers and 79 net new six figure customers in Q2.

Which represents 35 and 28% year over year growth respectively.

Underpinning our customer momentum as EP tenable that EEP, which continues to see strong demand in both the large and mid market and has resulted in more meaningful deal sizes amplified by the addition of cloud and identity security to our unified exposure platform.

Revenue for the quarter was $164 3 million growth in Q2 last year.

Revenue in the quarter exceeded the midpoint of our guidance range by $1 3 million.

Consequently product mix limited our upside in revenue in this quarter.

That said visibility remains high as our percentage of recurring revenue was 95%, which is consistent with prior periods.

I'll now turn to expenses, which include incremental investments in growth and the operating expenses related to the bit discovery acquisition that we closed in the quarter.

I'll start with gross margin, which was 81% this quarter and essentially flat compared to last quarter.

These savings were offset primarily by increased personnel costs.

The support of our products.

In connection with the closing of bit discovery, we launched a new external attack surface management offering in July that we will continue to integrate throughout our product portfolio.

Also as a reminder, we plan to release a more expansive set of cyber exposure analytics in the second half of the year.

This will include attack path analysis enhanced the unify analytics and improved benchmarking and contextual nation of vulnerabilities.