Q3 2022 Tenable Holdings Inc Earnings Call
[music].
Greetings and welcome to Tenable <unk> third quarter 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 today should require operator assistance during the conference. Please press star zero from your telephone keypad.
Please note that this conference is being recorded.
At this time I'll now turn the conference over to Erin Carnie Senior director of Investor Relations. Ellen you May now begin.
Thank you operator, and thank you all for joining us on today's conference call to discuss tenable third quarter 2022 financial results with me on the call Today Army, Iran, 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 fourth quarter and full year explain myself.
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 solution.
Innovation and new products.
If it does.
And our expectations regarding long term profitability and free cash flow.
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.
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 filed with U S.
Our available on your website you Doctor.
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 non-GAAP financial measure their closest GAAP equivalent.
Our earnings release issued today includes GAAP to non-GAAP reconciliation for these measures and it's also available on the Investor Relations section of our website.
I will now turn the call ever Kimi.
Thank you Laura.
I will discuss our financial performance in Q3.
Traction with our exposure solutions and.
The exciting release of Tenable, one our exposure management platform.
With that let me first touch on our Q3 results, we delivered strong revenue growth for the quarter, 26%.
We also delivered non-GAAP EPS of 15, Sun and Unlevered free cash flow of $34 8 million both significantly above expectations.
Additionally, we had another strong quarter for new enterprise customer acquisitions, adding 712, which is a record for us.
We have 89 large net new six figure customers, which grew 44% year over year, demonstrating particular strength in the enterprise.
Underpinning this demand was our tenable E P platform, which remains strong at low double digits of new sales, notably E. T has only single digit penetration into our current customer base, providing a significant opportunity for additional expansion.
Overall, we're very pleased with the demand in the quarter as we saw strength in both new logos and upsell to existing customers.
In addition to success in the large enterprise market public sector was also a highlight as we continue to win federal state and local markets.
We're excited is that even in a challenging macro environment cyber and vulnerability management remain a key priority customers regularly talk to us about needing more visibility across the attack surface how to focus efforts on prevention and how to make better cyber risk management decisions we believe.
Our leadership in vulnerability management.
Earns us the right. So not only have these conversations but also be the leading vendor when they are looking into understanding and managing cyber risk.
Over the last few years, we have broadened our products launched additional exposure solutions to address other parts of the attack surface such as operational technologies cloud Native Infrastructure's code in cloud security posture management active directory and identities.
Dan.
External attack surface discovery and management.
Exposure solutions include Tenable, Io, which is frequently used to help customers protect mobile and remote workers.
Probiller external facing assets and assess the integrity of their cloud environment.
Combined these exposure solutions and analytics make up approximately 50% of our overall sales relative to 5% pre IPO and approximately 30% at 2020.
With the introduction of E. T. We made it easier for customers to purchase multiple assessment technologies from us.
Over the past year, we have seen the uplift in Asps for E.
E P reached approximately 70%.
We've seen the market demand increase for exposure management through the adoption and consumption of E. P.
This gives us great confidence that.
And integrated exposure management platform will be even more compelling.
And this month, we announced the release of Tenable, one the strategic evolution of Tenable E P.
Tenable one brings data together from across Tenable is exposure management solutions and delivers new insights and analytics beyond what siloed products are capable of delivering.
Furthermore, on brings the customer's entire tax surplus whether it's on premise or in the cloud into a single unified view across vulnerability management class security active directory and identities and external attack surface management to deliver context, driven risk analytics provides actionable.
Intelligence.
This holistic approach breaks down silos and disparate data sources offering customers, a new way to understand and manage their cyber risk as well as measure their improvements over time.
Tenable, one helps our customers analyze the relationship between asset exposures privileges and threats across attack paths in order to more completely understand and reduce risk.
For customers that prefer to consume individual products tenable. One also delivers enhanced actionable analytics that differentiate accountable for example, tenable Io purchased with a standalone license delivers outstanding vulnerability management.
Our incredible one for V. M gives customers enhanced analytics like asset criticality based prioritization and attack path analytics, new analytics that will identify potential lateral movement.
Combinations of unpack vulnerabilities can create.
Tenable, one it makes each individual product even better.
With this month's released we've introduced three new analytic capabilities that we believe are foundational to exposure management programs.
Aluminum exposure views, which provides insights into an organization cyber exposure.
The task pass analysis, and they've only security teams to view attack pass from external sources to their most critical systems and basket inventory, providing users with a centralized view of assets and their context.
The success, we've seen with E. P gives us great confidence in leading our go to market efforts with Carnival one.
Gartner continues to highlight the importance of exposure management and while using slightly different terminology. Other analysts are increasingly talking about cyber risk and operationalized in the process of managing exposures is increasingly critical.
As a platform first company and the leader in vulnerability management, we're helping customers understand measure and manage risk across their entire attack surface.
<unk> cloud active directory and beyond.
Tenable, one represents an unprecedented opportunity to cement our role as the leading cyber exposure management platform.
Carnival, one represents a major milestone in our vision.
But over time, we will adjust and incorporate more data from a variety of sources and can deliver even more actionable analytics and insights.
While operating in one of the most challenging environments in many years, we're excited to be able to continue delivering both attractive growth strong earnings and an exciting path to transforming cyber risk management.
The value proposition for helping our customers.
More easily understand and prioritize how to reduce cyber risk is resonating, especially in this economic environment, where many companies are seeking to emphasize efficiency.
The investments we have made to develop and broaden our exposure management platform coupled with investments in our go to market efforts give us confidence in our ability to continue delivering on the 20% plus growth target we outlined last year.
Macro side, we believe that we've never been in a better position to deliver significant growth at scale.
We are also on track to meaningfully scale margins and cash flows we generate leverage from previous investments and increase our focus on driving operational efficiency.
We expect to deliver over $120 million in Unlevered free cash flow in 2022, and believe we can double that in 2024.
I'll now turn the call over to Steve for further commentary on our financial results.
Thanks, Amit.
We are pleased with our results for the third quarter highlighted by good topline growth our sites will be EPS and strong unlevered free cash flow.
I will provide more commentary Melbourne thoroughly.
But first please note that all financial results, we discuss today are non-GAAP financial measures with the exception of revenue.
As I already mentioned at the start of this call GAAP to non-GAAP reconciliations may be found in our earnings release issued earlier today, which.
Which is posted on our website.
Now on to the results for the quarter.
Calculated current billings defined as the change in current deferred revenue plus revenue recognized in the quarter grew 24% year over year to $207 3 million.
And benefited from our continued investment in our platform strategy and go to market efforts.
As mentioned earlier, we had one of our best quarters in terms of adding new customers and transacting larger deals.
Specifically, we added 712, new enterprise platform customers and 89 net new six figure customers in Q3, which represents 43 and 44% growth year over year, respectively.
Underpinning customer momentum.
Post your solutions, which is helping us become more strategic to our customers and translating to larger deal sizes.
New deals aside our platform is also creating a more compelling upsell path for existing customers and it's benefiting our dollar base net expansion rate.
<unk> D B N E R, which was 118% in the quarter.
We plan to disclose our D B N E R.
Going forward in our quarterly filings to provide further visibility into the broader adoption of our platform and other products.
While D. B N E. R may fluctuate on a quarterly basis, we generally expect it to be within 110% to 120% range.
Revenue was $174 9 million, which represents 26% year over year growth and was up from 23% growth in Q3 last year.
Revenue in the quarter exceeded the midpoint of our guidance range by $4 9 million.
Visibility remains high as our percentage of recurring revenue with 95%, which is consistent with prior periods.
Now I'll turn to expense, where we are achieving operating leverage while continuing to invest for growth I'll start with gross margin, which was 81% flat compared to last quarter.
Cost of goods sold increased sequentially in absolute dollars, primarily due to the increased usage of our cloud based products and the initial costs related to the release of Tenable, one which includes attack path analysis and external attack surface management.
Sales and marketing expense was $74 5 million, which was down from $75 6 million last quarter.
Sales and marketing expense as a percent of revenue was 43%.
Compared to 46% last quarter, reflecting greater efficiency in our go to market efforts Q.
Q3 expense reflects increased quota carrying sales reps and go to market personnel as well as higher commissions.
R&D expense was $27 4 million, which was down from $28 1 million last quarter.
R&D expense decreased sequentially due to lower contractor spend in connection with the recently from tenable, one offset by incremental engineering head count and less capitalized software development costs.
R&D expense as a percentage of revenue was 16%, which was slightly lower than last quarter.
G&A expense was $16 7 million, which was down from $17 3 million last quarter.
G&A decreased sequentially due to more efficient global operations, partially offset by increased company events and travel.
As a percentage of revenue G&A expense was 10% this quarter compared to 11% last quarter.
Income from operations was $23 1 million.
A notable $13 6 million above the midpoint of our guided range due to the outperformance in revenue and lower operating expenses, including lower payroll costs.
The takeaway here is as a company we have a lot of natural leverage in our business and remain focused on increasing the efficiency with which we build market and sell our products. While we continue to invest in key growth areas, such as sales and R&D.
EPS in the quarter was 15 cents, which was over 11% better than the midpoint of our guided range.
In terms of FX, a stronger dollar resulted in an FX loss of two cents per share.
Other expense in the quarter offset by approximately a penny benefit above the line in opex due to lower operating costs in local currency.
Now, let's turn to the balance sheet.
We finished the quarter with 548 million in cash and short term investments.
Accounts receivable was $147 9 million and total deferred revenue was $593.7 million, including 447.9 of current deferred revenue, which gives us a lot of visibility into revenue over the next 12 months.
Now I would like to discuss interest expense and income.
Looking ahead, we are assuming a higher interest rate environment, when our floating rate debt facility resets at the end of October .
Consequently, our full year guidance reflects $1 1 million of additional interest expense than our previously provided guidance.
However earnings or a cash and investment balances provide a natural hedge to interest expense and a rising rate environment.
As such we do not expect that interest expense net of interest income will have a significant impact on yes.
We generated $34 8 million of Unlevered free cash flow, which is a 20% margin.
With 95% recurring revenue high gross margins and renewal rates, we feel confident that we can continue to generate attractive levels of cash flow, while continuing to invest in the business.
With the results of the quarter behind us I'd like to discuss our outlook for the fourth quarter and full year 2022.
For the fourth quarter, we currently expect revenue to be in the range of $180 million to $182 million.
non-GAAP income from operations to be in the range of $15 million to $16 million.
non-GAAP net income to be in the range of seven five to $8 5 million.
Assuming interest expense of $6 8 million and a provision for income taxes up to $8 million.
non-GAAP diluted earnings per share to be in the range of six seven assuming $118 5 million fully diluted weighted average shares outstanding.
And for the full year, we currently expect.
Current billings to be in the range of $768 million to $776 million.
Revenue to be in the range of $678.6 million to $686 million.
non-GAAP income from operations to be in the range of $62 seven to $63 7 million.
non-GAAP net income to be in the range of 37, six to $38 6 million.
Interest expense of $19 million and a provision for income taxes of $6 million.
non-GAAP diluted earnings per share to be in the range of 32 to 33 cents.
Our EPS guidance assumes 118 million fully diluted weighted average shares outstanding.
And unlevered free cash flow to be in the range of $120 million to $125 million.
Today, we are reiterating our full year guidance for calculated current billings of $768 million to $776 million, representing 25% growth at the midpoint.
As we discussed earlier, we are pleased with our execution in the third quarter, but given the backdrop of an uncertain macro we believe this is a prudent approach.
Core revenue, which has more visibility we are raising our full year guidance by $3 6 million at the midpoint and recognition of the upside we achieved in Q3.
In terms of operating income at the midpoint, we are passing along the $13 6 million beat in Q3 and raising the full year by approximately $2 million as we continue to scale efficiently across the globe.
We're also providing a full year unlevered free cash flow guide for the first time today.
Reflects the confidence we have in our business to significantly grow cash flow over time.
At this point I'd like to turn the call back over to Amit.
Thanks, Steve.
Very confident in our differentiated technology our future.
And our ability to deliver exceptional results even in a tough market.
Hope to see many of you at the B T I G need them and Barclays conferences in the upcoming weeks.
We'd now like to open the call up for questions.
Thank you.
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One moment, please while we poll for questions. Once again, that's star one thank you.
Yeah.
Thank you and our first question comes from the line of Hamzah photo wallet with Morgan Stanley . Please proceed with your question.
Alright, Thank you for taking my questions.
And a way to start the earning season on a strong note our meat first question for you.
We're hearing a lot from customers around consolidation, particularly in this macro environment I think a lot of people still view tenable as just a you know V M. A solution and not just sort of broader cyber exposure platform and if I think about all the use cases you have.
Now things like active directory Ot security cloud security attack surface management could you talk a little bit about how you're seeing customers really buy into that bundle strategy, especially in this environment.
What how should we think about the runway of that consolidation strategy as it relates to your 40000 plus customers.
It comes up I'm going to talk specifically about in enterprise.
In a market, where we now have over 500 customers on our EP platform, we're seeing the double digit growth on the EP side and as you said, there's lots of runway so represents a five.
5%.
Ballpark or something of our existing enterprise platform customers. So there's a lot of traction there's a lot of adoption and there's a lot of runway left we think we're in a terrific position to be a consolidator when people think about and ask about risk.
They are really turning towards an expansion of their VM program. So as we've added.
Attack surface management capability as the battery cost security capability security for active directory.
Operational technologies, and we feel like we're in a fantastic position to consolidate all things around cyber risk management, and really becoming the platform go to company for that.
And maybe just a quick follow up for Steve Cool.
Kudos on the margin beat that was that was solid.
How are you thinking about sort of growth versus profitability, let's say over the next 12 to 18 months relative to perhaps when we spoke last quarter.
Yeah. Thanks for the question.
We continue to focus on gross margin I think it's fair to say, we're very focused on margins and cash flow.
Given our confidence in our growth opportunities, we're adding capacity.
Hiring in R&D with the backdrop of the uncertain macro we are carefully scrutinizing spend in all areas of our business notwithstanding the two that I just mentioned.
I think our Q3 results are indicative.
The kind of leverage that we expect casino business today, we're raising EPS.
By more than the Q3, BBB EPS by over 11 chunks.
And which gives us a lot of confidence that we had in the fourth quarter, but also over the next couple of years and for the first time, we're also providing a free cash flow guide.
And we also made some directional comments about cash flow and how we are not it is expected to grow over the next 24 months.
Alright, thanks for all the detail.
[laughter].
Our next question comes from the line of Rob Owens with Piper Sandler. Please proceed with your question.
Great and thank you guys very much for taking my question. This afternoon. Given you guys are hitting lead off here again for the earnings period, maybe you could help us understand what you saw come out of the public sector.
Usually very strong in the federal vertical this quarter, but you also mentioned <unk>.
State and local so just wondering if fed performed typically in line with where it's been and anything outsized across the state and local coming in as well. Thanks.
Thanks, Rob good to hear from you.
We actually saw green.
Greater upside and strength in the federal market and we typically comment on and I think that aligns well with the strength that we've seen across the large enterprise market segment, and then and as you pointed out over.
Over the last couple of quarters in this past quarter in particular, we saw.
Strong team model and follow up with the rest of the public sector state local markets as well as some of the global government sectors.
Great. Thank you very much.
Our next question is from the line of Joel Fishbein with Truest. Please proceed with your questions.
Thanks for taking my question and again, a very good strong execution. This quarter, Amit just one for you and a follow up for Steve I mean on Tenable. One can you just talk about you know where.
Where the technical price and and maybe I know eat pizza upsell for customers, but how old is tenable one fit in the go to market motion and and the potential upsell that would be helpful. And then Steve for you and just in terms of the operating margins would you performed fantastic. This quarter is this a new base case or is this just because you're too.
A more conservative approach because of the macro environment or where should we think of the profitability metrics going forward along these lines. Thanks.
Yeah.
Joe we see tenable, one as the natural evolution of E. T. So EP gave customers great flexibility to evolve and embrace new asset types.
Are you fishing fashion with tenable, one we're bringing the data across different asset types.
Unified data store. So we think it becomes more compelling not just unified the wording.
Perspective, but also from an analytics perspective. So we think we will continue to see very strong adoption, we didn't continue to see.
Similar or better.
NSP uplift with tenable, one relative to what we were seeing some 70% that we're seeing with BP and the opportunities now also saw additional analytic modules we have.
As part of the platform and some which are a tenable one a premium edition, which allows.
Us too.
Raise asps, even further through the sale of additional analytics, so not much as alumina alumina exposure cards, but also solid attack path analytics and other capabilities.
And then Joe with regard to your question on operating margins, obviously, we're delighted with our earnings.
Earnings in the third quarter.
Significant upside both in terms of operating income as well as Etfs and.
We would expect it to kind of be the new base case going forward our expectations, we're going to continue to drive leverage in the business. We have 95% recurring revenue with high gross margins high renewal rates and so there is a lot of natural leverage we are prioritizing spend.
Very key areas of the business, which is adding quota capacity.
Engineering.
Talent on the product side.
But we're also taking a very careful approach of other areas of spend in our business over the past few years, we've gone into new markets.
And expanded our go to market capability and that comes with some initial startup cost of the leverage Youre seeing today is what I would characterize as not natural leverage in the business, where we're able to add quota capacity northwood capacity in <unk>.
In other areas. So we're very pleased with.
With the margins and the cash flow characteristics. The company in both the third quarter and have confidence to drive higher leverage beyond.
Thank you very much.
Thank you. The next question comes from the line of second cause he is with Barclays. Please proceed with your question.
Yeah.
Okay, Great Hey, guys. Thanks for taking my questions here as well.
I mean, maybe for you I'd I'd love to dig into tenable, one just just a little bit more maybe maybe the the question is is tenable wants something that's complementary to E. P or is this more of a higher end SKU than EP and related to that there's 10 of them.
One maybe help a customer consolidate their budget right from you know maybe maybe take budget from other areas of their security spend or is this more of a new need that that's going to help the customer from a security perspective.
Yeah, we think the tenable one natural evolution for EEP and EEP are allowed for the acquisition of multiple assessment technologies multiple asset types of and a much more efficient fashion for our customers do you understand your exposure again.
And there's different parts of your environment and that message really resonates, which is where we're seeing great traction with key with kind of a one.
Is that natural evolution. So not only are we bring a unique assessment technologies to the table. We're consolidating the data on the back end. So that we can do it analytics between users and their commissions and what system as they are coming from and how those systems are slow are exposed to what assets.
There are accessing and what the integrity of both assets looks like and how you can find our attack paths from externally, finishing the resources to your most critical internal assets what are the paths that adversaries could take and how can we most efficiently disruptive. So we think it's just.
A very natural.
Evolution of how do we think about the cyber exposure and cyber.
Risk management, and we spent a lot of the.
Market opportunities a lot of the revenue stream would be able to talk with you.
Are actually very tightened coupled with.
And then related market segments. So external attack surface management is just helping people answer this question about their exposure and their cyber risk management. So we think being able to tap into not only the traditional G and budget, but also to go after all of the adjacent budgets.
But just with respect to external attack surface management operational technologies are active directory security and identity management cloud secured and we're seeing tremendous traction on the platform, helping folks secure their cloud environments again, it's just a natural.
If I'm understanding your your enterprise risk. So it's it's a it's an evolution that just allows customers to consolidate.
Both from a technology standpoint, and in our budgets team.
Got it got it that's very clear Steve.
Steve maybe maybe for you I'd love to just stay on E. P. For a second I think it was a 70% uplift that was that was mentioned earlier and of course, that's gone up right ever since E. P was introduced but I know that that you know there are some customers that up for all the different product to get that uplift in and some that don't maybe the question for you. Steve is just based off that five.
Were sent roughly 5% of the customer base, it's still a relatively small sample size based on the sample size that you've seen what's the actual uplift spin for those customers that the that that go all in with the you know that.
That by E P.
Oh, Yeah. Good question packet and the one thing I want to make clear is that the 70% uplift that we're seeing is actual realized price. This is not list price. This is a 70% partner that so we're seeing 70% higher selling prices when we sell E P. Our exposure platform relative to.
Selling standalone P M.
And so you can see it in the numbers today, we're having tremendous success transacting larger deals had one of our best quarter ever for net new six figure customers and the uplift that you're seeing is also positively impacting only productivity levels, but also margins. So it gives us a lot of conferences, we'd love to head. Our we just launched kind of a one.
And our expectation is that we'll continue to penetrate our sizable customer base represent a growing percentage not only with new customers, but also.
Some customers back into the base.
Got it very helpful. Thanks, guys.
Our next question is from the line of Brad Reback with Stifel. Please proceed with your question.
Oh, great. Thanks very much.
With the strength in the results in the quarter would it be correct to assume that the elongation that she saw and too cute didn't get any worse than might've gotten actually a little better here in <unk>.
Yeah, I think the way we would just privacy we saw stabilization.
<unk> targeted sales cycles that we experienced.
In Q2.
Got it and then on the.
On the enterprise customer adds obviously, a significant step up sequentially year over year should we think about this as a new level going forward or were there. Some one time items in the quarter and we settle back down to more of a historical level.
Hey, Brad Good question. Obviously, we're pleased we added over 700, new enterprise platform customers and that continues to.
To exceed expectation Trust I would just say pipeline opportunities can vary from quarter to quarter right and deal sizes can also fluctuate.
So we're.
We're not we're not going to see this as a new norm for us.
Pleased with demand that we're seeing broadly across the board as their new enterprise platform customers indicate that there could be some natural fluctuations.
That's great thanks very much.
Yeah.
Thank you. Our next question is from the line of Mike <unk> with Needham. Please proceed with your question.
Hey, guys a bit of a two parter here, but just wanted to come back to the guidance I guess for Steve could you help us frame out again I know there was some commentary at the end when you laid out your views here, but what was it that specifically led the company to to pick up its revenue guide by slightly below with that <unk>.
Was and why the why the maintain billings can you help put some better parameters around that just so where.
We're aligned as far as your thinking on that metric. Thank you.
Yeah with regard to revenue we saw a.
Notable outperformance of revenue by $4 nine almost $5 million.
We're very pleased with the outperformance.
This quarter, which is mainly attributed to strengthen our core subscription business they're all.
A small portion of that beat was related to slightly better than expected results for a D on crown.
In our Q4 guide reflects the strength.
Really in our core subscription business before passing through expectations for Avi on Prem sales for the second half of the year.
Change since our college it.
And then with regard to T. C V again, another area of outperformance are delighted with the execution in the quarter.
Fourth quarter is seasonally our strongest quarter in terms of absolute dollar sales and we think it's prudent to reaffirm our guidance for CTD This quarter and we think it's a good setup.
For Q4.
Thank you for that and if I could just tack on one more question here I know there was the question earlier about the deal cycles. So I'm happy to hear the commentary coming from a meat on that I did just wanted to see if you guys could parse out.
And any changes on the customer behavior, if we're segmenting by geography.
How is your performing versus expectations, how is north America performing versus expectations.
Yeah, we have Oh.
No as I said earlier, he has stabilized and were pleased with our performance in the quarter.
Yeah.
The market was still strong and obviously, it's probably impossible.
I have my global macro environment in terms of sales processes and sales cycles, we continue to see strength in North America.
Well globally public sector was strong.
Great. Thank you for the color.
Our next question is from the line of Andrew Nowinski with Wells Fargo. Please proceed with your questions.
Alright. Thank you for taking the question I'm, a suddenly really excited to watch the progress of all these new products.
Now I know, it's a little early I guess to discuss the calendar 'twenty three outlook, but at a high level. When you introduced many incremental growth drivers this year, including two acquisitions tenable one.
And you also noted this ramping demand for Tenable U P. So you know as we think about our estimates for for next year can you just help us understand maybe the puts and takes that might impact growth next year balancing all of these new growth drivers that you have well that you've introduced versus any factors that might cause growth to slow relative to the 26%.
Growth you just guided to for 2022.
I'm, sorry, Andrew as a matter as a point of clarification. So.
No I think make some directional comments about his next power expectation with Ralph and Kelly talked about a comprehensive wrong, 20% plus.
Felt really good about that certainly a lot of the execution that we're delivering today. We also made some comments about cash flow and how we expect that to grow over the course of the next 24 months, we're not providing an outlook for 2023 and lets call with do some in February but we feel good about the comments we're making.
Of course, we're seeing in our business and obviously, there's we have a much broader product portfolio from more strategically relevant to our customers, we're adding lots of new customers, having success closing larger deals E. P has been a major catalyst for that and tenable. One we expect will certainly be additive.
In terms of a catalyst for future growth I guess.
You know the the.
Key points I would make are one on the go to market side, just the continued maturity and growth of our sales team.
The secular drivers in the market will be.
Criticality of understanding cyber risk in today's environment, and the complexity of doing that using <unk>.
Siloed products and.
One of the things specific to toggle.
From a technology standpoint, you know and as you said, we've entered a number of really exciting markets from a top surface management operational technologies.
Directory and identity cloud cloud security as you know she S. P M.
Your security infrastructures.
A lot of new.
Capabilities and capabilities that are really being blocked together in a unified cyber exposure management platform that Oh, there's one.
With.
Customers and in the sales team. So we feel like Theres, a theres lots of.
Our reason for for excitement.
That's great just as a follow up to that you know you've given the broader platform that you have relative to your competitors.
And all of these adjacent markets I'm wondering if you could just comment on maybe the competitive landscape.
You know to your to your typical to competitors that you see the most and if there's anything that's changed from that perspective have you seen any improvement in win rates because of your broader platform. When all of these new products that you have that that they may not have thanks.
Yeah.
In the core equilibrium opportunities.
There was very little change in the competitive dynamics, we have exceptional win rates will continue to invest in its invested heavily.
In this market and our.
Our sales team our go to market teams.
Absolutely confident.
Deals are basically ours to lose.
When it comes to.
Broader conversations with the seasonal level about cyber risk about understanding cyber exposure.
Again, we feel like we've got a very compelling story to tell that's resonating.
And that speaks to the momentum we're seeing with both higher asps.
S P.
You know more customers on the landing and a lot of a lot of excitement there.
Thank you very much keeping with the good work guys.
Thank you.
Our next question is from the line of Jonathan Ho with William Blair. Please proceed with your questions.
Hi, good afternoon, and congrats on the strong results I guess, you know one thing I wanted to understand a little bit better about the tenable one platform as well you'd be beating with this now to kind of tackle. These other you know maybe a faster growing market on or is this still more of an upsell or attach you know type of promotion to the core VM product.
Yeah.
No I think the.
For the first time.
<unk>.
Extremely confident it will be leading our go to market efforts with tenable, one and the cyber exposure management platform, we feel like it's a differentiated story resonates in the enterprise.
We've seen the momentum.
P E T cells and customer of both existing and new customers gravitating to it.
In expansion opportunities and larger initial lands. So it is a.
Quickly become the.
The default.
Lead motion for Us as a company, we've got great confidence doing it.
Got it and then just as a quick follow up around the operating leverage on you around sort of the free cash flow commentary can you give us a sense of where you expect that leverage to come from you know what types of lines.
From a spending basis anything qualitative would be helpful as well thanks, Steve.
Well I think it's most notably in I'll say, our sales and marketing right now our sales and marketing spend as a percent of revenues, let's say around mid forty's and our long.
Our long term targets.
Freehand wanted somewhere in the 30% range and we have a lot of confidence years ago, we were spending over 60% of our routing themselves in marketing. So we've made tremendous progress on that and we're still early in the journey, there and there's a lot more leverage to go.
Also some efficiency on an R&D and we're also fully absorbing some oh.
Cost in G&A and metal.
Ticked down over the course of time, so I think we've demonstrated a lot of leverage to date Theres a lot more leverage to go we have a great business model lots of recurring revenue good renewal rates are and we're having success.
Landing customers at a very high rate, but also growing that relationship over the course of time.
Great. Thank you.
Our next question is from the line of Joshua Tilton with Wolfe Research. Please proceed with your question.
Hey, guys. Thanks for taking my question. So I first just wanted to follow up on the last free cash flow question. How should we think about your ability to double free cash flow by 2020 for it in context of your 20% growth target basically.
No.
Can you still grow above 20% and hit doubling your free cash flow and then also just just rank for us give us like a level like how confident are you in your ability to hit it not a target, but you know hit where you. You said you guys can do because it does kind of imply that the stock's pretty attractive here.
We are very confident our ability to grow free cash flow and for the first time, we are providing a guide around free cash flow for the year.
Some directional comments about cash flow and how it's going to grow over the course of the next two years.
Very confident and we also talked about 20% topline growth and so the clear inference, there isn't that free cash flow margins will grow at a higher rate.
And then top line growth and that is a natural evolution of an enterprise software company.
And that has high recurring revenue high gross margins high renewal rates and so we're very confident that we will not be making any comments today, if we were not.
And and then maybe just kind of step back a little bit.
There was there does seem to be a significant tone change from last quarter's call. So maybe just help me understand exactly what changed between <unk> and <unk>, that's kind of leading you guys. It sounds so much more positive this quarter and then maybe just given the macro backdrop and all the uncertainty in the environment like what's giving you guys the confidence that this.
Strength is sustainable.
Yeah.
Yeah, I think in the second quarter, we saw significant changes in the in some of the international markets.
Significant changes in the global macro environment.
We saw that impacting and longevity.
Sales cycles tend to deliver a strong quarter, but saw that impacting sales cycles I think now with another quarter under our belt, we've got great confidence that we understand the changes in the sales cycles, we feel like the sales teams made the appropriate adjustments and understand.
Forecasting and proven that we can continue to use land exceptional results in terms of top line growth in terms of new customer adds six figure ASP performance in the Boston.
Global public sector.
And while there are some other market segments.
As well as outperformed my model so.
We feel good about where we're at and path forward.
Thank you guys very helpful.
Yes.
Our next question comes from the line of Rudy Kessinger with D. A Davidson. Please proceed with your questions.
Great. Thanks for taking my questions guys.
I guess I'm kind of boat easier tenable, one now I'm curious you know when you look at yourselves of customers that go with EEP or kind of one or more of those conversations and the reason those customers opt for that platform focused around lower tcl and vendor consolidation, where theyre more focused around improved security outcomes by having all of these products with a single vendor.
Synergies between those products into lower Tcl and consolidation just comes as an added benefit to it which which is really driving the decision to opt for that bundled platform.
Yeah, I think it really is customer.
Or dependent and in some cases, it's more choice D. All of the above but certainly we.
We feel like having the data and we're demonstrating to customers how having external attack surface mapped against access controls map supports vulnerabilities in your cloud environment. You can show that these things will provide additional insights or simply just you can't do with with Siloed data salts. So.
We're seeing that as an issue.
Second driver and candidly we're also seeing.
The.
The English inverse prime where they're looking at spend in individual areas being cloud or.
Or tax office management and so this is this is naturally part of my.
Vulnerability management, and our risk management program and I can consolidate spending have delivered in her five lower cost.
Cost of ownership and better vendor management.
That's helpful. Steve just maybe kind of a cleanup a follow up to a question earlier you said you.
Going back last quarter, you took out $4 million to $5 million for on premise license deals for <unk>, you said it better than expected in Q3, but the second half what's baked into your to your full year guide for the second half for a deep remains unchanged and so most of the upside in the full year guide revision came from subscription I have that right.
That's correct.
Okay got it that's it for me thanks, guys.
Our next question is from the line of shall be suffering with SPN Securities. Please proceed with your question.
Yes. So thank you very much I just wanted to be clear on this does tenable one replace E P and if not how much do you think it's going to be incremental.
We.
E at capital one is the evolution evolution of V P.
And when it comes with now even the recent launches.
For me, it's a set of Alex yes, so with Carnival, one you'll have access to the expanded asset coverage of different asset types. The data comes into unified data store for consolidated reporting integration into other products applications workflows.
Consistent AP eyes, and then we have depending on which package.
Kind of a one you get we have additional.
Excuse an uplift into new analytic forms that weren't previously available on <unk>, specifically, a tap path analytics.
And it's.
Expanded sort of exposure score is.
So to be clear, you're not going to be selling both youre going to just be selling to them about one naughty P.
Correct, it's kind of a one off.
Got it and I just want to be clear on that okay. If you have a question I had was your accounts receivable grew by 35% sequentially and your revenue grew by 6% sequentially. So can you just talk about the linearity of the quarter, how backend loaded it was.
Sure this quarter was a little different than last than our Q2 call. We discussed that we experience more levels of review and inspection from customers specifically the last two weeks, which tends to be our busiest time of the quarter I think it's fair to say that we saw relative to do less.
A couple of weeks a continuation of that trend.
In the early months of.
For the quarter, but September was very strong for us.
And we closed a lot of our large deals in September .
And we're very encouraged as we head into the fourth quarter.
Okay. Thank you.
Yeah.
Our next question is from the line of Gray Powell with BTG. Please proceed with your questions.
Great. Thanks for thanks for taking the question Yeah, I just want make sure I understand the guidance correctly. So if I'm just doing the math right. It looks like the high end of.
Of your full year billings guidance implies 18% growth in Q4, that's below your 20% long term growth rate just how should we think about that is there some extra conservatism in there because of the macro.
But I think it's a coffee now.
Consistent with what we talked about earlier, so if you look at our guide for.
The full year for since he'd be left it unchanged, we're delighted with the results.
The third quarter.
Certainly better than what we expected were going to the fourth quarter and it's our largest quarter in the backdrop of an uncertain macro with confidence.
Confidence in our execution, but we think it's appropriate to reaffirm the guidance today.
Okay Cool I'll leave it there thank you very much.
Thank you.
At this time. This concludes our question and answer session and this will conclude today's conference. Thank you for your participation. You may now disconnect. Your lines at this time and have a wonderful day.