Q4 2022 Tenable Holdings Inc Earnings Call

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Speaker 6: Q4 2022 Ergance Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I'll now turn the conference over to your host, Aaron Carney, Vice President of the Reservations.

Speaker 7: You may begin. Thank you, operator, and thank you all for joining us on today's conference call to discuss Tenable's fourth quarter and full year 2022 financial results. With me on the call today are Amit Yuran, our chief executive officer, and Steve Bents, our chief financial officer.

Speaker 8: Prior to this call, we issued a press release announcing our financial results for the quarter and full year. You can find the press release on our IR website at tenable.com.

Speaker 9: 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 first quarter and full year 2023.

Speaker 10: Growth and drivers in our business changes in the threat landscape in the security industry and our competitive position in the market.

Speaker 11: Growth in our customer demands for an adoption of our solutions, land innovation, and new products and services, and our expectations regarding long-term profitability and free cash flow.

Speaker 12: These four-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 four-looking statements as a prediction of future events. Four-looking statements represent our management, belief, and assumptions only as a-

Speaker 13: actual results, please refer to those contained in our most recent annual report on Form 10K and subsequent reports that we filed with the FCC, which are available on the FCC website at FCC.gov.

Speaker 14: In addition, during today's call, we will discuss non-GAAP financial measures. These non-GAAP financial measures are in addition to, and not as 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 CLPSIS.

Speaker 15: Today I'll discuss our financial performance.

Speaker 16: the strong traction we're seeing with PENABLE-1, and our growth beyond vulnerability management in exposure management.

Speaker 17: With that, let me first touch on our financial performance.

Speaker 18: In the fourth quarter, we delivered strong revenue growth at 24% year over year. In addition, non-GAAP income from operations was $19.9 million and unlevered free cash flow was $32.1 million, both above expectations.

Speaker 19: For the full year, our results were well above our initial expectations, with full year CCB growth of 26% and 67.7 million in income from operations.

Speaker 20: Additionally, we had another strong quarter with large deals as we added 140 net new six-figure customers.

Speaker 21: which is a record for us and is up 40% year over year.

Speaker 22: Even more importantly, the number of six-figure deals accelerated throughout the year, further validating our corporate strategy and demonstration of momentum we are building.

Speaker 23: As the market leader in vulnerability management, we're seeing great demand in the market, including new customer acquisition, renewals, and expansions.

Speaker 24: Our years of leadership in VM has put kind of in a great position to target bigger, more strategic deals as customers continue to move beyond traditional VM to understand and reduce their cyber risk. We believe this is driving the acceleration of six bigger deals.

Speaker 25: We had strong performance in OT, including a number of six-figure deals.

Speaker 26: This is an early stage market with tremendous opportunity where we are now proving our ability to close larger transactions.

Speaker 27: We also saw particular strength in TENable-1, which I will discuss in more detail shortly.

Speaker 28: At Tenable, we continue to differentiate ourselves as a technology leader by continuing to prioritize investments in product innovation and go to market, including our partner ecosystem.

Speaker 29: Over the last several quarters, we have moved quickly to align our efforts where we see the greatest opportunities in the market. And, as our Q4 results indicate, we have moved to the next phase, which is the

Speaker 30: quarters we have moved quickly to align our efforts where we see the greatest opportunities in the market and as our Q4 results indicate we are clearly seeing success.

Speaker 31: Our decision to focus our product and go-to-market efforts around a unified platform is resonating in the market. We are incredibly excited by the traction we're seeing since launching Tenable 1.

Speaker 32: Tenable One continues to see rapid adoption and represented mid-teens percentage of total new business in a quarter.

Demand was broad-based as we saw healthy numbers of lands from new customers as well as upsell from existing customers across SC, IO, and Nexus.

And despite a tougher macro, we continue to see a material uplift with Tenable 1 relative to standalone VM.

We're also excited to note that customers are allocating Credible One licenses across more of their attack surfaces.

including the cloud infrastructure, truly leveraging the power of the platform.

Collectively, including Title I, our exposure solutions now represent approximately 50% of our renewals and new business, up from 40% a year ago.

We're able to leverage our leadership in VM for a natural upsell to 10-able-one, making us more strategic and driving larger transactions.

Penable One brings a single unified view across VM, Cloud security, Active Directory and Identity, and external attack surface management to deliver compelling analytics.

Threat actors don't limit their attacks to one silo of technology. They're looking for the right combination of vulnerabilities, misconfigurations, and account over provisioning that will meet their objectives.

Security teams have been operating on point products and specialized solutions, which created isolation within their operations.

Tenable One enables collaboration across the entire security stack.

It achieves this through enhanced analytics, as an inventory.

building attack path analysis to determine which combinations of vulnerabilities, access and permissions, and misconfigurations could result in paths from external points

The sensitive internal targets.

leveraging these capabilities we believe we offer the first platform to truly operationalize preventative security.

Operationalizing preventative security has been an objective in the market for a long time. It's really hard to do and requires a deep understanding of vulnerabilities, context, and prioritization.

It's our long history of understanding exposures at a very deep level that uniquely positions us to deliver on this objective.

We believe this gives us an edge with our technology and also in helping our customers' security teams operate more efficiently.

Connecting related points across security issues enables our customers to have broader visibility into risk across siloed security functions.

Additionally, in these market conditions, security teams need to do more with less. As Tenable One enables vendor consolidation,

We are consistently attracting a more senior economic buyer, which is crucial as investments require more scrutiny.

A great example of this is a win with a very large global technology and media company.

They were going through a large digital transformation, and they were looking at different vendors to secure their cloud, their external attack surface, and their VM asset.

10-1 enabled them not only to consult the vendors, but to do so also unify visibility across their customers who are on that side.

Years ago, we pioneered the concept of exposure management and set out a road map aligned with that vision.

Tenable One leverages our leadership in VM and realizes the next great step in that vision for managing cyber exposure.

Customers and industry analysts alike validate a VM leadership and the importance of cyber exposure.

Gartner continues to talk about exposure management as a discipline, in particular the importance of advancing a cyber exposure management program as critical to developing actionable security posture improvement plan.

We believe their commentary aligns very well with the attributes of Tenable One.

Additionally, IDC recently published their 2021 VM market share report, highlighting Tenable as the 2021 VM market share report.

market share leader for the fourth year in a row.

IBC added commentary around the importance of a holistic view and risk partization as the number of vulnerabilities is accelerating every year.

As the leader in Veeam and now a platform first company, we believe we've earned the trust of our customers to be the vendor of choice as they look to cover more of their tax evolving

Since the release of Tenable 1, we're seeing an immediate interest and adoption of Tenable 1 for cloud-native use cases.

Customers are looking to improve visibility into cloud assets, understand exposures, and manage risk around this portion of their tax services.

This provides a means to consistently enforce cloud security posture and compliance across multi-cloud and hybrid environments that is delivered in a single unified platform and is more cost effective and scalable than continued use of point provider tools.

In fact, a great example of this was a Q4 upsell for 10-able-1 within a large aviation club.

They saved budget by converting from another cloud security product and instead expanded from Tenable I-O to Tenable One.

As we look to 2023, we will continue to focus on innovation and we'll continue to increase our investment in quota capacity, enterprise customer support, customer experience, and our partner ecosystem.

While making these investments, we're also delivering a strong annual cash flow guide for this year and reiterating our 240 to 250 million in unlearned free cash flow target in 2024.

Our ability to deliver profitable growth with investments in innovation and distribution leads me with great confidence that we will be able to execute on the opportunity in front of us. In short, we're incredibly proud of our ability to execute in this market and look forward to yet another successful year.

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

Thanks Amit. We are pleased with our results for the fourth quarter, highlighted by better than expected growth and profitability due to strong customer demand.

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, gap to non-gap reconciliation may be found in our earnings release issued earlier today, which is posted on our website.

Now onto the results for the quarter.

Calculated current billings to find us to change in current deferred revenue plus revenue recognized in the quarter grew 23% year over year to $238.9 million.

and benefited from strength and vulnerability management, and continued momentum of 10-1, our exposure management platform.

Underpinning our better than expected Tatline result is strong customer demand.

Specifically, we added 571 new enterprise platform customers and 140 net new six-figure customers in Q4.

While both metrics are exceptional, large deals in particular grew 40% year-over-year.

The takeaway here is the investments we've made over the years to build a vast ecosystem of partners and extend our global reach, allow us to effectively serve customers of all sizes in most major markets.

for traditional VM or increasingly for unified risk and exposure management.

Our 10-1 platform also creates a compelling upsell path for our customers and is benefiting our dollar-based net expansion rate, which remains strong and was 117% in the quarter.

Well, this expansion rate may fluctuate on a quarterly basis. We generally expect it to be within a 110 to 120 percent range.

Revenue was $184.6 million, which represents 24% year-over-year growth.

Revenue in the quarter exceeded the midpoint of our guided range by 3.6 million.

Visibility remains strong as our percentage of recurring revenue is 95%, which is consistent with prior periods.

I will now turn to expenses, where we are demonstrating notable operating leverage while also continuing to prioritize investments in growth and innovation.

I'll start with Glow's margin.

which was 78.5% a decrease from 81% last quarter.

Gross margin for the full year was 80%.

As anticipated, cost of revenue increased sequentially, primarily due to higher demand for our cloud-based products, including tenable ones.

which was launched in the fourth quarter and includes attack path analysis and external attack surface management.

Looking ahead, we expect gross margins for the full year 2023 to be in the high 70% range, with modestly improving margins throughout the year.

as adoption of 10-1 increases and we absorb the initial costs related to our newer exposure management offerings.

The 1000 marketing expense was 78.3 million, which was up from 74.5 million last quarter.

Sales and marketing expense as a percentage of revenue was 42% compared to 43% last quarter, reflecting greater efficiency in our go-to-market efforts.

Sales and marketing expense reflects higher personnel costs, including payroll taxes as well as higher sales commissions and variable compensation attributed to our strong sales performance and higher renewal base in the quarter.

For the full year, sales and marketing expense adds a percentage of revenue, which is 44%.

R&D expense was $28.7 million, which was up from $27.4 million last quarter.

are in de-expense as a percentage or revenue with 16% of egg zero topped their salary.

and last quarter. R&D expense increased sequentially primarily due to lower capitalized software development costs in Q4 subsequent to the launch of Tenable One.

For the full year, R&D expense as a percentage of revenue was 16%.

GNA expense was 17.99 million, which was up from 16.7 million last quarter.

As a percentage of revenue, G&A expense was 10% this quarter and last quarter as well as for the full year.

We will continue to make investments in G&A to support the growth and scale of our business.

Income from operations was $19.9 million.

4.4 million above the midpoint of our guided range due to the better than expected pipeline results and greater operational efficiency in our business.

Operating margin for the quarter was 11%.

which was 220 basis points better than the midpoint of our guidance.

Operating margin for the year was 10%.

The takeaway here is even in a dynamic environment, we've been able to efficiently invest for growth and expand our operating margins by leveraging our VM market leadership, sizable customer base and broad exposure management platform.

In terms of headcount, we ended the year with 1,900 employees, which reflects a 2% reduction in force in the fourth quarter, resulting in $1.8 million in severance.

By aligning our cost structure more closely with our investment priorities, we believe we're a well-positioned, as we answered 2023, to capitalize on the opportunities in front of us.

All of this resulted in EPS in the fourth quarter of 12 cents.

which was approximately 5 cents better than the midpoint of our guided range.

Now, let's turn to the balance sheet.

We finished the quarter with 567.4 million cash in short-term investments.

Counts receivable was 187.3 million.

And total deferred revenue was $664.6 million.

including $502.1 million of current deferred revenue, which gives us a lot of visibility into revenue over the next 12 months.

We generate at 32.1 million of unlever free cash flow during the quarter and 128.1 million for the full year, which is up from 95.2 million last year.

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

I will discuss cashflow in greater detail momentarily.

But there's also the quarter behind us. I'd like to discuss our outlook for the first quarter in full year 2023.

Over the first quarter we currently expect revenue to be in the range of 186 to 188 million.

Non-GAP income from operations to be in the range of 9 to 10 million.

Non-gap net income to be in the range of 3 to 4 million.

Assuming interest expense of $7.5 million and a provision for income taxes of $2.1 million.

and non-gap diluted earnings per share to be in the range of two to three sets.

Assuming $120 million fully due to the weighted average shares outstanding.

And for the full year, we currently expect calculated current billings to be in the range of 915 to 925 million.

revenue to be in the range of $800 to $810 billion.

non-GAAP income from operations to be in the range of 86 to 91 million.

non-GAAP net income to be in the range of $63 to $68 million.

Assuming interest expense of 31.3 million and a provision for income taxes of 9.3 million.

non-GAAP diluted earnings per share to be in the range of 52 to 56 cents.

Assuming 122 million fully diluted weighted average shares outstanding.

and unlevered free cash flow to be in the range of $175 to $180 million.

There are a few comments I want to make today that will provide important context to our guidance.

First, we're delighted with our results for the quarter, which gives us a lot of confidence headed into 2023.

We beat on the top and bottom line, added hundreds of new customers and closed a record number of large deals in one of the most highly dynamic markets we've seen in many years.

Our unified exposure platform, Tenable One, provides the security analytics and insights to help customers effectively assess risks across the enterprise by building better interlock across siloed security functions at a time when security teams are being asked to do more with less resources. And while Pipeline continues to build.

We remind all the current spending environment.

Accordingly, our initial CCB guidance for the year reflects 18 to 19 percent growth, which we believe is appropriately cautious given the macro uncertainty.

In terms of quarterly flow, we expect modestly lower year-to-year growth in the first half of the year due to our strong quarterly compares last year with modestly higher growth in the second half.

of profitability we expect income from operations for the full year to grow approximately 30% reflecting an 11% margin

We also expect to follow the same seasonal spending patterns as prior years with incremental investment more.

and higher operating margins in the second half of the year.

We're also excited to be hosting a live in-person sales kickoff in Q1 for the first time since the pandemic, which is a discrete expense that is reflected in our Q1 guide.

With regard to cash flow, our unlevered free cash flow guidance for the full year represents 40% growth.

resulting in a 22% margin, which is up from 19% last year.

We expect unleavened free cashable margin to jelly ramp throughout the year, with Q3s are typical seasonal high point.

We are very pleased to provide an annual guide for unlevered free cash flow today, but please note that we do not plan to update our guide quarterly as the timing of collections and payments can vary from quarter to quarter.

Our next update is expected to be mid-year on our Q2 call.

One final parting comment on cashflow.

The strength of our business model enables us to generate this type of improvement while continuing to make strategic investments in innovation and go to market.

We delivered better than expected and leveraged pre-cash flow in Q4. We're providing strong guide, initial guide, that is, to the year. And we are well on our way to achieving the $240 to $250 million target for 2024.

In summary, we have a lot of confidence in our ability to effectively grow and scale our business and drive higher levels of cash flow.

At this point, I'd like to turn the call back over to Amit for some closing comments.

Thanks Steve. We're very confident in our differentiated technology, our future, and our ability to deliver exceptional results even in a tough market.

We hope to see many of you at the Morgan Stanley Conference in the upcoming weeks.

We now like to open the call up for questions.

Thank you and at this time we will be conducting a question and answer session. If you would like to ask a question please first start one on your telephone keypad. A confirmation tone will indicate your line isn't the question queue.

You may press start to if you would like to remove your question from the queue. For participants using speaker equipment, and maybe you need to pick up your handset before pressing the start keys.

And one moment please while we poll for questions.

Our first question comes from the line of Hamza Fadawala with Morgan Stanley . Please proceed with your questioning.

Hey guys, it's Matt Salsin on Pahamza. Thanks for taking the question. Just wanted to hit on pipeline for the year ahead. Obviously you've had a difficult macro situation. There's been some unevenness over the last year in terms of deals closing on times, deals getting pushed. I'm just curious what you guys are seeing.

kind of for the year ahead. And then also any incremental commentary that you guys can provide around the federal opportunity. Thanks.

Thanks. We're generally pleased with Pipeline. We feel like we've gotten a pretty good rhythm, good understanding of customer buying behaviors.

over the last several quarters and able to invest where we see continued opportunity. So, partization of the AMA, especially in the enterprise market and cannolly our ability to move.

enterprise customers through the 10-1.

motions as well. So feel good about piping. In terms of federal space...

I'd say it's

Very consistent with previous years in terms of seasonality, so weighted in what's typically the third quarter, but we feel good about the momentum that we're building and the pipeline that we're building throughout the year, especially in the state and local markets as well.

Is that off, Hamza?

That's it. Thank you.

Our next question comes from the line of Joel Fishbean with Truist. Please proceed with your question.

Thanks for taking my question and great quarter. Amit, I just want to drill down a little bit on 10.01, massive new product cycle. Love to understand how customers are thinking about the attack service management and also order it.

Talk about the price uplift. You've mentioned previously 30% plus. Love to just understand a little bit more detail about how that's the go-to-market structure. I know you're doing the sales kickoff this year, so 23 could be a really good year for that, but any color you can provide would be really helpful. Thank you.

Yeah, I think directionally still looking at that 70%. So we haven't updated that figure, but directionally consistent with.

with what we've seen previously with Tenable One. And I'd say both the sales team and the customer base seem to be gravitating to it. It's a double digit percentage of new sales and increasing high single digit percentage of existing.

customers now on 10.1, I think that the message resonates. It makes sense. They can look at.

a more complete understanding of cyber exposure, more complete perspective of risk, a much more compelling set of analytics, including attack path analytics and asset inventory types of things, which they haven't historically gotten with the vulnerability management program.

The other piece is it allows us to do spend and vendor consolidation. So by increasing their 10-able-1 spend to cover not only traditional V&B, but also looking at cloud-based assets, or also looking at their identity, we can offer them some volume-based pricing, which ends up being much more attractive than going to one vendor for V&B.

Steve, as a matter of clarity, the uplift we're getting on 10-1, we've said in the past is 70% in this quarter was no different. So we're getting a substantial uplift when transacting larger deals. It's one of the reasons why we're having great success adding lots of large customers.

Great, and just one quick follow-up Steve, just a, or a meet. OT is obviously a very big opportunity. I think, you know, I know we're early days, but, and it feels to me to be Greenfield. Can you just go through the competitive dynamics in some of these deals and, you know, what inning are we in with regard to this OT opportunity?

Yeah, I'd say we're probably still, you know, we're probably in the second inning at this point. We're still on the clock.

A couple of years as questions would come up about OT, what we'd say is we've entered some small procurements, we've entered pilot or phase one deployments where they're looking at a couple of factories, a couple of facilities.

trying to operationalize the data and the workflows that come along with the OT product. And over the last.

A couple of quarters, what we said is we're seeing some follow-on deals, global types of deployments, six and seven figure types of transactions. So we're seeing that momentum bill, I think we're still early in the market and it's a market that doesn't move as fast as the IT market, but it's very deliberate and I think the spending.

private

pure play focused vendors in the OT space. We feel like our technology is

compelling and really leads the market when it comes to looking at the converged IT-OT environment. So if you look at a factory for today, or if you look at pipeline operations or other OT environments, they are...

You know, they are not exclusively OT. They have a bunch of IT systems, IT control systems in those factory floors as well. So we're, I think, unique in our ability to deliver incredible insight.

for overall risk of facility which would include both OT and IT and we think it's a significant competitive advantage for us. Thank you so much.

All right, next question comes from the line of Brian Essex with JP Morgan. Please proceed with your question. Hi, good afternoon and thank you for taking the question. Maybe Amit, just to kind of follow up on spending environment, any incremental color or additional color you can provide in terms of...

Maybe how you've seen customers react to macro headwinds in the past and what's different now? They can do maybe approach asset coverage a different way and you know

Does that maybe impact your ability to expand on the asset coverage side? Maybe how is it as you're seeing?

adoption of 10-able 1-NEP, did that insulate you somewhat from that kind of environment? Maybe if you kind of cut that a bit.

Brian , a great question. We had a very successful quarter from an expansion business perspective, from a net dollar expansion business perspective. So we are seeing customers expand, both the number of assets we're covering for them, as well as through 10-able-one in particular, seeing the different types of...

budget and identify the new workflows in customer environments that are required in order to transact business. Again, if you rewind the clock three quarters or so we said, hey, we're seeing elongation of sales cycles, we're implementing more rigorous inspection, med-pip processes across our...

our sales forecasting, and I think those are paying off. I think the sales team feels more confident in transacting business in this environment. It's a tougher macro, and it's just the reality we're operating in. But I think we feel pretty good about both PIPE and our ability to close transactions.

God, if that's real helpful, we'll keep it to that one.

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

Great, thanks for taking my question. Could you speak to just how the quarter progressed, I guess, from a linearity standpoint. To that end, Steve, maybe anecdotes around the different puts and takes regarding conservatism on the 23 numbers. Just...

you know, what you discounted what you took into effect there. Thanks.

I have a good question there. First, I would say we had a strong finish to the quarter. We closed a lot of deals in December and especially the last couple of weeks.

That said, our quarters continue to be very back-end loaded, more so than what we typically see. I believe this is a consequence of the macro, as customers continue to scrutinize budgets and evaluate spending priorities. You know, we think cyber exposure fails pretty well in this market, but increasingly customers are waiting to see how they're...

You know, as we head into 2023, first we have a much tougher compare, particularly in Q1 where we grew CCB 31% last year. We're assuming the macro will continue to be challenging and potentially even deteriorate further. And that's reflected in our guide.

Look, overall, I think we're pleased with the progress on the quarter, adding lots of new customers, adding lots of large customers, pipeline levels are healthy, but

I think we're trying to take a cautious approach here as we set guidance initially out of the gate. And obviously there's a lot of selling left in the year and we're encouraged with our progress today and we'll have to see how the rest of the year plays out. But we're very good about our business and have a lot of confidence and our ability to be successful in this dynamic environment.

Great, just the one for me, thanks. Our next question comes from the line of Andrew Nowinski with Wells Fargo. Please proceed with your question.

Hi, this is Justin Denotti on for Andrew. Thank you for taking our questions. So congrats on my good quarter. When you were talking about the pipeline, you specifically spoke about strength with your enterprise customers. Best Merge. emerging to support your enterprise customers was separated into a professional intellectual organization.

Just wondering if you're seeing any difference in terms of buying behavior between your mid-market customers versus your enterprise customers. Thank you.

No, I think we saw strength pretty much across the board, including in the mid-market customers as well. On the enterprise side, maybe just slightly smaller in the net new lands.

but continued health in the number of new lands and the expands and certainly strength in the mid-market as well.

Great, and then just as a quick follow up, you know, you talked about your...

If you can use investments in your grow to market, just wondering what your plans are for sales hires in the coming year. And if you're expecting that to be more front-end loaded, if you're taking us slightly more, conservative approach this year.

Well, first and foremost, we are planning to hire in 2023. I think it's fair to say, adding more quidic capacity. Our expectations that we're going to add more quidic capacity in 23 that we did in 22. We have a lot of confidence in our business. And investments are certainly a big part of that. And obviously continue to double down on innovation.

and invest in product as well. We've been very active from a product perspective and bringing new products to market. We did talk a little bit about on the call the factors that kind of influenced the timing of those investments.

You know, first is hiring, you know, we tend to front load our hiring.

early in the year. So more of the hires are coming online in the first half of the year and specifically with Q1.

We also have a number of industry and other events in the first half of the year, such as our annual sales kickoff, which will be live, in-person event this year, RSA and many others. So clearly making a lot of investments. We're very pleased to be offering the guide in terms of operating margin and cash flow that we're providing today. And we're very pleased to be offering the guide in terms of operating margin and cash flow that we're providing today.

We have a lot of confidence in our ability to continue to drive further margin leverage. I appreciate the color.

Our next question comes from the line of Mike Asikos with Needham and Company. Please proceed with your question.

Hi guys, thanks for taking the questions here. I did want to touch on the customer behavior. I know you answered some earlier questions with respect to enterprise versus mid-market and obviously the strong expansion we've spoken to. But for sales cycles, and that's really what I'm driving at here with the customer behavior.

Have they been relatively stable versus what we spoke about in Q3, or have we seen any elongation any way on that front? And maybe it would be helpful if you could kind of pepper in any color when thinking about geographic theater.

Hey Mike, great to hear from you. We have not seen any elongation or any significant change in sales cycle since what we spoke about in Q3 of last year. And I think that seeing it continue to the complex range like you've seen, the start of the stage is very much in control.

allows our sales team to just have continued confidence in their adjusted sales processes and forecasting methodologies. In terms of geos, I think last year we called out some some any peculiar behaviors in geos. At this point I think we're seeing fairly consistent performance.

for how customers have put together their cybersecurity budgets as we think about calendar 23. Obviously we're all talking about the increased scrutiny here, but curious since cyber is perceived as being this more insulated sector.

What have those customer conversations been like? And just a real quick housekeeping to tap on to the end of that, but Steve, I know you spoke about the annual sales kick off in Q1 as being in person. Is there any way to quantify how much of an expense that item is? Are we talking about an incremental two to three million?

any color on both those fronts would be beneficial. Thank you. Yeah. I'll provide a little bit of color here on both your questions. I think we'll interject with maybe some color commentary on customer spending and budgets for 23. First, with regard to, I think your question was like, how does it look here out of the gate? We're encouraged by what we saw.

and 2 million, we're talking north of 5 million. So it's a large discrete item. We're very pleased to be doing a live in-person sales kickoff this year for the first time since the pandemic. And our sales team is really excited about it, as well as the rest of our company. Obviously, it's factored in our guidance. And our guidance, we believe, is strong out of the gate with regard to margins and cash flow. And our expectation is that we're going to have to take the same steps as we did last year. So we're really excited about it. We're going to be doing a live in-person sales kickoff this year. And we're really excited about it. We're very pleased about it. We're going to be doing a live in-person sales kickoff this year for the first time since the pandemic. So it's going to be a big deal. And our expectation is that we're

Operating margins will improve throughout the year, consistent with what we've seen in prior years.

will improve throughout the year, consistent what we've seen in prior years. Yeah, I think the only thing I would add to it is that

The VM market remains very healthy. We see customers continuing to expand their VM coverage. And we're also seeing great traction, especially with 10 of a one around cloud security. We called out strength in our OT sales during the course of the quarter. So customer budgets are there.

I think to the extent that we can become a cost effective vendor consolidation platform play for them, there's a lot of interest, a lot of strategic dialogue around that. And I think customers are very excited about some of the newer analytics that we've introduced with Temple 1. So we'll look forward to updating you during the course of the year, but I feel like Temple 1 looks like it will continue to play a larger and larger factor throughout the year.

future question. Okay great. Hey guys, thanks for taking my questions here. I mean maybe maybe just start with you and apologies if it's already been addressed but I was wondering if you could just talk about how customers look at the ROI from a platform like 10-able one.

You know, it includes so much more kind of additional valuable product that lowers the risk profile. But I'm curious when you talked to customers about 10-1, how are they sort of thinking about ROI? Okay, so I give a great question. There's a couple of obvious and a couple of non-obvious answers to it. I think the most...

to a separate vendor for those solutions, you're spending, you know, unit one through 10,000 on cloud assets and one through 8,000 on active directory, in addition to the one through 30,000 on VM. Whereas if you're consolidating your spend with Tenable and Tenable One, you can buy, you know, at volume discount, it's one through 50,000.

for us. The second is in the analytics. We simply are able to bring more analytics and unify the analytics to the table than going to disparate vendors. So for instance, building an asset inventory everywhere, a particular piece of software exists across your environment, anywhere if vulnerability exists.

across your environment, whether it's on-prem, in cloud, or other places, we think is very compelling. Prioritizing what needs to be addressed, we think can be a compelling differentiation. Looking at a TAC-PAT analytics, so saying, hey, what is the path, what are the various paths of systems and vulnerabilities and users and permissions.

that could get me to this sensitive internal asset from my external attack surface from internet facing assets is a pretty compelling differentiator compared to buying individual and stovepipe solutions. So we think both from a value and analytics standpoint as well as a vendor and cost consolidation standpoint.

the platform approach to understanding exposure and risk just makes sense. And that's why we're seeing both the sales team and customers really gravitate toward it.

That makes a lot of sense. Steve, maybe from I follow up for you, again, apologies if this was talked about, but can we just talk a little bit about gross margins for 23? You know, that was that was down sequentially in cute form, guessing that's from from hosting costs, but curious how you think about that here in 23 as 10 of a one.

presumably becomes a bigger part of the business. Sure, great question, Zach. The gross margin in the fourth quarter came in as expected and is impacted by the recent launch of some new products for us. One is ASM, which is a new use case. The cost of domain attribution is something we can leverage over time as we see higher penetration rates.

Also, with TENOBLE-1, we have a more robust cyber-asset inventory, which is critical to supporting functionality such as attack path analysis and Lumen exposure view. So these are new areas of innovation come with some initial semifix costs that we expect to fully absorb over time. And that's certainly impacting gross margins.

Overall, very pleased with gross margins. And we said on the call that we expect gross margins to kind of stay in the high 70 percent range for 2023. And we expect gross margins to improve during the course of the year.

Very helpful. Thanks guys. And as a quick reminder, if anyone has any questions, you may press star 1 to join the question and answer queue. Our next question comes from the line of Mike Walkley with Canaccord Genuity. Please proceed with your question.

Thanks. My congratulations also on the strong close to the year. Amit, when you study your customer base, what percent do you believe will ultimately upgrade to 10-1? While it's high single digits of the base currently, where could that penetration go over the next couple of years that should be a strong source of sustained growth?

Yeah, it's a great question. And I think obviously there's tremendous potential. We're putting a lot of...

A lot of focus on it as a company. The leading indicator for that would be our new sales and what we're seeing is...

is high teens percentage of new sales coming in on 10.1. So over time, as long as that continues to remain healthy, we would see a larger and larger percentage of customers moving to 10.1, where it could go long term.

is high teens percentage of new sales coming in on Tenable One. So over time, as long as that continues to remain healthy, we would see a larger and larger percentage of customers moving to Tenable One. Where it could go long term remains to be seen, but.

You know, we're pretty excited about the potential. Okay, great. And just a quick follow-up question. Any changes in the competitive environment entering 2023, one of your competitors potentially putting themselves up for sale, and you guys certainly have a lot of momentum with 10 number one. Just any change in the competitive environment that seems more favorable as you enter 2023? Yeah, I mean obviously we wouldn't speculate about that, but you know feel really good.

exceptionally confident going into any VM opportunity that those are those are really ours to ours to lose and And candidly they feel like 10-1 gives them a very significant value differentiated capability to talk about as well.

I hope your in-person event goes well. Thanks for taking my questions.

Great. Well, I hope your in-person event goes well. Thanks for taking my questions. Great. Thank you.

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

Hi, good afternoon and let me echo my congratulations as well. I wanted to maybe dig in a little bit into the Active Directory and Identity products. Can you talk a little bit about what you're seeing in terms of demand there and maybe the potential for that to be a larger product set over time as well?

Well, we think it's in those tremendous market potential there, you know, as you know, Jonathan, Active Directory is target number one for hackers, whether it's a nation state adversary, as we saw in the Mandiant breach, or whether it's, you know, ransomware, where over 90% of ransomware is going directly after domain controllers and Active Directory. Active Directory is a freaking mess to do.

a solution in this area, the security teams know it's a big problem. They maybe do a consultant and an annual audit or assessment of their Active Directory environments, which is, um, you know, uh, clearly not, not enough. So we feel like there's tremendous market opportunity. The sales team has a lot of confidence in the Active Directory product and bringing it into customers.

We had a great quarter with Active Directory in Q4, so excited about the potential both in 2023 as well as Active Directory playing an increasingly large role in Tumble 1 and some of the analytics that we're unlocking with Active Directory and identities.

Great, and just as a follow up for Steve, I think there was a small reduction in force. Can you maybe give us a little bit more detail on the risk and maybe what that means in terms of your margins, maybe where some of the cuts came from? Thank you. Yeah, it was fairly broad across many functional departments.

investments as Amique talked about earlier, making investments in terms of product and adding lots of quota capacity. And then what it wanted to come into me earlier was our expectations that we're going to have more quota capacity in 23 than we did in 2022. Obviously the demand environment remains highly dynamic, but we've done a good job over the years balancing growth with profitability.

driving marginal average and achieving sustainable levels of growth. Thank you. Our next question comes from the line of Joshua Tilton with Wolf's Research. Please proceed with your question. Hey guys, thanks for taking my questions.

My first one is kind of high level, but the feedback from the channel, I guess, throughout last year on VM, I would say, has gotten incrementally worse each quarter. But if we look at your guys' results, it sounds like you guys have almost gotten incrementally better, especially in regards to your six-figure ads.

Could you maybe kind of just help us reconcile those data points? Yeah, in terms of the channel checks, you know, we don't, I think that's where we don't see it. You know, our channel partners remain very bullish on VM and very bullish about their ability to differentiate.

Tenable is as leading as the leading VM Vendor and provider and feel bullish that their customers are looking to expand their VM Capabilities and more as more and more executive questions are asked of security programs You know Are we vulnerable? Where are we vulnerable? Are we exercising good standard of care? Are we patching our systems?

we feel like it bodes well for VM. We're seeing that in our results. We're seeing that in our conversations with customers. And Tenable One allows us to have.

Even more strategic conversations across a broader set of asset types. So we've remained committed to the VM and cyber exposure market and I think given both our results and our confidence in what we're seeing in our own conversations with customers and channel partners. You know, I...

we will remain committed to and increasingly invest in that strategy. The one thing that I'll add is keep in mind that we transact sales in 160 countries. We have hundreds of channel partners. So I can't speak to the channel checks, but sometimes if you're talking to a partner or a contact, they may only have a very specific view.

into our business or maybe even to the VM market. And also our exposure solutions collectively represent about 50% of our total sales. So over the years, we've done a really good job becoming more strategically relevant to our customers, broadening the focus and we're having success selling a platform and playing.

I think you guys are definitely communicating that the initial CCB guidance for 23 is in your opinion de-risk. I think you talked about that it assumes the macro actually gets worse. Is there anything else outside of that that you can just quantify or take one level deeper in terms of what exactly inside the guide is more de-risk?

you know, expansion versus new business, where you expect NRR to kind of shake out, anything else you can kind of talk to in a 23 guide that should help us feel like those numbers are de-risked. Yeah, we think our CCB guide for the year is good, but we describe it as cautious and we think that's the right...

approach to have in a market like this, the Tiley dynamic, right? Each quarter is different in its own, right? And our expectation going into 2023 is that the macro remain challenge and perhaps we'll even worsen, you know, the first half of the year. So we want to be prepared for whatever comes our way. We've done a good job over the past several quarters, really identifying opportunities where, you know, where we're, where we have success.

larger closing larger deals and some verticals are stronger than others as we've talked about earlier and Tech was particularly strong for us financial services You know all of those so so we have a good sense of what's working really well for us I think with regard to the guide

I think we're just taking a more cautious approach and we're assuming that the macro could potentially impact close rights and maybe even more no rights. But what I will say is that our no rights continue to remain strong. Opsel was very strong in the quarter. We did add lots of large deals.

But our expectation is that new lands, new lo- for new logos, could be tougher to transact in 23. Thanks guys. Thank you.

with DA Davidson, please proceed with your question. Hey, thanks for taking my questions, guys. Certainly a lot of talk about Tenable One and good traction there. I think it was last quarter, maybe the quarter before you guys started talking about the Salesforce, really leading with that product as opposed to leading with VM. Just where are we in that evolution? I don't know if you can speak to maybe the percent of deals or cycles where your reps are leading with Tenable One as opposed to VM, but just.

How has that changed over the last six months? Yeah, I think the sales team has a lot of confidence in the product.

Seeing the customer traction and the results that customers are experiencing with Tenable One gives them an increasing level of confidence.

Today, it remains a team's percentage of new sales, but obviously, the pipeline is more heavily weighted toward 10-able one, and we expect that continue to accelerate with sales takeoff and more training and more time and more differentiation. Got it. And then secondly, you need to talk about vendor consolidation.

I'm playing out as a positive for you guys. I guess I'm also curious, there are some other kind of larger, broader cyber platforms out there that have thrown in a VM product in the mix over the last couple of years. I'm curious if you're seeing vendor consolidation maybe hurt you in some cycles with some of those larger platforms out there throwing in a VM product.

Yeah, you know, there's been a lot of vendors over the course of years making a lot of noise about, you know, VM, you know, going back four or five plus years, you know, Tanium, CrowdStrike, Microsoft, others. And what I would tell you is, you know, they make noise. We see them for a quarter or two and then very quickly their sales team understand that their products are inferior and they start gravitating to.

their core markets and can we where their companies are investing much more aggressively logging Sim and elsewhere so especially in

a product like VM or independent audit is an important function and where, you know, we feel like we've got a quantitatively and qualitatively differentiated product and experience and in understanding enterprise, we almost never see those larger IT vendors participating, you know, particularly in a great world.

And certainly, you never see them beyond a rule, a first phase of competition. I just feel the only other thing I would add to that is, you know, our, obviously, our footprint is broader than VMs. So if customers are really looking to understand cyber risk more broadly than, you know, even other solutions which offer VM capability.

Yeah, so thank you very much. So were there any call-outs on the geo side of EMEA, for example growth there was decelerating the last two quarters. You have a tough comp in Q1 and EMEA as well. Just any call-outs on the geo side? No, I think on the geo side what we just said

Okay, and separately, you had a 2% headcount reduction in Q4, but, and I think you said 1,900 employees for the end of the year. I think that's up 10% or so year to year. What's your expectation for a headcount growth?

and be quote of caring salesperson growth in 23. Sure. Well, we provide head count at year end following our Q4 results. So this is not a number we provide for the upcoming years, part of our annual guidance, but as we discussed earlier, we are hiring and we're planning to make investments most notably in product and go to market.

In terms of quota capacity, we expect to add more quota capacity in 2023 than we did in 2022. Unequivocally, we have a lot of confidence based on the results of Nally this quarter, but the past couple of quarters. So we're adding lots of customers, transacting lots of large deals. The takeaway here is the business climate is pretty fluid. And so we're constantly re-assessing investment priorities, but...

As we discussed earlier, we're going to add headcount. We're in the fortunate position to make these investments in 23 because

We grew our workforce very thoughtfully since the pandemic. Our workforce grew in total 28 percent over the last three years, which puts us in a great position to invest this year while still delivering margin improvement. So we think we're doing a good job aligning our cost base with the investment opportunities that are in front of us. Thank you.

workforce very thoughtfully since the pandemic. Our workforce grew in total 28% over the last three years which puts us in a great position to invest this year while still delivering you know margin improvement. So we think we're doing a good job aligning our cost base with the investment opportunities that that are in front of us. Thank you. And ladies and gentlemen we have reached the end.

of the question and answer session and this also concludes today's conference and you may disconnect your lines at this time. Thank you and have a good day.