Q2 2023 Tenable Holdings Inc Earnings Call

July 25, 2023

Greetings welcome to Tenable second quarter 2023 earnings conference call.

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

Christian 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.

At this time I'll turn the conference over to Erin Carnie, Vice President of Investor Relations.

You may now begin.

Thank you operator, and thank you all for joining us on today's conference call just got Tenable second quarter 2023 financial results with me on the call today are around our Chief Executive Officer, and Steve Burns, Our Chief Financial Officer. Prior to this call we issued a press release announcing our financial results for the quarter you can find the press release.

On the IR website at Tenable dotcom.

Before we begin let me remind you that we will make forward looking statements. During the course of this call, including statements relating to our guidance and expectations for the third quarter and full year 2023, gross and drivers in our business changes in the threat landscape and the security industry and our competitive position in the market growth and our customer.

And for and adoption of our solution, including Tenable, one planned innovation and new products and services 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 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 a further discussion of the material risks and other important factors that could affect our actual results. Please refer to those contained in our most recent annual report on Form 10-K.

And subsequent reports that we file with the SEC, which are available on the SEC website at SEC Gov.

In addition, during today's call we will discuss non-GAAP financial measures. These non-GAAP financial measures are in addition to and not a substitute for or superior to measures of financial performance prepared in accordance with GAAP. There are a number of limitations related to the use of these non-GAAP financial measures versus their club.

The GAAP equivalents.

Our earnings release that we issued today includes GAAP to non-GAAP reconciliations for these measures and it's also available on the Investor Relations section of our website I will now turn the call over to me.

Thank you Alan today, I will cover some context on our financial performance in the quarter discuss the accelerating momentum, we're seeing with our platform, including strong demand in cloud.

Also touch on some exciting product updates.

Q2 surpassed expectations on every metric outperforming on both the top and bottom lines.

Our results for the quarter are testament to the growing importance of exposure management and our ability to pivot in a difficult market tenable.

Federal solutions are enabling customers to secure critical areas of their attack surface, while doing more with less.

This is incredibly relevant at a time when customers are focused on ROI.

Our sellers executed incredibly well during the quarter by combining our strong business use case with our industry leading technology.

Q2, we added 426, new enterprise customers and 63 net new six figure customers signaling a return to our typical quarterly ads.

Upside to our results was driven by demand for tenable, one where we continue to exceed expectation with record levels of deals closing and strong pipeline generation.

We also saw a high volume of large deals as customers look to reduce risk consolidate spend and security tool small with tenable one our OTC business also delivered strong results with notable traction in public sector.

Last quarter, we highlighted our competitive differentiation and we continue to experience a shorter time to tech win and very strong win rates. We believe this is a direct result of our strategy to broaden the use cases for our technologies and enable our customers to discover and secure the proliferation of asset and an increasingly complex environment.

Including hybrid multi cloud Ot identity.

The entity and beyond as.

As we increase the tenable one customer base, we continued to experience larger asp's and adoption of more platform use cases, such as identity and cloud security during.

During the quarter, we saw tenable, one increase from a teens percentage of new bookings to over 20% and now comprises low double digit percentage of new and renewal business.

We're also seeing increased ton about one growth from our on Prem customers driven by the need to expand coverage of their attack surface, coupled with new advanced analytics provided by kind of a one.

For all customers securing the cloud is a critical objective the speed and scale of cloud often leave environments with undetected and unremitting AG exposure such as this configuration system vulnerabilities and excess privileges.

In many cases customers not even know what assets they have and what access has been granted to those assets with.

With cloud security as part of Tenable, one platform, we can bring greater context to our customers' overall <unk>.

Security program, so they can better understand risk and prioritize mitigating actions.

Most organizations operate multi cloud and hybrid environments, and we can consistently enforced cloud security posture and compliance across their operating environments.

With our unified platform, we are helping organizations better measure and communicate improvements in security posture, which has become a board level issue.

During the quarter, we announced our identity risk score.

Agenda, Derisk more users mature AI and machine learning models to quantify risk.

Using modern techniques with conceptual exposure data tenable solutions can quickly identify and prioritize identity and entitlement related problems on <unk>.

And in cloud environments.

We believe cyber security and exposure management in particular are big data problems and that we are best suited to address them.

Through our analytics and artificial intelligence, we're helping security teams quickly identify issues and prioritize remediation across the modern attack surface. We've recently extended tenable, one to allow customers to ingest vulnerability and risk configuration data from their other security tools.

This combined with our extensive coverage across the attack surface and vulnerabilities must configurations and identities allows us to deliver deeper analytics and more insights into customer risk.

In short, we believe that our data Lake is largest repository of contextual exposure data in the world.

This data repository helps to power mature and Nexgen AI technologies for exposure management.

Stay tuned for further announcements and demos at black hat.

In addition to kind of a one we saw strength in both the public sector and OTT.

Cyber security is increasingly a focal point for public policy, including Cisco's operational directives for operational technology presidential decision directives and defense authorization Act all of which mandate improvements in cyber security for OTT.

As customers in the public sector and broader cyber industry faced more rules and regulations. They frequently mature the risk management practices. We are both market leading product in this area and a deep understanding of both Ot and it converged environments.

This combination is.

Is necessary <unk> are increasingly becoming a critical part of the Ot security purchasing process.

This year, we plan to integrate <unk> into tenable, one another milestone for our platform that will further enrich the data and differentiate our offerings.

We're incredibly excited about our performance, where we are today and where we're going.

Our industry, leading technology unified into differentiated platform, we're seeing demand at the top end of the funnel, particularly in cloud identity or achieving test validation wins at a faster rate.

All of this with our balanced growth strategy and continuing to invest for growth and expanding margins I'm, particularly proud of our ability to successfully navigate the ongoing uncertainty in the macro environment.

We had a great quarter and we are confident in our strategy and in our ability to execute.

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

Thanks, Amit overall, we are very pleased with our execution this quarter highlighted by better than expected PCB revenue and earnings attributed to continued traction with our exposure management platform.

I will provide more commentary momentarily, but first please note that all financial results. We discuss today are non-GAAP measures with the exception of revenue.

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

Now onto our results for the quarter.

Calculated current billings defined as the change in current deferred revenue plus revenue recognized in the quarter grew 15% year over year to $200 2 million.

A few things to note with regard to our strong results for the quarter.

First we saw stabilization in banking and financial services as well as tech and telecom sector is in comparison to Q1.

We attribute our success this quarter to a return to a more predictable selling environment.

Including an increased visibility with large deals.

Was benefited by a continued focus when lead qualification and ability to navigate a more rigorous contract approval process.

Just to put matters in perspective.

Panama line grew to over 20% of total new enterprise sales and is helping us inflect asp's and pipeline higher and achieved <unk> validation wins faster.

It's also worth noting that we recently integrated tenable I'm, a security center, which allows our on premise customers to access enhance capabilities and analytics and tenable one through our flexible hybrid deployment model.

This creates some tailwind in the quarter and we believe represents a sizable opportunity for us going forward to upsell, our exposure analytics and identity and cloud security solutions to our ASC customers.

Third <unk> also reflects better than expected early renewals, most notably from our Q3 renewal base.

This timing of billings contributed approximately 2 million of upside in the quarter.

And as I have mentioned in the past <unk> is a close but not perfect proxy of sales and it's influenced by a number of other factors such as deal timing, including renewals.

In summary, CCP was stronger than expected. Consequently, we are raising the midpoint of our <unk> outlook for the full year today by $3 million, which is the portion of the beat we attribute to our outperformance in the quarter.

In terms of key financial metrics, we continue to take and win share as reflected by our 426, new enterprise platform customers, we added in the quarter.

Large deals.

It was also strong as we added 63 net new six figure customers in Q2.

Our dollar based net expansion rate was 111% in the quarter compared to 113% last quarter.

As a reminder, the expansion rate is calculated on an LTM basis and reflects improvement during Q2 in comparison to what we experienced during Q1.

Revenue was 195 million, which represents 19% year over year growth.

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

Our percentage of recurring revenue remains high at 95% this quarter, which is consistent with prior periods.

I'll now turn to expenses, where we continue to demonstrate good cost control and operating leverage I'll start with gross margin, which was 81% this quarter up from 79% last quarter.

We are pleased to see our gross margin expand over the prior quarter, primarily due to the scalability of our public cloud infrastructure.

Looking ahead to the second half of the year, we expect gross margins to be modestly lower as we absorbed the initial costs related to the upcoming introduction of new exposure management functionality, such as cyber asset management and AI powered analytics.

Sales and marketing expense was $81 4 million, which was down from $82 8 million last quarter.

Sales and marketing expense as a percentage of revenue was 42% compared to 44% last quarter.

Sales and marketing expense decreased sequentially, primarily due to the timing of our sales kickoff conference in Q1 offset by incremental investments in demand generation programs and higher wages and commission expense.

R&D expense was $28 1 million, which was down from $29 3 million last quarter.

R&D expense as a percentage of revenue was 14% this quarter compared to 16% last quarter.

R&D expense decreased sequentially, primarily due to lower personnel costs, namely payroll taxes related to <unk> vesting and benefits.

Increased by capitalized software development costs related to innovation and our unified exposure management platform and efficiency in our public cloud development environment.

G&A expense was $17 8 million, which was down slightly from $18 8 million last quarter.

G&A expense as a percentage of revenue was 9% this quarter compared to 10% last quarter, reflecting a greater focus on cost containment and efficiencies as we scale our business.

Income from operations was $30 2 million, which was significantly better than expected as we exceeded the midpoint of our guidance range by $9 7 million.

Operating margin for the quarter was 15%.

Which was 470 basis points better than the midpoint of our guidance.

The strong beat earnings this quarter allows us to raise our outlook for the full year and reinvest a portion of the upside and go to market and product development in the second half of the year to better position us for future growth and success.

It's also worth noting that our operating margin improved over the same period last year by approximately 800 basis points of which 400 basis points of improvement is related to sales and marketing.

All of this resulted in EPS of <unk>, 22, which was approximately nine times better than the midpoint of our guided range.

Now, let's turn to the balance sheet.

We finished the quarter with $645 5 million in cash and short term investments.

Accounts receivable was $154 4 million and total deferred revenue was $650 2 million, including $495 2 million of current deferred revenue, which gives us a lot of visibility into revenue over the next 12 months.

We generate approximately $40 million of Unlevered free cash flow during the quarter, which exceeded our expectations and reflects the seasonal pattern of billings year over year, we generated.

Approximately $40 million of Unlevered free cash flow during the quarter, which exceeded our expectations and reflects the seasonal pattern of billings during the year.

Year to date, Unlevered free cash flow was $84 million, which puts us well within reach to achieve our annual unlevered free cash flow target for the full year.

Which we are raising today with.

With 95% recurring revenue high gross margins and high renewal rates, we feel confident that we can continue to expand our operating margin and free cash flow margin over the ensuing years.

With the results of the quarter behind us I'd like to discuss our outlook for the third quarter and full year 2023.

For the third quarter, we currently expect revenue to be in the range of $197 million to $199 million.

non-GAAP income from operations to be in the range of 26 million to $27 million.

non-GAAP net income to be in the range of $22 million to $23 million, assuming interest expense of $8 1 million interest income of $6 5 million and a provision for income taxes of $2 4 million.

non-GAAP diluted earnings per share to be in the range of 18 to 19.

Assuming a $122 5 million fully diluted weighted average shares outstanding.

And for the full year. We currently expect calculated current billings to be in the range of $879 million to $887 million.

Revenue to be in the range of 783% to $791 million.

non-GAAP income from operations to be in the range of $96 million to $100 million.

non-GAAP net income to be in the range of $79 million to $83 million, assuming interest expense of $31 5 million interest income of $25 million and a provision for income taxes of $8 6 million.

non-GAAP diluted earnings per share to be in the range of 65 to 69 tenths, assuming 121 million fully diluted weighted average shares outstanding.

And unlevered free cash flow to be in the range of $180 million to $185 million.

We're very pleased to be raising our full year outlook for topline growth and profitability.

We believe our outperformance in Q2, and an upward revision to our guidance today reflects the balanced growth approach that we've been taking.

Therefore, we're raising our outlook for CCP revenue and earnings for the full year, specifically, we are raising op income guidance by 5 million for the full year, while also increasing our investment in go to market and product in the second half of the year to better position us for success in 2024.

Takeaway here is even in a dynamic environment.

We have been able to expand our operating margin as we scale our business by leveraging our market leadership sizable customer base and broad exposure management platform.

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

Thanks, Steve in summary, Q2 was very successful we delivered better than expected growth a sizable beat in earnings and we believe we are well positioned for success in the second half of the year with tailwind from tenable one we.

We have a ton of opportunity ahead of us and look forward to updating you throughout the year.

We hope to see many of you at the upcoming Piper Conference.

Now I'd like to open the call up for questions.

Thank you well now be conducting a question and answer session.

If you'd like to ask a question today. Please press star one from your telephone keypad and a confirmation tone will indicate that your lines in the question queue.

You May press Star two if you would like to withdraw your question from the queue.

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One moment, please while we poll for questions.

Thank you and our first question comes from the line of Brian Essex with J P. Morgan. Please proceed with your question.

Hi, good afternoon, and thank you for taking the question and congrats on a much better quarter this quarter.

I guess.

You pointed to your pipeline.

Better pipeline.

Growth and better execution, this quarter and accelerated tech wins, I guess, you were to compare to last quarter.

Maybe could you highlight what youre seeing in terms of approval to.

To close rate and many frame out some of the measures that you took to improve the performance on the back end of that sales cycle.

Yeah, I think listen obviously, we're pleased with the results.

We saw what I would characterize as a return to normalcy in many.

Senses of the word.

You said last quarter demand was strong we saw a lot of deals entering the pipeline we saw deals moving through but we saw especially at the end of the quarter and were back end loaded in our quarters as many enterprise software companies are there was significant disruption in the market regional banking crisis, and a number of other factors.

This quarter.

We saw a return to normalcy in terms of the number of net new customer adds that we've been able to add to our enterprise platforms in terms of the.

Resumption of significant six figure deals and being able to transact business. We continue to maintain very close eye on the sales process, including much tighter engagement with.

The finance teams within the buyer so targeting conversations with Cfos earlier in the process of making sure. We've got line of sight into those conversations.

Got it that's helpful. If I could just follow up on the federal I think you've noted some traction there and as we enter the third quarter.

Any sense on it.

Initiatives that were maybe kicked off our emphasized last year end and how traction with those initiatives are tracking this year.

For me.

Yes, obviously in the in the federal space.

The engagement of the sales cycles are much longer the planning process for customers as is significantly longer. So a lot of the activity that we're seeing as a result of groundwork has been laid last year and over previous years and Terry.

So we're really pleased we saw very strong demand.

We outperformed plan in both Q2 and the first half of the year and we feel like we've got significant.

Pipe and the opportunity to outperform and federal here going into it is a big Federal Q3, we're also seeing I'd say significant traction in state and local governments many of those programs both funded by.

Federal Grant dollars and federal programs as well as kind of drafting awful lot of the technology choices, which Lee.

U S. Federal government has made so.

We saw really good strength in state and local and are optimistic that that will continue going forward.

Yeah.

Great helpful. Thank you very much.

Our next question comes from the line of Andrew Nowinski with Wells Fargo. Please proceed with your questions.

Great. Thank you and congrats on a nice quarter so I.

We saw a lot of your interviews at the end of the quarter regarding the move it vulnerability and there were reports out this week I think talking about a 400 plus companies are impacted by that vulnerability.

And I know it was only discovered in the last two weeks of the quarter, but did you see an impact to your calculated billings in Q2 from that.

What you saw from log for Jay.

Yes, I would say, it's probably not quite as energetic as what we saw from one for Jay which I think the the impact to financial performance.

To procurements was just very notable what we did was increased engagement with customers customers leveraging products and I think this is probably a more typical of a high profile vulnerability.

<unk> ability and just points to why there is strong demand environment. There are obviously compliance and regulatory drivers for managing risk managing and understanding cyber exposures and vulnerabilities in particular.

Beyond that strong engagement from security operations, recognizing that when issues like move it.

Manifest themselves they have to really understand what's happening in their environment, what it means from a risk perspective, and where they need to prioritize mitigating actions. So I'd say this is probably more we didn't see the same type of.

Procurement impact, but more just.

Part of the rationale behind why we see broadly strong demand.

Okay very good. Thank you for that and then just maybe a quick follow up you talked about al I think you mentioned in your prepared remarks, how your FC installed base or on Prem installed base.

It could be converting up to the tenable one platform and just wondering if you could quantify for us or give us some parameters around how big that FC installed base might be thank you.

Yes.

Talking about the size of the <unk> installed base, alright, well, we have 40000 plus customers and that includes the sizable SC customer base.

We would quantify it as a several hundred million dollars opportunity to sell tenable, one the expansionary functionality, whether its identity cloud security or even the more expansive analytics back into our customer base and SC customers, usually they have a choice right either on prem or cloud and overwhelmingly RSC customers.

<unk>.

Have an on premise environment and one of the few companies in our space that can address the needs of customers who want both on premise, but also on additional capabilities in the cloud. So tenable, one certainly has been a catalyst to.

To help us better serve the needs of our on premise customers, Yes, I would just add to that slightly saying, we only released.

<unk>.

The ability for <unk> customers to leverage tenable one.

Just a short period shortly before the end of quarter, So really sales team and customers with I think what I would characterize as pent up demand and excitement for the.

Convergence and the ability to operate in a hybrid mode. So keep keep the rest of your deployment start.

Leveraging the enhanced analytics and the capabilities of <unk> to the point, where it's it did have a little bit of a lift.

What we saw with one as you saw and heard on the call the.

As a percentage of new sales.

Total one has now gone from what was mid teens growth to now over 20%.

That's great keep up the good work guys. Thanks.

Thank you.

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

Great. Thanks for taking my question I mean, obviously a lot of optimism around the Ot opportunity and maybe you could just highlight for us what youre seeing what competition looks like in the.

The sense of urgency from the buyer.

Yeah.

I am extremely bullish about our OTT business, we don't talk about it.

Every quarter I think we're now at the point, where I believe we have market leading technology I think we can go toe to toe and win more than our fair share of competitive attacks against even the notable names in.

In terms of larger lands larger OTC transactions in terms of seeing more consistency in follow on procurements. Once they get past initial deployments and I think significant line of sight into.

Continued pipeline growth as those procurements and those initial deployments continue to grow so I believe a significant opportunity and upside for us in the Ot business and I would expect to hear more over the coming quarters.

Great I wanted to sneak one in for Steve Real quick on the $2 million in early renewal little unusual in this environment, given everyone's kind of clutching dollars. So.

Help us understand where customers incentives to do this you talked about getting back to more normalcy is there typically a few million dollars in early renewals. How are you thinking about that moving forward. Thank you.

Sure Rob good question.

Just to clarify consensus ECB growth coming into the quarter was 12% and we're reporting 15% today. So we're very pleased with the quarter to $5 million.

Better than expectations, and we did quantify we just say approximately $2 million of the beat is due to timing specifically billing related to early renewals as we said in the past <unk> is a close but not perfect proxy of the underlying sales of the business and it's influenced by a number of factors such as deal timing.

<unk> early renewals this quarter, we saw a higher than expected percentage of renewals that came in early we didn't do anything structural or structurally different. We just saw a couple of large deals early Q.

Q3 renewals come in early in the quarter.

And that gives us good backlog and visibility obviously as we head into the second half of the year.

Part of the reason why we guide to CCP on a full year basis and not quarterly is that there can be natural fluctuations like this.

Raising we're pleased to be raising our full year <unk> outlook.

And this will modestly impact <unk> growth in the third quarter.

Great. Thank you very much.

Our next question is from the line of second Kalia with Barclays. Please proceed with your question.

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

I mean, maybe maybe just to start with you and great to see that higher mix of tenable. One I think we said, 20% plus of new business. That's a nice that's a nice increase from prior quarters. Maybe the question is what what modules within tenable, one or maybe what asset coverage are you finding customers are off.

Foremost outside of maybe what I'll call traditional VM.

Yes, I think yes.

Outside of.

Traditional so first of all thank you for the compliment we're extremely excited and we believe that again, we're still in the early innings of timber one believes that there is significant opportunity to continue to advance the percentage of transactions and customers that operate on that platform, especially as we continue to innovate and release new product new capability, new analytic methods on it.

Happy to chat more about that.

In terms of asset types. We also continued to see a diversity of new asset types. So I think in prior periods and historically have been very <unk> centric I think in particular, we saw a lot of demand around cloud and.

In particular with cloud assets coming online and people looking at us as the best of breed ability too.

Thus for vulnerability in cloud environments with the same type of.

Consistency and rigor as they are accustomed to in their in their on Prem World.

Yes. This is Steve <unk> is the only thing I'll add there is that as a reminder, the asp's are notably higher returnable one than they are with selling standalone VM, 70% higher so we're continuing to get good traction and good uplift.

And.

It's also inflect the large deals higher today, we're reporting 63 net new six figure customers Thats up almost <unk> from what we report as sequentially in Q1.

And because we're covering more areas of the attack surface and helping customers.

Better understand the risks.

Yeah, absolutely, Steve maybe maybe on that point, maybe for my follow up for you.

Great to see the stabilization in CCP growth this quarter.

One of the things you mentioned in your prepared remarks, I think it was just having a little bit more of a higher visibility into some of the bigger deals right in the second half maybe the question is how are you thinking about big deal close rates in the second half or just sort of the levers of upside for CCP in the second half now that we can sort of put.

Some of the onetime finance and telco stuff behind us.

Yes, we're delighted with our results in Q2 as we head into the second half of the year pipeline remained strong and one of the things that we've been emphatic about is our ability to generate demand.

And I think we've had we have a lot of six figure opportunities third quarter as we all know is the.

Seasonally strong quarter for us.

We are the clear leader in U S fed in public sector more broadly.

And we have a ton of opportunity in front of US both in terms of funded deals in unfunded opportunity. So we expect certainly expect continuing traction with public sector and that was an area of outperformance in Q2.

Let's say, if we kind of widen the aperture here I would say that tenable one as another catalyst of growth for US again, just having a lot of success.

Creating demand for tenable, one and it now represents I would say most of our six figure opportunities as we look at the second half of the year tangible one is oh, well over 50% of that.

So overall I think we're pleased with certainly the print in Q2 the pipeline as we head into the.

Second half of the year. This is still a tough selling environment, but we're demonstrating real value in a market where customers are more discerning about their purchases.

And there is more levels of review uncertainty and I think we're navigating the current environment very well and obviously you have a great value from the platform as we consolidate vendor spend and help customers better understand the risks.

Got it very helpful. Thanks, guys.

Yeah.

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

Hi, Good afternoon, just wanted to maybe start out with some of your comments around the AI powered solutions can you help us understand what some of these applications will look like sort of the value proposition and maybe how this translates into a revenue opportunity.

Yeah.

I'd like to start off every conversation with AI by talking first about the demand environment I'd say, we see significant opportunities for AI to be leveraged by threat actors.

An acceleration of Weaponisation of vulnerabilities.

Increased activity, which I think will translate directly into strong market demand for more cyber security products, including in particular, the ability to identify where you have vulnerabilities, where you have exposures and to address them in AA.

We fashion.

A tenable use of AI perspective, I'd say there is.

Two main categories that we would bucket them into the first is leveraging AI to make.

The products smarter, we have for instance, and we've used we've talked about AI a number of times.

In terms of understanding.

Which vulnerabilities can be exploited in terms of understanding the criticality of assets in terms of helping us determine the prioritization of vulnerabilities and what to work on.

We've now extended the use of that AI to also help.

And identity risk perspective, so obviously been doing a lot of work in the identity space active directory Azure <unk> and other <unk> stores to be able to look at that look at the privileged level look at the access types and make determinations about risks that particular identity.

I suppose we think as Youre looking at overall enterprise risk, it's incredibly important to understand the data the vulnerabilities.

And how high and privileged access accounts.

Engage with systems, which may have.

<unk> in the second category is the use of AI.

Also making we're using generative AI is to make the products smarter and more usable for customers. So for instance, when we highlight a particular issue of particular exposure. We can provide a lot of research right at the customer's fingertips to understand what it means what it means in their environments. How they should go about remediated it end.

Really condense their workflow and enhance their experience.

Both of those methods are ones, which we expect to monetize.

Great. Thank you.

Our next questions are coming from the line of Matt Salzman with Morgan Stanley . Please proceed with your questions.

Hey, Tim Thanks for taking the question.

Just first question on a clarification on the <unk>. So you mentioned that Youre still seeing.

The upwards of 70% ASP.

ASP uplift on tenable, one sales I'm curious if that applies to only net new business demand or if that also applies to renewal and then have a question about the renewal piece out there.

It applies to both just as a matter of clarification.

Got it okay.

And then when you think about the tenable one platform for existing customers. So customers have now had ample time to evaluate it where.

Maybe on the big renewal cycle in the back half of last year. There just wasn't enough time for them to really sink their teeth in and see the benefits, but kind of as you lap.

One year of having the product in the market are you assuming any increased level of contribution from tenable one.

On renewals and the updated CCP guide.

Yes.

We have an asset based pricing model, so as customers renew they often look to us too.

Help secure more of their assets and so there is two ways, we get uplift and drive selling prices higher when it comes to tenable. One number one is covering more assets within their current environment and then number two would be addressing different asset types and Amit specifically talked about earlier on the call the momentum we're having with identity.

And even cloud security more broadly so our expectation as we go into the second half of the year is that when customers renew that we'll see expansion now I will say in this market right growth is tougher to transact we're doing a good job of executing we're delivering upside here.

In the quarter and we are raising our outlook, but we know that when it comes to in both.

Expansionary opportunities, while there is a huge opportunity that expansion can be a more moderate an environment like this in comparison to prior years.

So the good news is we have huge opportunity to sell <unk> and other products back into our base does represent larger Tam.

In high growth opportunities for us and we'll be working hard to do that in the second half of the year.

Got it very helpful. Thank you.

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

Hey, guys. Thanks for taking the questions here.

Just wanted to circle back to the pipeline Jen just because I know we've mentioned it a couple of times on this call.

I believe last quarter the company discussed how it was a record quarter for the company as far as pipeline Jamie. So the question that I have your first.

<unk> <unk> also a record quarter as far as that pipeline Gen. And then building on that can you help me think about these initiatives that you have in place what is it. The company is doing specifically to help build out that pipeline today versus what it was doing maybe a year ago to help ensure that that pipeline is growing at this healthy pace that you guys are talking to today.

Yeah, Hi, Mike. This is Steve So yes. So Q2 is up sequentially in comparison to Q1's, a demand Gen continues to remain strong and more importantly, as the company grows you would expect pipeline to continue to grow with it so and while pipeline is growing.

And we see strong demand is exceeding our expectations overall in aggregate. So I think I'm going to remain clear about that exceeding the expectations of the plan that we developed at the beginning of the year.

And.

I think it's a confluence of a number of factors number one distributions really important we felt an expansive network of distributors and partners over the years and years ago.

Low percentage of inbound opportunities came from the channel today it's.

We said, it's well over 40%. So the channel is really working for US opening doors <unk> security market is very fragmented and we have a great relationship with a lot of our channel partners.

Also we are investing a lot in go to market more and more countries. We transact sales in 160 countries. We have feet on the street in 35, so distribution matters and a market, especially in cyber and then obviously, we continue to get great success doing a number of events and creating inbound opportunity. So overall.

We're pleased with the demand that we're seeing there is a lot of opportunity in front of US we'll be focused on.

Executing against those opportunities and conversion rates remain well.

It remained healthy it's taking longer to close some of those opportunities in a market like this as we've discussed before.

But overall, we're really pleased what were seeing with the pipeline.

Yeah.

Got it thank you and if I could just tack on for a follow up.

I know you were talking about conversion rates, which feeds nicely into my my second question here, but as far as the guidance construction happy to see the reason that we're seeing.

Above and beyond some of the <unk> beat for revenue and then you called out the timing on the billings and the reinvestment.

I guess some of the upside in <unk> when thinking about that operating profit guide right. So.

From a from a top down level.

Does management view.

Macro and sales cycles like like what are your assumptions for the remainder of the year versus the quarter that we just finished as a way to help us frame out.

Guidance construction process that you guys went through thank you.

Well with regard to the Guy.

And our outlook that we are raising today, we're not assuming that there's any improvement in conversion rates, we're not assuming that there's changes in sales cycles.

We're looking at the data that's right in front of us and our outlook reflects a continuation of what we're doing today, we think we're doing some things really well and there is certainly an opportunity to even improve on all of those things I just mentioned so I would characterize the our outlook really is a reflection of what we're doing today.

No change.

Yes, I guess I would just add.

We are pleased with the return of predictability from a sales process perspective, as Steve said.

In a difficult macro you do see elongated sales cycles, but we're.

We're extremely pleased with our competitive win rates were extremely pleased with the number of.

Six and seven figure deals and opportunities in pipe.

And feel like we're in especially with what we're seeing with tenable. Once we feel like we're really well positioned to deliver on the second half of the year.

Terrific. Thank you very much guys.

Our next questions are from the line of Brad Reback with Stifel. Please proceed with your questions.

Great. Thanks very much.

Is it related to the slipped deals from <unk> that you guys had mentioned we're beginning to close in April a couple of months ago was there any meaningful benefit from that.

Yeah.

I'll start off and let Steve jump in <unk> been doing this for 30 years I've never seen deals that slipped in one quarter just be additive to your performance and your delivery in the following quarter and that's true across every business that I've been.

<unk> and so.

We did close a.

A significant percentage of those slipped Q1 deals I'm pleased that none of those projects have gotten canceled none of those initiatives have been de prioritize but just simply in industries in a challenging macro you see green.

Greater scrutiny of procurement practices, specifically from from CFO , and so I think we've gotten our arms around that we have our sales teams trained up and engaged with the finance teams of our customers. So we have more visibility.

Building greater predictability.

Don't think that there was any.

Bump in Q2, <unk> as a result of slip deals from push deals from Q1.

There is good demand environment and good execution.

That's great thanks very much.

Yes.

Our next question is coming from the line of Joshua <unk> with Wolfe Research. Please proceed with your questions.

Hey, guys. Congrats on the results and thanks for sneaking me in here.

I guess I don't want to follow up on the last question.

I mean, I totally understand where you're coming from with the change in performance on flip deals but.

Let's forget about bumping the performance I guess, if we have some deals slip into this quarter and some deals pulled in from the next quarter.

High level, what gives you guys the confidence that what you saw in <unk> broadly is what you would characterize as a return to normalcy.

I guess the way the deals flow in and the number and size and impact of those pushed deals from Q1 did not materially impact Q2, a lot of it was typical deal forecasted for Q2 closing in Q2, we feel confident looking at.

The remainder of the year, it will be able to deliver on.

On the guidance.

Super Helpful. And then just a quick follow up Steve I know, you mentioned kind of a little bit on what's baked into the guidance for the rest of the year, maybe just how has that changed and specifically with regard to the macro how is what you are baking into the guidance for the rest of the year changed relative to what you guys or the assumptions that <unk>.

And when you.

When you updated the full year guidance for us last quarter.

Sure well, we are raising our outlook for CCP as I mentioned earlier to the tune of 3 million, we're guiding in the 13% to 14% and for US we're flowing through.

Flowing through part of the beat here and I think our assumptions as we head into the second half of the year, we're trying to take a cautious approach. That's one thing I want to be.

Very clear about what we're trying to be pragmatic here. This is still a tough selling environment, we're taking conversion rates against the pipeline of opportunities we have and we're getting you look at throughout the second half of the year and we feel like we can certainly deliver on that.

And based on the pipeline of opportunities we have so we're not assuming that conversion rates.

<unk> significantly we're not assuming any major changes in sales cycles as well as renewal rates here. So we feel like we have good visibility as we enter the second half of the year, we expect a seasonally strong U S. Federal.

And.

<unk>.

And I think we're excited about about what lies ahead for us and certainly tenable one is a big catalyst of that we talked about the large.

Six figure deals that are that are in the pipeline in most of those deals are related to tenable one for us.

<unk>.

That is an investment that we've made over the years and we think it positions us well.

Update you over the ensuing quarters.

Okay.

Super helpful and again, congrats on an awesome quarter.

Thank you.

Our next questions are from the line of Mike Walkley with Canaccord Genuity. Please proceed with your question.

Great. Thanks, and my Congrats also Amit.

With you highlighting faster deal wins due to tenant, but one I assume this is mostly related to upselling your large customer base, but.

How are you seeing the longer term opportunity to land larger customers migrating from competitors given your differentiated approach in a market where customers are trying to conserve spend and consolidate vendors.

Yes, I think turmoil really plays to the to the ladder.

Ladder.

Comments, so certainly.

I believe we can improve and increase we're already compelling win rates against customer discernible on is a differentiated platform. We can deliver analytics, we can do all sorts of.

<unk>.

Benchmarking capabilities on tenable, one that arent available.

In competitive.

VM products, we also have the ability to consolidate significant spend so looking at.

Assets cloud based assets looking at money someone might spend on products to help secure active directory.

Cloud security and even here in the second half of the year as we expect to integrate <unk> into tenable one.

We are the <unk>.

Ability to consolidate vendor consolidate spend and reduce overall expense for our customers and we think it's a great position to be in this market.

Thanks, and just a quick follow up given the vendor consolidation and the strong cash flow that your company is generating whats the appetite for M&A versus investing in the platform and are you seeing any change in the private company valuations given some are struggling with financing in its market.

Yeah, Great question, obviously, we're pleased with the with the cash flows of the business and.

Natural use for some of that would be to look at investment opportunities both organically as we've called out.

Some investments that we will be making into the business as well as inorganically and I can tell you we.

We're seeing a lot more at bats, and we're seeing a lot more at bats with.

Very attractive forward leaning market, leading technologies, which if you rewind the clock a year or two years ago, where price.

And an unrealistic in.

Unattainable fashion today, you look at every report that venture capital going in follow on funding rounds are extremely difficult and we have seen an inflection of private company valuations and a willingness to engage in conversations that wouldn't have happened a year or two ago.

Great. Thanks for taking my questions.

Okay.

Our next question is from the line of Rudy passenger with D. A Davidson. Please proceed with your question.

Hey, guys. Thanks for taking my questions.

Steve you're taking the <unk>.

Revenue looked especially you guys take numbers up I mean, youre, taking the revenue guidance for the full year by $7 million, you're only taking up current calculated billings by $3 million and Youre just help explain that variance did you did you close deals earlier in the quarter than you expected and therefore, you got more revenue recognition or why aren't you taking up GCB more for the year.

Yes with regard to <unk> I think we talked about that we'd beat by $5 million.

Grew 15% relative to the 12 in terms of what the consensus was and some of that was timing some of that was outperformance clearly which were reflected in our outlook for the year for <unk>, but we said about $2 million of that is timing and timing in specifically in the way of early renewals and so look we guide <unk> on a full year basis not on a call.

Early basis, we know that there can be some natural variability from quarter to quarter <unk> as a close but not perfect proxy of what we sell is influenced by a number of factors and.

So less.

So you're not always going to have.

Dollar for dollar.

[laughter] increments higher or even lower.

CCP relative to revenue and revenue Theres, a lot of things that influence revenue right.

Most of its recurring revenue and ratable.

We do have some professional service engagements. So theres a number of factors that influenced revenue growth. So overall raising our outlook for both.

Lot of confidence in our ability to execute and I think it reflects just better execution and improved visibility in the business.

Okay, and then I know you said, you're reinvesting some of that upside on operating income in the quarter just.

What is your sales capacity additions. This year now look like I know a couple of quarters ago. Initially said you wanted to add more capacity. This year than last year, you backed off that a little bit last year, how much sales capacity are you looking to add this year at this point.

Yes.

Our goal is each and every year is that sales capacity, we have a massive market opportunity.

Our expectations, we're going to continue to expand our sales force expand our network of partners.

AG quota capacity and feet on the street and this year is no different what we talked about on the last call was really hitting the is the incremental investments we are going to make we added a lot. In Q1, we said we were going to moderate that over the ensuing quarters I think our results today give us confidence to go out and invest we know that when you invest right more investment comes with higher <unk>.

Spectation.

And we certainly understand that but we have a massive market opportunity here, we are planning to invest more in the second half of the year now than what we were assuming 90 days ago.

Well.

And we'll be working hard that quota capacity. So investments also of note here is not just quota capacity, which we're adding but investments in partnerships and new routes to market, such as <unk>, MSP and <unk> and some of the other things in.

Marketplace. So there's lots of routes to market for us too.

To continue to sustain and even accelerate growth.

The investments that we're making today, we think that will position us well for success not only in the second half of the year, but also in 2024.

That's helpful. Thanks for taking my questions and congrats again on the bounce back quarter here.

Thank you.

Our next questions are from the line of Roger Port with UBS.

With your question.

Great. Thanks for taking the question just on the customer addition side I think you added 426, new enterprise customers kind of consistent with <unk> on a year over year basis, and generally good resort and the environment.

Would just appreciate any additional color on the mix of wins Youre seeing if you think about.

Additions coming from brownfield replacement for opportunities as customers kind of move from.

Treating VM is a compliant service or a D. Var. DIY approach you still have any color on that that mix of Greenfield brownfield.

Yes, I think we're still we're seeing.

Fairly consistent results to what we've seen in previous periods in terms of.

Ballpark call it 25.

To 30%.

Of our new enterprise larger logos coming to us from what we characterize as greenfield so either.

Do it yourself approaches or annual rely on annual assessments from.

And auditor or security consultancy, which obviously isn't practical.

Practical where defensible approach to security.

In this environment.

We continue to see significant.

Competitive win rates are those remain exceptionally healthy I think our sales team would tell you if we're going into VM opportunities there ours to lose and a lot of engagement with customers is showing them, what the power and capability of the platform is and trying to.

Educate them on that and deliver.

Higher lands with with expand opportunity as they cross over to new and modern asset types and as I said earlier significant traction now with with cloud security.

Very helpful. Thank you.

Thank you.

At this time, we've reached the end of our question and answer session and this will also conclude today's conference you may disconnect. Your lines at this time and we do thank you for your participation.

[music].

Greetings welcome to Tenable second quarter 2023 earnings conference call.

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

A question and answer session will follow the formal presentation.

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

Please note this conference is being recorded.

At this time I'll turn the conference over to Erin Carnie, Vice President Investor Relations.

You may now begin.

Thank you operator, and thank you all for joining us on today's conference call. Just got Tenable second quarter 2023 financial results with me on the call today are <unk>, our Chief Executive Officer, and Steven <unk>, Our Chief Financial Officer. Prior to this call we issued a press release announcing our financial results for the quarter you can find the press release.

On the IR website at Tenable dotcom.

Before we begin let me remind you that we will make forward looking statements. During the course of this call, including statements relating to our guidance and expectations for the third quarter and full year 2023 rose 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, including Tenable, one planned innovation and new products and services and our expectations regarding long term profitability and free cash flow.

And subsequent reports that we file with the SEC, which are available on the SEC website at SEC Gov.

The GAAP equivalents.

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

Now I'll turn the call over to me.

Thank you Erin today I'll cover some context on our financial performance in the quarter discuss the accelerating momentum, we're seeing with our platform, including strong demand in cloud, but also touch on some exciting product updates.

Q2 surpassed expectations on every metric outperforming on both the top and bottom lines.

Our results for the quarter are a testament to the growing importance of exposure management and our ability to pivot in a difficult market.

Technical solutions are enabling customers to secure critical areas of their attack surface, while doing more with less.

This is incredibly relevant at the time when customers are focused on ROI.

Our sellers executed incredibly well during the quarter by combining our strong business use case with our industry leading technology.

In Q2, we added 426, new enterprise customers and 63 net new six figure customers signaling a return to our typical quarterly ads the upside to our results was driven by demand for tenable, one where we continue to exceed expectation with record levels of deals closing and strong pipeline generation.

We also saw a high volume of large deals as customers look to reduce risk consolidate spend and security tool sprawl with carnival one.

Our <unk> business also delivered strong results with notable traction in public sector.

Last quarter, we highlighted our competitive differentiation and we continue to experience a shorter time to tuck win and very strong win rates. We believe this is a direct result of our strategy to broaden the use cases for our technologies and enable our customers to discover and secure the proliferation of assets and an increasingly complex environments.

Including hybrid multi cloud Ot.

Identity and beyond as.

As we increase the tenable one customer base, we continued to experience larger asps.

And adoption of more platform use cases, such as identity and cloud security during.

During the quarter, we saw a tenable one increase from a teens percentage of new bookings over 20% and now comprises low double digit percentage of new and renewal business.

We're also seeing increased tenable, one growth from our on Prem customers driven by the need to expand coverage of their attack surface, coupled with new advanced analytics provided by tenable one.

For all customers securing the cloud is a critical objective the speed and still of cloud often leave environments with undetected and unrwa mediated exposure such as this configurations system on our abilities and excess privileges in.

In many cases customers are not even know what assets they have and what access has been granted to those assets with.

With cloud security as part of Tenable, one platform, we can bring greater context to our customers' overall security.

Security program, so that they can better understand risk and prioritize mitigating actions.

Most organizations operate multi cloud and hybrid environments, and we can consistently enforce cloud security posture and compliance across their operating environments.

With our unified platform, we are helping organizations better measure and communicate improvements in security posture, which has become a board level issue.

During the quarter, we announced our identity risk score.

Agenda, Derisk more users mature AI and machine learning models to quantify risk.

Using modern techniques with conceptual exposure data Carnival solutions can quickly identify and prioritize identity and entitlement related problems are on prem and in cloud environments.

We believe cyber security and exposure management in particular are big data problems and that we are best suited to address them.

Through our analytics and artificial intelligence, we're helping security teams quickly identify issues are prioritized remediation across the modern attack surface. We've recently extended tenable one to allow customers to ingest vulnerability and this configuration data from their other security tools.

This combined with our extensive coverage across the attack surface and vulnerabilities must configurations and identities allows us to deliver deeper analytics and more insights into customer risk.

In short, we believe that our data Lake is largest repository of contextual exposure data in the world.

This data repository helps to power mature and Nexgen AI technologies for exposure management.

Thank you and for further announcements and demos at Black hat.

In addition, as kind of a one we saw strength in both the public sector and OTT.

Arbor security is increasingly a focal point for public policy, including Cisco's operational directives for operational technology presidential decision directives and defense authorization Act all of which mandate improvements in cyber security for Ot.

As customers in the public sector and broader cyber industry faced more rules and regulations. The frequently matured the risk management practices. We are both market leading product in this area and a deeper understanding of both Ot and converged environments.

This combination.

Is necessary <unk> are increasingly becoming a critical part of the Ot security purchasing process.

This year, we plan to integrate <unk> into tangible one another milestone for our platform that will further enrich the data and differentiate our offerings.

We're incredibly excited about our performance, where we are today and where we're going.

We have industry, leading technology unified and the differentiated platform, we're seeing demand at the top end of the funnel, particularly in cloud and identity or achieving test validation runs at a faster rate.

We're doing all of this with our balanced growth strategy and continuing to invest for growth and expanding margins I'm, particularly proud of our ability to successfully navigate the ongoing uncertainty in the macro environment.

We had a great quarter and we are confident in our strategy and in our ability to execute.

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

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

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

Now onto our results for the quarter.

Calculated current billings defined as the change in current deferred revenue plus revenue recognized in the quarter grew 15% year over year to $200 2 million.

A few things to note with regard to our strong results for the quarter.

First we saw stabilization in banking and financial services as well as tech and telecom sectors in comparison to Q1.

We attribute our success this quarter to a return to a more predictable selling environment.

Including increased visibility with large deals.

Was benefited by a continued focus on lead qualification and ability to navigate a more rigorous contract approval process.

Second kind of a one continued to gain momentum and is creating tailwind with customers seeking to consolidate vendor spend and more broadly understand risk across their attack surface.

And just to put matters in perspective.

Panama, one grew to over 20% of total new enterprise sales and is helping us to inflect asp's and pipeline higher and achieved <unk> validation winds faster.

It's also worth noting that we recently integrated tenable I'm, a security center, which allows our on premise customers to access enhance capabilities and analytics in tenable, one through our flexible hybrid deployment model.

This creative some tailwind in the quarter, we believe represents a sizable opportunity for us going forward to upsell, our exposure analytics and identity and cloud security solutions to our customers.

Third <unk> also reflects better than expected early renewals, most notably from our Q3 renewal base.

This timing of billings contributed approximately $2 million of upside in the quarter.

And as I have mentioned in the past <unk> is a close but not perfect proxy of sales and it is influenced by a number of other factors such as deal timing, including renewals.

In terms of key financial metrics, we continue to take and win share as reflected by our 426, New enterprise platform customers, we added in the corner.

Large deals.

It was also strong as we added 63 net new six figure customers in Q2.

Our dollar based net expansion rate was 111% in the quarter compared to 113% last quarter.

As a reminder, the expansion rate is calculated on an LTM basis and reflects improvement during Q2 in comparison to what we experienced during Q1.

Revenue was $195 million, which represents 19% year over year growth.