Tenable Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
April 24, 2023

There are 14 speakers on the call.

Operator

Greetings, and welcome to Tenable's First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Erin Kearney, Vice President, Investor Relations.

Operator

Thank you. You may begin.

Speaker 1

Thank you, operator, and thank you all for joining us on today's conference Call to discuss Tenable's Q1 2023 Financial Results. With me on the call today are Amit Yoran, our Chief Executive Officer And Steve Vince, 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 attenable.com. 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 Q2 and full year 2023, Growth and drivers in our business, changes in the threat landscape in the security industry and our competitive position in the market, Growth in our customer demand for and adoption of our solutions, planned innovation and new products and services, and are expectations regarding long term profitability and free cash flow.

Speaker 1

These forward looking statements involve risks and uncertainties, some of which are beyond our control, which could cause actual results to differ materially from those anticipated by these statements. You should not rely upon forward looking statements as a prediction of future events. Forward looking statements represent our management's beliefs and assumptions only as of today and should not be considered representative of our views as of any subsequent date. We disclaim any obligation to update any forward looking statements or outlook. For further discussion of the material risks And other important factors that could affect our actual results, please refer to those contained in our most recent annual report On Form 10 ks and subsequent reports that we file with the SEC, which are available on the SEC website atsec.gov.

Speaker 1

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 The use of these non GAAP financial measures versus their closest GAAP equivalent. Our earnings release that we issued today includes GAAP I'll now turn the call over to Amit.

Speaker 2

Today, I'll provide some financial highlights on the quarter, discuss the current state of the market and our momentum with Tenable One. We delivered strong revenue, operating income and cash flow during the quarter. This is particularly notable given the macro headwinds we experienced at the end of March. Based on conversations with customers, we are confident that cybersecurity and specifically cyber exposure management remains a top strategic focus for organizations globally. While we experienced some challenges in the quarter, we saw some incredibly positive signs for our business.

Speaker 2

Let me start by making a few comments about the broader market, which impacted current calculated billings. Some of the macro conditions we've been discussing, Back end loaded quarters, longer sales cycles and more scrutiny of large deals, particularly new business continued during the quarter. Last 2 weeks of March exacerbated these conditions as the banking crisis came to light. Specifically, we saw a longer lead time In purchasing and approval phases of our sales cycle in the Q1 versus what we had typically experienced. As a direct result, a number of highly qualified committed deals pushed out of the quarter, which is reflected in our net new enterprise And our 6 figure adds, of the deals pushed, many were in banking and financial services and technology and telecom, traditionally strong sectors We expect these macro factors to continue to have an impact this year.

Speaker 2

As we navigate the current macro environment, There are two points that are important to note. The first is that demand remains strong. New pipeline generation added during the quarter exceeded our expectations and was a record for Tenable. Customers clearly want to understand and reduce their risk and they're increasingly using Tenable One as the platform of choice to do so. The second is that we believe our competitive dynamics have never been more favorable.

Speaker 2

We're getting tech evaluation wins at a much faster rate. In fact, the lead to tech win phase of our sales cycle in the quarter was approximately 10% shorter than the same quarter last year, which was also aided by Log4j. In this market, more enterprises are specifically looking to consolidate their investments with a platform first approach to cyber This trend is good news for us and one that we intend to use to our full advantage. Tenable. 1 enables our customers to achieve greater return their cybersecurity investment, while also providing the preventative security they desperately need.

Speaker 2

Tenable 1 continues to be an exciting area of growth for us and represents mid teens percentage of new business and a high single digits percentage of our overall business. It's also noteworthy that within Tenable One, we continue to see a shift in Allocation of licenses beyond vulnerability management. Cloud and analytics are key areas of growth with existing customers validating our investments To unify cloud security posture and vulnerability management, as well as our analytics led approach to exposure management. The strength we're seeing in Tenable 1 is a direct result of our pursuit to operationalize preventative security, which has been a driving force for our roadmap. While reactive cybersecurity is necessary, it does little to nothing to address the root causes of a majority of breaches, known vulnerabilities and misconfigurations.

Speaker 2

We are leading the industry to change the way it thinks about managing risk. With exposure management abilities of Tenable One, organizations are rethinking their approach to risk, leveraging vulnerability and risk data to proactively unearth weaknesses and prioritize vulnerability remediation. And as I mentioned, we're getting tech wins faster. We believe the speed of our wins reflects A combination of our position as a technology leader, our reputation as a company and the superiority of our exposure management platform. There's no doubt that security teams need to do more with less and are choosing to do so with a partner they trust.

Speaker 2

We're committed to delivering more for our customers and we're updating Tenable 1 to support on premise In hybrid environments via integration with Tenable Security Center. This enables tens of thousands of organizations and customers With regulatory and data privacy requirements to access Tenable One's features such as risk analytics, attack path analytics, Benchmarking and asset inventory. SemOne streamlines exposure management for hybrid vulnerability management deployments and may help on prem customers Transition to the cloud more quickly. Customers want to understand exposures and manage risk. Tenable.

Speaker 2

1 provides a means to consistently enforce cloud security posture and compliance across multi cloud and hybrid environments through a single unified platform. Our solution is more cost effective and scalable than using 1 off or silo tools. While we are navigating some near term macro headwinds, which have led us to revise our top line guide, we have a lot to be excited about. We have an industry leading technology and are expanding successfully to a platform, enabling our customers to consolidate vendors and increased operating efficiency, both of which are critical in this environment. We're building strong demand with the top end of the funnel, We're achieving tech wins faster, and we believe we've never been better positioned competitively.

Speaker 2

In short, I believe that Tenable is well positioned strategically for long term success and could not be more excited about our future. Additionally, we remain committed to delivering on the operating and unlevered free cash flow commitments we made at the beginning of the year. We look forward to updating you as the year progresses. I'll now turn the call over to Steve for further commentary on our financial results and outlook.

Speaker 3

Thanks, Amit. Our ability to deliver better than expected profitability in the quarter due to stronger operating efficiency It's certainly a notable accomplishment in this market. I will provide more commentary momentarily. But First, please note that all financial results we discuss today are non GAAP financial measures with the exception of revenue. As Aaron mentioned at the start of this call, GAAP to non GAAP reconciliations may be found in our earnings release issued earlier today, which is posted on our website.

Speaker 3

Now on to our results for the quarter. Calculated current billings defined as the change in current Deferred revenue plus revenue recognized in the quarter grew 13% year over year to 176,800,000 As Amit discussed earlier, we experienced a more challenging selling environment in Q1, most notably during the final 2 weeks The quarter, which historically is our busiest time. This resulted in a higher percentage of large deals, both in terms of new lands and expansion opportunities That pushed out of the quarter, particularly in North America and specifically in the Banking and Financial Services and the Technology and Telecom sectors. It's important to note that Banking and Financial Services and Technology and Telecom are frequently an area of strength for us. Given the sophisticated nature of these customers from a cyber perspective and their propensity to transact larger deals.

Speaker 3

Despite the environment, demand remains strong and exceeded our expectations as we generated more pipe during the quarter than in any other time in our company's history. In terms of key financial metrics, we added 379 new enterprise platform customers and 24 net new 6 figure customers in Q1. Our dollar based net expansion rate was 113% in the quarter. As a reminder, the expansion rate can fluctuate on a quarterly basis. Gross retention is worth noting was strong in the quarter.

Speaker 3

Revenue was $188,800,000 which represents 18% year over year growth. Revenue in the quarter exceeded the midpoint of our guided range by $1,800,000 Our percentage of recurring revenue remains high And was 95% this quarter, which is consistent with prior periods. I'll now turn to expenses, where we are demonstrating good cost control and operating leverage. I'll start with gross margin, which was 79% this quarter and up from 78% last quarter. We are pleased to see our gross margin expand over the prior quarter, primarily due to our ability to cost effectively provision and manage public cloud infrastructure as we absorb the initial costs related to our newer exposure management offerings.

Speaker 3

Sales and marketing expense was $82,800,000 which was up from $78,300,000 last quarter. Sales and marketing expense as a percentage of revenue was 44% compared to 42% last quarter. Sales and marketing expense primarily due to the incremental costs associated with resuming our annual in person sales kickoff, higher wages attributed to hiring additional sales personnel R and D expense was $29,300,000 which was up from $28,700,000 last quarter. R and D expense as a percentage of revenue was 16% this quarter last quarter. R and D expense increased sequentially due to additional personnel costs, primarily payroll taxes and benefits and investments in software development and associated cloud resources.

Speaker 3

G and A expense was $18,800,000 which was up from $17,900,000 last quarter, primarily due to higher wages and payroll taxes as well as higher IT and professional fees to support our continued growth. As a percentage of revenue, G and A expense was 10% this quarter, consistent with last quarter. Income from operations was $18,100,000 which is very notably above the midpoint of our guided range by $8,600,000 Operating margin for the quarter was 10%, which was 500 basis points better than the midpoint of our guidance. The takeaway here is even in a dynamic environment, We've been able to expand our operating margin as we scale our business by leveraging our VM market leadership, sizable customer base and broad exposure management platform. All of this resulted in earnings per share in the Q1 of $0.11 which was $0.085 better than the midpoint of our guided range.

Speaker 3

Now let's turn to the balance sheet. We finished the quarter with $616,700,000 in cash and short term investments. Accounts receivable was $123,900,000 and total deferred revenue was $642,100,000 including $490,100,000 of current deferred revenue, which gives us a lot of visibility into revenue over the next 12 months. We generated $44,200,000 of unlevered free cash flow during the quarter, which is up from 32,100,000 Last quarter, with 95% recurring revenue, high gross margins and high renewal rates, we feel confident that we can continue to expand our operating With the results of the quarter behind us, I'd like to discuss our outlook for The Q2 and full year 2023. For the Q2, we currently expect revenue to be in the range of 189 to $191,000,000 non GAAP income from operations to be in the range of $20,000,000 to 21,000,000 Non GAAP net income to be in the range of $15,000,000 to $16,000,000 assuming interest expense of $7,700,000 Interest income of $5,200,000 and a provision for income taxes of $2,400,000 non GAAP diluted earnings per to be in the range of $0.12 to $0.13 assuming 120,500,000 fully diluted weighted average shares outstanding.

Speaker 3

And for the full year, we currently expect calculated current billings to be in the range of $875,000,000 to $885,000,000 Revenue to be in the range of $775,000,000 to $785,000,000 non GAAP income from operations to be in the range of 90 $95,000,000 non GAAP net income to be in the range of $69,000,000 to $74,000,000 assuming interest expense $31,600,000 interest income of $20,800,000 and a provision for income taxes of 9,900,000 Non GAAP diluted earnings per share to be in the range of $0.57 to $0.61 assuming 121 point 5,000,000 fully diluted weighted average shares outstanding and unlevered free cash flow to be in the range of 175,000,000 To $180,000,000 There are a few comments I want to make that will provide important context to our guidance today. 1st, Our annual CCB guide reflects a continuation of the selling environment that we experienced at the end of March. While in April, we closed A number of the deals that pushed out of Q1 and demand generation was strong in the quarter, our guidance assumes that new business will take longer to close over the remainder of the year In light of the macro, our annual CCB guide also reflects a slightly shorter contract duration, which is what we experienced in Q1.

Speaker 3

In terms of quarterly flow, we expect Q2 to be slightly lower than the 13% to 14% CCB growth expected for the full year. Our revenue guidance also reflects the impact of all these factors. In terms of profitability, We are very pleased to raise our full year outlook for operating income given our outperformance in the Q1 and our confidence to drive continued leverage in the business. Recall in February, we laid out a plan to invest more aggressively this year in go to market. And it's worth noting that we were able to execute on some of that hiring in Q1.

Speaker 3

That said, our guidance calls for more select investment across the business for the remainder of the year. In addition, our outlook reflects Lower variable costs that drop directly to the bottom line based on our revised top line guidance. We are mindful the macro is very fluid and It's also important to note that we were able to reiterate our annual guide for unlevered free cash flow today based on the

Speaker 2

At this point, I'd like

Speaker 3

to turn the call back over to Amit for some closing comments.

Speaker 2

Thanks, Steve. This is indeed a very fluid environment, but we are well positioned strategically to help our customers solve their most Important cyber challenges. 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 JPMorgan conference in the upcoming weeks. We'd now like to open the call up for questions.

Speaker 2

Thank you.

Operator

And answer session. Our first question comes from the line of Rob Owens with Piper Sandler. Please proceed with your question.

Speaker 4

Great. Thank you very much for my question. Good afternoon. Could you guys specifically speak to the weakness that you're seeing in the tech and telecom vertical, anything headcount related or Some of the reasoning behind the push deals and then I guess in addition steps that you guys are taking from a pipeline management perspective to shepherd deals across the line? Thanks.

Speaker 2

I don't think that we've looked at any of the Change in sales cycle as related specifically to headcount in tech and telecom, Although I do acknowledge that maybe there has been some impact to that. From our perspective, it was much more of a procurement process That it was headcount or number of assets types of issue. We saw deals actually we saw very healthy demand in the top end of the funnel, a lot of Demand titration activity, we actually saw faster lead to technical win By about 10% faster than we have in previous periods. So from our perspective, there's more of deal delay in the final phase waiting negotiation and final approval from the finance team. So I think that's kind of how I would characterize the change in buying papers.

Speaker 2

And internally, we're doing a number of things with the sales team to go to market functions to ensure that we've got greater visibility

Operator

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

Speaker 5

Thanks for taking my question. Amit, I guess one quick one for you and a quick follow-up for Steve. I just am curious, you talked a little bit about the 10,000,001 getting some traction. I really want to understand what the buyer reaction is In terms of pricing and how that has flowed through if pricing is stable and maybe you could talk about and give an example or 2 of some customers that have You adopted

Speaker 2

Tenable 1. Yes, I think, listen, we're super excited about Every data point that we've seen shows us that we're achieving faster sales cycles, we're achieving higher ASPs. And from our customer perspective, We're seeing them allocate more of their licenses toward things above and beyond VM. So looking at cloud Looking at identity and other aspects of their attack surface. So from our perspective, faster sales cycles, larger ASPs, We can deliver better and more compelling analytics.

Speaker 2

And from a customer perspective, yes, they're paying more, but they're actually able to Consultants do some vendor consolidation and reduce costs. So if you look at Tenable on VM and some other solutions for identity or securing identities For helping with cloud security, that combination of activities and vendors ends up being subsequently more expensive than Allowing Tenable to deliver on all those capabilities through a unified platform, which helps save on license costs and ultimately Helps you operationalize these security activities through integrated APIs and streamlined operations, fewer interfaces and the like.

Speaker 5

Okay. And Steve, real quick just as a follow-up. On you reiterated the unlevered free cash flow for 2023. Can we assume that the unlevered free cash flow of 24 for 2.40 to 2.50 is still intact?

Speaker 3

Hey, Joel, this is Steve. Now, let's hear about 2024 in February of next year, but what I will say is not The current macro, nothing changed here in our business. We're excited about the opportunity. We're committed to the cash flow targets We said at the beginning of the year, so we're reaffirming op income and free cash flow and we're happy to talk about free cash flow more in 2024 February next Great. Thank you.

Operator

Our next question comes from the line of Brian Essex With JPMorgan, please proceed with your question.

Speaker 6

Hi, good afternoon and thank you for taking the question. Maybe if I could follow-up to Rob's question a little bit. Could you speak to weakness in the financial services vertical with regard to the size of the enterprises? And then Was there any specific focus in terms of the breadth of the deals? So are these, for example, Tenable 1 deals, where you had a lot greater Hatch rates and there was maybe more dollars at stake, maybe just a little color there would be helpful.

Speaker 2

Yes. I think with respect to the Banking and Financial Services sector, we saw, as we said, In the elongation of the deal approvals in the finance team at the very end of the sales cycle, it was certainly More toward the mid size and regional banks and I'd say also more heavily weighted in North America than in any other geo.

Speaker 6

Okay. And in terms of breadth of deals and complexity, Tax rates and so forth, any concentration there?

Speaker 3

Brian, this is Steve. I would just say that What we call the last week's quarter was more broadly across the board. And obviously we talked about Greater percentage of push deals in Banking and Financial Services and Tech and Telecom and specifically in North America. Those two sectors Are pretty sizable for us. It can represent approximately 30% of our total sales.

Speaker 3

Historically, it's been very strong. And they also tend to skew towards larger transactions, irrespective of whether they're national bank or Even a regional bank here. So for us here, we're seeing a lot of positive in the quarter, but obviously, we believe these are short term headwinds that we're working to overcome and feel good about the outlook that we're giving with regard to profitability and cash flows. And The good news here is that we made a fair investment out of the gate here at the start of the Q1 and our expectation is that this is a good setup for success for the remainder of the year.

Speaker 6

That makes sense. Thank you very much

Speaker 7

for the additional color. I appreciate it.

Operator

Our next question comes from the line of Hamzah Fadawala with Morgan Stanley. Please proceed with your question.

Speaker 8

Hey, team. Good afternoon. Thanks for taking my question. So if I get this straight, last 2 weeks of the quarter, Not great. Seems like a lot of that was due to the financial services sector.

Speaker 8

Has there been anything in the month of April, to suggest to you that it was in fact a pause from some of your banking customers as opposed to perhaps another leg down For Q2 versus Q1?

Speaker 3

Hey, Holger, this is Steve. Well, April was strong for us. We're tracking to our revised outlook. We're encouraged by some of the data that was in April. And as I talked about earlier, we've closed some of the deals that we that pushed out of Q1.

Speaker 3

We closed specifically in April. That said, the last month of the quarter is always our busiest, so June will certainly be determinative year, but initially off to a strong start and all this is factored

Speaker 8

Got it. So it sounds like too early to tell. And then just roughly like could you help us size what the Banking and Financial Services, revenue exposures from Tenable. I know there's a lot that goes into Financial Services like different sectors, but like Just roughly how big that is for you guys? Thank you.

Speaker 2

Yes. I see not surprisingly when you look at banking and Financial Services and also Tech Telecom, those are some of the more sophisticated industries when it comes to cybersecurity. So collectively, Those represent about 30% of the overall business on a global basis.

Speaker 8

Thank you.

Operator

Our next question comes from the line of Saket Kalia with Barclays. Please proceed with your question.

Speaker 9

Okay, great. Hey, guys. Thanks for taking my questions here. Emy, maybe for you, just to change it up a little bit on verticals. Was wondering if you could just talk a little bit about the federal business.

Speaker 9

How did that do here in the March quarter? And how does sort of the pipeline look for the rest of the year?

Speaker 2

Yes, we actually saw a reasonably strong quarter for our public sector business, including federal and maybe even more so on the state and local side, and we anticipate that to be A strong sector for us throughout the remainder of the year.

Speaker 9

Got it. Got it. And Steve, maybe for You talked about maybe seeing slightly shorter contract durations, but you're still able to reiterate the unlevered free cash flow guide. So kudos. Just maybe help us think about some of the puts and takes there.

Speaker 3

Yes, sure. Well, we Talked about in terms of CCB reflects the continuation of the selling environment we experienced in Q1. We are assuming that new business, albeit from new logos or even upsell, Take longer to close for the remainder of the year. So we're modeling in lower conversion rates and even lower net dollar expansion rates than What we were expecting on our last call in February and we think this is prudent to do so, the way it would play out here in the last couple of weeks. Our guidance does reflect a slightly shorter contract duration due to fewer than expected multiyear prepaid deals.

Speaker 3

That said, Top of the phone is strong. We're getting to Tech wins much faster. We're qualifying these opportunities working closely with our prospects and partners. Now on the other side of that, the expense side, our plan this year costs were fairly significant investment. And the good news is, We were able to execute on a lot of that in the Q1.

Speaker 3

Again, we've played out the last couple of weeks of the quarter, we're moderating that level of investment, We'll be more selective about investing going forward, and that allows us to achieve actually the same, If not higher levels of op income, I think we're guiding you up today on op income due to the strong start in Q1. We're also able to get back to reaffirm our outlook We've always been a balanced grower. We have a great business model of lots of recurring revenue, high gross margins, high renewal rates. And each quarter is different in its own right and we're going to continue to balance the investments with the opportunities that are in front of us and with the desire to achieve

Operator

Our next question comes from the line of Brad Reback with Stifel. Please proceed with your question.

Speaker 10

Great. Thanks very much. Steve, sorry if I missed this, but on the quota capacity, do you still expect 2023 to be larger from an ad perspective than 2022?

Speaker 3

We are, as we mentioned, some of the moderation in investment also in past quarter capacity. So our focus here, we've had a good quarter Back in Q1, our focus here short term is going to be on achieving higher levels of productivity. And so our expectation is that The investment that we contemplated across the board for the business at the onset of the year and specifically in sales We'll be more moderate going forward here than what we discussed on our February call.

Speaker 10

Great. And Amit, given the significant amount of free cash flow you guys are generating right now, Do you need CCB to reaccelerate before you would do an M and A transaction or does it not matter?

Speaker 2

No, I don't think we have to wait for CQB to reaccelerate before Doing M and A transactions. I think we're looking at it and in this market especially where we anticipate a lot of Company is struggling both from a sales perspective as well as from a cost of capital perspective. We do expect And we want to take advantage of that.

Speaker 10

Perfect. Thanks very much.

Speaker 7

Hey guys, thanks for taking the question here. Wanted to circle back, I know that we're talking about the moderation in investments Help you guys preserve that unlevered free cash flow guidance we have for the year. Like if we're moderating on the hiring side For quota carrying reps or the sales and marketing more broadly. Beyond those hires, are there other areas where the company is looking to either become more efficient or To reduce some of those variable expenses that you guys were initially looking to invest in? And can you give us some more concrete examples as far as where those, I guess, redeployed assets, where those savings are coming from?

Speaker 2

Yes. I guess, I'd start by saying, We did a tremendous amount of hiring in Q1 and believe that we have both the quota capacity as well as the headcount to drive the results that we provided through the remainder of the year. What is contemplated is that we will be moderating the pace New and additional investments throughout the year while we're seeing these longer sales cycles and changing sales process. And that enables us to deliver on the free cash flow commitments that we've made.

Speaker 7

Understood. And I guess for the follow-up here, but I know Tenable 1 continues to be something that you guys are highlighting. Can you give us a better sense, I guess excluding some of the commentary that we have around those more difficult weeks in March, but where are you seeing the greatest success with 10.1, is it with existing customers? Is it with landing new customers? Is it vertical specific?

Speaker 7

Any sense there would be helpful.

Speaker 2

Yes. I think not surprisingly, the greatest momentum is occurring with existing customers where they're already leveraging for VM and this becomes an easy on ramp to broadening their understanding of cyber exposure. And in this market, we do anticipate New customer acquisition to be more difficult than it has been in previous periods. So we do land new logos. We think there's competitive differentiation with Tenable One, but we believe given the size of our customer base, the sales motion and the market that we're operating in that We expect to see a lot of the sales coming from the existing customer base.

Speaker 7

Makes a lot of sense. Thank you.

Operator

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

Speaker 11

Okay. Thank you. Good afternoon. So you guys play across a number of different market segments, including like identity, cloud, VM, App Security, etcetera. Just wondering if you saw a change in sales cycles across all those different Product segments or was it more concentrated than maybe in 1?

Speaker 2

No. We saw the change in buying behavior across all product segments. It was more heavily weighted to, again, the financial services, banking, Telecom and Technology sectors and more heavily weighted in North America Other geos, but it wasn't specific or weighted in any one product there. It's pretty much across all of them.

Speaker 11

Okay, got it. And then I wanted to ask a follow-up question on your comments about TENNELL 1 being Updated for on prem and hybrid. I was wondering, do you still get the 70% price uplift with that form factor? And are there any new recognition differences between the 2 when you sell it as an on prem solution?

Speaker 2

Yes. We have not, yes, I can't comment to The actual price uplift because we're only now or certainly going to be introducing The hybrid with on prem capabilities for Tenable 1, and then from a revenue recognition perspective, Yes, being separate purchases, I don't know.

Speaker 3

There's no change in revenue recognition. Even when we sell it on prem, almost all the time, it's subscription and

Operator

Our next question comes from the line of Joshua Tilton with Wolfe Research. Please proceed with your question.

Speaker 12

Hey, guys. Thanks for taking my questions. I have 2 actually. From my understanding, the initial guidance For 1Q and the full year did assume that things got worse in the macro environment, and I guess that was before the SVB fallout. So I guess my question is ex the weakness in Banking and Financial Services, was the rest of the business materially worse than the weakness you'd already baked into the guide?

Speaker 12

And my second question is, you said that the guidance assumes that new business remains pressured for the rest of the year. Are you assuming this for just the verticals that you saw weakness in this quarter? Or are you assuming this for all the verticals that you sell to?

Speaker 2

Yes. I guess the way I would answer that is, We saw a particular impact in the sectors that we had mentioned earlier, But that those also we believe that those the challenges experienced in the Financial Services sector do have spilled into other companies and other sectors. So what we're modeling in It's basically more of the same, more of those challenges that we saw at the very end of Q1 Occurring and playing themselves out for the remainder of the year.

Speaker 3

What actually reflects lower achievement rates and We know our net dollar expansion rate. We think that's the right thing to do. And again, what we saw from these headwinds the last 2 weeks of the quarter, which are typically

Speaker 12

And just Steve, is that lower DBNR that you're assuming, is that lower than what you saw this quarter? Or is that lower than the midpoint of your expected range that you've previously communicated to us?

Speaker 3

Our guidance reflects a lower net dollar expansion rate for the rest of the year than what we experienced. And keep in mind too, We don't the net dollar expense rate can vary from quarter to quarter, but if you look at the compare last year in Q1, it was exceptional. It was one of our strongest because of Log 4J. So our outlook reflects moderating net to our expansion rate due to some Factors that we experienced the last couple of weeks of Q1 and we think this is the right approach.

Speaker 2

Thanks

Operator

guys. Our next question comes from the line of Felicia Scarpelli with FBN Securities, please proceed with your question.

Speaker 13

Thank you very much. Related to the last question, The net expansion rate did decline by 4 points from 117% to 113% and you expect another decline. How confident are you that it won't undercut the low end of the range of which is 110% going forward?

Speaker 3

Yes. Well, we instead of providing the history, we used to provide the range, We expect the net dollar expansion rate to be between 110% and 120%. That's when we were not disclosing the net dollar expansion rate. Now every quarter, We're one of the few companies that do this. We disclose the exact net dollar expansion rate.

Speaker 3

So there's a lot of visibility into the business. We also provide Investors with a number of new enterprise platform customers we add, a number of message 6 figure customers. So it's important to note that Pipeline opportunities can vary from quarter to quarter between new logos and expansion opportunities and there's going to be some natural variation. This quarter, we saw some moderation. We expect it to moderate our expectation in the outlook for the full year is that, that will indeed moderate Lower and I think that's a good approach to take right now.

Speaker 3

So The takeaway as always, we have 40,000 customers, massive customer base. We have a broad product we have a broad Product portfolio, we have a platform that continues to take hold and get momentum. And we see a massive opportunity to sell good products back into our base. And in terms of long term, nothing's changed here in terms of what our expectation is on the expansion rate, our ability to monetize our existing Our product back into the base, notwithstanding the current quarter.

Speaker 13

Okay. And my second question is, The financial services vertical, some believe that the mess in the banking sector has stabilized a bit, notwithstanding the the fact that First Republic was down 20% today after the market, but there are some sense that it has stabilized. So Did you see any signs of stabilization in the month of April in that sector?

Speaker 2

Yes. I'll talk one

Speaker 3

time, Steve. I would say, the good news is, and we talked about this earlier that some of the deals that pushed, we closed a good percentage of those In April, that is certainly encouraging. And we're not seeing customers cancel projects across the board. I would make that very clear. Now that said, if you look at the seasonal flows Of our business and kind of the intra quarter flow, the last month of the quarter is always expected to be our strongest, so June will certainly beat the churn, but we're very pleased With our start to the quarter and specifically what we're seeing in April, but when you see something towards the end of the quarter, we think the right thing

Speaker 2

to do is kind of

Speaker 3

We'll be working hard in the ensuing quarters, trying to capitalize on the opportunities that are right in front of We've seen demand remain strong, competitive differentiation, Amit talked about that and we're getting to tech wins much faster. So We think the opportunities are right in front of us and we're working with our prospects and customers to close. Okay. Thank you.

Operator

Our next question comes no, there are no more questions in the queue at this time. This does conclude today's teleconference. Thank you for your participation, everyone. You may disconnect your lines at this time and have a wonderful day.

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Earnings Conference Call
Tenable Q1 2023
00:00 / 00:00