Tenable Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 25, 2023

There are 14 speakers on the call.

Operator

Greetings. Welcome to Tenable's Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. Question and answer session will follow the formal presentation. Please note this conference is being recorded.

Operator

At this time, I'll turn the conference over to Erin Carney, Vice President, Investor Relations. Ms. Carney, you may now begin.

Speaker 1

Thank you, operator, and thank you all for joining us on today's conference call to discuss Tenable's Q2 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 You can find the press release on the IR website at 10able.com. Before we begin, let me remind you that we will make forward looking statements during 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, 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.

Speaker 1

You should not rely upon forward looking statements as a prediction of 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 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 ks and subsequent reports that we file with the SEC, which are available on the SEC website atsec.gov. In addition, during today's call, we will discuss non GAAP financial measures. These non GAAP financial Are in addition to and not as substitute for or superior to measures of financial performance prepared in accordance with GAAP. There are a number of limitations related to the use of these non GAAP financial measures versus their closest GAAP equivalent.

Speaker 1

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

Speaker 2

Thank you, Erin. Today, I'll cover some context on our financial performance in the quarter, 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 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.

Speaker 2

Our sellers executed incredibly well during the quarter by binding our strong business use case with our industry leading technology. In Q2, we added 426 new enterprise And 63 net new 6 figure customers, signaling a return to our typical quarterly ads. The upside to our results was driven by demand for Tenable 1, 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 tools for all of Tenable One. Our OT business also delivered strong results with notable traction in public sector.

Speaker 2

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 Environments, including hybrid, multi cloud, OT, identity and beyond. As we increase the Tenable. 1 customer We continue to experience larger ASPs and adoption of more platform use cases such as identity and cloud security. During the quarter, we saw Tenable 1 increase from a teens percentage of new bookings to over 20% and now comprise low double digit percentage of new and renewal business.

Speaker 2

We're also seeing increased Tenable 1 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. 1. For all customers, securing the cloud is a critical objective. The speed and still of cloud often leave environments with undetected and unremediated Exposure such as misconfigurations, system vulnerabilities and excess privileges. In many cases, customers do not even know what assets they have and what access has been granted to those assets.

Speaker 2

With cloud security as part of Tenable One platform, we can bring greater context Most organizations operate multi cloud and hybrid environments, and we can consistently enforce cloud security posture and clients across their operating environments. With our unified platform, we're 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. Identity Risk Score uses mature AI and machine learning models to quantify risk. Using modern AI techniques with contextual exposure data, Tenable Solutions can quickly identify and prioritize identity and entitlement related problems On prem and in cloud environments.

Speaker 2

We believe cybersecurity and exposure management in particular are big data problems Remediations across the modern attack surface. We've recently expanded Tenable. 1 to allow customers to ingest vulnerability and misconfiguration data from their other security tools. This, combined with our expansive coverage across the attack surface and vulnerabilities, misconfigurations and identities, Stay tuned for further announcements and demos at Black Hat. In addition to Tenable One, we saw strength in both the public sector and OT.

Speaker 2

Cybersecurity is increasingly a focal point for public policy, including CISA's operational directives for operational technology, Presidential Decision Directives And Defense Authorization Act, all of which mandate improvements in cybersecurity for OT. As customers in the public sector and broader cyber industry Based more rules and regulations, they frequently mature than risk management practices. We have both market leading product in this area and a deep understanding of both OT and IT converged environments. This combination is necessary as CSOs are increasingly becoming a critical part of the OT have industry leading technologies unified in the differentiated platform. We're seeing demand at the top end of the funnel, particularly in cloud and identity, We're achieving text validation wins at a faster rate.

Speaker 2

We're doing all 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 will now turn the call over to Steve for further commentary on our financial results and outlook.

Speaker 3

Thanks, Amit. Overall, we are very pleased with our execution this quarter, highlighted by better than expected CCB, 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 on to our results for the quarter.

Speaker 3

Calculated current billings defined as the change in current deferred revenue plus revenue recognized in the quarter grew 15% year over year to $200,200,000 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, which was benefited by a continued focus on lead qualification and an ability to navigate a more rigorous contract approval process. 2nd, Tenable One continues to gain momentum and is creating tailwinds with customers seeking to consolidate vendor spend and more broadly understand risk across their attack surface. And just to put matters in perspective, Tenable One grew to over 20% of total new enterprise sales and is helping us inflect ASPs and pipeline higher It's also worth noting that we recently integrated Tenable 1 with Security Center, which allows our on premise customers to access enhanced capabilities and analytics in Tenable 1 through a flexible hybrid deployment model.

Speaker 3

This created some tailwinds in the quarter, we believe represents a sizable opportunity for us going forward to upsell our exposure analytics And third, CCB also reflects better than expected early Most notably from our Q3 renewal base. This timing of billings contributed approximately $2,000,000 of upside in the quarter. And as I have mentioned in the past, CCB 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, CCB was stronger than expected. Consequently, we are raising the midpoint of our CCB outlook for the full year today by $3,000,000 which is the portion of the beat we attribute to our outperformance in the quarter.

Speaker 3

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 was also strong as we added 63 net new 6 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 $195,000,000 which represents 19% year over year growth. Revenue in the quarter exceeded the midpoint of our guided range by $5,000,000 Our percentage of recurring revenue remains high at 95% this quarter, which is consistent with prior periods.

Speaker 3

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 absorb 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 81,400,000 which was down from $82,800,000 last quarter.

Speaker 3

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 Q1, offset by incremental investments in demand generation programs and higher wages and commission expense. R and D expense was $28,100,000 which was down from $29,300,000 last quarter. R and D expense as a percentage of revenue was 14% this quarter compared to 16% last quarter. R and D expense decreased sequentially primarily due to lower personnel costs, namely payroll taxes related to RSU vesting and benefits Increased by capitalized software development costs related to innovations in our unified exposure management platform and efficiency in our public cloud development environment.

Speaker 3

G and A expense was $17,800,000 which was down slightly from $18,800,000 last quarter. G and 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 $30,200,000 which was significantly better than expected As we exceeded the midpoint of our guided range by $9,700,000 Operating margin for the quarter was 15%, which was 4 70 basis points better than the midpoint of our guidance. The strong beat in earnings this quarter Allows us to raise our outlook for the full year and reinvest a portion of the upside in 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 $0.22 which was approximately $0.09 better than the midpoint of our guided range.

Speaker 3

Now let's turn to the balance sheet. We finished the quarter with $645,500,000 in cash and short term investments. Accounts receivable was $154,400,000 and total deferred revenue was $650,200,000 Including $495,200,000 of current deferred revenue, which gives us a lot of visibility into revenue over the next 12 months. We generated approximately $40,000,000 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 $84,000,000 which puts us Well within reach to achieve our annual unlevered free cash flow target for the full year, which we are raising today.

Speaker 3

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 Q3 and full year 2023. For the Q3, we currently expect revenue to be in the range of $197,000,000 to 199,000,000 Non GAAP income from operations to be in the range of $26,000,000 to $27,000,000 Non GAAP net income For income taxes of $2,400,000 non GAAP diluted earnings per share to be in the range of $0.18 to $0.19 Assuming 122,500,000 fully diluted weighted average shares outstanding and for the full year, we currently expect Calculated current billings to be in the range of $879,000,000 to $887,000,000 Revenue to be in the range of $783,000,000 to $791,000,000 non GAAP income from operations to be in the range Non GAAP diluted earnings per share to be in the range of $0.65 to $0.69 Assuming 121,000,000 fully diluted weighted average shares outstanding and unlevered free cash flow in the range of $180,000,000 to $185,000,000 We're very pleased to be raising the full year outlook Therefore, we're raising our outlook for CCB, revenue and earnings for the full year.

Speaker 3

Specifically, we're raising op income guidance by $5,000,000 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. The 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.

Speaker 2

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 tailwinds from Tenable 1. 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.

Speaker 2

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

Operator

Thank you. We'll now be conducting a question and answer session. Thank you. And our first question comes from the line of Brian Essex with JPMorgan.

Speaker 4

I guess, Amit, you pointed to your pipeline, better pipeline Growth and better execution this quarter and accelerated tech wins. I guess if you were to compare it to last quarter, Maybe could you highlight what you're seeing in terms of approval to close rate and maybe Frame out some of the measures that you took to improve the performance in that back end of that sales cycle.

Speaker 5

Yes, 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. We 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 we're back end loaded in our quarters as many enterprise software companies are.

Speaker 5

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 6 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 So making sure we've got line of sight into those conversations.

Speaker 3

Got it. That's helpful. And if

Speaker 4

I could just follow-up On the federal, I think you noted some traction there. And as we enter the Q3, any sense on initiatives that were maybe kicked to offer emphasized last year and how traction with those initiatives are tracking this year and that will do it for me.

Speaker 5

Yes. Obviously, in the federal space, the engagement, the sales cycles are much longer. The planning process for customers is significantly longer. So A lot of the activity that we're seeing is a result of groundwork that has been laid last year and over previous years and periods. So in the federal We're really pleased.

Speaker 5

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, piping opportunity to outperform in federal here going into 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 off a lot of the technology choices, which the U. S. Federal government has made.

Speaker 5

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

Speaker 4

Great. Helpful. Thank you very much.

Operator

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

Speaker 6

Great. Thank you and congrats on a nice quarter. So, Amit, we saw a lot of your interviews at the end of the quarter regarding the Move It vulnerability and the reports out this week, I think talking about how 400 plus companies were impacted by that vulnerability. I know it was only discovered in the last 2 weeks of the quarter, but did you see an impact to your calculated billings in Q2 from that, similar to what you saw from Log4j?

Speaker 5

Yes. I would say it's probably not quite as energetic as what we saw from Log4j, which I think the impact to financial performance and 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 and just points to why there's strong demand environment. There are obviously Compliance and regulatory drivers for managing risk, managing and understanding cyber exposures and vulnerabilities in particular, I think 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.

Speaker 5

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.

Speaker 6

Okay, very good. Thank you for that. And then just maybe a quick follow-up. You talked about how I think you mentioned in your prepared remarks, Sal, your SC installed base or on prem installed base could be converting up to the Tenable 1 platform. I'm just wondering if you could quantify For us or give us some parameters around how big that SC installed base might be?

Speaker 6

Thank you.

Speaker 5

Yes, Steve, if you want to start off talking about the size of the SC Well,

Speaker 3

we have 40,000 plus customers and that includes a sizable SE customer base and We would quantify it as a several $100,000,000 opportunity to sell Tenable. 1, the expansionary functionality, whether it's Identity, cloud security or even the more expansive analytics back into our SC customer base. And SC customers, Usually, they have a choice, right? Either on prem or cloud and overwhelmingly our SC customers want We'll have an on premise environment and we're one of the few companies in our space that can address the needs of customers who want both on prem, but also additional capabilities in the cloud. So Tenable 1 certainly has been a catalyst to help us better serve the needs of our on premise customers.

Speaker 5

Yes, I guess I would just add to that slightly saying we only released the ability for SG customers to leverage Tenable Just a short period, a short bit before the end of quarter. So really sales team and customers with I think what I would characterize is pent up demand and excitement for The convergence and the ability to operate in hybrid mode, so keep their SC deployment, but start Leveraging the enhanced analytics and the capabilities of 10.1 to the point where it did have a little bit of a lift What we saw with 1 and as you saw and heard on the call, the as a percentage of new sales, Title 1 has now gone from what was mid teens growth to now over 20%.

Speaker 6

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

Speaker 3

Thank you.

Operator

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

Speaker 7

Great. Thanks for taking my question. Amit, obviously, a lot of optimism around the OT opportunity. And maybe you could Just highlight for us what you're seeing, what competition looks like and the sense of urgency from the buyer?

Speaker 5

Yes. I'm extremely bullish about our OT 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 at bats against Even the notable names in the space.

Speaker 5

And I think in this market being a more sizable company, being public,

Speaker 3

Having the growth, having the stability

Speaker 5

provides customers extra assurance. On the technology side, we're seeing that start to play itself out in terms of Larger lands, larger OT 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 significant opportunity and upside for us in the OT business and I'll expect to hear more over the coming quarters.

Speaker 7

Great. I want to sneak one in for Steve real quick. On the $2,000,000 in early renewal, Little unusual in this environment given everyone's kind of clutching dollars. So help us understand where customers incented to do this. You talked about getting back to More normalcy, is there typically a few $1,000,000 in early renewals?

Speaker 7

How are you thinking about that moving forward? Thank you.

Speaker 3

Sure, Rob. Good question. And just to clarify, consensus CCB growth coming into the quarter was 12% And we did quantify, we did say approximately $2,000,000 of the beat is due to timing, specifically billing related to early renewals. As we said in the past, CCB 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, including early renewals. This quarter, we saw a higher than expected percentage of renewals That came in early.

Speaker 3

We didn't do anything structural or structurally different. We just saw a couple of large deals early Q3 renewals come in early in the quarter. 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 the CCB 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 CCB outlook. And this will modestly impact TCB growth in the Q3.

Speaker 7

Great. Thank you very much.

Operator

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

Speaker 8

Okay, great. Hey guys, thanks for taking my questions here. I mean, maybe just to start with you, great to see that higher mix Of Tenable One, I think we said 20% plus of new business. That's a nice increase from prior quarters. Maybe the question is, What modules with Intentable 1 or maybe what asset coverage are you finding customers are opting for most Outside of maybe what I'll call traditional VM?

Speaker 5

Yes, I think outside of 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 10,000,000 and believe that there's significant In terms of asset types, we also continue to see a diversity of new asset types. So I think in prior periods And historically have been very VM centric. I think in particular, we saw a lot of demand around cloud, in particular, With cloud assets coming online and people looking at us as a best of breed ability to assess for vulnerability in cloud environments with the same type of Consistency and rigor as they're accustomed to in their on prem world.

Speaker 3

Yes. And this is Steve Saket. The only thing I'll add there is that, as a reminder, the ASPs are notably higher with 10.1 than they are with Selling standalone VM 70% higher. So we're continuing to get good traction and good uplift. And It's also inflecting large deals higher.

Speaker 3

Today, we're reporting 63 net new 6 figure customers. That's up almost 3x from We reported sequentially in Q1, and because we're covering more areas of the attack surface and helping customers Better understand the risk. We're quickly evolving to become a platform first company and obviously results today certainly are indication of that.

Speaker 8

Yes, absolutely. Steve, maybe on that point, maybe for my follow-up for you. Great to see the stabilization in CCB growth this quarter. One of the things you mentioned in your prepared remarks, I think 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 for just sort of the levers of upside CCB in the second half now that we can sort of put some of the one time finance and telco stuff behind us.

Speaker 3

Yes. We're delighted with our results in Q2. As we head into the second half of the year, pipeline remains strong. And one of the things that we've been emphatic is our ability to generate demand. And I think we've had we have a lot of 6 figure opportunities.

Speaker 3

The 3rd quarter, as we all know, is the Seasonally strong quarter for us. We are the clear leader in U. S. Fed and public sector more broadly. And we have a ton of opportunity in front of us, both in terms of funded deals and unfunded opportunities.

Speaker 3

So we expect certainly expect And I would say, if you kind of widen the aperture here, I would say that Tenable 1 is another catalyst of growth for us. Again, just having a lot of success, creating demand For Tenable 1, it now represents, I would say, most of our 6 figure opportunities. As we look at the second half of the year, Tenable 1 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's more levels of review uncertainty and I think we're navigating the current environment very well and obviously have a great value prop But the platform as we consolidate vendor spend and help customers better understand the risk.

Speaker 8

Got it. Very helpful. Thanks guys.

Operator

Our next question is coming from the line of Jonathan Hoag with William Blair. Please proceed with your question.

Speaker 2

Hi, good afternoon. Just wanted to maybe start out with some of your comments around the AI powered solutions.

Speaker 5

Yes. I'd like to start off every conversation with AI by talking first about the demand environment. I think we see Significant opportunities for AI to be leveraged by threat actors and acceleration of weaponization of vulnerabilities And increased activity, which I think will translate directly into strong market demand for more Cybersecurity products, including and in particular the ability to identify where you have vulnerabilities, where you have exposures and to address them in a timely fashion. From a tenable use of AI perspective, I'd say there's 2 main categories that we would bucket them into. The first is leveraging AI To make the product 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.

Speaker 5

We've now expanded the use of that AI to also help From an identity risk perspective, so obviously we've been doing a lot of work in the identity space, Active Directory, Azure AD and other identity stores to be able to look at that, look at the privilege level, look at the access types And make determinations about risks that particular identities pose. We think as you're looking at overall enterprise risk, it's incredibly important to understand Exposures. In the second category of the use of AI, we're also making we're using generative AIs to make the products And I think all both of those methods are ones which we expect to monetize.

Speaker 2

Great. Thank you.

Operator

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

Speaker 9

Hey, team. Thanks for taking

Speaker 10

the question. Just first question on a clarification on the ASP uplift. So you mentioned that you're still seeing The operating 70% 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 after.

Speaker 3

It applies to both,

Speaker 10

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 1 year of having the product in the market. Are you assuming any increased level of contribution from Tenable 1 on renewals in the updated CCP guide?

Speaker 3

Yes. We have an asset based pricing model. So as customers renew, they often look to us to Help secure more of their assets. And so there's 2 ways we get uplift and drive selling prices higher when it comes to Tenable 1. Number 1 is covering More assets within their current environment.

Speaker 3

And then number 2 would be addressing different asset types. And Amit specifically talked about earlier in the call, The momentum we're having with identity and even cloud security more broadly. So our expectation as we go into the second In the quarter, we're raising our outlook, but we know that when it comes to both expansionary opportunities, while there's a huge opportunity That expansion can be more moderate in an environment like this in comparison to prior years. So The good news is we have a huge opportunity to sell 10% of the one and other products back into our base. This represent larger TAMs and high growth Opportunities for us and we'll be working hard to do that in the second half of the year.

Speaker 4

Got it. Very helpful. Thank you.

Operator

Our next question is from the line of Mike Sicos with Needham and Company. Please proceed with your questions.

Speaker 9

Hey, guys. Thanks for taking the questions here. Just wanted to cycle 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 gen. So the question that I have here first, With 2Q also a record quarter as far as that pipeline, Jen?

Speaker 9

And then building on that, can you help us 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 You guys are talking to today.

Speaker 3

Yes. Hi, Mike. This is Steve. So yes, so Q2 is up Sequentially in comparison to Q1, so demand gen continues to remain strong. More importantly, right, as the company grows, you would expect pipeline to continue to grow with it.

Speaker 3

So And while pipeline is growing and we see strong demand, it's exceeding our expectations overall in aggregate. I think I want to remain clear about that, exceeding the expectations and the plan that we developed at the beginning of the year. And, I think it's a confluence of a number of factors. Number 1, distribution is really important. We've built an expansive network of distributors and partners over the years.

Speaker 3

And years ago, A small low percentage of inbound opportunities came from the channel. Today, it's what we said, it's well over 40%. So the channel is really working for us, opening doors, Right. Security market is very fragmented and we have a great relationship with a lot of our general partners. Also, we're investing a lot in go to market.

Speaker 3

We're in more countries. We transact sales in 160 countries. We have feet on the street in 35. So distribution matters in the market, especially in cyber. And then obviously, we continue to get great success doing a number of events and creating inbound opportunity.

Speaker 3

So overall, And conversion rates remain 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 with what we're seeing with the pipeline.

Speaker 9

Got it. Thank you. And if I could just tack on for a follow-up, just I know you were talking about conversion rates, which feeds nicely into my second question here. But as far as the guidance construction, happy to see the raise that we're seeing above and beyond some of the 1Q deep for revenue. And then you called out the Timing on the billings and the reinvestment of, I guess, some of the upside in 2Q when thinking about that operating profit guide, right?

Speaker 9

So Maybe from a top down level, how is management viewing macro and sales cycles? 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 this guidance construction process that you guys went Thank you.

Speaker 3

Well, with regard to the guide, that's in our outlook that we're 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's 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, and no change.

Speaker 5

Yes, I guess I would just add, pleased with the return to predictability from a sales process perspective. As Steve said, in a difficult macro, you do see elongated sales cycle, but we're extremely pleased with our competitive win rates. We're I feel like we're and especially with what we're seeing with 10:1. So, I feel like we're really well positioned to deliver on the second half of the year.

Speaker 9

Terrific. Thank you very much, guys.

Operator

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

Speaker 5

Great. Thanks very much. As it related to the slip deals from 1Q that you guys had mentioned or beginning to close in April A couple of months ago, was there any meaningful CCB benefit from that? I'll start off and then Steve, jump in. I've been doing this for 30 years.

Speaker 5

I've never seen deals that slipped in 1 quarter just be additive Your performance and your delivery in the following quarter and that's true across every business that I've been involved in. We did close 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 deprioritized, but just simply in industries and in a challenging macro, you see a greater scrutiny of procurement Specifically from CFOs. And so I think we've gotten our arms around that.

Speaker 5

We have our sales teams trained up and engaged with the finance teams So we have more visibility and greater predictability. I don't think that there was any bump In Q2, CCB as a result of slipped deals from or pushed deals from Q1. It's just good demand environment and good execution.

Speaker 2

That's great. Thanks very much.

Operator

Our next question is coming from the line of

Speaker 5

I guess I kind of want

Speaker 11

to follow-up on the last question. Amit, I totally understand where you're coming from with the change in performance on flip deals. But Let's forget about like bumping the performance. I guess if we have some deals slip into this quarter and some deals pulled in from the next

Speaker 8

quarter, Just high level, what gives

Speaker 11

you guys the confidence that what you saw in 2Q broadly is what you would characterize as a return to normalcy?

Speaker 5

I guess the way the deals flow 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, we'll be able to deliver on the guidance.

Speaker 11

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're baking into the guidance for the rest of the year change relative to what you guys or the assumption You baked in when you updated the full year guidance for us last quarter? Thanks.

Speaker 3

Sure. Well, we're raising our outlook for CCB, as I mentioned earlier, to the $2,000,000 to $3,000,000 we're guiding to the 13% to 14%. And for us, we're 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, Bill.

Speaker 3

We're trying to be pragmatic here. This is still a tough selling environment. We're taking conversion rates against the pipeline opportunities we have and We're getting you look at growth in the second half of the year and we feel like we can certainly deliver on that As well as we're no rights here. So we feel like we have good visibility as we enter the second half of the year. We expect a seasonally strong U.

Speaker 3

S. Federal. And I think we're excited about what lies ahead for us. And certainly Tenable One is a We talked about the large 6 figure deals that are in the pipeline and most of those deals are related to Tenable One. And for us, That is an investment that we've made over the years.

Speaker 3

We think it positions us well and we'll update you over the ensuing quarters.

Speaker 11

Super helpful and again congrats on an awesome quarter.

Speaker 3

Thank you.

Operator

Next questions are from the line of Mike Walkley with Canaccord Genuity. Please proceed with your questions.

Speaker 12

Great. Thanks and my congrats also. Amit, just with you highlighting faster deal wins due to Tenable 1, I assume this is mostly weighted 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.

Speaker 5

I think Temple One really plays to The latter comments. So certainly, and I believe we can improve and increase where already compelling win rates against 10b1 is a differentiated platform. We can deliver analytics. We can do all sorts of benchmarking and capabilities on 10b1 that aren't 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 OT into Tenable One.

Speaker 5

We have the ability to consolidate vendor, consolidate spend and reduce Overall expense for our customers, we think it's a great position to be in this market.

Speaker 12

Thanks. And just a quick follow-up, given the vendor consolidation and The strong cash flows your company is generating, what's the appetite for M and A versus investing in the platform? And you seeing any change in the private company evaluations given some are struggling with financing in this market?

Speaker 5

Yes, great question. Obviously, we're pleased with the cash flows of the business and natural use for some of that would be to look at Investment opportunity, both organically as we've called out, some investments that we will be making With a very attractive forward leaning, market leading technologies, which you grew on the clock a year or 2 years ago, were priced In an unrealistic and unattainable fashion today, you look at every report, the venture

Speaker 12

Great. Thanks for taking my questions.

Operator

Our next question is from the line of Rudy Kessinger with D. A. Davidson.

Speaker 4

Steve, you're taking the Revenue guide look, it's nice to see you guys take the numbers up. I mean, you're taking the revenue guide up for the full year by $7,000,000 You're only taking up current calculated billings by $3,000,000 for the year. Just help explain that variance. 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 CCV more for the year?

Speaker 3

Yes. With regard to CCV, I think we talked about that. We beat by $5,000,000 right? We grew 15% relative to the $12,000,000 in terms of what the consensus was. And some of that was timing.

Speaker 3

Some of that was outperformance clearly, which we're reflecting in our outlook for the year for CCB, but we said about $2,000,000 of that It's timing and timing specifically in the way of early renewals. And so look, we guide to CCB on a full year basis, not on a quarterly basis. We know that can be some natural variability from quarter to quarter. CCB is a close, but not perfect proxy of what we sell. It's influenced by a number of factors.

Speaker 3

And so let's so you're not always going to have dollar for dollar increments higher Or even lower of CCB relative to revenue. And revenue, there's a lot of things that influence revenue, right? Most of its recurring revenue and ratable. We do have some professional service engagement. So there's a number of factors that influence revenue growth.

Speaker 3

So overall raising our outlook for both. We have a lot of confidence in our ability to execute and I think it reflects just better execution and improved visibility in the business.

Speaker 4

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 Quarter's ago, you initially said you wanted to add more capacity this year than last year. You backed off that a little bit last year.

Speaker 4

How much sales capacity are you looking to add this year at this point?

Speaker 3

Yes. Well, our goal is each and every year is to add sales capacity. We have a massive market opportunity and our expectations, we're going to continue to expand our sales force, Networking partners and add quarter capacity and fees on the street. And this year is no different. What we talked about on the last call was Really hitting the incremental investments we are going to make.

Speaker 3

We added a lot in Q1. We said we're 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 expectation And we certainly understand that. But we have a massive market opportunity here.

Speaker 3

We are planning to invest more in the second half Year now than what we were assuming 90 days ago and we'll be working hard to add quarter 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 MSSP and some of the other things and marketplace. So there's lots of routes to market for us to hear to Continues to sustain and even accelerate growth and the investments that we're making today, we think that will position us well for success, not only the second half of the year, but also in 2024.

Speaker 4

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

Speaker 9

Thank you.

Operator

Our next questions are from the line of Roger Boyd with UBS. Please proceed with your question.

Speaker 13

Great. Thanks for taking the question. Just on the customer addition side, I think you added 426 new enterprise customers, kind of consistent with 1Q on a year over year Generally good result in the environment. We just appreciate any additional color on the mix of wins you're seeing. If we think about Additions coming from brownfield replacements versus opportunities as customers kind of move from treating VM as a compliance service or a DIY Just any color on that mix of greenfield, brownfield?

Speaker 13

Thanks.

Speaker 5

Yes. I think we're still we're seeing Fairly consistent results to what we've seen in previous periods in terms of ballpark called 25% to 30% of Our new enterprise larger logos coming to us from what we have characterized as greenfield. So either Do yourself approaches or annual relying on annual assessments from an auditor or security consultancy, Which obviously isn't a practical or defensible approach to security in this environment. And we continue to see significant competitive win rates. Those remain exceptionally healthy.

Speaker 5

I our sales team would tell you if we're going into VM opportunities, they're hours to lose and a lot of the 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 expand opportunity as they cross over to new and modern asset types. And as I said earlier, Significant traction now with cloud security.

Speaker 9

Very helpful. Thank you.

Operator

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

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Earnings Conference Call
Tenable Q2 2023
00:00 / 00:00