Tenable Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 31, 2024

There are 17 speakers on the call.

Operator

Greetings and welcome to Tenable Q2 twenty twenty four Earnings Conference Call. At this time, all participants are in a listen only mode. A brief 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, Ms.

Operator

Erin Carney, Senior Director, Investor Relations. Thank you, Ms. Carney. You may begin.

Speaker 1

Thank you, operator, and thank you all for joining us on today's conference call to discuss Tenable's Q2 2024 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 our IR website attenable.com. We will make forward looking statements during the course of this call, including statements related to our guidance and expectations for the Q3 and full year 2024 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 the potential benefits and financial impact of our recent acquisition of Eureka and our 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 beliefs and assumptions only as of today and should not be considered representative of our views as of any subsequent date, and 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. In addition, all of our financial results we will discuss today are non GAAP financial measures, with the exception of revenue.

Speaker 1

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 closest GAAP equivalent. Our press release includes GAAP to non GAAP reconciliations for these measures. I'll now turn the call over to Amit.

Speaker 2

Thank you, Arun. We delivered mixed results for the quarter with lower than expected CCB, but with outperformance in revenue and earnings. Exposure Management continues to generate demand, particularly for Tenable 1 and cloud security as key priority areas for CSOs. Before I get into the quarter, I'd like to first comment briefly on the recent CrowdStrike outage. This incident highlights the importance of independent cybersecurity assessments and the negative global consequences of creating single points of failure with any one vendor.

Speaker 2

Excessive reliance on any one vendor reduces enterprise resilience just as deviating from best of breed platforms increases exposure to risk. Boards have fiduciary responsibility to oversee cyber hygiene and we expect the regulators will play an increasingly critical role in promoting resiliency and requiring transparency. We believe the path forward for modern organizations lies in interoperable best of breed platforms that empower enterprises to reduce risk and improve cyber hygiene. Now on to the quarter. A few areas stood out as notable in Q2.

Speaker 2

First, customers continue to highly scrutinize their spend and rigorously prioritize their investments. 2nd, and this is a positive trend for us, is that exposure management is gaining increasing momentum in the industry among customers and analysts. Customers need and want to understand their level of risk across their attack surface from their IT environment to the cloud to their critical infrastructure, and we believe that has resulted in strong traction for Tenable. 1. And 3rd, as customers increasingly rely on cloud, we are seeing strong momentum for our cloud exposure solution.

Speaker 2

Fact, one of our largest deals for the quarter was for our cloud security product with a major financial services company. I will talk more about that in a few minutes. Let me dig deeper on that first point on spending patterns that we noticed in Q2. We continue to see a great deal of customer scrutiny around cyber spending. This makes it more difficult to transact and close new deals as new projects and procurements are getting the greatest scrutiny.

Speaker 2

This trend becomes more apparent as deal sizes get larger. These two dynamics were more pronounced in our vulnerability management business in Q2 than what we had seen historically. And while our mix shift to our faster growing exposure solutions is healthy, it is not enough to offset the cyclical impact of our traditional standalone VM business. While VM is becoming more cyclical, we remain the clear leader. VM continues to drive initial Tenable.1 adoption and lays the groundwork for future upsell opportunities.

Speaker 2

Our win rates continue to be very strong. Exposure management is becoming increasingly critical for customers. We pioneered this category knowing that point products leave customers with an incomplete view of actual risk in their environments. This is where Tenable shines. Tenable 1, our exposure management platform, provides a unified approach and consolidates visibility across asset types to deliver insights that individual products alone cannot provide.

Speaker 2

And there's also compelling ROI to customers who consolidate spend and reduce complexity in their security stack. We are expanding into budgets beyond VM and broadening our reach within enterprises. Tenable has become a trusted source of truth for boards and executives needing to understand their businesses exposure and risk. We're seeing this play out in our product mix as Tenable One represented 30% of new business in Q2. We are also seeing increased utilization with different asset types, which allows customers to leverage features such as attack path analytics, visualize the riskiest exposures and toxic combinations and enables customers to quickly assess and safeguard their business.

Speaker 2

We're also seeing significant momentum in cloud security. Prioritization of cloud security spend coupled with our CNAP offering resulted in strong growth in our cloud security for the quarter. Tenable Cloud Security delivers immediate value as an exceptionally user friendly multi cloud solution. We're starting to land technical wins with large sophisticated enterprises. In fact, it's in the 2nd quarter in a row that one of our largest deals included cloud security.

Speaker 2

As I mentioned, the Fortune 100 Financial Services Company selected us this quarter for Keane, which is an integral piece to CNAP. Their other cloud security provider for CNAP was not able to deliver visibility in identity for cloud, where we are the best provider to meet their needs. During the quarter, we acquired Eureka, a leading data security posture management company, adding discovering and securing data to Tenable Cloud. We're excited to add enhanced DSPN to our CNAP offering, which we expect to happen this year. We're also expanding our generative AI capabilities to maximize customer value.

Speaker 2

Along with integrating AI into our products, we're also seeing rapid adoption of our exposure management platform to identify where and how AI is operating in customer environments. We introduced 2 new capabilities in Q2. 1st, an AI security posture management capability within our cloud security offering that detects AI misconfigurations in services like AWS Bedrock and Azure OpenAI and ensures compliance with their organization's security policies. 2nd, we now provide runtime detection to identify AI software libraries and browser plug ins that may be in use within the enterprise. We believe this is an innovative capability to alert security teams where the unauthorized use of AI may be taking place in their environments.

Speaker 2

As we look ahead, we are going to focus on optimizing the business by investing in areas that matter most to our customers, while continuing to drive profitability in the business. We will continue to enhance our CNAP offering, add additional features to Tenable. 1 and leverage AI to drive efficiency in our products and to solve problems for our customers. On that note, Steve will go into more detail, but we are introducing our 2025 unlevered free cash flow target of 280 dollars to $290,000,000 today. We believe this is a strong initial target representing our commitment to deliver durable cash flow growth and we look forward to updating you as we get through the second half of the year.

Speaker 2

We'll continue to evaluate the appropriate level of investment and resources going forward to strike the right balance of growth and profitability. This is an exciting time for Tenable. We are leveraging our leadership position in VM, seeing major momentum in cloud and delivering broader exposure management platform. Despite challenges for this quarter, I am confident in our long term strategy and our ability to grow over the ensuing years. I'll now turn the call over to Steve for further commentary on our financial results and outlook.

Speaker 3

Thanks, Amit. Calculated current billings defined as revenue recognized in the quarter plus the change in current deferred revenue grew 10% year over year to $221,100,000 While we only guide to CCB on an annual basis, I think it's fair to say CCB growth in the quarter fell short of our expectations and accordingly we are revising our outlook for the year to reflect a more challenging selling environment. Now let's get into the results for the quarter as it will provide context to our outlook for the full year. Recall, we went into the quarter with a healthy pipeline and a large number of 6 and 7 figure opportunities. We closed fewer deals than expected as customers deferred new projects in the face of a more challenging macro environment and tighter budgetary constraints.

Speaker 3

This shortfall was specific to VM, particularly with large opportunities in North America, where we experienced longer sales cycles and more modest growth in comparison to other geos. Other areas of new business continue to get traction despite the selling environment. Tenable. 1 grew 30% of total new enterprise sales and is up from 26% last quarter. Exposure solutions, which includes Tenable.

Speaker 3

1, standalone cloud, identity and operational technology security solutions represented over 50% of our total new sales in the quarter. As a point of comparison, exposure solutions was under 10% of total new enterprise sales in Q2 of 2020. We've made a lot of progress in this regard. This healthy mix of new business demonstrates our ability to broaden the product portfolio and expand into new markets over the years and reflect the growing demand for exposure management and the actionable insights we deliver to CSOs and their security teams. As Amit commented earlier, cloud security was also a major highlight for us with several sizable 6 figure wins in the large market, including a global financial services and payments firm, a large defense contractor and a multinational enterprise software company.

Speaker 3

We believe our success here is a clear indication that we will continue to take in one of the faster growing areas of the cybersecurity market. Finally, I also want to note that current RPO growth in the quarter was 14%. Turning to other highlights. We added 408 new enterprise platform customers and 76 net new 6 figure customers during the quarter. Our net dollar expansion rate was 109% this quarter, consistent with last quarter.

Speaker 3

Our NORH remains strong. Now on to the P and L for the quarter. Revenue was $221,200,000 which represents 13% year over year growth. Revenue in the quarter exceeded the midpoint of our guided range by $3,200,000 Our percentage of recurring revenue remains high at 96% this quarter. I'll now turn to expenses.

Speaker 3

I'll start with gross margin, which was 82% this quarter, up 70 basis points from last quarter. Gross margin was better than expected due to our continued ability to cost effectively scale our public cloud infrastructure for our exposure management platform and other cloud based offerings. Sales and marketing expense was 84,800,000 dollars up modestly from $84,500,000 last quarter and as a percentage of revenue was 38% compared to 39% last quarter. Sales and marketing expense was higher sequentially on an absolute dollar basis, primarily due to greater marketing investments to promote our cloud security and exposure management offerings, as well as to build our global brand, partially offset by cost in Q1 related to our annual sales kickoff conference. Overall, we are pleased with the improved efficiency in our go to market efforts this quarter and expect sales and marketing spend as a percentage of revenue to continue to trend lower over the remainder of the year and beyond.

Speaker 3

R and D expense was $33,400,000 which is up from $32,600,000 last quarter. R and D expense as a percentage of revenue was 15% this quarter, flat compared to last quarter. Wages were higher in the quarter related to the acquisition of Eureka. G and A expense was $19,600,000 which was down from $20,600,000 last quarter primarily due to lower payroll taxes, primarily related to divesting of RSUs in Q1. G and A expense as a percent of revenue was 9% this quarter compared to 10% last quarter.

Speaker 3

Income from operations was $42,800,000 and exceeded the midpoint of our guided range by 7 $800,000 Operating margin for the quarter was 19%, which was approximately 325 basis points better than the midpoint of our guided range. The notable outperformance in earnings this quarter reflects our ability to continually drive leverage in our business while making investments to win share in cloud security and the exposure management markets. The sizable beat in operating income resulted in significant EPS upside. EPS for the quarter was $0.31 which was $0.08 better than the midpoint of our guided range. Let me briefly touch on the restructuring expense in the quarter, which is excluded from our non GAAP results.

Speaker 3

You recall that in Q4 2023, we announced an optimization plan, including the potential sublease of a portion of our real estate. In Q2, we executed the sublease and recognized a $4,500,000 impairment charge related to the leaseholds and furniture and fixtures. Now let's turn to the balance sheet. We finished the quarter with $487,000,000 in cash and short term investments, reflecting the $29,200,000 of net cash used for the Eureka acquisition. Accounts receivable was 179,600,000 dollars and total deferred revenue was $725,800,000 Current deferred revenue was $562,600,000 which gives us a lot of visibility into expected revenue over the next 12 months.

Speaker 3

We generated $36,500,000 of unlevered free cash flow during the quarter, which reflects the seasonal pattern of billings during the year. To date, unlevered free cash flow was $91,200,000 and puts us well within reach to achieve our annual guide for the full year, which we are raising today. We feel confident that we can continue to expand our operating and free cash flow margin over the ensuing years as we have done so every year since our IPO. During the quarter, we repurchased 589,000 shares of common stock for an aggregate purchase price of 25,000,000 Thus far, we've repurchased almost 1,500,000 shares and have $35,100,000 of remaining authorization under our initial $100,000,000 share repurchase program. With the results of the quarter behind us, I'd like to discuss our outlook for Q3 and the remainder of the year.

Speaker 3

For the Q3, we currently expect revenue to be in the range of $222,000,000 to $224,000,000 non GAAP income from operations to be in the range of $42,000,000 to $44,000,000 non GAAP net income to be in the range of $35,000,000 to $37,000,000 assuming interest expense of $8,300,000 interest income of $5,700,000 and a provision for income taxes of 3,800,000 dollars And non GAAP diluted earnings per share to be in the range of $0.28 to $0.30 per share assuming 123,000,000 fully diluted weighted average shares outstanding. And for the full year, we currently expect calculated current billing to be in the range of $957,000,000 to $967,000,000 revenue to be in the range of $889,000,000 to $895,000,000 non GAAP income from operations to be in the range of to $171,000,000 non GAAP net income to be in the range of $143,000,000 to 147,000,000 dollars assuming interest expense of $32,700,000 interest income of $23,500,000 and a provision for income taxes of 12,800,000 dollars Non GAAP diluted earnings per share to be in the range of $1.16 to $1.19 assuming 123 point $5,000,000 fully diluted weighted average shares outstanding and unlevered free cash flow to be in the range of $225,000,000 to 2 $35,000,000 I would like to provide some commentary regarding our revised outlook today, reflecting lower CCB and revenue for the year.

Speaker 3

As we think about the second half of the year, we are taking a more cautious approach to new business, not only with large VM opportunities, but also with other pipeline opportunities. While demand generation remains healthy, the rate in which these opportunities are expected to progress through the funnel in the second half of the year is expected to be more moderate than previously anticipated, which will constrain our near term results. Despite the reduction in our top line outlook, we remain committed to our margin target and are pleased to be raising our operating income and unlevered free cash flow outlook for the year. We're also providing an unlevered free cash flow target today of $280,000,000 to $290,000,000 for the full year 2025, which is 24% growth year over year at the midpoint and a major milestone toward achieving our updated long term target unlevered free cash flow margin of 35% plus. With over 95% recurring revenue, high gross margins and high renewal rates, we have a lot of confidence in our ability to drive continued leverage in our business.

Speaker 3

It's important to note that we are committed to delivering on this level of cash flow in 2025 based on a range of growth scenarios and we'll continually evaluate the appropriate level of investment and resourcing to achieve this target. As a platform and cloud first company, we will invest in areas where we see outsized growth and we'll reprioritize spend in other areas where appropriate. I will now turn the call back to Amit for some closing comments.

Speaker 2

Thanks, Steve. In summary, this market is very fluid and we are taking a more cautious approach to our CCB and revenue outlook today. We are very encouraged by the momentum in exposure management and cloud security and we are excited about where we are as a company and the opportunity in front of us. We hope to see you at the Canaccord, Stifel and Piper Sandler Conferences in the upcoming weeks. We now like to open the call for questions.

Operator

Thank you. We will now be conducting a question and answer The first question comes from the line of Saket Kalia with Barclays. Please go ahead.

Speaker 4

Okay, great. Hey guys, thanks for I mean, maybe to start with you. I thought it was interesting in your prepared remarks that you talked about sort of traditional VM becoming more cyclical. Maybe to start us off, can you just talk about some of the market dynamics in VM? And maybe why you think the demand for Tenable.

Speaker 4

1 feels just decently stronger right now than traditional VM. Does that make sense?

Speaker 3

It does, Saket. Thank you for the question. With respect to VM, like it's an established market. We're seeing some cyclical patterns. But we are the clear market leader.

Speaker 3

In Q2, we saw greater scrutiny of transactions, specifically in North America and in the large enterprise segments of the market. With respect to Tenable One, it's just a more modern infrastructure and a more strategic conversation that we're having with our customers. We continue to see strong demand for Tenable 1, which accounted for 30% of our new sales in the quarter. And that's even more broadly than T1. We saw attractive growth for exposure solutions, including cloud, where we're proving ourselves to be highly competitive with market leaders, identity and OT.

Speaker 4

Got it. That's helpful. Steve, my follow-up maybe for you. Despite the challenges in VM that we just spoke about, the focus on free cash flow definitely comes through and certainly appreciate the early look at how you're thinking about 2025. Just understanding that it's still very early, can you just talk us through how you kind of think about the balance between growth and margins in setting that target even anecdotally?

Speaker 3

Sure. Thanks, Saket. Well, we're very pleased to be providing an initial unlevered free cash flow target today for 2025 of $280,000,000 to $290,000,000 That's for the full year next year. That's up 24% at the midpoint. And that's also a major milestone by the way towards achieving our updated long term target for unlevered free cash flow of 35% plus.

Speaker 3

Previously, our long term target for cash flow was 30%. So, I have a lot of confidence in our ability to continue to drive margin leverage. In terms of growth for next year, look, I'm not going to comment about that. We're not through our planning process yet. And we have to see how the second half of the year plays out.

Speaker 3

But the one thing I will say is that we're firmly committed to delivering on our unlevered free cash flow targets. We're also raising our unlevered free cash flow outlook for the year. And we're going to continually evaluate the appropriate level of investment and resourcing to achieve these targets. Some areas will continue to lean in and invest, and other areas will reprioritize where appropriate. So overall, we just have confidence in our ability to drive higher levels of cash flow.

Speaker 4

Very helpful. Thanks, guys.

Operator

Thank you. Next question comes from the line of Brian Essex with JPMorgan. Please go ahead.

Speaker 5

Great. Thank you. Thank you for taking the question. And Amit, great to see you back in the seat. So congratulations to you.

Speaker 5

I guess I wanted to touch on Hermetic and cloud security. Maybe if we can get an update on that. Where are you integrating it? Is it only on the analytics portion of that business? Are you integrating with the rest of the company?

Speaker 5

And are you able to lead with cloud security? I know you talked about, seeing as a point of strength there, but would love to get more detail on where you're seeing success and plans for integration longer term. Thank you.

Speaker 3

Thanks, Brian. It's great to be back. I'll start off talking a little bit about the strength we're seeing in our cloud security product. We're providing a full end to end full CNAP solution and that's resonating with customers. The majority of our cloud sales are for that full CNAP capability.

Speaker 3

That said, in the very large enterprise side of the market where they may already have a CSPM solution, they already have a CNAF solution. We have market leading capability in particular strength around identity and the key functionality. So I think the large win, I think it was our largest single transaction for the quarter came as a Keane win from a Fortune 5 100 company in the financial services segment, a better used suit, very sophisticated consumer of technology where they were doing bake offs. In terms of our ability to generate leverage with our cloud security product, we have a lot of confidence. A majority of our cloud security sales, in fact, are procuring cloud security through 10.0.1 licensing.

Speaker 3

So we're extremely excited that that is resonating. VM customers choosing to move to the modern platform, modern way to assess exposures and then diversifying their asset types and recognizing that we've got market leading cloud security that they can procure and they can do that and get more leverage through an integrated Tenable One platform. So we think the strategy makes sense. We think we're in the early innings, but we think it's resonating and driving early results.

Speaker 5

Great. Thank you. And just maybe a quick follow-up for Steve. Steve, could you comment on the Fed business or just public sector in general? I know that I think last quarter you felt really good about it and called out some strength there.

Speaker 5

And I think we've heard about federal spend trickling down to SLED. Maybe just a comment on mix strength of the business there and is that reacting or behaving differently than the enterprise side of the business? Thanks.

Speaker 3

Our Public Sector business was good this quarter and in line with our expectations. There are some very large seven figure agency wide opportunities in our pipeline for the second half of the year. Some due to its size involve coordination and budgetary alignment, I'll say across dozen of sub agencies for some deals, which can introduce some variability. But overall, we continue to see strength in public sector and we're set up for a good second half of the year with U. S.

Speaker 3

Federal.

Speaker 5

Great. Thank you so much.

Operator

Thank you. Next question comes from the line of Hamzah Fodderwala with Morgan Stanley. Please go ahead.

Speaker 6

Hey, good evening. Thank you for taking my question and good to hear from everybody as well. Amit or Steve, I wanted to follow-up on the public sector question. You mentioned obviously good strength there for Q2. We have heard that there have been some delays on the Fed budget and perhaps some agencies who are a bit uncertain given potential change in administration with the elections later this year.

Speaker 6

I'm wondering if you're seeing any of that impact elongate some of the sales cycles for you within that vertical and if that is reflected in your guidance? Thank you.

Speaker 3

Yes. I'll start off and say, we saw in line delivery with our expectations for Q2 obviously is a seasonally high quarter for public sector. It is an election cycle and we have a significant number of 6 and 7 figure opportunities in public sector. That said, I think we're taking approach for the remainder of the year and trying to understand that there's a certain amount of predictability around public sector in the election cycle. Yes.

Speaker 3

And the only thing I'd add there is, look, we're trying to take a more cautious approach here in new business, specifically with large deals in the second half of the year. This is predominantly in VM, but we're also applying more broadly across our business, which is including public sector. And while demand generation remains healthy, the regulatory opportunities are expected remain through the funnel and the second half of the year is expected to be more moderate. So we're trying to factor that into the guidance and trying to be cautious.

Speaker 6

Thank you very

Operator

much. Thank you. Next question comes from the line of Rob Owens with Piper Sandler. Please go ahead.

Speaker 7

Yes. Thank you for taking my question. And Amit, appreciate your comments around the VM business, but what can you say to assuage investor concerns that it's not

Speaker 8

Yes. I

Speaker 3

Yes. I'll start off by saying I've got a lot of confidence in the VM market, in the VM business. It's a strategic market. As you and others have been in the space for a long time recognize, it's one of those foundational tools that CISOs need and report regularly to audit and risk committees, sometimes cyber committees and to the boards of directors. So it's a foundational market requirement within cyber.

Speaker 3

It's not one that we anticipate going away or even having a more secular downward trend. It's cyclical and I think we're going to see an improved outlook in the VM market with improved macro conditions. We saw this specifically in North America and with large enterprises and we're trying to take a more cautious approach to our guidance to ensure we're setting ourselves up for success for the remainder of the year. I do think that there's opportunity for outperformance in VM and growth over time.

Speaker 2

Thanks for the color.

Operator

Thank you. Next question comes from the line of Mike Chikos with Needham and Co. Please go ahead.

Speaker 9

Hey guys, thanks for taking the question here. Wanted to circle back, I think you guys had called out that Tenable 1 contributed 30% to new business in this quarter, if I had the metrics right. Can you just help us think about if it's contributing, I guess, that percentage, right, 30%, when can we start expecting Tenable 1 to start showing up in the revenue stream, just given the ASP uplift that management has historically spoken about for Tenable 1?

Speaker 3

Well, thanks Mike for the question. We have broadened our business over the years and expanded into adjacent markets. And the one thing I will say is that VM is, as Amit commented earlier, is foundational. We're the clear leader, but growth there, as we mentioned earlier, has become more moderate. But that said, we have confidence in that business to be able to drive growth higher in the ensuing years.

Speaker 3

And of course, we have a portion of our business, most notably cloud security and platform that is growing at a very high rate, and we expect that to continue. And that will represent an increasing mix of our total business going forward. So our core market is seeing slower growth right now in this macro and we have a portion of our business that's expected to represent a greater percentage of our total business going forward that's seen outsized growth. And obviously, we expect going forward that we'll be able to to be able to drive higher levels of cash flow regardless of the growth outcomes either at the second half of the year or for next year.

Speaker 9

Thanks for that, Steve. And I also just wanted to circle up on the new business to the extent that customers are showing increased cyber scrutiny on these new deals. Can you just help us because I know Q1 was a very strong quarter for you guys. You guys were citing the strength that you were seeing in new deals. In hindsight, is it fair to think that that 1Q strength may have been more tied to the pause that we saw in March of last year with SVB and the easier comp?

Speaker 9

Or was there something that really showed up that was different in Q2? And can you maybe clarify when that showed up in Q2? Was it in April, May, June, really the last couple of days of the quarter? How did that progress? Thank you.

Speaker 3

Yes. I'll start off by saying, listen, we're pleased with our Q1 results. We came into Q2 with a strong pipe and a healthy number of 6 and 7 business deals. Obviously, a large portion of that comes in North America. And as the quarter played itself out, we saw some of the softness in VM in North America in the large enterprise, which has a disproportionately large impact on those larger transactions, which play a factor in our financials given the size of the company.

Speaker 3

So I think we've got a reputation for client like we see it and saw strength in the business in Q1 and felt good with our sales for Q2 and obviously the quarter didn't play out that way.

Operator

This is Xiopeta. Mr. Chikos, are you done with the question? Since there is no reply from the line of Mr. Chikos, we'll go for the next participant.

Operator

The next question comes from the line of Joel Fishbein with Tuohy Securities. Please go ahead.

Speaker 10

Thanks for taking the question, Amit. Good to hear your voice. Question on Eureka. DSPM market seems very crowded. Can you just help us through how that's going to fit in the product portfolio?

Speaker 10

When we would likely see revenue from it? And what the target customer is there? That would be really helpful. Thank you.

Speaker 3

Thanks, Phil. Great to be back. We're excited about the Eureka acquisition. DSPM is a strategic component of a CNAP platform. I anticipate that over time, most organizations will procure unified CNAP solutions and that will include a component or some licensing component of ESPN.

Speaker 3

We have ESPN in our current CNAB offering. It's tightly integrated in a unified workflow. And that's really one of the strengths that are met approximatating with the cybersecurity capability. With the REIT acquisition, we're able to introduce next generation features and next generation DSPM capabilities into that CNAP offering and into our cloud security offering and feel like we can now be highly competitive with the absolute market leaders in DSPM. So we can compete on the DSPM, TOEFR TOEFR TOE.

Speaker 3

I think we can lead the market when it comes to Keane. And when it comes to unified CNAV workflow. I think some of the early innings here with our cloud security offering, they're starting to bear that out and we're excited to prove that out over time.

Speaker 10

Great. Thank you so much.

Operator

Thank you. Next question comes from the line of Andrew Nowinski with Wells Fargo. Please go ahead.

Speaker 8

Great. Thank you. And it is great to have you back, Amit. I wanted to ask about, I guess, your really your guidance. The CrowdStrike outage obviously occurred after the quarter in July.

Speaker 8

But do you think this outage might have maybe exacerbated the scrutiny that you're seeing on some of these larger deals at your customers and that they're maybe just holding back spending now because of the outage in Q3. Do you factor that in, I guess, is what I'm asking? Is that a factor as part of your guidance?

Speaker 3

Yes. I think we're certainly factoring in increased scrutiny from large enterprise transactions. And candidly, we're seeing that in what I would characterize as anecdotal instances at this point, where customers which have been burned and which experienced significant outage, their procurement teams are very aware of that and asking very pointed questions. Luckily, we have great answers for them. We can operate in an agentless fashion.

Speaker 3

We've been doing so for decades. Whether we do operate with an agent, we can do it outside of kernel mode, which introduces a lot of safety valves for customers. And we don't force customer upgrades. So customers can select whether they want to operate with the latest agent or whether they want to operate with agent N-one or N-two releases and make sure that what is experienced out in the wild doesn't disrupt operations. So we are seeing increased scrutiny of procurement.

Speaker 3

I think that's baked into the guidance that we're putting out in conservatism for the second half of the year. And we think that we've got a lot of great answers for procurement teams as it's kind of spread the CABG kind of place itself out.

Speaker 8

Okay. Thank you. And congrats on putting out the fiscal 2025 free cash flow guidance. That was really impressive. I was just wondering, given the news that we've or the rumors that we've seen, can you

Speaker 3

obviously, good question, but obviously we don't comment on rumors and speculation.

Speaker 6

All right. Thank you.

Operator

Thank you. Next question comes from the line of Jonathan Ho with William Blair. Please go ahead.

Speaker 11

Hi, good afternoon. With regards to your 2025 free cash flow guidance, can you give us a little bit more color on where you see the opportunity to drive this incremental leverage from? Do we see additional rationalization? Is there going to be like any commentary would be helpful in terms of just understanding where you'll see the opportunity to drive this from?

Speaker 3

Yes. I would say, first, we had notable outperformance in the quarter and that reflects our ability to continue to drive leverage in our business, while also making investments to continue to take and win share in cloud security in the exposure management market, we're turn straight. And part of our focus this year in Infinix is to be more efficient in our business and specifically with regard to sales and marketing and something we talked about at the beginning of the year. And how it play out this year is proven to be true. Like for example, sales and marketing as a percentage of our revenue was 42% last year and this year is 38% this quarter rather.

Speaker 3

And so we expect continued leverage in sales and marketing. Obviously, in terms of G and A, we'll as we continue to grow in scale, we'll be able to more fully absorb some of those costs, which are semi fixed. We're driving leverage in our gross margins as we scale our cloud security offerings and our unified exposure management platform. Every year since we've been public, we've expanded our free cash flows and we've also increased our free cash flow margins, unlevered free cash flow margins. So we expect a continuation of that trend.

Speaker 3

And just given the confidence in our business and what we've demonstrated today, as I mentioned earlier, we're also raising our long term target for our level free cash flow from 30% previously to now 35% plus.

Speaker 11

Excellent. And just very quickly, in terms of your ability to win on the CNAP side, clearly there's a lot of competition in this space. You've got clear differentiation with your Kym product. Can you help us understand what percentage of the market you think you can take or how the competitive dynamics are really playing out in this space, just given how many players are sort of targeting this market? Thank

Speaker 3

you. Yes. There's obviously, it's a crowded market. There's a lot of players in broadly cloud security. I think when you look at Tier 1 CMAP solutions, I would consider us a top 5 player today.

Speaker 3

And as we get into bake offs with other top tier products, I think that's proving itself out. Whether we're a 1, 2 or 3 player this year, I have a high degree of confidence that we've got the team to bet on and that we're proving ourselves to have in the field with competitive win rates and we'll see how it plays out over time. We have a lot of confidence in the team. We have a market leading Teams solution, which can set foot in the door and I'd say among the best seen app experiences in the market today.

Operator

Mr. Ho, are you done with the question?

Speaker 5

Yes. Thank you.

Operator

Thank you. Next question comes from the line of Shaul Eyal with TD Cowen. Please go ahead.

Speaker 3

Thank you. Good afternoon, everybody.

Speaker 12

Great to hear Amit's voice on the call. Steve, actually, let me start on with

Operator

you. Some of the slippage

Speaker 12

that you might have seen towards the end of the quarter, has anything been booked back over the course of the past 30, 31 days now?

Speaker 3

The short answer is yes. But what I will say is this, is in our experience, when we see deals push out of the quarter, it would not be prudent to assume that for the upcoming quarter or even the second half of the year that we'll continue to close what we expected plus the deals that push. Overall, we're just seeing longer sales cycles specifically with large deals. The good news is we are transacting and closing large deals and we have lots of pipeline opportunities that are in high 6 and 7 figure range. But we're just assuming a longer sales cycle And longer sales cycle means it impacts not only the current quarter, but also the outlook for the second half of the year.

Speaker 3

And so that's what we're factoring into the guidance as it needs to be more cautious.

Speaker 12

Fair enough. And maybe for Amit, when you run a quick compare contrast with the softness you've observed back at the beginning of the 1Q 2023, what would that compare contrast look like? Is it strictly geographic? Is it product? Is it category driven?

Speaker 12

Just curious.

Speaker 3

Yes. Well, it's certainly product and category driven. So on the product side, we specifically saw it in our VM business in North America and the large enterprise segment. We in fact had reasonable performance in the commercial market, mid market with VM. No notable change.

Speaker 3

I think what we're trying to do in the outlook is apply that same level of scrutiny to our other theaters and make sure that we're taking a cautious approach to the remainder of the year and setting ourselves up for success. What we are seeing is a healthy amount of engagement in strategic conversations with our customers and that's what's really driving the impressive growth with Tenable. 1 where they're talking about exposure management and leveraging Tenable. 1 as a exposure management platform and where we're able to engage with them in our exposure solutions, specifically strengthened cloud, which we saw and expect to continue and as that product is highly competitive, as well as with identity and OT.

Speaker 12

Got it. Thank you very much.

Speaker 3

Thank you.

Operator

Next question comes from the line of Gray Powell with BTIG. Please go ahead.

Speaker 13

Okay, great. Thanks for taking the questions. Just a couple of quick ones on my side. So in terms of the I guess, we'll call them new disclosures. You've called out 50% plus of new sales from exposure solutions and then 30% of new sales from Tenable 1.

Speaker 13

So this might be

Speaker 3

a little basic, but does

Speaker 13

that mean that 20% of your new sales are standalone products like cloud security, identity and OT? And then I just want to make sure that I'm correlating it correctly. Like when you say new enterprise sales, like what specifically is the definition there? Does that correlate more with something like current bookings or should we think of something else?

Speaker 3

Hi, Greg. Yes, this is Steve. So when we said that 50% of our total sales in the quarter is exposure solutions. That is inclusive of Tenable 1. It includes the 30%, just as a clarification.

Speaker 3

And then we often talk about enterprise sales, right? We have 2 really go to market motions. We have direct sales organization that stands shoulder to shoulder with partners that transact deals and they have quotas. And so collectively we refer to that business as our enterprise sales business. They're selling to either mid or large size customers.

Speaker 3

And then also part of our go to market is an unaided sale without the assistance of sales rep or we transact deals through DMRs or online via our e commerce engine. So collectively in total new business refers to our enterprise direct sales organization and also refers to our unaided sales motion with kind of lower ASPs, high velocity deals.

Speaker 13

Okay. So the metrics more, like a subset of total ACV. It's the total enterprise and does not include commercial. Is that I just want to make sure I have

Speaker 3

it correct. That does not include the Nessus lower ASP products. Yes. Yes. All right.

Speaker 3

Got it.

Speaker 1

All right, great. I'll leave it there. Thank you very much.

Operator

Thank you. Next question comes from the line of Brad Ryback with Stifel. Please go ahead.

Speaker 5

Hi, this is Rob on for Brad. Thanks for taking the question. Ahead of the federal fiscal year end next quarter, I was wondering if you've seen any uptick in federal and public sector customers adopting Tenable 1 as opposed to the perpetual license VM and OT adoption trends from last Q3? And if we should expect the same CCB headwinds from last Q3 recurring next quarter? Thanks.

Speaker 3

Yes. I think what we're seeing out of the federal market is similar in buying patterns and behaviors to other market segments. So we're seeing some adoption of TENBA 1, but obviously that's a multi year given the penetration in the account base we have in the federal market that's going to be a multi year account effort to transition and grow them into 10,000,001.

Speaker 5

Great. Thank you.

Operator

Thank you. Next question comes from the line of Srinik Kothari with Robert W. Baird. Please go ahead.

Speaker 14

Hey, thanks for taking my question. Welcome back, Ahmed. Just a follow-up to an earlier question and a commentary on the CrowdStrike outage driven deal scrutiny impacted in the second half. At the very beginning, you highlighted the importance of best of breed solutions in promoting resilient and reducing risk associated with over reliance on a single vendor. Can you elaborate on how you are positioning Tenable to address?

Speaker 14

And if they're already seeing some traction in the ongoing customer conversations? And I just had a follow-up for Steve.

Speaker 3

Yes. I think we're in the early innings of how customers are going to perceive this and you hear different responses and different approaches from CISOs around the world who have been impacted. For us, we look at it and say, hey, there are certainly some characteristics which could serve as tailwinds. When you looked at vendor consolidation on higher risk agents, things like kernel level usage or even operating system diversification. So we think that there is significant validation for having an independent audit, an independent exposure assessment from a vendor like Tenable.

Speaker 3

It's not also providing an operating system or other security functionality. We think that message resonates. We think it makes great sense in a high resiliency architecture. So there's good argument that we might see some tailwind from this. Just as we spoke earlier on the call, there's good arguments where we may see some headwinds, but we see increased scrutiny or might see increased scrutiny on a more consistent basis from large enterprises where the procurement teams have experienced outages and are being asked by their corporate leadership or by the security leadership for different levels of assurances and different terms around liabilities and assurances around failure.

Speaker 3

And I think we've said earlier in the call, I think we've got great answers for those teams.

Speaker 14

Got it. Thanks for the color, Amit. And Steve, a quick follow-up on the net dollar expansion rate remaining steady at 109. So just can you provide more insights into kind of how does this stack up against billing softness? Is it just the lagging indicator that dynamic versus kind of real time billings dynamic or anything else that we're missing contributing to this?

Speaker 3

Well, obviously, there's a lot of interplay between new deals in the quarter from new logos and then expansion within existing customers and each quarter is different in its own right. And that mix between new business from new logos and expansion from existing customers can vary. As you mentioned earlier, our net dollar expansion rate in the quarter was 109, 109 last quarter. It was good to see that stabilize and that reflects the customer's ability to expand and add Tenable One. But also we're acknowledging here in this market, specifically the large deals and in particular VM, where you're seeing customers moderate the rate of expansion within that product set.

Speaker 3

So overall, we have a big customer base with confidence in our ability to sell a broader product portfolio back into that base and we would expect the net dollar expansion range over time that trends up over the course of years here.

Speaker 14

Got it. Thank you.

Operator

Thank you. Next question comes from the line of Joshua Tilton with Wolfe Research. Please go ahead.

Speaker 3

Hey guys, this is Rich Magnuson for Josh Tilton. Coming back to the macro, some other software names you reported are saying the macro is starting to stabilize and your results and commentary suggests maybe some potential softness there. Can you guys give any other points on inputs that may be driving that or some thoughts on the possible disconnect from others who have reported? So any additional color on things that changed quarter over quarter would be helpful. Thank you.

Speaker 3

Well, we reported a good Q1 and raised our outlook for the year and that was due to strength specifically in new logos, new dollars from new logos. As I mentioned earlier, every quarter is different in its own right. And I think in Q1 that was at a time when others were reporting a tougher macro and softness. This quarter, we saw certainly more levels of review and budgetary constraints with respect to large deals and reflecting that in our outlook for the year. So, yes, each quarter is different in its own right.

Speaker 3

We're trying to be cautious in our outlook and we're reflecting what we saw in Q2 for the second half of the year. Thank you.

Operator

Thank you. Next question comes from the line of Patrick Colville with Scotiabank. Please go ahead.

Speaker 15

All right. Thank you so much for taking my question. Steve, this one's for you, please. So current billings rose 10% this quarter, which I mean given the tough comp is pretty respectable. But the guidance implies quite a big falloff in the back half.

Speaker 15

I mean, I model an exit billings growth rate in 4Q of about 7%. So I guess, am I thinking about it the right way? And then is it these trends you've been talking about shortfall in VM because of the cyclicality, North America softness and large enterprise softness, those trends are going to get worse and worse through the year, like what we see in 2Q worsens?

Speaker 3

Yes. So I would say it's impacting our CCB guide a little bit. If you look at the second half of the year, that suggests that we're expecting to grow, call it, 9%, 10%, given the range that we provided. So yes, we are expecting more moderate growth in the second half of the year relative to what we experienced in the first half. What we said specifically in Q2 is that we saw a challenge getting deals across the finish line, specifically with VM in North America.

Speaker 3

And so that's reflected in our outlook the second half of the year, which for large deals as a whole, more notably in our VM business, but we're also trying to hedge large deals across our feeders, whether it's public sector or otherwise. And we think that's the right thing to do. And so overall, we're trying to take precautions about the second half of the year. And good news is that pipelines are full and top of the funnel remains strong and our focus will be on executing and closing a lot of those large opportunities.

Speaker 15

Very helpful. And in an earlier question, you highlighted the criticality of VM, it's a core discipline in every enterprise CISOs arsenal, certainly grew with that. The commentary you've given is that we're going through a cyclical trough. When given prior cycles and given what you're seeing right now, when do you think the cycle might pass here in DM?

Speaker 3

Yes. I think it's we obviously quite speculative to throw out a particular quarter. And it's more just a recognition of the importance of the market and that at some point both from the macro perspective, but more specifically from a VM perspective that it will come back in favor and have an increasing share of budget over time the way it has in years past. And it has been cyclical in years past as well. And we saw it a couple of years ago, it was the number one priority in some CIO, CISO surveys.

Speaker 3

And then a few years before that, it was a number 5, number 6 priority. So these things are cyclical and we believe that it will come back, but difficult to project when. And we're certainly not factoring that into our outlook for the year. Certainly, our expectation is that we would see relative type higher over the years.

Speaker 15

Crystal, yes. Thank you so much.

Operator

Thank you. Next question comes from the line of Roger Boyd with UBS. Please go ahead.

Speaker 16

Great. Thanks for taking the question. Steve, I'm wondering if you could help bridge the CCB performance versus the CRPO performance and anything you're seeing from a billings duration or payment terms

Speaker 3

14%. And look, we talk about CCB as a proxy of what we sell. And some quarter CCB can closely correlate to the underlying health and sales of the business. In other quarters, I think we talked about this in Q3 of last year, RPO is a better approximation. And I think it's fair to say regardless of what metric Top line came in lighter than expected, which we've talked about.

Speaker 3

But there's not a perfect metric and CCV here is also influenced by deal timing, early renewals, a number of other factors. But overall, it's a corollary to our performance in the quarter, which we discussed.

Speaker 16

Got it. And then maybe a quick follow-up for Amit. Just approaching the cloud competition debate from another perspective, any color on the contract durations or strategic nature of the deals you're seeing in cloud security? It seems like you're having a lot of success, but the Keane function in particular winning along side existing CNAP solutions. Can you just talk to your confidence in winning that broader cloud security budget over time and not the other way around as other CNAV vendors expand their own key offerings?

Speaker 16

Thanks.

Speaker 3

Yes, sure. I'll start by saying most a vast super majority of the transactions A lot A lot of customers begin their CNAP journey with CSPM. We think we have highly competitive CSPM functionality, but really that unified CNAP approach is an area where we really shine, especially vis a vis competition. And again, I think some of our early win rates are starting to prove themselves out in the specialty and in large enterprises where they're doing bake offs and doing testing. That said, for organizations which have already deployed a CNAP or just deployed a CSPM, we don't have to go in and displace and do a rip and replace in order to pull down budget.

Speaker 3

I think the great example we called out was a sophisticated customer, which was able to differentiate our team functionality from what they were able to get with their existing vendor. It also enabled us to attractively tap into identity and access management budget. It wasn't even coming from the cloud security budget. So again, that opens up additional TAM to us and one that I feel great we'll be able to continue expanding over time.

Operator

Thank you. Next question comes from the line of Rudi Kissinger with D. A. Davidson. Please go ahead.

Operator

Mr. Kissinger, please go ahead with your question.

Speaker 14

Yes.

Operator

Since there is no questions at this point of time, this concludes today's teleconference. You may disconnect your lines

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Earnings Conference Call
Tenable Q2 2024
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