Tenable Holdings, Inc. (TENB) Q4 2019 Earnings Report, Transcript and Summary

Greetings and welcome to the Tenable Q4 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. [Operator Instructions] Please note that this conference is being recorded. I would now like to turn the conference over to your host, Andrea DiMarco, VP of Investor Relations. Thank you, you may now begin.

Thank you, operator, and thank you all for joining us on today's conference call to discuss Tenable's fourth quarter and full year 2019 financial results. With me on the call today are, Amit Yoran, Tenable's Chief Executive Officer; and Steve Vintz, Chief Financial Officer. Prior to this call, we issued a press release announcing our financial results. You could find the press release on the Investor Relations website at Tenable.com. Before we begin, let me remind you that we will make forward-looking statements during the course of this call, including statements relating to Tenable's guidance and expectations for the first quarter and full year 2020, growth drivers in Tenable's business, changes in the threat landscape and security industry and our competitive position in the market, growth in our customer demand for and adoption of our solutions; Tenable’s expectations regarding the long-term profitability and planned innovation and new products and services. 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 management's beliefs and assumptions only as of today and should not be considered representative of our views as of any subsequent date. We disclaim any obligation to update any forward-looking statements or outlook. For a further discussion of the material risks and other important factors that could affect our actual results, please refer to those contained in our most recent quarterly report on Form 10-Q filed with the SEC on November 14th 2019 and subsequent reports that we file with the SEC, which are available on the SEC website at sec.gov. In addition, during today's call, we will discuss non-GAAP financial measures. These non-GAAP financial measures are in addition to and not a substitute for or superior to measures of financial performance prepared in accordance with GAAP. There are a number of limitations related to the use of these non-GAAP financial measures versus their closest GAAP equivalent. 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. We look forward to seeing many of you at RSA later this month or at the Morgan Stanley and KeyBanc conferences in March. I will now turn the call over to Amit.

Thank you, Andrea. Thank you all for joining the call today. I am pleased to report that we delivered strong financial results in the quarter and for the year and achieved a number of significant milestones that demonstrate our innovation and leadership in the market. For the fourth quarter, calculated current billings grew 28% year-over-year and revenue grew 29%. We are pleased with our growth and believe our scalable model allows us to attain attractive growth while also delivering free cash flow. During the call, I’ll provide commentary on our market momentum and ability to deliver our best-of-breed solutions. I’ll also talk about how we’ve broadened and enhanced our product portfolio as part of our cyber exposure strategy and our mandate to help our customers master and understand their cyber security risks. We operate in a sizable market with real momentum and the importance of what we do continues to increase. The adoption of a broader set of technologies has elevated cyber security to one of the top challenges facing business. And Nessus Pro has elevated from one focused on technology to one focused on business risk. In 2019, we believe we’ve elevated our leadership position in this market. Our investments in research and product development have earned us the number one position in vulnerability coverage, lab testing down 20% more CVEs covered than our next closest competitor. In addition to broader coverage, we also benchmark ourselves to six-sigma accuracy with lower false positive and false negative rates. Better coverage and accuracy is fundamental to anyone interested in building a professional VM program. Tenable also leads the industry in dealing with zero-days with more than 100 discovered in 2019, significantly more than our competitors have announced. We added over 1500 new platform customers in 2019, 461 in the fourth quarter alone, which we believe is attributable in part to our leadership in the market and best-of-breed offering. We also added a 188 net new six-figure deal, 52 in the fourth quarter, which we think demonstrates growing evidence from the increased importance of vulnerability management and our ability to transact larger deals. Beyond differentiating ourselves in VM, in 2019 we enhanced our product portfolio across the entire breadth of customer compute environments, cloud, web application scanning, container security and operational technologies. We bolstered our cloud security capabilities with Microsoft Azure Security Center API integration and new integrated offering to secure cloud workloads with Golden Amazon Machine Image pipeline. Both integrations represent a critical step in ensuring that organizations have all factors to build cyber security best practices directly into their multi or hybrid cloud strategies. We enhanced our web application scanner adding hundreds of new and improved detections representing a five-fold increase in the capabilities for our customers. Our container security product is going further up the application level stack by detecting the vulnerabilities of commonly used opensource components used by popular frameworks such as NOJAs, Ruby and several others. And lastly, we acquired Indegy to expand our OT capabilities. In integrating the pioneer of adaptive industrial security directly into our enterprise platform, we now deliver a unified risk-based platform to the market. We’ve also made great progress in the depth of our analytic offerings with the introduction of predictive prioritization and the release of Lumin, aggressive steps forward in the execution of our broader cyber exposure strategy. With new assets coming online across web, DevOps, cloud and OT environments, prioritization of vulnerabilities has been a huge challenge, which tenable now addresses head on. Predictive prioritization determines the issues most likely to exploited by icing vulnerability severity, exploitability, exploit code availability and threat intelligence with vulnerability context. In simple terms, our customers get a headstart addressing the issues that matter most. As an example, a large telco carrier in South America with a 1,000 buildings spread across the country, both internal and external cloud and a huge amount of network assets and servers to protect was looking to mature their VM program. Within a large and complex environment that’s constantly expanding, they found that it’s not easy to identify what’s most important or what’s critical to mitigate first. This customer purchased SC and they indicated that they were really compelled by the power of predictive prioritization within SC to help them prioritize which vulnerabilities to address. The Tenable’s cyber exposure vision extends well beyond prioritization of vulnerability. Lumin brings in a new era, the measurement of cyber risk as a new management discipline. In addition to vulnerability data, and all of the components of predictive prioritization, Lumin also assesses assets to determine their criticality. With Lumin, Tenable automates the translation from vulnerabilities to risk. We also deliver trending and benchmarks as cyber hygiene against industry peers and best practices. Finally, Lumin provides automated remediation workflow guidance to help our customers efficiently reduce their exposure. Lumin became available-for-sale the end of Q3 and we are very pleased with what we've seen so far. Already our leadership position has been acknowledged in Forrester's Q4 release of their wave on vulnerability risk management. And in Q4, we further expanded Lumin’s analytic capabilities with the first-ever assessment maturity score. It's compelling to know your level of risk and that your program has granularity of visibility, as well as the complete coverage of your environment. I am also pleased to report that we’ve delivered on our commitment to make Lumin available for all platform customers including I/O and SC. In short, our product team has been very busy and let there be no doubt we are pleased with the innovation and the results. I’d like to share some examples of Lumin at work within our customer base. One of the largest telcos in Europe and the long time SC customer was struggling to identify which vulnerabilities to target first. This customer began using predictive prioritization earlier in 2019 and wanted to extend more deeply into risk-based VM. Once they saw Lumin firsthand, they decided to elevate their VM management efforts to better prioritize measure and articulate the state of their vulnerability program. Another Lumin example, a new I/O the customer in the financial services industry purchased Lumin and web application scanning to consolidate risk between web applications and on-prem infrastructure. This customer was looking to measure and track cyber risk, while at the same time automate the manual assessment tasks. They were specifically looking for prioritization features for their risk security program. With I/O Lumin, and web application scanner, this customer raised their VM programs maturity and was able to provide executive level information and benchmarking on their cyber exposure to the Board. As organizations continue to become more technology-dependent, understanding cyber exposure has become more strategic and important. We believe that there is lots of evidence that our strategy to be best-of-breed in VM is generating strong momentum in the market and strategic opportunities continue to present themselves as the surface to the attack continues to widen. We are seeing growing need for organizations to prioritize their exposure and understand what that means to enterprise risk and we believe that the number of players able to compete in this new paradigm is quickly shrinking. As an example of our leadership, BeyondTrust selected Tenable as a preferred vulnerability management platform for BeyondTrust enterprise customers as the company exits the VM market. We are excited about the opportunity to partner with them in this endeavor. As we continue to increase our breadth of assets, we provide a unifying data set for all the devices customers across their operating environment. We capture how to expose those assets are and how valuable they are. Our customers are increasingly turning to us for definitive answers, giving us the mandate to become their system of record for cyber risk management. The compelling analytics we provide are just the first few transformative steps in our ambitious plans. Now before I turn the call over to Steve, I would like to share that Mark Thurmond has joined our team as Chief Operating Officer. In this role, Mark will report to me and lead global field operations including sales, professional services and technical support. Mark’s appointment adds another layer of depth to an already powerful bench of executive talent. Mark is a highly respected go-to-market executive with a proven track record of driving revenue growth and operational excellence with notable cloud and cyber security companies. We’re excited to have him join our team. With that, I like to highlight our enthusiasm with what we've accomplished in 2019 and our excitement about the opportunity still ahead of us. Now I’ll turn it over Steve

Thanks, Amit. As Amit mentioned earlier, we are very pleased with the results for the quarter and are excited about our outlook for 2020, which calls for continued growth and significant operating margin leverage as we scale our business to address a major market opportunity and cyber exposure. I’ll begin by reminding you that, except for revenue, all financial results we will discuss today are non-GAAP financial measures, unless stated otherwise. As Andrea mentioned at the start of this call, GAAP to non-GAAP reconciliations may be found in our earnings release issued earlier today and posted on our website. Before I discuss our fourth quarter results, I would like to also remind you that our results of operations reflects one month of activity for the Indegy acquisition. Consequently, Indegy’s revenue and calculated current billings are immaterial given the formative stages of the go-to-market activity. That said, our non-GAAP OpEx in the quarter reflects approximately $1.5 million from the impact of Indegy, primarily related to R&D expense and to a lesser extent, sales and marketing for headcount related to SCs with specific OT experience. From a GAAP perspective, we did incur cost related to the transfer of acquired intellectual property, as well as professional fees and the amortization of acquired intangible assets, which are detailed in the press release we issued today as well. Now on to our results for the quarter which is highlighted by record revenue, CCB and new enterprise customers. Revenue for the quarter was $97 million, which represents 29% growth over the same quarter last year. Revenue in the quarter exceeded the midpoint of our guided range by $3 million aided by strong execution both domestically and abroad. The upside revenue is a result of solid sales and a healthy intra-quarter flow due to some larger deals closing earlier than anticipated in the quarter. It is also worth noting that the quality of revenue is very strong as 93% of revenue is recurring which is a benefit of our subscription model. Calculated current billings defined as the change in current deferred revenue plus total revenue recognized in the quarter grew 28% year-over-year to $125 million. Overall, we’re very pleased with the positive trend line of CCB growth throughout the year, as growth increased from 25% in Q1, to 27% in Q2, to 28% in both Q3 and Q4. One of the drivers of CCB growth is the strength we are seeing in the enterprise market and our ability to transact larger deals. We added 461 new enterprise platform customers this quarter, which is a record and the first time you got it more than 400 in a single quarter. We attribute momentum here to the investments we've made in sales to grow ourselves what’s globally and in R&D to deliver continued innovation and differentiation. Not only are we seeing an acceleration of customers, but are also having success closing larger deals, as evidenced by the 52 net new six-figure customers in Q4. This brings the total number of customers spending in excess of $100,000 annually to 461 [Later changed by the Company to 641] and a notable increase over the 453 at the end of 2018. I’ll now turn to expenses and profitability. Gross margins were 82%, down from 84% in Q3 and 85% in Q4 2018 and is tracking in line with expectations. Our gross margin for the quarter reflects $1.6 million of additional costs related to the launch of Lumin including predictive analytics and data science and the amortization of capitalized software cost. As a reminder, we expect our gross margin to be in the low 80s to the high 70% range long-term. Now let’s turn to operating expenses. Sales and marketing expense is $57.7 million, compared to $53.2 million last quarter and $44.5 million in the fourth quarter last year. This represents 59% of revenue for the quarter and 60% for the full year, which is down from 62% in 2018. It’s also worth noting that the fourth quarter, it seems to be our largest quarter in terms of sales and this quarter was no different. As a result, we incurred higher sales incentive compensation on sequentially higher sales. Overall, we are very pleased with the leverage we demonstrated to-date which we attribute to a healthy productivity levels and a maturing sales force and continued progress is expected in 2020. R&D expense rose $20.4 million, compared to $18.6 million last quarter and $19 million in the fourth quarter last year. As a percent of revenue, R&D was 21%, compared to 25% in the same period last year. The increase over Q3 is primarily related to not capitalizing internal development cost associated with Lumin as well as the incremental cost from Indegy. G&A expense was $12.6 million, compared to $13.3 million last quarter and $11.2 million in the fourth quarter last year. As a percent of revenue, G&A was 13% this quarter which is down from 14% last quarter and 15% in the same period last year. Non-GAAP loss from operations was $11.1 million, compared to a loss of $7.7 million last quarter and $10.8 million in Q4 last year. Non-GAAP operating margin was negative 11%, compared to negative 8% last quarter and negative 14% of the fourth quarter last year. Again to summarize, our Non-GAAP op loss in the fourth quarter include $1.5 million of additional OpEx related to Indegy and $1.6 million of incremental expense related to Lumin as we are no longer capitalizing internal development costs related to this product. Overall, we’re very pleased with the significant operating leverage we have achieved to-date as our Non-GAAP operating margin for the full year increased from a negative 18% last year to negative 12% this year. Now all of this has translated positively to EPS. Our pro forma non-GAAP net loss per share for the fourth quarter was $0.11 which is two pennies better than the low-end of our guided range as adjusted for the Indegy acquisition. Now on to the balance sheet. We finished the fourth quarter with $212 million in cash and cash equivalents and short-term investments. Our cash balance reflects the cash consideration paid for the acquisition of Indegy. As part of the purchase accounting, we recorded $15.5 million of intangible assets associated with acquired technology, which will be amortized over seven years and $54 million of goodwill. Turning to cash flow, there a few discrete items impacting free cash flow this quarter such as, non-recurring payments related to the Indegy acquisition, primarily from income taxes and other costs related to the IP transfer, as well as CapEx for our new headquarters and the benefits from the SPP activity that we highlighted in our press release and in our prior conference calls. That said, our free cash flow burn was $13.5 million for the quarter. However, excluding these items our cash flow would have been positive for the quarter. With the results of the quarter behind us, I’d like to now discuss our 2020 outlook. I’ll start by echoing Amit’s comments on balanced growth. With over 90% recurring revenue, 80% gross margins, increasing enterprise penetration and strong unit economics, we have confidence in our ability to sustain attractive long-term growth and are committed to becoming a role of 40 company. Accordingly, our 2020 guidance reflects progress towards achieving this. Recall, we previously stated that we intend to turn free cash flow positive by the time we exit 2020. Today, I am pleased to add that we expect to generate positive free cash flow for the full year and expect our free cash flow margins to increase over time. In terms of expense flow in 2020, we expect total operating expenses to increase sequentially in Q1 due to the timing of industry and other events, as well as the inclusion of Indegy for a full quarter. For the remainder of the year, we expect operating expenses to grow more modestly than the years past, which is contemplated in our annual guidance and reflects improved operating margins. Essentially, the Indegy acquisition allowed us to accelerate investments that we otherwise would have made throughout the year. With that as a backdrop let’s turn to guidance. For the first quarter of 2020, we currently expect, revenue to be in the range of $100 million to 101 million. Non-GAAP loss from operations to be the range of $18 million to $17 million. Non-GAAP net loss in the range of $19 million to $18 million and pro forma non-GAAP net loss per share in the range of $0.19 to $0.18 assuming weighted average common shares outstanding of 98.7 million. For the full year 2020, we currently expect revenue of $435 million to $440 million, Calculated current billings of $500 million to $510 million. Non-GAAP loss from operations in the range of $38 million to $33 million. Non-GAAP net loss in the range of $41 million to $36 million. Pro forma non-GAAP net loss per share in the range of $0.41 to $0.36 assuming weighted average common shares outstanding of $100.1 million. For the full year our CCB guidance reflects strength in our core business with modest contributions from our newly launched Lumin product and OT offering. We are seeing good early momentum from our more expansive product portfolio. But we expect the contribution from newer products to build over time. The non-GAAP net loss for the full year assumes a provision for income taxes of approximately $6.5 million. This amount is highly dependent on the allocation of income by jurisdictions, as well as non-resident withholding taxes. In summary, we are pleased with our Q4 and 2019 full year results and believe we are positioned well for continued success. And now I will turn the call back to Amit for some closing comments.

Thanks, Steve. We continue to be excited about the opportunities in front of us and to be recognized as a leader in this transformational and increasingly strategic market. We believe the combination of our differentiated technology, even stronger now with Lumin and Indegy and our data analytic capabilities position Tenable to become the cyber risk system of record. We now like to open the call up for questions.

Thank you. [Operator Instructions] Our first question comes the line of Sterling Auty with JPMorgan. Please proceed with your question.

Yes, thanks. Hi, guys. So, I know it's early days, but just kind of curious what we should be thinking about in terms of the uplift that you get from a customer adding Lumin into either I/O or SC.

Yes, obviously it’s early in the lifecycle for Lumin but what we've seen is pretty consistent with the expectations that we’ve been talked about and in line with the 30% to 50% higher ASPs for those customers, which are embracing Lumin in addition to their core VM work with the SC or kind of I/O.

All right. Fantastic. And then, Steve, one for your side, just looking at the gross margin in the quarter coming in a little bit lower than you would have expected. Was that just the release of Lumin and amortization of the capitalized R&D flowing through cost of revenue? Or was there anything else impacting it?

It was primarily that, look overall gross margins came in line with our expectations and it’s trending in line with where we said we expect to be long-term which is low 80% high 70% range. And so, the increase in cost of revenue this quarter is a result of the launch of Lumin and specifically data science and some additional public cloud costs, but also more specifically, if the amortization of capitalized software which is the internal developments cost leading up to the launch of Lumin. Now, I would just say here that, a lot of these costs are semi-fixed. So we expect to absorb them over time. But overall, margins will track in line long-term as per our direction.

Great. Thank you.

Our next question comes from the line of Melissa Franchi with Morgan Stanley. Please proceed with your question.

Great. Thank you. Amit, I am wondering if you could just talk about how the integration of Indegy has proceeded this far and I know it’s early, but what are you seeing in terms that how this technology is changing the opportunity for you all around OT?

Thanks, Melissa. We’re really excited about the opportunity with Indegy and in the broader opportunity for Tenable in the OT market. As you know, we’ve been a participant in the OT market with our industrial security product and that’s giving us great insight into what customers are looking for, what their future requirements are, confidence that our existing buyers have great interest and requirements in the OT side of the market. And also confidence that our sales team and our go-to-market motions are very natural ways to acquire customers and pickup opportunities in that OT market. So, we are early in the days of integration, but we announced on day one that we've integrated it or released the integration of Indegy with our SC product and a lot of these customers have on-prem solutions. So, we think it’s a very natural pairing. And were committed to the near-term integration of our OT solution with and for our Tenable I/O customers. And that integration really flows through. So it’s not just, hey we now give you the perspective of IT and OT, but it flow through all the analytic products and the analytic capabilities. So, as you ingest the OT data alongside the IT VM data, this like predictive prioritization and other analytic components work naturally. We feel it’s really compelling and actually down here at our sales kick-off, there is a lot of enthusiasm, a lot of excitement in the sales teams for the new capabilities of our OT offering.

Great. That’s great to hear. One for Steve, just to follow-up on your guide for 21% to 20% current billings growth next year, can you just detail on maybe what are some of your underlying assumptions around that growth particularly around whether that's coming from expansion into your existing customer base through asset growth or even new used cases like Lumin versus – which is coming from new customer adds?

Sure. Thanks, Melissa, well as Amit mentioned earlier, we’re very excited about the new products we launched at the end of last year. There is certainly a major opportunity here and also excited about the newly acquired OT enterprise capability. Early indications are positive. But it’s certainly in the year. And so our CCB guide largely reflects momentum on our core business and a modest contribution from Lumin and Indegy. And given enterprise sales cycles, new products take time to season. But we certainly expect this to be a growth driver for us going forward. And as a reminder for OT in particular, deal sizes tend to be somewhat larger and sales cycles tend to be slightly long. So the OT sector is in very early innings and we anticipate it to grow over time. In terms of expansion, we do expect healthy expansion rates and expansion in the back. So continued asset growth and to some extent some contribution from newer products. Over time now, we would expect more contribution from newer products in addition to helping expansion with assets in our key customer accounts.

Great. Thank you.

Our next question comes from the line of Gur Talpaz with Stifel. Please proceed with your question.

Sure. Thank you. So Amit, you too talked about being the best in terms of VM coverage, I guess a broader question here. Do you think we are now in a best-of-breed market for VM within the enterprise? And do you think that customers whether they are existing your own customers or other customers, you think they recognize the differentiation that you had in terms of your functionality relative to your peer set?

Good question and one that we feel obviously very certain of. If you rewind the clock back going three years ago and you talk to Gartner or other industry analysts, they would have said, all VM products are basically created equal. Last year, where Gartner analyst was telling us that, we’ve really distanced ourselves from the competition and that we’ve got a better opportunity to take market share and convert customers over the next two years than we had over the trailing 3 to 5 years. So, I think, they're starting to see that differentiation. And that plays itself out in the market. In my comments earlier, I talked a little about BeyondTrust getting out of the enterprise VM market and BeyondTrust coming and selecting Tenable as the right landing platform for their enterprise customers with VM requirements. And so, that is – those types of selections are a random and the differentiation in growth rates, especially around VM are not random. It’s a deliberate and I think it’s a direct result of a superior product and superior level of investment. And what we talk about the 20% greater coverage in CVEs to our next closest competitor, that’s 20%, it’s not 2%. When you go in to a network and when you are testing an environment and you seeing a quantitative difference, as well as higher accuracy rates with fewer false positive and false negative, that really stands out to people in enterprises who are responsible for VM programs and for them coverage and accuracy and dependability of the product to do their job matters. So, we are firm believers that secured to security market is spoken time and again looking for best-of-breed approach as we think we bring to the table with an open API and open integrations with other major infrastructure components. So we’re firm believers and we think the data is supporting our hypothesis.

That’s really helpful. And thank you. Pretty good lead into my next question which is about BeyondTrust. So in security we see similar arrangements in the past and others exited certain spaces, whether it’s email security or even VM. How do you think about the opportunity here with BeyondTrust exiting the space? Maybe just context or base line how did this relationship ultimately evolved? Thank you.

The relationship evolved traveling just from your engagement with the Beyond Trust team and the BeyondTrust customer base out in the field and healthy relationships with folks at BeyondTrust over the course of many years. So, I think really getting together with them and understanding their corporate strategies, their corporate direction. Where they are making investments where they are seeing growth and ultimately the belief that they will have a better customer outcome and better customer experience through integrating with Tenable as a best-of-breed provider for their VM requirements. So, we are early in the relationship, but the go-to-market activities between the sales organizations that are trying to come across in an organized fashion for a smooth and orderly transition of BeyondTrust’s customers especially in the enterprise segment to Tenable.

Thanks.

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

Hi. Good afternoon. I just wanted to maybe start with a little bit of additional color around enterprise sales cycles. I think you guys talked about some of the deals closing a little bit earlier, but can you give us a sense of maybe where we stand? Have all the issues been corrected at this point? And then maybe as a lead into that, why the decision to hire Mark? What does he sort of beef up in this entire process? Thank you.

Hi, Jonathan. This is Steve. I’ll take the first part of your question. First and foremost, we see a lot of momentum and traction in the enterprise market. We announced today on this call a record number of new enterprise customers over 400 for the first time we've done so in a single quarter. And then we also announced over 50 net new six-figure customers. I think it’s fair to say we couldn't be happier with the size of the length and types of command that we’re seeing. And this certainly underscores the growing importance of VM. But it also coincides with the investments that we are making in sales too to win share. We did talk about a couple of quarters ago that we are seeing more larger deals and sales cycles within certain categories are not necessarily extending. We’re just doing more deals with larger price points that come with larger sales cycles and come with frankly more levels of complexity and review. I think we've navigated that very well and you can see here in the quarter the upside in revenue which we attributed to strong inter-quarter flow. So, in total, the takeaway here is that I think we’re very pleased with our progress to-date and Mark is going to add another level of review and focus for us in an area where we needed. Like we guided today, it’s a $0.5 billion – and say, $500 million - over $500 in sales. We think we are offering good growth and we see a major market opportunity ahead and we look forward to updating you on our progress throughout the year.

Thanks.

Our next question comes from the line of Dan Ives with Wedbush Securities. Please proceed with your question.

Yes, thanks. So, my question is on the large deal from – I mean, obviously you are seeing larger deals more, strategic discussion with Lumin as well, I mean, just talk about going into next year in terms like pipeline and just composition of deals. I mean is that a trend that to just continue to sort of accelerate in terms of just the composition of deals when you just think about product set?

I think – so I think what we have said and continue to see is that there is a very steady volume of predictable business in the traditional deals that we’ve been doing. And I think we are seeing that continue. We’re also seeing with our increased capabilities in OT, in conversations with and about Lumin and how customers moves from vulnerabilities to prioritization and how they move from prioritization to a real understanding of risk with Lumin and kind of benchmarking tiers and what and how are you tracking your hygiene and how are you talking about and presenting that risk to the Board, to the audit and risk committee, to the CEO, to the executive staff. We’re seeing those play themselves out in more strategic conversations and we announced Lumin, but we continue to enhance the product in just the last 90 days we’ve added assessment maturity to it. And so, you not only see how – how your hygiene rates, you look at your programs, how mature is that program, how much coverage do I have. What were the gaps. And so those conversations are really enterprise conversations. So we are seeing consistency in the volume of the deals that we've always done, but now in increasing volume of enterprise conversations and enterprise tractions. And obviously, we’re excited with the tract.

Great. And should I just think, I know this is asked before, but just when you think about just the guidance for 202o in terms of you in terms of that Lumin is obviously factored in there. But it's not like from a composition. It's still early being, it’s going to take time. So that sort of accelerates some penetration. That’s not something that you’ve really factored into number. But I am just trying to understand that, because I got a few questions on that.

Sure, Daniel. I think, that’s fair. We said that our guidance reflects strength in our core business and we are pleased with the print in Q4 and our full year results. I think it’s fair to say that we have confidence about 2020 now than we did 90 days ago. But our guidance also reflects contribution from newer products. We’re making investments next year and that should not be lost. We spent over $80 million in R&D last year and with continued investments we have more products coming to market now than we ever had in our company’s history with Lumin, with IT, with certainly a refresh of glass and container security. So, think it just gives us a lot of confidence heading into 2020. Now that said, it is early in the year. And we’re pleased with the guidance that we are providing today and we look forward to keeping you updated on our progress.

Great thanks.

Our next question comes with the line of Nick Yako with Cowen. Please proceed with your question.

Great. Thanks. Just wanted to ask a quick follow-up on the BeyondTrust partnership. Just wondering if there is any contribution from that partnership factored into your outlook for 2020?

There is some, not a lot and look I think it's fair to say, BT’s focus is really in another market, pay on for access management and so they’ve had a competing VM offering for some time. But I think they recognize that that we are the best partner for them and the best landing pad for their customers. And they thought they undertook VM customers. They are largely a perpetual license company. So there was a residual maintenance stream there. So our expectation is that we will have some f success working with him in concert on combined go-to-market activities and we will be able to successfully migrate some customers over. But to what degree, we will see. But it’s an opportunity, but I just want to put in context because, it's a more modest opportunity.

Okay. Makes sense. And then on free cash flow, you guys mentioned you now expect to generate positive cash flow in 2020 versus prior expectations of maybe getting there in 4Q. Any point of leverage in the model that you would highlight or anything that's changed?

Well, first I would say, so yes, we are very committed to becoming a real 40 company. But we think that is something that naturally occurs in our model. We have 90% recurring revenue 80% plus gross margins. We have great unit economics and the ability to expand once we land with customers. So you are seeing some natural leverage there. And so, one of the things that we said is that we expect to see free cash flow positive for the full year, not just in Q4. The other point that I want to make is just the operating margin leverage too. If you look at our guidance, for the full year we are guiding non-GAAP loss from operations of $38 million to $33 million. If you look at the non-GAAP loss from operations the same guided just for the quarter is $18 million to $17 million. So, that would seem to suggest over next three quarters, that you will see some fairly significant margin leverage. However, we are investing. I talked about the investment in R&D. And I also want to make the point that we are investing in sales and marketing and we are investing aggressively and we are adding sales capacity. And we’re seeing great returns in the investments that we are making on sales. So, you will certainly see leverage in sales and marketing this year, just given the fact that, we see we have a more mature sales force, more products to sell and our expectation is that we will have more productive sales reps as a result.

Okay, great. Thank you.

[Operator Instructions] Our next question comes from the line of Joshua Tilton with Berenberg. Please proceed with your questions.

Yes. Hi. Thanks for taking my questions. I just wanted to touch on the BeyondTrust one more time. So I believe they go end-of-life at the end of 2020. So, when would you expect to see meaningful amounts of customers looking to move over to Tenable? And you think there will be in education phase getting them to pay subscription?

Just to put matters in context. This is we are not talking about a $10 million plus opportunity with BeyondTrust. It’s something much less. And so, we’re - there are three VM vendors in the market, all having some success converting BeyondTrust customers over. And so, what we’re talking about as a combined go-to-market activity here that we think will result in some success in moving BeyondTrust customers over to we think the reading VM and OT platform. But it’s just that time that will tell.

I guess, I would just add to that saying that, look, Tenable has got a proven track record of converting our historic security center and ST customers moving them to a subscription-based licensing model and that’s had great success. We may see about 15% of sales as perpetual license. But otherwise, vast majority of customers have already gone on that migration with us. And I would also say the excitement and enthusiasm for the BeyondTrust relationship is, step one, there is real opportunity in the existing customer base. And step two is, look because we have a certain level of spend and a certain amount of account penetration with BeyondTrust, doesn’t mean that with our enhanced products and enhanced capabilities that we couldn't expect to see good growth in those accounts for more asset coverage and cost a lot of analytic products and other asset types. So, we feel like – we feel like it’s a great relationship. We are excited about it.

That was very helpful. Thanks and then just a quick follow-up. I believe you mentioned Lumin Automated Remediation Guidance, is the first time the Tenable is offering remediation capabilities. I know that some of your competitors already offer it. So, I was just curious as to, was this in response to customer demand? Are you trying to get ahead of customer demand? If you could comment on that that will be great.

Sure, sure. And actually, thanks for asking it and the clarification. We are not getting into the remediation business. We not in a patching business. We don’t want to imply that we are. What we’ve chosen is to have a tight integration platform with configuration management tools and enterprise infrastructure products and our customers have deployed and selected as best-of-breed solution and have deployed and they are already leveraging in their workflows. So what we’re doing is, part of the analytics within Lumin is looking at the vulnerabilities that exist and obviously all of the contexts around that in terms of exploitability and severity and all that sort of stuff, but also looking at the criticality of the asset. And then, looking at things like patch supercedence to say, hey if I apply this patch, it’s going to seven vulnerabilities on this system. And then when I look at the various combinations of patches or configuration changes, the various asset values and the number of instances across the environment what we could do is provide very specific remediation guidance that says, if you do these three things, you will reduce your cyber exposure by a score of Y. And then, through our APIs integrating with, those configuration management tools, so that we can really automate that workflow. But we’re not getting into the configuration patch management business. We haven't seen that request from our customers and we like the sort of go-to-market ecosystem and partnerships that we do have.

That was very helpful. Thank you.

Ladies and gentlemen, we have reached the end of our Question-and-Answer Session, as well as today’s conference call. We thank you for your participation. You may now disconnect your lines at this time and have a wonderful day.