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…

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…

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.