Greetings and welcome to the Tenable Second Quarter 2020 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] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Andrea DiMarco, Vice President, Investor Relations and Strategy. 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 second quarter 2020 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 second quarter financial results. You could find the press release on the IR 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 second quarter and full-year 2020. Growth and 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, the impact of COVID-19 on our business and on global economy, 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 a subsequent reports that we file with the SEC, which are available on the SEC’s 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. I will now turn the call over to Amit.

Thank you, Andrea and thank you all for joining us today. As you mentioned on our last call, Tenable is an incredibly resilient organization. I was very pleased with how our team came together in the second quarter to support our customers in this virtual environment and deliver on our mission. Steve will discuss our financial performance in greater detail, but there are a few broader comments I would like to make regarding our results for the quarter. Revenue grew 26% year over-year-over in Q2, overall it was a strong quarter of top line growth in this uncertain macro environment. I’m also excited to note that we delivered our first quarter of positive non-GAAP operating income as a public company and continue to improve our free cash flow profile. Underpinning these strong financial results or few key trends that I would like to highlight. First enterprises continue to prioritize vulnerability management as a critical building block to understanding their cyber security risk. Second Tenable’s best-of-breed strategy continues to drive our success. Leading the VM market earns us the right to compete for cross sell opportunities. And finally, power deployments are an accelerating expansion of the tax surface, where enterprises are looking to better assess and understand their cyber risk. Let me walk you through each of these points. First as digital initiatives accelerate customers continue to prioritize vulnerability management. Vulnerability management serves as a foundational building block for enterprises, as they try to understand their cyber risk. This quarter, we saw high customer engagement level, increased scanning and assessment frequency and even third-party CIO and Chief Security Officer highlighting VM as the top three security budget priority. As the tax surface widens with distributed workforces, new assets coming online, and as shift to cloud risk based vulnerability management is becoming…

Thanks, Amit. As Amit commented earlier, we are very pleased with our results for the second quarter and remain excited about the opportunity to extend our leadership in this market by helping customers measure and manage their cyber exposure. Let’s talk about our results to the second quarter then turn to guidance. First, please note that with the exception of revenue all financial results that we will discuss today are non-GAAP financial measures. 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. Now, on to our Q2 results. Revenue for the quarter was 107 million which represents 26% year-over-year growth. Revenue in the quarter exceeded the midpoint of our guided range by approximately $5 million. Revenue was aided by better than expected demand in both new and renewal business and overall healthy flow throughout the quarter. Our percentage of recurring revenue continues to remain high at 93%, which is a testament to our annual prepaid subscription model. In terms of demand, and despite the backdrop of the challenging macro environment, we saw strength in winning new logos that included some sizable competitive takeaways. We added 341 new enterprise platform customers and 50 net new six-figure customers this quarter just over 2x higher than the number of net new six-figure customers we added last quarter, and it is one of our best ever. This brings the total number of customers spending in excess of $100,000 annually to 715. It is also worth noting that we are seeing increased demand for securing cloud applications, which has resulted in accelerating adoption of Tenable IO and cloud security model, which is web application security and container secure. This trend is contributing to an overall higher…

Thanks Steve. Regardless of the macro environment, we believe vulnerability management will continue to grow in priority. For Tenable our core strength in VM has driven our success and aided in our natural expansion across the surface of attack into cloud and OT deployment. Our second lien product portfolio positions us for long-term success. We hope to see many of you virtually at the city and DA Davidson conferences in September. We would now like to open the call up for questions.

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

Hi, guys this is [Matt[ (Ph) on for Sterling. Thanks for taking the question. So I had one question and one follow-up. The first question is what direct impact are you seeing from business given COVID environment on the positive and the negative side?

Yes, I guess I will comment. Thanks for the question I will comment briefly. I think there is both some positive and negative aspects to it. We certainly see an acceleration of activity around our SAS solution Tenable I/O. We see acceleration of customers trying to assess cloud environments using our solution, most frequently Tenable I/O, web application scanning, container security to help them assess cloud environment. All as you might expect, given the acceleration of the digital transformation. And then on the wins that are created as part of the macro environment, just like every other company in the world reviewing operating expenses, reviewing spending, changing procurement, practices and processes. And so just more scrutiny over every purchase I think does just create a little bit of a natural headwind for us and others.

Great that is very helpful. And then just a follow-up. I was wondering if you can give us an update on your channel strategy and any improvements that you may have seen given these programs that you have put into place in the last year. Thanks.

Hi, this is Steve. We are the only VM company in our space has made the commitment to the channel, we sell through two tier just the - so we sell to distributors, who in turn sell through resellers and we transact - although we transact directly with the end customer, we work closely with our vast network of partners to close new business. I think having a cohesive channel strategy is particularly important even in a market like this. We have over 30,000 customers, spanning 160 countries, and we have sellers in over 30 countries. And it is important because the channel partners serves as a cost effective way to help bring new business. I think we have talked about this on prior calls. Years ago, 4% of our business was inbound from the channel, years ago, there is a little over 20 and today it is much higher than that. We think long-term, as much as 50% or even 60% of our total sales can come from the channel. So, channel is an important part of our go-to-market strategy. And especially for selling to the enterprise customers, they have relationships and can take you into markets that you otherwise don’t have critical mass. So, it is important, and we are continuing to build greater intimacy with the channel and making sure that they are incentivized and re-numerated for the good work they do for us.

Great. Thanks guys, that is very helpful. Thank you.

Our next question comes from line of Keith Weiss with Morgan Stanley. Please proceed with your question.

Excellent, thank you guys. Maybe one question for Steve, and one question for Amit. The question for Steve is one, congratulations on sort of the really good job of accelerating profitability. And getting to that milestone as a full-year profitability. And how much of this is going to be durable like as we are thinking about heading into 2021 and beyond, how much of this should we think about is the benefits of like nobody is traveling and some of the conferences aren’t taking place, and it is going to come back and we should temper expectations 2021 versus how much is the productivity gains that you have been talking about?

Well I think it is a lot of the latter, which is operational efficiency. We talked about the benefits of having a subscription model. But if you look at our business, in particular, we have over 90% recurring revenue over 80% gross margins, and very strong net dollars and all that. So, it gives us a lot of confidence in the margin profile of the company. If you look at sales and marketing in particular, last year, this time, we were spending about 60% - over 60% of our revenues and sales and marketing. And today we are reporting something that has a four handle on it. And one of the big drivers for growth, there is just a greater maturity, we have more reps echo greater percentage of reps that are fully ramped versus those that are not. And we also have had a lot of maturity in sales. We have also been able to stretch, sales overhead in markets where we have critical mass. So, I will tell there is a lot of leverage in business, not just in sales and marketing, but also in R&D. We were quick to call out some COVID related savings, which we estimate to be two to three million. Some of that came in the way of traveling through marketing. But I will be honest with you, I’m not sure what is normal and what is not certainly over the next couple of quarters, we expect the current environment will remain the same and we expect a slow and uneven reopen in the economy. And we know that we can transact larger deals without face-to-face contact with customers. So, that also would yield some greater efficiencies for ourselves. But this leverage in the business that you are seeing today is something we have talked about now for several quarters. It is playing out and there is just a lot of natural leverage in the business, given the dynamics that are at play here.

Got it. That is super helpful, and it is great to see that flowing through. And then for Amit, you talked about kind of the higher priority for a VM that you are seeing and we are picking up as well in recent surveys and channel conversation, a lot of the sort of moving to the public cloud in the environs been around for a while. And do you think you could point to in terms of like the near-term environment that may be causing that to ramp up the priority of VM in particular?

I think when the pandemic first hit, people shifted very quickly to a work-from-home environment and the top priority was very focused on productivity. How do we keep our employees active? How we keep our employees able to sustain the level of proficiency that they have when they were working together in the office. As organizations make that shift, I think the next priorities understanding how these changes in computers and these changes in technology, whether it is work-from-home or the acceleration of cloud adoption, how do they change their risk profile? And so, in that, the natural place that people gravitate to is their VM solution, when CEOs, audit risk committees, CIO ask questions about risk the foundational answer for many of those questions comes from the data that is provided in the VM Solution. So, I think it just becoming a very natural question. Okay, well, I now have this environment, how do I gain insight and visibility into it? And in many cases, in thousands of cases, customers just use the cloud native connectors that we have developed over the years and continue to enhance and then work with all the major cloud providers.

Excellent. That is super helpful. Thank you so much for the time guys.

Thanks Keith.

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

Okay. Great. Thanks for taking my questions. Amit, you talked about some large displacements this quarter. Can you talk about more broadly customer willingness that embark on more complex projects in the current environment?

Yes. Thanks Gur. It is a great question. And certainly, you know we have as a part just about any other company looked at some of the larger projects and customers and say and looking at their spend and scrutinizing their spend, their operating expenses and saying, okay, is this critical? Does this make sense? Do I want to prioritize it? In our case, understanding cyber risk and understanding the new attack surface and getting their arms around risk continues to be an absolute priority. You are seeing in the survey results for CEO’s and CISOs and you hear about it consistently in surveys of directors, NACD survey, earlier this year and others. So, it is certainly a concern, and I think like others, we have seen some deals adversely affected by that. But for the most part, look people have a desire to understand their risks. They want understand it in a more granular way. It matters more than it has before and to the extent that we could help them to understand that risk across different factors and different forms of their computer environment, whether it is just to have servers and workstations and cloud environments and web applications and dev ops environments and help them. I think that that has loaded well for us, as well as just sort of like core differentiation in our VM capabilities, right. We have 20% plus more coverage of CDEs and lower false positive, false negative rate for people whose job it is to understand risks. Those data points are incredibly meaningful.

That is helpful. Maybe one for you Steve. You mentioned that current RPO growth, maybe a better process to gauge growth with the quarter. I was hoping you could elaborate a bit on that and maybe give some more color there.

Sure. I will talk about it in relation to CCB. So first and foremost, we are very pleased with our performance in the quarter and in particular sales and our ability to close deals in this environment, we often discuss CCB as an indicator of that effort and as a proxy of annual contract value, and most quarter CCB is our close proxy to the underlying performance of the business. However, as I mentioned on our last call CCB during a pandemic may not be a good leading indicator of future revenue growth, because it is as I call it on the call influenced by many factors, such as deal timing, multi-year prepaid deals everything else, which can have more variability in a challenging market. So while CCB is most notably influenced by the annual contract value of deals invoiced in the quarter short-term, RPO captures all of that plus additional customer commitments yet invoice due to deal timing. And in most quarters CCB growth and short-term RPO growth are fairly tightly aligned. This quarter there is a clear separation and short-term RPO growth with several points higher and more importantly, a closer approximation of the underlying ACV growth for the business. We just wanted to call this out. I think in terms of whether or not that is the best indicator going forward, I think we are in an uncertain market and we will just have to see whether or not that is a better indicator or if there is another one, but this quarter right now, we are just calling out RPO growth as a close approximation of underlying performance of the business.

Very helpful. Thanks Steve.

Thank you.

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 out with the OT deal that you signed and maybe better understand your why this potentially signals on either a change in maturity of the environment or higher prioritization. I guess I wanted to understand why you thought it was so important and what implications we should be thinking about relative to that deal.

Yes, I think we have felt very strongly about the opportunity in front of us with OT as you recall, we embarked on our journey with OT years-ago. We saw, good leverage between buyer use case an opportunity and our messaging resonated in our sales teams are able to transact with our current buyers and users. So, that gives us a lot of confidence going into make an acquisition late last year, we have integrated in many facets of that technology into our analytics platform for unified reporting, prioritization, things of that nature. And so it is nice to see just sort of the continued traction we are seeing with customers in those environments where it is not just OT but where they want the converged reporting and prioritization and understanding of risks across these different types of operating environments. So we think it really plays to our strengths and we thought it was notable that a global auto manufacturer, in the current environment was prioritized and saw enough value to pull the trigger on a pretty sizable purchase, in the middle of all the challenges that they are facing.

Got it, that is helpful. And then just relative to the net retention, clearly, there was an impact this quarter, and you talked a little bit about the differences between TCP and RPO. Can you maybe help us understand like, are you seeing your net retention on it may be start to clip here, or do you think this is just sort of a short-term effect and we should expect it to normalize for time? Thank you.

Hey Jonathan this is Steve. As I mentioned earlier, that renewals were strong in the quarter and so we wanted to call that out. We came in better than expected, but with larger initial lands and given the current environment, we are seeing a more moderate pace of asset expansion. And so our net dollar expansion rate tempered a bit, but it still continues to track above 110%. This quarter, we are pleased with the number of your local act. And sometimes there can be some natural variability quarter-to-quarter between pipeline opportunities with new logos and also deals. So, we don’t optimize the company to drive anything will metric in any one quarter there can be some natural variability from quarter-to-quarter. And this quarter, we were pleased with the pace of new enterprise logos that we added those over well over 300 and the number of six figure deals and to larger land. Notwithstanding our seasonally strong Q4, this was our best quarter for adding six figures customers, which is very notable, especially in the current environment where new logos are certainly harder to win. And for us to see a really strong number of new six figure deals and an acceleration of competitive takeaways is certainly worth calling out. And so we wanted to do that today.

Great. Thank you.

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

Can you give some thoughts going into federal fiscal year in terms of 3Q. What are your thoughts in terms of what you are seeing especially many government workers going remote?

Yes, I think we continue to feel very bullish about our federal business. I think we have an exceptionally strong position in the federal marketplace, as we have said earlier, you would be hard pressed to find a single department or agency that doesn’t use Tenable as a core part of its VM program and understanding of cyber risk and we maintain a very close finger on the pulse of that market working with many of our federal customers on some of the analytic applications we are developing, also federal requirements around operational technologies. So, I think there remains a strong desire to understand risk in this environment and feel like Tenable is a technology that has proven itself from a differentiation standpoint over the years and maintain close ties to that market

Great. And just I mean, like, how does that changed conversations with customers? And obviously your many customers are just kind of doing the transformation right now, especially moving to cloud movement comes that is great, but can you just talk about that just to intersect?

Yes, sure Dan. And I think it is a great point, which is that as operating environments get more complex, you have a shift to work-from-home. You have people accelerating their clouds deployment, moving more things to cloud platforms, to web applications. We see continued adoption of container environments and dev ops environments. And so, as these trends continue and to a large extent have accelerated in recent time, it becomes more difficult to truly understand risk and how to calculate prioritize activities. And certainly in this environment where IT cycles are limited, right. Your IT staff is completely inundated trying to embrace these new technologies. The security team can really go back to them with far fewer apps. And so they need to make sure that they are prioritizing their requests and that the requests that they do make have the greatest impact to materially reducing risks for the enterprise. So, products like lumen, enhanced analytics, prioritization, understanding of risk play a much larger role and can be much more impactful for customers.

Great. Thanks.

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

Hey, guys. Thanks for taking my question. I wanted to touch on the IDC report that you called out in the prepared remarks. The data would suggest that the smaller players are continuing to give up share. So, how do you guys see the mix of business these days. Is it shifted more towards these competitive replacements or do you continue to see a meaningful Greenfield opportunity?

I think we continue to see meaningful Greenfield opportunity, quarter-in, quarter-out sometimes a little bit higher, sometimes a little bit lower. But quarter-in, quarter-out, we look at our larger enterprise transactions and more or less 30% of them consistently are coming from a Greenfield account. I mean the customer has no in-house VM technology or capability. So, we look at it at the market and say, hey, we have tremendous growth potential within our existing customer base. We have the ability to sell you asset types into our existing customer base. We are consistently landing a lot of net new logos onto our enterprise platforms, 300 plus and increasing the number of six figure transactions. And ultimately there in addition to that, there is ample evidence that there is plenty of Greenfield in the market. So, we feel pretty bullish about it and we saw a lot of the I think Steve called out a number of our takeaways in the quarter were coming from some of our larger more established competitors. So, as we continue to differentiate ourselves, we think that trend will continue.

That was helpful. And then just to follow-up, if I could talk. How should we think about gross margin going forward if customers continue to prioritize I/O at least?

I think we said long-term. Well, first of all, we have really healthy gross margins and it is been a source of pride for the company. We said long-term, we expect gross margin to kind of settle in the high 70% range, low 80% range. But what I will say is that, we are expecting margins to moderate maybe more quicker at the onset here, but they have and we have been able to drive a lot of operational efficiency and our cost of goods sold with regard to public cloud costs. And so, we believe that our gross margins will continue to remain healthy. We are also seeing some efficiencies too, in this work from anywhere environment with our delivery of professional services, which we are now able to do virtually here and remotely, the ability to do training implementations, other professional services, so that in concert with greater efficiency in public cloud costs and just given our points of presence that we have today, we think that there will be good margins going forward and we will settle into that high 70%, low 80% range long-term.

Thanks guys. Thanks for that it is helpful.

Thank you.

[Operator Instructions] Our next question comes from the line of Brian Essex with Goldman Sachs. Please proceed with your question.

Hi, good afternoon. And thank you for taking the question. I mean, I was wondering if you could touch on a little bit around the process that you went through about thinking about your full-year outlook as well as next quarter, what has primarily changed from last quarter. I know there was a lot of uncertainty around pipeline build and sales execution and pipeline conversion. Where was the uncertainty last quarter and then what are you more comfortable with this quarter? If we could maybe understand where, I guess the level of confidence that you have in that guidance and where opportunities for upside might lie, whether it is, better attach rates with Tenable I/O, web security and container for example?

Hey Brian, this is Steve. I will jump in here - I think on our call last quarter, we provided an outlet for Q2, but pulled the guidance for the full-year, just given the uncertainty and this clear corollaries between GDP growth and IT spanned the good news is that security is considered, we believe a higher ground knowledge into other categories within IT. I think VM in particular has remained an important part of a customer security program. So we are seeing an increasing need for vulnerability management. Going into Q2 there is a lot of uncertainty. You didn’t know what to expect. So we provided guidance for the quarter and that was in revenue in EPS. We have an annual fee paid subscription model. So a lot of our revenue comes from different sources and they gave us a lot of visibility. I think it is fair to say that there is more confidence in our business now than 90-days ago. And we are very pleased with the results here. And as a result, we are not only providing guidance for the third quarter in terms of revenue and EPS, but we are also able to provide this for the fourth quarter and the full-year. So I think just, we have more confidence today in our business than we did last quarter. But we also are quick to note that despite our success in Q2, we know that, and we expect it will be a slow and uneven reopening of the economy and there will be, there will continue to be uncertainty. And so our guidance takes all of that into consideration. And that is why, we are providing it today. I will say though, that we are very pleased with activity levels, and pipeline that pipeline not only in terms of coverage, but also maturity, we continue to pipeline at a healthy rate and continue to make good progress on those opportunities and have them progress. So we do know that, you know, we expect there will be more challenging in the pandemic and then the more normal times, but we are delighted with our ability to execute against those opportunities and our ability to continue to win deals and share here.

Great, that is super helpful. And maybe could you touch on maybe the tax rates, you called out Tenable I/O web security containers, kind of being sold together, so what are tax rates looks like now relative to prior quarters and is that something that is kind of implicit in your expectations going forward?

So, Lumin is something - so I think we call out more cross sells in the quarter and we talked about that earlier. And I think the work from anywhere environment certainly been a catalyst, catalyst for Tenable I/O as well as our other cloud based applications, including web app security, and we talked about container security. So, we are seeing certainly more pull in that regard, with regard to Lumin here, and we have talked directionally again successful SaaS product, our expectation is that tax rates will continue to grow over time you think they could be as a 50% plus, and that will take over the course of years. And this is a new way of thinking for a lot of our customers. And we believe it provides compelling value, especially in a market like this, where there is a lot of uncertainty, customers are stretched for resources and often have limited resources, the ability to quickly prioritize focus on what is the most impactful in terms of risk, we think is really important. So, overall, pleased with the progress on our add on modules, and specifically with Lumin, and it will continue to grow and build overtime.

Okay, great. Thank you very much.

There are no further questions in the queue. This does conclude our call for today. Thank you all for your participation. You may disconnect your lines at this time and have a wonderful day.