Greetings. Welcome to Tenable’s First Quarter 2023 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, Erin Karney, Vice President 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 first quarter 2023 financial results. With me on the call today are Amit Yoran, our Chief Executive Officer; and Steve Vintz, our Chief Financial Officer. Prior to this call, we issued a press release announcing our financial results for the quarter. You can find the press release on 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 our guidance and expectations for the second quarter and full-year 2023, growth and drivers in our business, changes in the threat landscape in the security industry and our competitive position in the market, growth in our customer demand for and adoption of our solutions, planned innovation and new products and services, and our expectations regarding long-term profitability and free cash flow. These forward-looking statements involve risks and uncertainties, some of which are beyond our control, which could cause actual results to differ materially from those anticipated by these statements. You should not rely upon forward-looking statements as a prediction of future events. Forward-looking statements represent our management's beliefs and assumptions only as of today and should not be considered representative of our views as of any subsequent 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 annual report on Form 10-K 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 equivalents. Our earnings release that we issued today includes GAAP to non-GAAP reconciliations for these measures and is also available on the Investor Relations section of our website. I’ll now turn the call over to Amit.

Today, I'll provide some financial highlights on the quarter, discuss the current state of the market, and our momentum with Tenable One. We delivered strong revenue, operating income, and cash flow during the quarter. This is particularly notable given the macro headwinds we experienced at the end of March. Based on conversations with customers, we are confident that cyber security and specifically cyber exposure management remains a top strategic focus for organizations globally. While we experienced some challenges in the quarter, we saw some incredibly positive signs for our business. Let me start by making a few comments about the broader market, which impacted current calculated billings. Some of the macro conditions we've been discussing back and loaded quarters, longer sale cycles, and more scrutiny of large deals, particularly new business continued during the quarter. The last two weeks of March exacerbated these conditions as the banking crisis came to light. Specifically, we saw longer lead times in purchasing and approval phases of our sales cycle in the first quarter versus what we had typically experienced. As a direct result, a number of highly qualified committed deals pushed out of the quarter, which is reflected in our net new enterprise and our 6-figure ads. Of the deals pushed, many were in banking and financial services, and technology and telecom, traditionally strong sectors for Tenable. We expect these macro factors to continue to have an impact this year. As we navigate the current macro environment, there are two points that are important to note. The first is that demand remains strong. New pipeline generation added during the quarter exceeded our expectations and was a record for Tenable. Customers clearly want to understand and reduce their risk and they're increasingly using Tenable One as the platform of choice to do so. The…

Thanks, Amit. Our ability to deliver better-than-expected profitability in the quarter due to stronger operating efficiency is certainly a notable accomplishment in this market. I will provide more commentary momentarily. But first, please note that all financial results we discuss today are non-GAAP financial measures with the exception of revenue. As Erin mentioned, at the start of this call, GAAP to non-GAAP reconciliations may be found in our earnings release issued earlier today, which is posted on our website. Now, on to our results for the quarter. Calculated current billings, defined as the change in current deferred revenue plus revenue recognized in the quarter, grew 13% year-over-year to $176.8 million. As Amit discussed earlier, we experienced a more challenging selling environment in Q1, most notably during the final two weeks of the quarter, which historically is our busiest time. This resulted in a higher percentage of large deals both in terms of new lands and expansion opportunities that pushed out of the quarter, particularly in North America and specifically in the banking and financial services and the technology and telecom sectors. It's important to note that banking and financial services and technology and telecom are frequently an area of strength for us, given the sophisticated nature of these customers from a cyber perspective, and their propensity to transact larger deals. Despite the environment, demand remained strong and exceeded our expectations as we generated more pipe during the quarter than any other time in our company's history. In terms of key financial metrics, we added 379 new enterprise platform customers and 24 net new six-figure customers in Q1.Our dollar-based net expansion rate was 113% in the quarter. As a reminder, the expansion rate can fluctuate on a quarterly basis. Gross retention is worth noting, was strong in the quarter. Revenue was…

Thanks, Steve. This is indeed a very fluid environment, but we are well-positioned strategically to help our customers solve their most important cyber challenges. We have a ton of opportunity ahead of us and look forward to updating you throughout the year. We hope to see many of you at the JPMorgan conference in the upcoming weeks. We now like to open the call up for questions.

Thank you. [Operator Instructions] Our first question comes from the line of Rob Owens with Piper Sandler. Please proceed with your question.

Great. Thank you very much for taking my questions. Good afternoon. Could you guys specifically speak to the weakness that you're seeing in the tech and telecom vertical? Anything headcount related or some of the reasoning behind the pushed deals? And then, I guess, in addition, steps that you guys are taking from a pipeline management perspective to [shepherd deals] [ph] across the line? Thanks.

I don't think that we've looked at any of the change in sales cycle as related specifically to headcount in tech and telecom, although I do acknowledge that maybe there has been some impact to that. From our perspective, it was much more of a procurement process than it was headcount or a number of assets types of issue. We saw deals actually – we saw very healthy demand in the top-end funnel, a lot of demand generation activities. We actually saw faster lead to technical win by about 10% faster than we have in previous periods. So, from our perspective, there was more of deal delay in the final phase, waiting for negotiation and final approval from the finance team. So, I think that's, kind of how I would characterize the change in buying behaviors. And internally, we're doing a number of things with the sales team to a go-to-market functions to assure that we've got greater visibility across the board in terms of looking above and beyond approval from the Exposure Management, risk management teams, the [indiscernible], and much more visibility into the financial side of deal close.

Our next question comes from the line of Joel Fishbein with Truist Securities. Please proceed with your question.

Thanks for taking my question. Amit, I guess one quick one for you and a quick follow-up for Steve. Just I'm curious, you talked a little bit about the Tenable One getting some traction. I really want to understand what the buyer reaction is to that in terms of pricing and how that has flowed through if pricing is stable? And maybe you could talk about and, give an example or two of some customers that have adopted Tenable One.

Yes. I think we're super excited about Tenable One. Every data point that we've seen shows us that we're achieving faster sales cycles, we're achieving higher ASPs. And from our customer perspective, we're seeing them allocate more of their licenses toward things above and beyond VM. So, looking at cloud security, looking at identity and other aspects of their [tax surface] [ph]. So from our perspective, faster sales cycles, larger ASPs, which can deliver better and more compelling analytics. And from a customer perspective, yes, they're paying more, but they're actually able to do some vendor consolidation and reduce costs. So, if you look at Tenable on VM and some other solutions for identity or securing identities or helping with cloud security that combination of activities and vendors ends up being subsequently more expensive than allowing Tenable to deliver on all those capabilities through a unified platform, which helps save on license costs and ultimately helps you operationalize these security activities through integrated API and streamlined operations, fewer interfaces, and the like.

Okay. And Steve, real quick, just as a follow-up. You, sort of reiterated the unlevered free cash flow for 2023. So, can we assume that the unlevered free cash flow of 2024 for 240 million to 250 million is still intact?

Hey Joel, this is Steve. We'll take about 2024 in February of next year, but what I will say is, notwithstanding the current macro, nothing changed here in our business. We're excited about the opportunity. We're committed to the cash flow targets that we said at the beginning of the year. So, we're reaffirming op income and free cash flow, and we're happy to talk about free cash flow more in 2024 in February of next year.

Great. Thank you.

Our next question comes from the line of Brian Essex with JPMorgan. Please proceed with your question.

Hi, good afternoon and thank you for taking the question. Maybe if I could follow-up to Rob's question a little bit. Could you speak to weakness in the financial services vertical with regard to the size of the enterprises? And then was there any specific focus in terms of the breadth of the deals. So are these, for example, Tenable One deals where you had a lot of greater attach rates and there was maybe more dollars at stake. Maybe just a little color there would be helpful?

Yes. I think with respect to the banking and financial services sector, we saw – as we said in the elongation of the deal approvals in the finance team at the very end of the sales cycle, it was certainly more toward the midsized and regional banks, and I'd say also more heavily weighted in North America than in any other GL.

Okay. And in terms of breadth of deals and complexity, attach rates and so forth, any concentration there?

Brian, this is Steve. I would just say that what we saw in the last weeks of the quarter was more broadly across the board. And obviously, we talked about greater percentage of pushed deals and banking and financial services in tech and telecom and specifically in North America. Those two sectors are pretty sizable for us. It can represent approximately 30% of our total sales. Historically, it's been very strong. And they also tend to skew towards larger transactions, irrespective of whether they're [Technical Difficulty] or even a regional bank here. So, for us here, we're seeing a lot of positive signs in the quarter, but obviously, we believe these are short-term headwinds that we're working to overcome and feel good about the outlook that we're giving with regard to profitability and cash flows. And the good news here is that we made a fair investment out of the gate here at the start of the first quarter, and our expectation is that this is a good step for success for the remainder of the year.

That makes sense. Thank you very much for the additional color. Appreciate it.

Our next question comes from the line of Hamza Fodderwala with Morgan Stanley. Please proceed with your question.

Good afternoon and thank you for taking my question. So, if I get this straight, last two weeks of the quarter, not great, seems like a lot of that was due to the financial services sector. Has there been anything in the month of April to suggest to you that it was, in fact, a pause from some of your banking customers as opposed to perhaps another leg down for Q2 versus Q1?

Hi Hamza, this is Steve. Well, April was strong for us. We're tracking to our revised outlook. We're encouraged by some of the data that we're seeing in April. And as I talked about earlier, we closed some of the deals that we – that pushed out of Q1, we closed specifically in April. That said, the last month of the quarter is always our busiest, so June will certainly be determined here, but initially off to a strong start, and all this is factored into our outlook for the year.

Got it. So, it sounds like too early to tell. And then just roughly, like, could you help us size what the banking and financial services revenue exposure for Tenable? I know there's a lot that goes into financial services like different sectors. But like just roughly how big that is for you guys? Thank you.

Yes, not surprisingly, when you look at banking and financial services, and also tech telecom, those are some of the more sophisticated industries when it comes to cybersecurity. So, collectively, those represent about 30% of the overall business on a global basis.

Thank you.

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

Hi guys. Thanks for taking my questions here. Amit, maybe for you, just to change it up a little bit on verticals, I was wondering if you could just talk a little bit about the federal business. How did that do here in the March quarter? And how does, sort of the pipeline look for the rest of the year?

Yes. We actually saw a reasonably strong quarter for our public sector business, including federal and maybe even more so on the state and local side and we anticipate that to be a strong sector for us throughout the remainder of the year.

Got it. Got it. And Steve, maybe for you. You talked about maybe seeing slightly shorter contract durations, but you're still able to reiterate the unlevered free cash flow guide so kudos. Just maybe help us think about some of the puts and takes there.

Yes, sure. Well, we talked about, you know in terms of CCB reflects a continuation of the selling environment we experienced in Q1. We are assuming that new business, albeit from new logos or even upsell will take longer to close for the remainder of the year. So, we're modeling in lower conversion rates and even lower net dollar expansion rate than what we were expecting on our last call in February. And we think this is prudent to do so, [and the way it] [ph] would play out here in the last couple of weeks. Our guidance does reflect a slightly shorter contract duration due to fewer than expected multi-year prepaid deals. That said, the [top performance] [ph] is strong. We're getting to tech lines much faster, we're qualifying these opportunities, working closely with our prospects and partners. Now, on the other side of that, the expense side, our plan this year calls for a fairly significant investment. And the good news is, we were able to execute on a lot of that in the first quarter. Beginning with the last couple of weeks of the quarter, we're moderating that level of investment, to be more selective about investing going forward and that allows us to achieve actually the same, if not higher levels of op income, I think that we're guiding up today of op income due to the strong start in Q1, we're also able to get back to and reaffirm our outlook for unlevered free cash flow. We've always been a balanced grower. We have a great business model with lots of recurring revenue, high gross margins, high renewal rates, and each quarter is different in its own right, and we're going to continue to balance the investments with the opportunities that are in front of us and with the desire to achieve compelling levels of cash flow.

Very helpful. Thanks guys.

Our next question comes from the line of Brad Reback with Stifel. Please proceed with your question.

Great, thanks very much. Steve, sorry if I missed this. But on the quarter capacity, do you still expect 2023 to be larger from an ad perspective than 2022?

We are, as we mentioned, some of the moderation in investment also impact quarter capacity. So our focus here – we've added good quarter capacity in Q1. Our focus here is, short-term is going to be on achieving higher levels of productivity. And so our expectation is that the investment that we contemplated across the board for the business at the onset of the year and specifically in sales will be more moderate going forward here than what we discussed on our February call.

Great. And Amit, given the significant amount of free cash flow you guys are generating right now, do you need CCB to reaccelerate before you would do an M&A transaction or does it not matter?

No, I don't think we have to wait for CCB to reaccelerate before doing M&A transactions. I think we're looking at it – and in this market, especially where we anticipate a lot of companies struggling, both from a sales perspective, as well as from a cost of capital perspective, we do expect opportunities to make themselves available for – with respect to M&A that would not be available in other markets and we want to take advantage of that.

Perfect. Thanks very much.

[Operator Instructions] Our next question comes from the line of Mike Cikos with Needham & Company. Please proceed with your question.

Hi, guys. Thanks for taking the questions here. I wanted to circle back. I know that we're talking about the moderation in investments to help you guys preserve that unlevered free cash flow guidance we have for the year. Like, if we're moderating on the hiring side for quota-carrying reps or the sales and marketing more broadly, beyond those hires, are there other areas where the company is looking to either become more efficient or to reduce some of those variable expenses that you guys were initially looking to invest in? And can you give us some more concrete examples as far as where those, I guess, redeployed assets, where those savings are coming from?

Yes. I guess I'd start by saying, we did a tremendous amount of hiring in Q1 and believe that we have both the quarter capacity, as well as the head count necessary to drive the results that we provided through the remainder of the year. What is contemplated is that we will be moderating the pace of new and additional investments throughout the year while we're seeing these longer sales cycles and change in sales process and that enables us to deliver on the free cash flow commitments that we've made.

Understood. And I guess, for the follow-up here, but I know Tenable One continues to be something that you guys are highlighting. Can you give us a better sense, I guess, excluding some of the commentary that we have around those more difficult weeks in March, but where are you seeing the greatest success with Tenable One? Is it with existing customers? Is it with landing new customers? Is it vertical specific? Any sense there would be helpful.

Yes. I think not surprisingly, the greatest momentum is occurring with existing customers where they're already leveraging us for VM and this becomes an easy on-ramp to broadening their understanding of cyber exposure. And in this market, we do anticipate new customer acquisition to be more difficult than it has been in previous periods. So, we do land new logos. We think there's competitive differentiation with Tenable One, but we believe, given the size of our customer base, the sales motion and the market that we're operating in, that we expect to see a lot of those sales coming from the existing customer base.

Makes a lot of sense. Thank you.

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

Okay. Thank you. Good afternoon. So, you guys play across a number of different market segments, including like identity, cloud, VM app security, et cetera. Just wondering if you saw a change in sales cycles across all those different product segments or was it more concentrated than maybe in one?

No. We saw the change in buying behavior occur across all product segments. It was more heavily weighted to, again, the financial services, banking, telecom, and technology sectors and more heavily weighted in North America than other geos. But it wasn't specific or weighted in any one product here. It's pretty much across all of them.

Okay. Got it. And then I wanted to ask a follow-up question on your comments about Tenable One being updated for on-prem and hybrid. I was wondering, do you still get the 70% price uplift with that form factor? And are there any revenue recognition differences between the two when you sell it as an on-prem solution?

Yes. We have not – yes, I can't comment to the actual price uplift because we're only now – we're certainly going to be introducing the hybrid with on-prem capabilities for Tenable One. And then from a revenue recognition perspective, being separate purchases. I don't know if there's anything…

Yes, there's no change in revenue reference even when we sell an on-prem. Almost all the time, it's subscription and to a recurring revenue model and it will continue to be that way.

Okay. Thank you.

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

Hi guys. Thanks for taking my questions. I have two actually. From my understanding, the initial guidance for 1Q and the full-year did assume that things got worse in the macro environment. And I guess that was before the SVB fallout. So, I guess my question is, ex the weakness in Banking and Financial Services, was the rest of the business materially worse than the weakness you'd already baked into the guide? And my second question is, you said that the guidance assumes that new business remains pressured for the rest of the year, are you assuming this for just the verticals that you saw weakness in this quarter? Or are you assuming this for all the verticals that you sell to?

Yes. I guess the way I would answer that is, we saw a particular impact in the sectors that we had mentioned earlier. But that – those also, we believe that those – the challenges experienced in the financial services sector do have [Technical Difficulty] into other companies and other sectors. So, what we're modeling in is basically more of the same or those challenges that we saw at the very end of Q1 occurring and playing themselves out for the remainder of the year. Our outlook actually reflects lower achieving rates and lower net dollar expansion rate. We think that's the right thing to do. And again, what we saw some of these headwinds in the last two weeks of the quarter, which are typically their busiest time so we're translating that out over the rest of the year and taking a more cautious outlook.

And just – Steve, is that lower [BBNR] [ph] that you're assuming? Is that lower than what you saw this quarter or is that lower than the midpoint of your expected range that you've previously communicated us?

Our guidance reflects a lower net dollar expansion rate for the rest of the year than what we experienced. And keep in mind, too, we don't – the net dollar expansion rate can vary from quarter-to-quarter, but if you look at the compare last year in Q1, it was exceptional, it was one of our strongest because of Log4j. So, our outlook reflects moderating net dollar expansion rate due to some of the factors that we experienced the last couple of weeks of Q1. And we think this is the right approach.

Thanks guys.

Our next question comes from the line of [Shebly Seyrafi] [ph] with FBN Securities. Please proceed with your question.

Thank you very much. Related to the last question, the net expansion rate did decline by 4 points from 117% to 113%, and you expect another decline. How confident are you that it won't undercut the low-end of the range of which is 110% going forward?

Yes. Well, we – instead of providing the – historically we used to provide the range, saying that we expect the net dollar expansion rate to be between 110% and 120%. That's why we were not disclosing the net dollar expenditure. Now, every quarter, we're one of the few companies that do this. We disclosed the exact net dollar expansion rate. So, there's a lot of [indiscernible] the business. We also provide investors with a number of new enterprise platform customers we add, the number of net new 6-figure customers. So, it's important to note that the pipeline opportunities can vary from quarter-to-quarter between new logos and expansion opportunities and we're seeing some natural variation. This quarter, we saw some moderation. We expect it to moderate. Our expectation in the outlook for the full-year is that, that will indeed moderate lower. And I think that's a good approach to take right now. So, the [take rate] [ph] is always we have 40,000 customers, [natural customer] [ph] base. We have a broad product portfolio with a platform that continues to take home and get momentum. And we see a massive opportunity to sell with products back into our base. And in terms of long-term, nothing has changed here in terms of what our expectation is on the expansion rate, our ability to monetize our existing – more product back into the base, not within the current quarter.

Okay. And my second question is, the financial services vertical, some believe that the mess in the banking sector has stabilized a bit, notwithstanding the fact that First Republic was down 20% today after the market. But there is some sense that it has stabilized. So, did you see any signs of stabilization in the month of April in that sector?

I would say the good news is, we talked about this earlier that some of the deals that pushed, we closed a good percentage of those in April. That is certainly encouraging. And we're not seeing customers cancel projects across the board. I would make that very clear. Now that said, if you look at the seasonal flows of our business and kind of the intra-quarter flow, the last month of the quarter is always expected to be our strongest. So, June will certainly be determinative, but we're very pleased with our start to the quarter and specifically what we're seeing in April, but when you see something towards the end of the quarter, we think the right thing to do is, kind of extrapolate that out over the rest of the year, and we'll be working hard in [some] [ph] quarters trying to capitalize on the opportunities that are right in front of us. We've seen demand remain strong, competitive differentiation, Amit talked about that, and we're getting to tech wins much faster. So, we think the opportunities are right in front of us, and we'll be working with our prospects and customers to close.

Okay. Thank you.

Our next question comes – no, there are no more questions in the queue at this time. This does conclude today's teleconference. Thank you for your participation everyone. You may disconnect your lines at this time, and have a wonderful day.