Tenable : Q1 2022 Earnings Call Transcript

REFINITIV STREETEVENTS

EDITED TRANSCRIPT

TENB.OQ - Q1 2022 Tenable Holdings Inc Earnings Call

EVENT DATE/TIME: APRIL 26, 2022 / 8:30PM GMT

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CORPORATE PARTICIPANTS

Amit Yoran Tenable Holdings, Inc. - Chairman, President & CEO Erin Karney Tenable Holdings, Inc. - Senior Director of IR Stephen A. Vintz Tenable Holdings, Inc. - CFO

CONFERENCE CALL PARTICIPANTS

Andrew James Nowinski Wells Fargo Securities, LLC, Research Division - Senior Equity Analyst

Brad Robert Reback Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst Brian Lee Essex Goldman Sachs Group, Inc., Research Division - Equity Analyst

Gray Wilson Powell BTIG, LLC, Research Division - MD & Security and Analytics Software Analyst Hamza Fodderwala Morgan Stanley, Research Division - Equity Analyst

Jonathan Frank Ho William Blair & Company L.L.C., Research Division - Technology Analyst Joshua Alexander Tilton Wolfe Research, LLC - Research Analyst

Michael Joseph Cikos Needham & Company, LLC, Research Division - Senior Analyst Robbie David Owens Piper Sandler & Co., Research Division - MD & Senior Research Analyst Rudy Grayson Kessinger D.A. Davidson & Co., Research Division - Research Analyst

Saket Kalia Barclays Bank PLC, Research Division - Senior Analyst

PRESENTATION

Operator

Greetings. Welcome to the Q1 2022 Earnings Conference Call. (Operator Instructions) Please note, this conference is being recorded.

I will now turn the conference over to your host, Erin Karney, Senior Director and Investor Relations. You may begin.

Erin Karney - Tenable Holdings, Inc. - Senior Director of IR

Thank you, operator, and thank you all for joining us on today's conference call to discuss Tenable's first quarter 2022 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 2022, 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; the potential benefits and financial impact of our acquisitions, including our recent acquisition of Cymptom and the expected acquisition of Bit Discovery; planned innovation and new products and services; our expectations regarding long-term profitability and our ability to attract and retain employees and its impact on our business.

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 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.

Amit Yoran - Tenable Holdings, Inc. - Chairman, President & CEO

Thank you, Erin. Today, I'll discuss our outstanding financial performance in Q1, our accelerating momentum, exciting product enhancements, including our agreement to acquire Bit Discovery and the continued progress of our Cyber Exposure management platform.

With that, let me first touch on our Q1 results. We saw tremendous strength in the first quarter, driven by contributions from all products and theaters. Our CCB growth for the quarter was 31%, which we believe positions us well for strong 2022. Additionally, the health of our market and the durability of our business provides us with the confidence to continue to invest in our products and our people.

Momentum across cybersecurity is accelerating, as increased threats are driving a healthy spending environment. The need for customers to understand their true exposure and risk is at an all-time high. We're seeing that momentum translate across our entire portfolio, core VM and exposure solutions, particularly in our identity and cloud security offerings. We're leveraging this momentum and have plans to add significant new capabilities to our cloud offerings as well as create unique differentiation for our VM customers.

These enhancements include expanding our exposure platform, Tenable.ep to include Tenable.ad and Tenable.cs. EP customers can deploy these new capabilities immediately and take advantage of our single unified licensing model to secure their cloud environments and active directory. Launching our cloud-native application security platform, Tenable.cs, to address cyber risks from build through runtime. We delivered seamlessly integrated cloud-native web application and container exposure data into Tenable.io. This allows organizations to analyze cloud and web app exposures alongside other assets and take advantage of the rich platform's capabilities such as advanced search, streamlined reporting, comprehensive role-based access controls and a single sign-off for easy access, unified APIs and other capabilities.

We also delivered important updates to Tenable.ad and Tenable.ot to detect new indicators of attack used to escalate privileges in ransomware and nation-state exploits and attempts to exploit OT devices. Our investments in product development over the last few years highlight our commitment to best-in-class security assessment across a customer's attack surface. We think our timing couldn't be better with increased threats, larger consequences for business and helping spending environment for cyber, we believe we're moving into the golden age of VM.

More than ever, customers must understand every aspect of their digital footprint so they can reduce their cyber exposure, and this is reflected in a larger TAM that we discussed on our Investor Day.

In conjunction with earnings, we announced that we've reached an agreement to acquire Bit Discovery, an external attack surface management leader with a differentiated Internet-facing asset discovery, attribution and monitoring capability. The problem for many organizations is that they're largely blind to full and ever-changing scope of their Internet-facing assets and services.

These systems service high-priority exposure points for attackers and important starting points for attack paths into critical systems. Discovering and gaining insight into every part of a businesses digital footprint are essential steps for any effective cybersecurity program.

In concert with our attack pathway assessment technology, this new capability will allow us to tie the artificially fragmented parts of security into one view that shows how attackers from the Internet can ultimately gain access to any specific high-value system regardless of where it sits. For CISOs, this analysis is a knockout punch of what is top priority.

Once integrated, the automated discovery of external attack surface will be native in the new and upgraded version of Nessus. Automated attack surface discovery will also be included in many of our enterprise products, including Tenable.se, Tenable.io, Tenable.ep and our cloud security solution. This insight will drive great value for our customers and increased adoption of our cyber exposure solutions.

Beyond this basic discovery offered to many of our existing customers, we will also have a new SKU with advanced attribution functionality that will help customers understand the broader set of context and exposure of these assets. We're incredibly excited about adding these new capabilities and Bit Discovery is a very natural and tightly aligned motion for our go-to-market team.

Attack surface management data is absolutely critical exposure data. ASM has the same buyer and the same go-to-market motion as the VM buyer with a highly compatible messaging, which will provide very fast time to value for our customers.

Let me talk a little bit about Tenable.ep. During the quarter, we extended Tenable.ep beyond vulnerability management, web application security in Lumin by adding assets and security findings across identity and cloud via the inclusion of Tenable.ad and Tenable.cs.

Cloud assets include systems and software vulnerabilities, a cloud security posture management across workloads, but also Kubernetes clusters and containers. EP now offers customers a comprehensive cyber exposure management platform that assesses hybrid IT, the full life cycle of cloud and cloud-native environments, active directory and following closing of the acquisition and integration of Bit Discovery and Internet-facing assets such as web applications, cloud resources, open gateways, bringing these solutions into one unified platform enables us to identify, evaluate and prioritize risk across the entire digital footprint for our customers.

In addition, we saw continued traction in the quarter for Tenable.ep, and it's quickly becoming a rapidly growing portion of our new sales. We're leading with Tenable.ep in the commercial sector, where sales cycles are shorter, and we're seeing dramatic adoption also occurring in large enterprises as they embrace EP as well.

For years, we've been pioneering cyber exposure and the role of Tenable plays and is incredibly important in emerging discipline. When we introduced this category, it was a new concept to many investors despite its rather than native with CISOs. Since then, we've expanded exposure beyond traditional assets to include cloud assets, cloud infrastructures and cloud-native architectures into identities and operational technologies and web applications.

And more importantly, we've expanded analytic insights between these data sets in the form of attack pathways, benchmarking and other methods to prioritize risk. We believe Gartner's recent recommendation that organizations need to look beyond vulnerability patching and to manage a wider set of security exposures is spot on.

Further, we see Gartner's newly defined discipline of exposure management, which includes some mature markets like vulnerability management and emerging markets such as cloud-native security and attack surface management as very well aligned with the definition of cyber exposure and the strategy that we have been pursuing and talking about for years.

We believe strongly in this opportunity and that we are an early market leader as it continues to mature and grow. We will continue to invest, including the planned acquisition of Bit Discovery, to deliver on our vision for an exposure management platform that enables our customers to better assess and manage risk.

Now before I hand the call over to Steve, I want to talk a bit about the people side of our business. As a software company, our greatest long-term asset is our people. It's an area that we spend a lot of time and effort on. Coming out of the pandemic, many investors asked about our ability to continue the hiring necessary to fuel growth. And candidly, how we'll fare in the great resignation. We always strive to nurture a culture of innovation and transparency while building a diverse thriving workforce.

Our investments in our people continue to pay off, and I'm happy to report that in Q1, we had exceptional results in our recruiting efforts, hiring and onboarding. We're also seeing strong retention levels this year. People want to work at Tenable. New talent and lower attrition will translate directly into increased efficiency and an increased pace of innovation. Tenable has become a market recognized destination employer of choice, with a great culture and compelling products in a very exciting market.

I'll now turn the call over to Steve for further commentary on our financial results.

Stephen A. Vintz - Tenable Holdings, Inc. - CFO

Thanks, Amit. As Amit mentioned earlier, we are delighted with our results for the first quarter, highlighted by 31% growth in calculated current billings, an EPS and continued investment in innovation and distribution. I will provide more commentary on each of these points 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 the results for the quarter. Revenue for the quarter was $159.4 million, which represents 29% year-over-year growth, which is up from 20% growth in Q1 last year and 26% growth last quarter. Revenue in the quarter exceeded the midpoint of our guided range by $6.4 million. We are delighted with the results for the quarter and the very sizable beat in revenue. Please note that approximately $1.4 million of revenue recognized in the quarter was due to the early termination of customer contracts in Russia and Belarus as a result of sanctions and export restrictions imposed by the U.S. government.

This is revenue that largely would have been recognized over the ensuing quarters this year, but had little impact on CCB this quarter as the value of these contracts were already reflected in the current portion of deferred revenue. Visibility remains high as our percentage of recurring revenue was 95%, which is primarily a result of our annual prepaid subscription model.

The outperformance in revenue is a result of continued accelerating growth in calculated current billings. CCB, defined as the change in current portion of deferred revenue plus revenue recognized in the quarter, grew 31% year-over-year to $156.5 million. This is our fourth consecutive quarter of accelerating CCB growth, which started from a base of 20% CCB growth in Q1 last year. We attribute this inflection in growth to our market leadership in VM, expanded product portfolio and increased innovation and go-to-market activities.

More specifically, the heightened threat environment has highlighted the need for our customers to continuously map and measure their cyber exposure across the attack surface. This is evidenced by the strength in new business this quarter as new enterprise platform customers grew 39% year-over-year. In particular, demand was very strong in North America as well as internationally in both the large and mid-market.

In terms of product mix, our exposure platform, Tenable.ep, which now includes cloud and identity security, benefited from customers seeking broader awareness of risk across their attack surface. Upsell from existing customers was also substantial in the quarter, which combined with robust renewals resulted in an LTM net dollar expansion rate that was notably above our historical rates over the last 2 years. This was aided in part by Log4j, although to a lesser extent than what we experienced in Q4.

I'll now turn to expenses, which include incremental investments in growth and the additional operating expenses related to the Cymptom acquisition that we closed in February. I'll start with gross margin, which was 81% this quarter compared to 82% last quarter. Cost of sales increased sequentially due to higher public cloud costs associated with increased usage from our products and incremental investment in infrastructure to support new analytics for our exposure platform.

As Amit mentioned earlier, we plan to launch a more expansive set of cyber exposure analytics, which we currently expect to be in the second half of the year. This will include attack path analysis via newly acquired Cymptom, enhanced and unified analytics and improved benchmarking and contextualization of vulnerabilities, all of which will help customers better visualize and efficiently manage risk across their hybrid environments.