Tenable : Q2 2022 Earnings Call Transcript

REFINITIV STREETEVENTS

EDITED TRANSCRIPT

TENB.OQ - Q2 2022 Tenable Holdings Inc Earnings Call

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

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JULY 26, 2022 / 8:30PM, TENB.OQ - Q2 2022 Tenable Holdings Inc Earnings Call

C O R P O R A T E P A R T I C I P A N T S

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

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

Stephen A. Vintz Tenable Holdings, Inc. - CFO

C O N F E R E N C E C A L L P A R T I C I P A N T S

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 - SVP & Senior Research Analyst

Saket Kalia Barclays Bank PLC, Research Division - Senior Analyst

Shebly Seyrafi FBN Securities, Inc., Research Division - MD

Thomas Michael Walkley Canaccord Genuity Corp., Research Division - MD & Senior Equity Analyst

P R E S E N T A T I O N

Operator

Greetings, and welcome to Tenable's Quarter 2 of 2022 Earnings Conference Call. (Operator Instructions)

As a reminder, this conference is being recorded.

I will now turn the conference over to your host, Erin Karney, Senior Director Investor Relations. Please go ahead.

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 second 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 third quarter and full year 2022, growth in 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 acquisitions of Cymptom and Bit Discovery, planned innovation and new

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JULY 26, 2022 / 8:30PM, TENB.OQ - Q2 2022 Tenable Holdings Inc Earnings Call

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 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.

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

Thank you, Erin.

Today, I'll discuss our strong financial performance in Q2, strong demand, and the continued progress of our Cyber Exposure management platform. With that, let me first touch on Q2 results.

We delivered strong CCB growth for the quarter at 27%, which we achieved despite the macro environment. We believe cybersecurity and specifically, Cyber Exposure management remains a top strategic focus for organizations and will continue to be a spending priority. Against this backdrop, we are also very pleased to deliver compelling top and bottom line results and EPS and unlevered free cash flow were both notably above expectations for the quarter.

Our business navigated a number of ebbs and flows during the quarter that we believe are a direct result of the complicated environment our customers are operating in. We saw a few dynamics play out during the quarter. North America delivered above expectations led by Tenable.ep platform sales. Conversely, international business in most regions did not grow as fast as we expected going into the quarter, which Steve will cover in more detail. As far as the business as a whole, deals are going through more scrutiny than they typically do. Overall demand remained strong even with increased inspection on a customer-by-customer basis.

Coming out of the quarter, there were a number of things that substantiated our conviction around our business, even in the short term. Security remains a key budget priority and a defensible spend for our customers. Customers continue to face an expanding attack surface and need to properly identify their exposure and their understanding of risk. EP is an incredibly efficient way to consume our products as customers look to a more comprehensive assessment of risk. We have seen this with the strength in EP adoption and Exposure Solutions more broadly. A great example of this was a 7-figure EP competitive takeout deal with a large international financial institution. We had another strong quarter for both large 6-figure deals and overall enterprise customer adds. We continue to see large deals entering and moving through our pipeline and our confidence in the fundamentals of our business has never been stronger.

Our ability to take advantage of this demand is a direct result of meaningful and critical investments we have made, organic and inorganic, to help our customers identify and manage their Cyber Exposure. Continuing to enhance our platform, we closed the acquisition of Bit Discovery, a provider of external tax service management, enabling us to cover and assess Internet-facing assets such as web applications, cloud resources and open gateways.

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JULY 26, 2022 / 8:30PM, TENB.OQ - Q2 2022 Tenable Holdings Inc Earnings Call

Following the closing of the acquisition, we delivered a new version of Nessus, Nessus Expert, that includes external asset discovery. External asset discovery will be included at no additional cost for our enterprise platform customers, and a separately sold context to where external attack surface management offering for continuous discovery and ongoing monitoring is also available today.

Cyber Exposure Management as a discipline is attracting attention from industry analysts and customers alike. It is an incredibly important approach to managing cyber risk and it is an approach that we've pioneered over the last several years. We believe delivering on a successful Cyber Exposure management platform requires a unified best-in-class approach across vulnerability management, cloud security, Active Directory security, OT security and other parts of the attack surface, which we are successfully executing on. We believe our roots and laser focus position us incredibly well to be a market leader.

As we continue to execute on our own vision, we're excited to see industry acknowledgments and the importance of this discipline. Continued coverage by Gartner talking about exposure management as a discipline, amplifies this point. In particular, the importance of advancing Cyber Exposure Management program adds critical to developing actionable posture improvement plans that can be understood by executives. As Boards and executives are pressured to understand their cybersecurity posture, having a clear view of risk is increasingly critical.

Preventing cyber attacks requires full visibility into all assets and exposures, extensive context into potential security threats and clear metrics to objectively measure cyber risk. Tenable's Cyber Exposure Management platform delivers visibility across the modern attack surface with intelligent analytics to prioritize preventative actions and communicate risks to all levels of the organization. We are building the broadest understanding of Cyber Exposure, spanning IT assets, cloud resources, containers, web applications and identity services. We're delivering unifying analytics, prioritized actions and benchmarking to help our customers truly manage risk more effectively. And that's a compelling capability.

I will 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 pleased with our results for the second quarter, highlighted by good topline growth, a sizeable beaten EPS and strong unlevered free cash flow. There are a confluence of factors related to the broader market that impacted our results, but we are pleased with our execution in the quarter despite a more cautious spend environment.

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 the results for our quarter. Calculated current billings, defined as the change in current deferred revenue plus revenue recognized in the quarter, grew 27% year-over-year to $174.1 million and benefited from our continued investment in our platform strategy and go-to-market efforts.

The fundamentals of our business remain very strong, and we are pleased with the demand overall in the quarter, but it was mixed across geographies as North America exceeded our expectations while our international theaters encountered headwinds and fell short of expectations.

As a reminder, we go to market using a 2-tier channel model with our customer contracts denominated in U.S. dollars. During the quarter, the U.S. dollar strengthened compared to other currencies, which made our products more expensive, and that, combined with other macro considerations, impacted our international sales.

In addition, on a global basis, we experienced deeper levels of inspection and more approvals with some customers. Despite that, we are pleased with our CCB growth, and had one of our best quarters in terms of adding new customers and transacting large deals. Specifically, we added 540 new enterprise platform customers and 79 net new 6-figure customers in Q2, which represents 35% and 28% year-over-year growth, respectively.

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JULY 26, 2022 / 8:30PM, TENB.OQ - Q2 2022 Tenable Holdings Inc Earnings Call

Underpinning our customer momentum is EP, Tenable.ep, which continues to see strong demand in both the large and mid-market and has resulted in more meaningful deal sizes, amplified by the addition of cloud and identity security to our unified exposure platform. Tenable.ep also creates a more compelling upsell path for our existing customers and benefited our dollar-based net expansion rate in the quarter, which remains elevated in comparison to prior years, and is well above our 110% threshold.

Revenue for the quarter was $164.3 million growth in Q2 last year. Revenue in the quarter exceeded the midpoint of our guided range by $1.3 million. As discussed earlier, we experienced less-than-expected international sales, which typically have a higher mix of stand-alone Active Directory on-premise deployments, which is our only software solution with upfront revenue recognition. Consequently, product mix limited our upside in revenue this quarter. That said, visibility remains high as our percentage of recurring revenue was 95%, which is consistent with prior periods.

I'll now turn to expenses, which include incremental investments in growth and the operating expenses related to the Bit Discovery acquisition that we closed in the quarter. I'll start with gross margin, which was 81% this quarter and essentially flat compared to last quarter. Despite increased usage of our cloud products, our public cloud costs decreased sequentially as a result of efforts to optimize the efficiency of our product delivery infrastructure, along with our procurement strategy, which resulted in credits in the quarter that reduced our compute costs. These savings were offset primarily by increased personnel costs for support of our products.

In connection with the closing of Bit Discovery, we launched a new external attack surface management offering in July that we will continue to integrate throughout our product portfolio. Also, as a reminder, we plan to release a more expansive set of Cyber Exposure analytics in the second half of the year. This will include attack path analysis, enhanced 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.

We expect the incremental investments for Bit Discovery and Cymptom, a portion of which are upfront costs to modestly impact gross margins in the second half of the year, but provide runway to support future growth. As I've indicated in the past, long term, we still expect gross margins to be in the high 70% to low 80% range.

Sales and marketing expense for the quarter was $75.6 million, which was up from $71.5 million last quarter. Sales and marketing expense increased sequentially due to higher wages and benefits related to hiring more quota-carrying sales reps and associated head count as well as higher marketing spend related to industry and other events. Sales and marketing expense as a percentage of revenue was 46% in Q2 compared to 45% last quarter.

R&D expense for the quarter was $28.1 million, which was virtually flat compared to $27.8 million last quarter. It should be noted that we added incremental engineering head count in support of unifying our product architecture and enhancing our platform, and capitalized $2.9 million of software development costs. R&D expense as a percent of revenue was 17% in Q2, which was consistent with last quarter.

G&A expense was $17.3 million compared to $16.6 million last quarter. We continue to make investments in our back-office functions and systems to support the growth and scale of our business. As a percentage of revenue, G&A expense was 11% this quarter compared to 10% last quarter.

Income from operations was $12.2 million, essentially flat compared to last quarter, but $5.7 million better than the midpoint of our guided range, which had contemplated incremental COGS for our public cloud infrastructure, increased spend for industry events, and higher head count and related costs. However, in response to the changing business climate, we were able to achieve greater operational efficiency through more focused efforts on spend optimization, which resulted in upside to op income in the quarter. It's also worth noting that a stronger U.S. dollar contributed approximately $1 million of outperformance as approximately 40% of our employees are based outside of the U.S. In short, we incurred less expense in our international locations due to a stronger dollar.

Operating margin was 7% for Q2 compared to 8% last quarter. EPS in the second quarter was $0.05, which was $0.035 better than the midpoint of our guided range due to the same expense trends I just mentioned. EPS also includes $0.02 or $1.8 million of FX remeasurement losses included in other expense net. As a matter of clarity, this FX activity is due to the remeasurement of our non-U.S.dollar-denominated cash and other monetary assets and liabilities. The FX remeasurement losses more than offset the $1 million of OpEx savings from FX I previously discussed.

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