Tenable Holdings, Inc.

Greetings and welcome to Tenable's quarter two of 2022 Earnings Conference call. At this time, all participants are in listen-only mode. A question and answer session will follow the formal presentation. If anyone should require assistance during the conference, please press star and zero on your telephone keypad. As a reminder, this conference is being recorded. I will now turn the conference over to your host, Erin Carney, Senior Director, Investor Relations. Please go ahead.

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 Vince, 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 Symptom and 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 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'll now turn the call over to Amit.

Thank you, Aaron. 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 our 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 of 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 remains 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 product 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 seven-figure EP competitive takeout deal with a large international financial institution. We had another strong quarter for both large six-figure deals and overall enterprise customer ads. 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 BitDiscovery, a provider for external attack surface management, enabling us to cover and assess internet-facing assets such as web applications, cloud resources, and open gateways. 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-aware 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 acknowledgement 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 as 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.

Thanks, Amit. As Amit mentioned earlier, we are pleased with our results for the second quarter, highlighted by good top-line growth, a sizable beat in 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 discussed 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 relief issued earlier today, which is posted on our website. Now on to the results for our quarter. calculated current billings to find us the change in current deferred revenue plus revenue recognized in the quarter grew 27% year-over-year to 174.1 million and benefit it 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 and while our international theaters encountered headwinds and fell short of expectations. As a reminder, we go to market using a two-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 six-figure customers in Q2, which represents 35 and 28% year-over-year growth respectively. Underpinning our customer momentum is EP, Tenable.EP, which continues to see strong demand in both the large and mid-markets 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 standalone 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 bid 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. 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 enhance the unified analytics and improve 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 bid discovery and symptom, 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, an associated headcount, 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 headcount 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 headcount 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 US dollar contributed approximately $1 million of outperformance as approximately 40% of our employees are based outside of the US. 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 5 cents, which was 3.5 cents better than the midpoint of our guided range due to the same expense trends I just mentioned. EPS also includes two pennies 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-US 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. Now let's turn to the balance sheet. We finished the quarter with $510.9 million in cash and short-term investments. Accounts receivable was $109.4 million, and total deferred revenue was $548.1 million, including $415.4 million of current deferred revenue, which gives us a lot of visibility into revenue over the next 12 months. Now I would like to discuss cash flow. We paid $3.3 million of cash interest on our credit facility in the quarter. Looking ahead, we are assuming a higher interest rate environment with our floating rate debt facility when it resets at the end of July. Consequently, our full year guidance reflects $17.9 million of interest expense, which is $2.2 million higher than our previously provided guidance. That said, our term loan B continues to provide a very low cost of capital, which has allowed us to fund acquisitions without equity dilution to our shareholders. Earnings on our cash and investment balance provides a partial natural hedge to interest rate expense. As such, we expect the full-year EPS impact on interest expense net of interest income to be one penny as yields on our cash and investments also rise. We generate $29.1 million of unlevered free cash flow, which is an 18% margin. With 95% recurring revenue, high gross margins and renewal rates, We feel confident that we can continue to generate attractive levels of cash flow while continuing to invest in the business. Striking the right balance between growth and profitability has always been and will continue to be an area of focus for us. Last year, we became a Rule of 40 company, and we are confident we are well on our way to becoming a Rule of 50 company. With the results of the quarter behind us, I'd like to discuss our outlook for the third quarter and full year 2022. In terms of the top line growth, our guidance reflects a continuation of the trends we experienced in the back half of the second quarter. Specifically, we expect the fundamentals of our business and the demand for our cyber exposure solutions to remain strong. However, given the current macro environment, we think it's prudent to expect a similar level of review and scrutiny on some deals that we experienced in Q2. Our guidance also contemplates approximately 4 to 5 million of less contribution from upfront AD on-prem revenue and higher levels of adoption of AD in Tenable EP, our unified exposure platform. Now, in terms of expenses, our outlook reflects the expected impact of inflationary costs, most notably on wages, the absorption of bid discovery, and higher interest expense on our floating rate debt. With that in mind, here are the specifics. For the third quarter, we currently expect Revenue to be in the range of 169 to 171 million. Non-GAAP income from operations to be in the range of 9 to 10 million. Non-GAAP net income to be in the range of 3.2 to 4.2 million, assuming interest expense of 5 million and a provision for income taxes of 2.3 million. Non-GAAP diluted earnings per share to be in the range of 3 to 4 cents. assuming 119.5 million fully diluted weighted average shares outstanding. And for the full year, we currently expect calculated current billings to be in the range of 768 to 776 million, which reflects a $4 million increase from the midpoint of our prior guidance, including 2 million of the Q2 outperformance, and $2 million of contribution for bit discovery, primarily in Q4. Revenue to be in the range of $673 million to $679 million, which remains unchanged. Non-GAAP income from operations to be in the range of $45 to $49 million, which is a $1 million increase from the midpoint of our prior guidance, reflecting a $6 million beat over the midpoint of our Q2 guidance offset by 3 million of operating losses from debt discovery and 2 million of higher inflationary costs. Non-GAAP net income to be in the range of 19.7 million to 23.7 million, assuming interest expense of 17.9 million and a provision for income taxes of 7.6 million. Non-GAAP diluted earnings per share to be in the range of 17 to 20 cents reflecting the three and a half penny beat from the midpoint of our Q2 guidance offset by approximately three pennies related to BIT discovery and one penny of higher net interest expense. Our EPS guidance assumes 119 million fully diluted weighted average shares outstanding. In summary, We're very pleased with the results for the quarter, feel good about the fundamentals of our business, and believe we are thoughtfully navigating the current climate to deliver continued growth and profitability. I'll now turn the call back to Amit for some closing comments.

Thanks, Steve. We hope to see many of you at the Canaccord and Piper conferences in the coming weeks. We'd now like to open the call up for questions.

Thank you. Ladies and gentlemen, at this time we will be conducting a question and answer session. If you would like to ask a question, please press star then 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove yourself from the question queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. In the interest of time, we ask that you please limit yourself to one question. You may rejoin the queue for additional questions if time allows. We will pause the moment. The first question comes from Hamza Podawala of Morgan Stanley.

Hey guys, good evening. Thank you for taking my question. Steve, for you, I just want to be really specific. So it seems like just the negatives in the quarter were international, sounds like Europe coming in slower than expected, the higher scrutinization of deals that was exclusively to Europe, and then FX basically making the products more expensive. Was there anything in North America or other regions that you saw that was – driving that scrutinization as well, or was it just concentrated in Europe?

I would say, first of all, overall, we're pleased with our performance in the quarter. We grew CCB 27%, and as you know, we added a lot of new customers, 540 new enterprise platform customers. We transacted a bunch of large deals, so one of our best quarters in terms of momentum. As I called out earlier, Performance was mixed. We saw significant strength in North America, which is our largest theater, but international fell short of expectations for some of the reasons that you mentioned. Generally, we are seeing more levels of scrutiny and review, but we were able to overcome this because we saw strength in our enterprise business. We're just commenting on the current environment in terms of what we're seeing. By the way, I referred internationally broadly, but it's more specifically in EMEA, which is what you had mentioned before. I will say this, that it's not pervasive across all countries. in our international theaters, and specifically in Europe, not across all countries. It's more on a customer-by-customer basis. It's based on specific company budget dynamics, industry, geo, and we saw strength in major sectors, including in Europe. So obviously, overall, we're pleased with our results for the quarter. We're raising CCB guidance for the year, and we think we're set up for success for the second half of the year.

Just one quick follow-up on that. When it comes to international, are you increasing the level of discounting for your products, and is that something that's reflected in the back half guide?

No, we're not. We did not see that in the second quarter, levels of discounting increase. We're mindful of that as we enter the second half of the year, but we're spending a lot of time looking at pipelines. We feel really good about our pipelines as we head into the second half of the year, not just the size but also the shape and maturity of it. Activity levels are high, and we're looking at all forecast lenses. Spending a lot of time qualifying opportunities. We feel good about the second half of the year and our setup.

Okay. Thank you.

The next question comes from Rob Owens of Piper Sandler.

Great. Thank you guys for taking my question. Maybe like Hamsa, I'll sneak in one as well. We'd love to better understand this, the higher levels of scrutinization, I guess, juxtapose what you're seeing with your enterprise customers in large deals, the success on that front. And as we enter the third quarter, just any broad brushes around government. Thanks.

Yeah, thanks. Great question. I'll chime in and I'll say, listen, it's just a tough macro environment. And as a result, many customers, and it's on a region by region basis, on a customer by customer basis, many customers are looking at their spend, at their expense basis, and they're scrutinizing every contract, every opportunity. Security remains top of list. We are not seeing a high level of customers abandoning their position in pipeline. Deals continue to move forward in the pipeline. There's just additional signatures to get in the process that companies are putting in place on a customer-by-customer basis. But again, pipeline continues to build at a healthy rate. has never been stronger than it is today. Deals continue to move forward in the pipeline, and we feel exceptionally confident in how we're set up going into the third quarter and going into the year. You asked specifically about public sector. We had a good quarter in the public sector, I'd say kind of in line with expectations, including a seven-figure transaction at the state level. at the state level. Globally, public sector did really well. And we continue to invest with a high degree of confidence in the public sector, seeing strong opportunity in our pipe, seeing more transactions and seeing longer transactions than we've seen at any point in recent history. So again, we feel as well set up as we can going into the third quarter.

Thanks for the color. The next question comes from Sackett Collier of Barclays.

Excellent. Hey, guys. Thanks for taking my question here. Steve, I'll keep it to one and maybe just for you. Can you just dig into the dynamic that you mentioned on AD a little bit, you know, for upfront revenue? I think you said it's about four or five million less contribution this year. Can you just flush that out a little bit? Is it on revenue? Is it on CCB? And why the change?

Yes, the $4 to $5 million is for AD on-prem the second half of the year, specifically the second half of the year. So we're taking the $4 to $5 million out of our guidance. And so we're just seeing slightly different mix. That said, we are very pleased overall with our ability to sell identity security As a standalone offering into our customer base, we've demonstrated success doing that, and now part of a broader offering in Tenable.ep. With regard to the latter, I think it's important to note we've integrated AD security into EP as well as cloud security, and historically we're seeing a 60% uplift in Tenable.ep, our unified exposure management platform. relative to our core VM offering, and we're now seeing a 70% uplift. So we're having success transacting larger deals specifically because of EP. Certainly AD is an important part of that, but our guidance reflects lower contribution due to, you know, less expected AD on-prem revenue.

Yeah, Zach, just to clarify, the AD on-prem revenue is all recognized up front, so it has a disproportionate impact on, you know, the quarter and our expectations for the remainder of the year.

And it is our only product that has upfront revenue recognition. All the other products are ratable.

Okay, so just to be clear, just to put a bow on this topic, it doesn't sound like all the CCB expectation for AD is going down in totality, just the mix of what is cloud versus on-prem. Is that right, or are we taking the expectation? Exactly.

No, that is right. That's why you saw the outperformance in CCB. That's why we're, we pass on a beat and we're also raising in CCB. We have not raised our outlook for revenue because we're reflecting less upfront revenue related to standalone AD on-prem.

Got it. Very helpful. Thanks for that clarification.

The next question comes from Mike Sikoff of NeedHunt & Co.

Hey, guys. Thanks for getting me on the line here. I just wanted to circle back to that increased scrutiny that you guys are seeing. Can you help us think through when that dynamic really started to come into play for the international markets, that increased scrutiny? And maybe it would be helpful, too, to talk through how that trended through the quarter, through July, like why. you'll seeing as a result of the scrutiny are those deals extending with more constituents sitting around the table has that deteriorated further as we've gone from may to june to july or or have things been relatively stable when we start thinking through that scrutiny that you guys were talking to earlier yeah we we saw that scrutiny really um

kick in in June, and things have been relatively consistent since then. Again, the sales team has a lot of confidence. They continue to enter deals into the pipe. Deals continue to move through the pipeline. There's just more signatures to get in order to close transactions. I don't think it's specific to Tenable, and I don't think it's specific to security. I think Largely speaking, we do not hear the sales team tell us that budgets are going away. We don't hear them telling us that deals are going away. It's just a matter of some transactions on a customer-by-customer basis require additional signatures. And as you note, in certain instances, that can prolong the sales cycle. But we feel exceptionally confident given the pipe and the progress through the pipe in second half of the year, and that's reflected in the increase in CCB.

That's very helpful. Thank you for that. And if I could just squeeze one more in, when looking at the strength of the new enterprise platform customers added, or even the customers over 100,000 in ACV at period end, you guys had some strong numbers when looking at those metrics. And I just think it'd be helpful to frame out for the investment community here, but Can you help us think through the segments that you guys are working through? If I think about, like, enterprise versus mid-market versus SMB, if I stratify your customer base according to those different parameters, I'm starting to see a different behavior coming out of enterprise versus maybe mid-market. And maybe a reminder, too, as far as your exposure to each of those different stratifications would be helpful as well. Thank you.

Yeah, so as we commented earlier, we have one of our best quarters in terms of customer demand, in terms of new enterprise platform customers and large deals. So really strong. And, you know, if you kind of disaggregate that, you know, we saw significant contribution from enterprise as well as commercial customers. Both are working well in aggregate globally for the company. Commercial, which we'll say is mid-market, is certainly an area of opportunity for us. We're building out a commercial team in APAC, and we're seeing outperformance there. But overall, we saw strength in both our large and mid-market, both commercial as well as enterprise.

And, of course, exceptional strength in North America.

And as we commented earlier, EP is figuring prominently here. We're transacting larger deal sizes, covering more areas of the attack surface, and we're now getting a 70% uplift relative to our core VM offering.

Thank you for the call.

Thank you. The next question comes from Brad Reback of Stuffle.

Great. Thanks very much. Steve, with respect to the 2-H guide, how should we think about what you've modeled in for international and domestic? So I think you talked about international having pockets of weakness. So are you assuming that it's just those pockets going forward and that you just domestically it's been very strong? Do you expect that strength to continue in the guide? Whatever type of moderation you've put in there would be great to highlight. Thanks.

Yeah, I think some of the trends that we saw in the second quarter we're expecting to play out for the second half of the year. I will say the secular trends of our business are very strong. We're seeing healthy levels of demand. Now, North America was strong, and we expect it to continue to be the second half of the year. Our guidance reflects not only what we experienced in Q2, but what we also saw in July. So we're taking everything into account. We have a lot of confidence in our ability to execute. And so it's really a continuation of trends.

Great. Thanks very much.

The next question comes from Brian Essex of Cozman Sachs.

Great. Thank you. Thank you for taking the question. I was wondering if we could dig in a little bit on the sales side, you know, I mean, I think you guys last quarter talked about elevated hiring in the front half of the year. How did that pan out? Is there any way you can parse that out by geography and level of success, you know, attracting and retaining talent where you need it? And are we looking at, you know, maybe an elevated spend in the front half of the year with better leverage in the back half of the year? Or given the current macro situation, has any of that changed at all?

Well, this is Steve. I'll start. Hiring is an area that we called that earlier, so we are continuing to hire and invest. So significant levels of hires in the first half of the year, specifically in Q2. So we're adding quota capacity and obviously, you know, not just domestically, but also abroad. And that's really important. Coming into the year, you know, we increase quotas, you know, productivity levels continue to be healthy globally. And so my expectation the second half of the year is that you'll see a leverage in the business and our guidance reflects that. So, overall, we think we're striking the right balance between growth and investment. We do not want to moderate the level of investment, right, just given what we're seeing, outperformance in CCB and sales. You know, while performance may have been mixed globally across the board, across various theaters, we have a lot of confidence in our business, and we expect to continue to success the second half of the year. So, yes, we're still continuing to lean in and invest both on the sales side as well as engineering.

Great, that's super helpful. I'm going to keep it to that one question. Thank you.

The next question comes from Jonathan Ho of William Blair.

Hi, good afternoon. Can you maybe help us understand or quantify the FX impact and international underperformance on the business this quarter, and maybe what your assumptions are around guidance on the magnitude of that impact going forward?

Sure.

So I think Jonathan's question is around FX. I'll start and feel free to interject. So as a reminder, our customer contracts are denominated in U.S. dollars. In terms of operating expenses, there was a $1 million benefit sequentially from the stronger dollar impacting expenses and local currency. Impact was primarily due to fluctuations in the euro and we'll say the British pound. Further, the remeasurement of cash and other monetary balances in local currency, that means outside of the U.S., resulted in a $1.8 million loss, which isn't reflected in other incomes, so below the line. Average rate in Q2 was like 1.07 for the euro and 1.26 for the pound. We're expecting something similar for the second half of the year.

I guess the only thing I would add to that is, broadly speaking, strong demand, including in international markets, and that's reflected in the increase in CCB and confidence in the business that you're hearing on the call. The primary of discrepancy is probably the recognition of AD on-prem services. revenue and so for that reason not not raising the the revenue got to there but you know more broadly speaking feel really good about the business the rate of growth the deals entering the pipeline and our ability to continue to move deals through the pipeline and and increase gcb guide as a result got it thank you the next question comes from gray powell of btig

Great. Thanks for taking the question. And I guess before I ask it, I just want to say thanks for the transparency just on the headwinds that you're seeing in the international business. I'm not sure how other companies would deal with that. You may have said this before, but just roughly speaking, can you help us think through how much the softness on the international side impacted billings in Q2? Like, was it a small miss? Was it a big miss? Just any sort of order of magnitude would be really helpful there.

I think it's fair to say that we would have seen a couple points of additional growth in the second quarter. So, order of magnitude, we're not talking about something that's sizable. We're talking about something that's just different than what we've experienced in prior quarters. So that's why we're calling it out. And of course, because they have a procurement bias towards upfront revenue, it did have an impact on revenue. So that's why we're providing the transparency.

Got it. So a couple of additional points of growth on Q2 total billings, had it not been for international. Just make sure I got that correct.

Yeah, I think that's a fair characterization. Yes. Awesome. All right. Thank you very much.

The next question comes from Joshua Tulten of Wolf Research.

Hey, guys. Thanks for taking my question. Assuming that you had some deals slip in EMEA this quarter, have you been able to close them since the quarter closed?

Yes, we have closed some of those, but, you know, obviously it's very early in the quarter, and that's one of the reasons why we feel really good about our guidance for the second half of the year and why we're providing passing through the beat and also increasing. But we also know there's more deals to close, right? And our pipeline, we talked about the quality, the shape, and the size of the pipe. There are a lot of large deals as we head into the third quarter. So we're going to continue to focus on moving these deals through the pipeline and closing deals. And obviously, we think we're set up well for success.

And just to maybe sneak one more in there, you said it's not or you don't think it's specific to Tenable, but I kind of want to ask the question a different way. From your conversations with customers, does it sound like it's a VM issue or is it just a broader scrutiny issue?

No, I think it's just a broader scrutiny issue. And, again, I don't think it has anything to do with VM. I don't think it has anything to do with security. Customers are changing their procurement processes as they look at their operating expenses. I sat with a number of CISOs over the last couple of weeks, and the security budgets are not changing. But procurement processes require additional hoops and jumping, and that just has added, in certain instances, a number of delays to transactions that are in process. So we don't think it's specific to VM. We don't think it's specific to security, and I don't want to say we're pervious to it, but, you know, I think to a large extent it's just deal process, not so much change in budget.

Thank you very much.

The next question comes from Rudy Kissinger of DA Davidson.

Hey, guys. Thanks for taking my question. I guess I'm curious, you know, if you look at the increased level of scrutiny, obviously North America outperformed relative to me in the quarter, but you know, is the increased level of scrutiny kind of similar across geographies and just more deals are getting pushed across the finish line of North America or, um, or just what's the dynamic there. And then secondly, if you look at the new deals in the quarter, did you have maybe some customers that started the quarter were considering maybe going with EP and then maybe to downsize their deal to maybe just going with IO. I'm curious if you saw any of that as well.

So we certainly haven't seen that. EP continues to do very well for us. It's a double-digit percentage of new sales. It's higher this quarter than it was last quarter. Penetration back into our customer base has been strong, but it's still modest in terms of the opportunity, single-digit penetration. And we're getting even more of an uplift. So absolutely not on the EP side. And you broke up a little bit. The first part of your question in terms of North America, Again, I would just say with regard to deals, I think it really varies. Now, clearly North America exceeded our expectations, and there's just really strong momentum there. I think just generally speaking, though, there are more levels of review across the board. Now, the good news is we were able to overcome that. And what we don't want to lose sight of is really the bigger picture here, which is we had a great outcome for CCB. We grew 27%. Customer momentum has never been better. It's one of our best quarters for closing deals, new enterprise customers. One of our best quarters for closing large deals. We're getting uplift from EP. So a lot of areas in our business continue to be very, very strong. We're providing just additional color commentary on how performance varied across the board because it did have an impact on revenue. But we have, I want to make sure we don't lose sight, we have a lot of confidence in our business. And hopefully our guidance today reflects that. We're just providing additional color commentary because we think it's necessary.

Thank you. The next question comes from Mike Walke of Canaccord Genentech.

Great. Thanks for taking my question. Just to follow up to that with the EP on it, single digit penetration. How should we think about the dollar-based net retention? Should it remain above your 110 threshold for quite some time, or are you seeing any kind of slowdown in terms of larger deal momentum with the increased scrutiny?

Let me chime in here, but in terms of the metrics itself, which is our dollar-based expansion rate, it's very healthy, well above the 110% threshold. And as we commented earlier, it's elevated. EP is certainly playing a big part of that because we're having success selling it back into the base, as well as other products too. So yeah, absolutely healthy in terms of the expansion within the customer base.

Yeah, the only thing I would add to EP is Steve noted this 70% higher ASPs. So the differentiation in ASPs as customers move to EP is actually increasing, which is a phenomenal sign and a healthy signal. The comment about single, so it's a double-digit percentage of new customer growth. I think Steve's comment that it's a single-digit percentage of our existing customers that are on EP. So when you look at the size of the ASP increase and our ability and success that we're showing going back into the base and upselling them to EP, it just speaks to the opportunity for net dollar expansion rate moving from individual products to EP as well as asset expansion. Great. That's helpful. Thank you.

The next question comes from Andrew Nowinski of Wells Fargo.

Okay. Thank you for squeezing me in. I don't think you guys mentioned a lot for Jay in the prepared remarks this quarter, and I know last quarter you talked about it potentially only having an impact in Q1. But you know, then a few weeks ago, I think DHS put out a report that said log4j would remain a risk to organizations for the next decade. Do you think it may have pulled in any deals into Q1? And what impact did it have in Q2? And then how are you thinking about it as it relates to your pipeline going forward? Thanks.

Yeah, I think there's no doubt we saw some tailwind from Log4J, top of mind for customers and prospects at the end of Q4 and going into Q1. Log4J will be with us for years to come. I think over time folks will be and are integrating log4j activities into the more standard operating pace and procedures and less of a, hey, there's an emergency spend. We really need to get visibility around this particular key issue. You know, again, it's not to say that some issue might not raise its head in the current or next quarter that would cause a similar buying behavior, but, you know, we don't – I think it's fair to say it means vulnerability management is strategic and will continue to be, but I don't think there's the type of urgency around log4j procurement that we saw late last year and beginning of this year.

Got it. Thanks.

The next question comes from Shibli Isarasi on FBA insecurities.

Yes, thank you very much. Do you expect your federal and public segment business to outgrow your overall business by a larger margin in this current fiscal Q3 than, say, last year's fiscal Q3 because of the funding? And just can you provide us with an update on roughly what your current federal and public percentage of revenue is? Thank you.

It's approximately 15%. of our total sales, and that's public sector as a whole. Going into Q3, we think our pipelines are strong. There's a lot of opportunity, so we feel good about public sector. As Amit commented earlier, we saw areas of strength globally within public sector, and specifically at the state and local level. That's been an area of investment for us. In our guidance, we didn't really break out growth rates by theater and what we're expecting But I will say we're expecting certainly a sequential uptick in sales or CCB from our public sector theater.

Thank you.

Thank you. Ladies and gentlemen, we have reached the end of our question and answer session. This concludes today's conference. Thank you for your participation. Anyone else connect to your line?