Tenable Holdings, Inc.

And welcome to Tenable Q3 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Aaron Carney, Vice President, Investor Relations. Thank you, Ms. Connie. You may begin.

Thank you, Operator, and thank you all for joining us on today's conference call to discuss Tenable's third quarter 2023 financial results. With me on the call today are Amit Yaran, 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 fourth quarter and full year 2023 and expectations for the first quarter of 2024, growth and drivers in our business, changes in the threat landscape and the security industry and our competitive position in the market, growth in our customer demand for and adoption of our solutions, including Tenable One, planned innovation and new products and services, the potential benefits and financial impact of our recent acquisition of Aromatic, 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 further discussion of the material risks and important factors that could affect our actual results, please refer to those contained in our most recent annual report on Form 10-K our quarterly report on Form 10-Q for the quarter ended June 30, 2023, 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, Erin. Today I'll provide some context on our financial performance in the quarter, discuss the accelerating momentum we're seeing with our platform, and touch on our growth strategy with cloud. We delivered a solid Q3 with strong contributions from Tenable One, OT, and the public sector. In addition, we continued to deliver significant margin leverage by delivering a $10 million beat to operating income. While the underlying performance of the business was good this quarter, the mix of our business was different than we typically see and led to an unusual divergence between sales and CCB. At a high level, through the outside strength in public sector, we saw a much larger mix shift to perpetual licenses and services with minimal contribution to CCB. A flexible deployment model gives our customers the ability to optimize their architecture in the cloud, on-premise, or hybrid, which directly benefits our customers through unified visibility and simplified management. We believe we are the only vendor to deliver exposure management for both on-premises and hybrid deployments, which enables us to address our customer deployment's biases. During the quarter, we added a record number of seven-figure customers, a testament to the growing importance of our solutions and our strength in public sector and large enterprise. Our products are helping customers secure even more areas of their attack surface, expanding their use cases, and consolidating around printables. In particular, our outperformance in federal reflects a strong mix of business and our expansion into larger, more strategic deals. We're also seeing great traction in signing large OT deals, signaling our growing leadership in this space. This boils down to our installed customer base trusting us to expand beyond VM to help them manage risk using our portfolio of products. We believe our leadership in helping organizations understand risk positions us for considerable opportunity going forward that we think we're still in the early innings of. While we're pleased with our performance in the quarter and soft strength in large deals, we're seeing some softness in the mid-market, which we expect to persist in Q4 and into next year. As their use of technology continues to expand, customers are looking for clarity around their attack surface, including accurately identifying all the assets in their environment and prioritizing which areas of the attack surface are most at risk. Tenable 1 connects the dots from externally facing points of attack across the entire surface of systems, identities, permissions, vulnerabilities, and configurations, and delivers differentiated analytics including building asset inventories and identifying and prioritizing attack tasks which magnify risk. As an innovator, we continue to build out capabilities with Incredible One. We're now using generative AI to deliver faster, more intuitive insights so customers can be more efficient and focus more resources on preventing successful attacks. Additionally, we expect that new features, including AI-fueled identity assessments, will only serve to accelerate our time to value for customers. Looking at the buying patterns of customers, we continue to see a broad distribution of asset types, particularly from our specialty products. We also saw strong adoption from Tenable One from our Security Center customers this quarter. Security Center customers represent a very sizable base that are increasingly operating in hybrid environments. Our ability to deliver The insights and analytics from Tenable One, without requiring them to go through structural changes, resonate deeply with these customers. Within our specialty products, we're seeing increased emphasis on Active Directory security and cloud security as customers continue to struggle with how to adequately manage risks in those areas of their attack surface. Tenable Cloud Security, now with Hermetic, is a complete code-to-cloud, highly competitive CNAP offering. Customers everywhere understand that securing the cloud is critical and incredibly complex. Security teams have to be cloud experts to find and prioritize the most urgent risks and how to address them. In many cases, customers do not even know what assets they have, let alone what access has been granted to those assets. The situation is complicated further as cloud adoption accelerates and naturally multiplies user identities, machine identities, and the complex web of entitlements which grow exponentially. Tenable and or Medic are helping organizations address some of the most difficult challenges in cloud security today. Our cloud security solutions are simplifying security management to meet the increasing and relentless demands of cloud infrastructure growth. Additionally, they enable security professionals to understand the complex relationships and risk across assets, identities, and their entitlements, and reduce the risk caused by explosion in the volume and permission of users and machine identities in the cloud. The unique combination of Tenable and Hermetic gives customers a tightly integrated cloud-native application protection platform and capabilities for cloud environments. An elegant user experience minimizes complexity and can speed adoption. Even the more mature organizations have not yet integrated commonly deployed security tools like infrastructure as code, cloud security posture management, cloud workload protection, and cloud infrastructure entitlement management across multiple cloud environments. Tenable Intermedic can bring together greater context to a customer's overall security program by integrating these point products into a single unified CNAP offering. We're delivering unparalleled insights into identities and access, which go hand-in-hand with configurations and vulnerabilities in being absolutely critical to securing cloud workloads. And with the integration of insights from Tenable One, customers can also consolidate, simplify, and reduce costs. Our sellers are having incredible engagement with our customers, pipeline is drawing out of the gate, and excitement is running high. We continue to execute well with our product vision and balanced growth strategy. Over the next few quarters, we'll continue to execute on a product roadmap and integrate Hermetic which we expect to enable us to demonstrate more leverage in our business. Cybersecurity has never been more important nor more fundamental to our economies and business than it is today, requiring corporate leaders to elevate cybersecurity within their organizations. As just one example, the SEC's recent Cyber Risk Management and Incident Disclosure Rules require disclosures on board oversight and management's role in assessing and managing material risk from cyber security threats. Companies will continue to feel pressure from management teams, boards, and increasingly regulators, shareholders, and customers. And they will continue to turn to Tenable to understand where they're exposed and how to reduce risk. I'll now turn the call over to Steve for further commentary on our financial results and outlook. Thank you.

As Amit discussed earlier, we are pleased with the underlying performance of the business this quarter. which is not reflected in our calculated current billings. 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 Aaron mentioned at the start of this call, GAAP and non-GAAP reconciliations may be found in our earnings release issued earlier today. Now on to the results for the quarter. Calculated current billings. to find his revenue recognized in the quarter, plus the change in current deferred revenue grew 8% year-over-year to $224.7 million. As I have mentioned on prior calls, CCB is typically a close but not perfect proxy for sales in the quarter, and is influenced by a number of factors, such as mix of business, deal timing, including early renewals. Since our IPO, CCB growth has generally tracked in line with the underlying sales growth of the business. However, this is the first quarter in which there was such a large disparity. Current IPO growth in the quarter was 15% and is a closer approximation of the underlying performance of the business this quarter. During the quarter, we saw significant outperformance in the public sector, specifically in U.S. Federal, which benefited from a robust spending environment related to the September 30th fiscal year end. We closed a few strategic agency-wide seven-figure deals on both the defense and the civilian sides, some of which are listed on public procurement sites. Consequently, the outperformance in U.S. Federal resulted in a higher mix of public sector sales and overall a much higher mix of professional services and perpetual licenses that either did not contribute or minimally contributed to CCB in the quarter. The total impact here was approximately 12 million of lower CCB in the quarter. To provide a little more color, these services were sold primarily with our VM and OT offerings that are tied to large government programs and included initial software purchases as part of deployment planning exercises that we expect will result in additional product purchases over the next several quarters. We believe these large strategic wins not only demonstrate our leadership position in the federal market but also give us a very significant opportunity to sell additional software in future periods also please note that perpetual license software sales are recognized over five years not up front so four-fifths of the annual contract is excluded from CCP another major highlight was tenable one which represented 20 percent of new sales in the quarter and grew over 100% year-over-year. Despite these strengths, we did start to see some headwinds in the mid-market where spending was constrained, particularly with new logos. It's important to note that while the top of the funnel remains strong, there appears to be a more cautious outlook from buyers in this market related to the broader macro, which impacted our conversion rates in the quarter. In terms of key metrics, we added 386 new enterprise platform customers in the quarter. Also, as discussed earlier, large deals were strong as we added 58 net new six-figure customers in the quarter. And we also closed a record number of seven-figure deals in the quarter, which reflects strength in the large enterprise market as well as the public sector. Our dollar-based net expansion rate was 111% in the quarter compared to 111% last quarter. As a reminder, the expansion rate is calculated on an LTM basis. Revenue was $201.5 million, which represents 15% year-over-year growth. Revenue in the quarter exceeded the midpoint of our guided range by $3.5 million. Our percentage recurring revenue remains high at 95% this quarter, which is consistent with prior periods. I'll now turn to expenses. I'll start with gross margins. which was 80% this quarter compared to 81% last quarter. As I mentioned on the last call, we expect margins to be modestly lower in the second half of the year as we absorb the initial public cloud costs related to the upcoming relief of cyber asset management and AI-powered analytics. Sales and marketing expense was $79 million, which was down from $81.4 million last quarter. Sales and marketing expense as a percentage of revenue was 39%, compared to 42% last quarter. Sales and marketing expense decreased sequentially, primarily due to lower personnel costs and event marketing spend related to the timing of industry conferences, partially offset by higher commission expense. R&D expense was $27.8 million, which was down from $28.1 million last quarter. R&D expense as a percentage of revenue was 14% this quarter, flat in comparison to last quarter. R&D expense decreased sequentially, primarily due to lower personnel costs, partially offset by increased public cloud costs. G&A expense was $18.5 million, which is up from $17.8 million last quarter. G&A expense as a percentage of revenue was 9% this quarter, and flat relative to last quarter. Income from operations was $36.6 million, which was significantly better than expected and exceeded the midpoint of our guided range by approximately 10 million. Operating margin for the quarter was 18%, which was 470 basis points better than the midpoint of our guidance. The sizable upside in earnings this quarter reflects the strength of our business model and our ability to cost-effectively acquire customers and expand those relationships over time. It's also worth noting that our operating margin improved over the same period last year by approximately 490 basis points. Additionally, you will note 6.5 million of other expense met this quarter. Included in this amount is a $5 million impairment charge related to a strategic investment in a privately held company. All of this resulted in EPS of 23 cents, which was approximately 4.5 cents better than the midpoint of our guided range. Now, let's turn to the balance sheet. We finished the quarter with $693 million in cash and short-term investments. Accounts receivable was $179.4 million and total deferred revenue was $681.5 million, including $518.4 million of current deferred revenue, which gives us a lot of visibility into expected revenue over the next 12 months. We generated approximately $48 million of unlevered free cash flow during the quarter. Year-to-date unlevered free cash flow was $132 million, which puts us well within reach to achieve our annual unlevered free cash flow target for the full year, which we're raising today after adjusting for the dramatic acquisition. With 95% recurring revenue, high growth margins and renewal rates, we feel confident that we can continue to expand our operating and free cash flow margins over the ensuing years. With the results of the quarter behind us, I'd like to discuss our outlook for the fourth quarter and full year 2023, which reflects the estimated impact of the Hermetic acquisition that closed on October 2nd. For the fourth quarter, we currently expect revenue to be in the range of $204 to $208 million. Non-GAAP income from operations to be in the range of 23 to 24 million non-GAAP net income to be in the range of 16 to 17 million assuming interest expense of 8.3 million interest income of 4.9 million and a provision for income taxes of 3 million non-GAAP diluted earnings per share to be in the range of 13 to 14 cents assuming 123.5 million fully diluted weighted average shares outstanding And for the full year, we currently expect calculated current billing to be in the range of $862 to $870 million, revenue to be in the range of $789.4 to $793.4 million, non-GAAP from operations to be in the range of $107.9 to $108.9 million, non-GAAP net income to be in the range of $83 to $84 million, Assuming interest expense of 31.5 million, interest income of 24.2 million, and a provision for income taxes of 9.1 million. Non-GAAP diluted earnings per share to be in the range of 68 to 69 cents per share. Assuming 121 million fully diluted weighted average shares outstanding. and unlevered free cash flow to be in the range of $168 to $173 million. I'd like to provide some commentary regarding our outlook today. The trends we observed in the mid-market in Q3 are expected to persist, so we think it's appropriate to revise our CCB range for the year to reflect a more cautious outlook in Q4, as well as the flow-through of our CCB results in the third quarter. Revenue which is recurring in nature, reflects a $3.5 million beat in Q3 and a $1 million raise. Also, as a reminder, Hermetic is not expected to contribute materially to the top line in the fourth quarter. In terms of profitability, we are increasing our outlook for income from operations for the full year by $10 million, which reflects a $15 million beat and raise for Tenable and less, $5 million related to the impact of the Hermetic Acquisition. Net income for the full year reflects a $10 million dollar beaten raise for Tenable, less $8 million related to the impact of Hermetic, which includes $3 million of foregone interest income. We're also revising our outlook for unlevered free cash flow to reflect a $3 million dollar raise for Tenable due to the operational efficiencies we continue to realize in our business, less $15 million of cost due to the impact of the Acquisition. In terms of 2024, we will provide guidance for Q1 and the full year on our earnings call in February, but we believe mid-teen CCB growth, which reflects the contribution from Hermetic and the current selling environment in the mid-market, is a fair expectation of growth for the upcoming year. Q4 is an important input to setting expectations for the upcoming year, so we want to have that data point in hand before we discuss the business in more specific terms. All of that said, we will continue to effectively balance growth with profitability and expect unlevered free cash flow to grow approximately 25% next year, which reflects the anticipated impact of Hermetic. We expect Hermetic to be breakeven and unlevered free cash flow in the fourth quarter of 2024 and be accretive to EPS for the full year in 2025. At this point, I'd like to turn the call back over to Amit for some closing comments.

Thanks, Steve. In summary, Q3 is a clear indication of our ability to drive continued leverage in the business. We are at an exciting time in our business and have a ton of opportunity ahead of us. We look forward to updating you on our next call and seeing you at the Needham, DA Davidson, Wells Fargo, Stevens, and Barclays conferences in the coming weeks. Additionally, we expect to have our investor day in the first half of 2024. We'd now like to open the call up for questions.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your questions from the queue. For participants using speaker equipment, It may be necessary to pick up your handset before pressing the start keys. One moment, please, while we poll for questions. The first question comes from the line of Brian SX with J.B. Morgan. Please go ahead.

Hi, good afternoon, and thank you for taking the question. And Steve, really appreciate the color around the moving pieces with CCB. Amit, just a question for you, and I'll maybe keep it to one. With regard to code to cloud security, we're seeing a lot of different companies target this space, whether it's larger platform vendors or best-of-breed vendors operating in certain niches of that market. Who do you typically see competitively? How are you winning in that market? And what is your outlook for market share as we kind of think about your ability to penetrate that space in the years ahead?

Yeah, so I guess I'll start off by saying, you know, Tenable's been an active participant in the cloud security market for some time. Obviously, we moved forward with an acquisition of Couric some time ago. We continue to build organic capability agentless assessment and do some integration along those lines. With the most recent acquisition at the beginning of Q4 of Hermetic, we believe we have a highly competitive fully integrated CNAP offering that can look at infrastructure's code, see what that build out looks like, assess systems and how they're operating in real time in cloud environments. And so we have that very elegant code to cloud visibility. and also the ability to go inverse. So from a piece of operating code, from operating live systems in cloud environments, we can trace back toward the code which produced those systems and how they're executing. So we feel like we've got a highly differentiated, highly competitive capabilities in the integration of Tenable's existing functionality and cloud capabilities with what ERMEDIC brings to the table. To that end, we think we're going to be head-to-head competitive with all of the major and market-leading CNAP vendors out there and feel like we have a number of key differentiators and capabilities, including the cloud infrastructure entitlement management functionality that is market-leading, which Omedic brings to the table, and our visibility and our ability to give customers visibility across hybrid environments, so not just what's happening in their cloud, but what systems they have that are connecting to their cloud, and a much more accurate picture of overall exposure.

That's great. Maybe a quick follow-up. Are you currently seeing those vendors competitively now, or is it mostly Greenfield for you?

No, we're seeing those vendors competitively now. Again, we've differentiated ourselves In a number of fronts, historically, including how tightly we can integrate the on-prem and cloud vulnerabilities, including the agentless assessment and infrastructure's code, I think with the addition of ERMEDIC and the unified, elegant CNAP offering, we feel like we can continue to leverage those traditional differentiators and also go direct head-to-head competition with all of the market-leading CNAP vendors and win more than our fair share.

Got it. Super helpful. Thank you.

Thank you. Next question comes from the line of Rob Owens with Piper Sadler. Please go ahead.

Great, thank you guys for taking my questions this afternoon. I'm going to follow in line with Brian and ask one question that's really going to turn into two. Steve, first of all, just around the CCB discussion, and I appreciate the disclosure there, is the commentary around the fact that when it's a perpetual deal, its ACV is actually less, and so that negatively impacts CCB, because obviously Billings is revenue plus change, so you're getting the revenue more upfront. or is it the services that are associated with the contract that then wouldn't be necessarily in deferred revenue given how those work? I was a little confused.

Yes. Hi, Rob. So we mentioned the outperformance in public sector which weighed on CCB, and specifically we saw, if you look at our performance in public sector, specifically U.S. Federal, it was twice as high this quarter in terms of mix of business. as any quarter we've experienced previously since going public, so a much higher mix of business. Finance procurement bias is more weighted towards perpetual licenses and these deals are large and complex and strategic in nature and came with a higher level of services. So it was the combination of both professional licenses and professional services that's not fully reflected in CCB. With regard to perpetual licenses, these perpetual licenses are In fact, amortized over five years. That's how we recognize revenue. So consequently, only one-fifth of the annual contract value related to these deals are reflected in calculated current billings. Professional services will be delivered over the course of the next several quarters. And unlike our enterprise customers, these services cannot be billed up front, and consequently, they're not included in CCB.

Great, thank you for the color there. And then Amit, for you, obviously very unfortunate with the geopolitical situation in the Middle East right now. And I know Hermetic's over there. I'm just curious, given when it was acquired and what's transpired since, any changes to timeline thoughts of integration into the cloud security suite as well? Thanks.

Yeah, I'll start just by saying, you know, our team there is incredibly resilient and incredibly proud of the work that they're doing and their ability to keep focus. That said, we do anticipate, you know, some modest delays in integration activities. But for the most part, at a strategic level, they continue to move forward and feel like those changes will be modest.

Great. Thanks for the color.

Thank you. Next question comes from the line of Joel Fishbein with Tourist Securities. Please go ahead.

Thank you for taking my question. I have one for you similar to Brian's, but on the OT space. That space seems to be crowded, but it seems like you are doing well there. And I'd love to just understand the competitive dynamics of the space, and then why Tenable is winning there. A lot of the companies we cover are talking about OT, but it seems like you've got some real traction there. I'd love to just get a little bit more color. Thanks.

Yeah, we're incredibly bullish about our OT business, and that comes on the heels of a couple of quarters in succession here where we're talking about it on the earnings call, say we're pulling down larger six-figure and seven-figure deals. We're winning larger opportunities in both public sector, significant opportunities in public sector with OT, and continued traction in critical infrastructure. We think these are markets that will continue to grow in importance from a cybersecurity perspective. There's a couple of key differentiators for us. One is we've got a very large and robust and diverse customer base on a global basis. They're used to coming to us to help them evaluate cyber risk and we think that visibility which we can provide on a unified basis across both OT and IT is a strategic differentiator for us relative to what most OT vendors provide which is just a very myopic focus on control systems. If you walk through a factory floor, if you look at a pipeline, if you look at manufacturing operations, data center automation, what you'll see is that all of these systems, all of these activities have a combination of OT and IT in their environment, and it's impossible to help someone assess and understand the risk to that operation looking only at control systems. So we think we've got highly competitive product. We think it's strategically differentiated in our ability to combine IT and OT in the evaluation of risk, And we've got a significant customer base and distribution for that technology into what is a rapidly growing market.

Great. Thank you.

Thank you. Next question comes from the line of Hamza Fordewalla with Morgan Stanley. Please go ahead.

Hey, good evening, guys. Thank you for taking my questions. Steve, maybe a question for you and Amit as well. Just if I look at your outlook here, so you did about 8.5% current billings growth this quarter. The guidance for Q4 implies somewhere between 10 to 11, and then you're guiding for mid-teens next year, I guess, if you back out the acquisition sort of low teens. I'm just curious because it does seem like the environment got a little bit worse for you on the mid-market side, what gives you confidence that you can accelerate next year?

Hi, Hunter. This is Steve. Yes, our guidance for the fourth quarter does assume at the mid-point 11% and at the high end 12%, the range is 9% to 12% here. As we look out over the next year, I think the selling conditions that we're seeing today, specifically in the mid-market, we expect to persist. And what we said directionally for next year is mid-teens growth. That's inclusive of the contribution from Hermetic. And so largely, you know, if we look at next year, we're assuming no change in the selling conditions, same selling environment. And we also have some slightly easier compares, so that sort of skews growth a little bit. So I think we're taking a cautious approach to our outlook next year. But again, Q4 is a big quarter for us, and it's important to have that data point in hand. So in February, we'll provide guidance and talk about the business in more specific terms, but we want to make sure that we have a cautious outlook. And there's a lot of great things about our business, and the performance in the quarter was really strong, as we're commenting. It's not reflected in CCB, but saw major outperformance in U.S. Federal. But we think it's appropriate, just given some of the selling conditions in the mid-market to take a cautious approach here.

Yeah, I guess the only thing I would add to that is, you know, look, we saw exceptional strength in the quarter on a number of fronts in terms of, you know, Tenable One's growth, both as a percentage of product and growth overall, the large enterprise traction, the seven-figure deals, the half-million-dollar deals, you know, all record numbers for us, the strength in federal markets, And I think, candidly, just the competitiveness of the products. If you look at our portfolio across the board, whether it's in identity, in OT, our capabilities in cloud security, and our ability to differentiate both in core VM as well as in this unified platform sale, our confidence in the sales team's confidence in what they're seeing has never been stronger. So that gives us confidence going into... into 2024, and like Steve said, we'll see how Q4 plays out and look forward to updating folks on the plan as we get into the Q1 call. All right.

Thanks, guys.

Thank you. Next question comes from the line of Andrew Nowinski with Wells Fargo. Please go ahead.

Great. Thank you. Thanks for taking the question. So I was wondering on the mid-market softness, was there any Anything specific to any maybe sort of verticals within that mid-market or any regions that were particularly soft or was that just broad-based? And maybe like what percentage of your installed base or revenue is derived from that mid-market segment?

It's more broad-based in nature. And approximately about 25% of our total sales, as we've discussed before, is attributed to the mid-market segment. And it appears that smaller-sized customers, specifically in the mid-market, are certainly feeling more of the impact of the macro, which tends to be fluid from quarter to quarter.

Okay, thanks, Steve. And I had a question on the larger customers, the 100,000, the customers that spent over 100,000. It looks like you added 386, excuse me, 58 this quarter, which was down on a year-over-year basis. So I'm wondering, given that you have Tenable One, which I believe is a much higher price point and a larger, presumably larger deal sizes. Was there any softness there that may have caused your new logo ads of the large customers to decline on a year-over-year basis?

Yeah, I guess I would just start off by saying, listen, anytime you're in a tougher macro environment, and I think what you're hearing consistently from us and other software companies is that new logo ads is typically weaker in tougher markets. That said, we're still adding more than 300-plus logos onto our enterprise platforms, still a solid number of six-figure ads, and on top of that, record number of $7.5 million plus deal. So strength in the more mature customer base, the larger enterprises that really value and understand security a little bit better, and solid performance even in the tougher mid-market.

Okay, got it. Thanks, guys.

Thank you. Next question comes from the line of Brad Reback with Stifel. Please go ahead.

Great. Thanks very much. Amit, high-level question. Given the breadth and depth of the product portfolio at this point and the vagaries of the mid-market, which kind of is always that way, up and down, what's the thought of pivoting the sales force to more of an up-market focus? Well, it's certainly something that we look at and try and provide careful balance around. And as you recall, we've got a real hybrid sales approach where we've got inside sellers, which we think are cost-effectively going after our mid-market customers. We're 100% dedicated to channel. We transact all of our business through channel partners, which also help us achieve scale and cost-effectiveness into that mid-market. And then direct touch enterprise sales team working hand in glove with partners to get to those larger opportunities and larger enterprise customers. So we look at and also operate on the e-commerce side for the higher volume transactions. So we try and find the appropriate balance to have cost-effective leverage and opportunity because ours is a solution which is broadly applicable. So we'll continue to look at that going into next year and make sure that we're optimizing our go-to-market spend for the greatest return. Got it. And then given the valuation of the stock and the significant amount of free cash flow that you all are generating at this point, what's the board's thought on share repurchase activity?

Well, I think there's a clear use of, the good news is we're generating increasing levels of cash flow and we have confidence that we'll continue to drive higher levels of cash flow. Like the operating margins have expanded significantly over the years, as have the free cash flow margins. And in terms of use of cash, I would say the security market is very fragmented. Amit can comment further, but clearly we're using cash to acquire strategic and accretive assets. We're going deeper and wider in cloud security, which is a major market opportunity for us. And then we'll continue to evaluate other uses of cash. to provide better returns for shareholders. That's great.

Thank you very much.

Thank you. Next question comes from the line of Roger Boyd with UBS. Please go ahead.

Great. Thanks for taking the question. As the CNAP platform gets larger, I'm wondering if you could provide any update on maybe where you are in terms of adoption of cloud security within the install base and then I mean, more of a high-level question, but it feels like the industry's been talking about CNAP consolidation for some time. And you talk to customers, and it still sounds like buyer behavior is skewing towards picking and choosing different point products and CSPM, et cetera. So I guess I'd love to get your perspective on how you think the timeline for cloud security consolidation plays out.

Yeah, first of all, I'll start by saying we're seeing tremendous demand on the cloud security side. At this point, prior to acquisition, Tenable's already delivering cloud security capability to over 1,000 customers. And so we're seeing demand, we're seeing momentum, and we continue to invest organically and inorganically in building out those capabilities. Certainly market leading on the infrastructure as code side, I think Hermetic, the absolute market leader when it comes to cloud infrastructure and entitlement management, and so to your point earlier, even where other CSPM solutions have been deployed, Hermetic has shown the ability to sell alongside those products with their team functionality. That said, I do believe that we're gonna see a lot of consolidation, both in security and specifically within cloud security, because these capabilities really need to be tightly integrated to maximize value for customers because what you have in the cloud, how it's configured, how it's vulnerable, who has access to those assets, what are the permissions and entitlements to those assets, what would it look like if any of those identities or assets were compromised. I think all of those data points are tightly intertwined both from a security and compliance perspective. And I think that there's a very natural progression from point products in cloud to unified CNAP platforms. And I think that's what you're hearing from most of the market-leading cloud security vendors and certainly what Euromatic is bringing to the table for Tenable.

Appreciate the call. Thank you.

Thank you. Next question comes from the line of Gray Powell with PTIG. Please go ahead.

Great. Thanks for taking the questions. So, yeah, maybe just kind of drilling on the Q4 outlook. I'd be curious, are you guys expecting a budget plush this year? And then just, you know, on a comparison basis, like how does the environment feel today versus, like, this time last year? Is it better, same, or worse in terms of just the visibility that you feel like you have?

Yes, in terms of budget flush, you know, they're certainly, if you look heading into Q4, we'd expect Q4 to be sequentially higher in terms of CCB on an absolute dollar basis relative to, you know, what we're, you know, providing today. The fourth quarter tends to be seasonally strong for us. It can represent over 30% of our total sales. We do see budget plush. We would expect that in the fourth quarter. We are expecting some of the selling conditions that we experienced in the mid-market to persist. But overall, we feel good about the guidance that we're giving today. And I think in terms of the comparison to last year, I think it's fair to say that this is a new budget cycle, new fiscal year, and new logos are tougher to transact in this environment. But we're also very pleased to see us demonstrate real momentum, not only with Tenable One, where it's growing over 100%, and we're seeing higher selling prices there, but also really strength in large deals. As Amit commented earlier, we had a record number of seven-figure deals, also half-million-dollar deals and up. So the value that we deliver to our customers continues to grow in terms of importance, and it's resulting in larger deals.

Yeah, I guess the only other thing I would add to that is less on the macro and more on the competitiveness of product sets, whether it's on the OT side, our ability to compete and win and deliver on cloud security, on identity and the unification of these capabilities, the tenable one. The sales and go-to-market teams have never had greater confidence in the products that we're bringing to market and our ability to value differentiate from competition. So, you know, there's a lot of cost for optimism.

Understood. Okay. Thank you very much.

Thank you. Next question comes from the line of Brian Cooley with Stephen Inc. Please go ahead.

Hi. Thanks for taking my questions. So I wanted to drill down on the commentary around the mid-market. Could you just elaborate on whether you saw, was it less new logos in the mid-market, or was it more related to expansion business? And then, is part of this due to increased competition in the mid-market?

Yeah, great questions. It is absolutely on the new logo side. It continues to strengthen in renewal rates. I think Steve called out the net dollar. Renewal rates remain consistent and healthy both in enterprise and mid-market. On the competitive dynamics, competitive landscape, we just continue to see strength and improvement. I think this quarter was the first significant step above previous quarters in terms of competitive win rates and close rates. So we feel really good about where we're at competitively from a product perspective, as well as our ability to execute. It's just, as we said, more difficult to transact new logos in the mid-market in this economy.

Got it. Okay, that's helpful. And then one for you, Steve. Apologies if I missed it, but did you disclose the statistic on what tenable one represented as a percentage of new business and total sales? I did.

20% approximately of total new enterprise sales. Okay. Thank you.

Thank you. Next question comes from the line of Garrett Berkham, Jonathan Ho, with William Blair. Please go ahead.

Hi. Thanks for taking my question. And this is Garrett Berkham on for Jonathan Ho. So you noted success with selling Tenable One as a strength on the quarter. So how has pricing been for those specific deals? Have you been able to realize as much pricing as you anticipated, or has there been a lot of discounting involved? We'd just like to get some color there. Thanks.

Yeah, no change in pricing dynamics. We continue to see strong traction with Tenable One. Selling prices there are 70% higher, selling the platform in comparison to selling standalone VM. We have an asset-based pricing model with Tenable One. And because Tenable One not only includes VM, but also... newer asset types. We are covering more assets within a customer's environment. So that's what's driving the selling price is higher, not only the ability to capture more of those systems and more of those assets, but also delivering more value, greater insight. So the price per asset consequently is higher, but no changes in pricing.

Got it. Thanks.

Thank you. Next question comes from the line of Matthew Calitri with Needham & Co. Please go ahead.

Hey, guys. This is Matt Calitri from Mike Seacost over at Needham. Thanks for taking our questions. I wanted to ask about how Pipeline looked in Q3, both in comparison to the first two quarters, which I believe were both record quarters, and also in terms of linearity throughout the quarter.

Yeah, first I would say top of the funnel remains strong for us. And as we stated on prior calls, we continue to generate healthy levels of demand. And the size and the shape of those pipelines are very strong. I think where we're seeing and what we specifically discussed in the call as it relates to the mid-market is the conversion rates, the bottom of the funnel. And the biggest factor here is no decision. We're not seeing any changes in pricing or competitive dynamics. we're confident we'll continue to be able to close deals at a very high rate. In this market, though, the macro impacts some customers more so than others. And it's fluid from one quarter to the next. So the good news is that demand, we believe, remains healthy. We've adequate pipeline coverage. As we look into the fourth quarter, now that we're one month in, we take it all into consideration in terms of flow. We're off to a strong start here in the fourth quarter. But You know, the quarter is back and loaded. Just like other software companies, it's not unusual for us to close 50, 60% or more of our total new enterprise sales in the last month. And a lot of that can come in the last couple of weeks of the quarter. But we're all feeling good as we head into Q4.

Awesome. Awesome. Thanks so much. And then despite macro pressures you mentioned, net expansion rate was steady in a quarter after decreasing for two in a row. Is it fair to think that this is stabilized at this level, or how should we think about that going forward?

Thanks. Yeah, well, the net dollar expansion rate was 111%, so consistent with what we saw in the prior quarter. Keep in mind the NDRR is an LTM number. It reflects the culmination of sales and upgrades over the prior quarters. And I think it's fair to say that the market was a little stronger last year than it is this year, so we're certainly encouraged to see it continue to be at 111%. There could be further moderation in the rate. It could also increase. We don't optimize the business for any one metric. I think that's important to note. And pipeline opportunities in any given quarter can fluctuate between new logos and upsell opportunities. So, you know, certainly there can be some variability here, but we wanted to provide transparency, and we report it quarterly, and, you know, I think that's important. So the good news is the renewals themselves are very strong, and when customers renew, they expand more, and we expect continued expansion as we move along here, not only for Q4, but also for the full year.

Mr. Karatsui?

Yeah, great. Thanks so much.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.