Tenable Holdings Inc

NASDAQ:TENB

Earnings Call Transcript 2023-Q2

[Operator]

Greetings. Welcome to the Tenable Second Quarter 2023 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded.

At this time, I'll turn the conference over to Erin Karney, Vice President, Investor Relations. Ms. Karney, you may now begin.

[Erin Karney, VP, IR]

Thank you, operator, and thank you all for joining us on today's conference call to discuss Tenable's second quarter 2023 financial results. With me on the call today are Amit Yoran, our Chief Executive Officer; and Steve Vintz, our Chief Financial Officer.

Prior to this call, we issued a press release announcing our financial results for the quarter. You can find the press release on the IR website at tenable.com. Before we begin, let me remind you that we will make forward-looking statements during the course of this call, including statements relating to our guidance and expectations for the third quarter and full year 2023, growth and drivers in our business, changes in the threat landscape in the security industry and our competitive position in the market; growth in our customer demand for and adoption of our solutions, including Penal One, planned innovation and new products and services and our expectations regarding long-term profitability and free cash flow.

These forward-looking statements involve risks and uncertainties, some of which are beyond our control which could cause actual results to differ materially from those anticipated by these statements. You should not rely upon forward-looking statements as a prediction of future events. Forward-looking statements represent our management's beliefs and assumptions only as of today and should not be considered representative of our views as of any subsequent date. We disclaim any obligation to update any forward-looking statements or outlook.

For a further discussion of the material risks and other important factors that could affect our actual results, please refer to those contained in our most recent annual report on Form 10-K and subsequent reports that we file with the SEC which are available on the SEC website at sec.gov.

In addition, during today's call, we will discuss non-GAAP financial measures. These non-GAAP financial measures are in addition to and not as latitude 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 will now turn the call over to Amit.

[Amit Yoran, CEO]

Thank you, Erin.

Today, I'll cover some context on our financial performance in the quarter, discuss the accelerating momentum we're seeing with our platform, including strong demand in cloud and also touch on some exciting product updates. Q2 surpassed expectations on every metric outperforming on both the top and bottom lines. Our results for the quarter are a testament to the growing importance of exposure management and our ability to pivot in a difficult market.

Tenable solutions are enabling customers to secure critical areas of their attack surface while doing more with less. This is incredibly relevant at a time when customers are focused on ROI. Our sellers executed incredibly well during the quarter by combining our strong business use case with our industry-leading technology.

In Q2, we added 426 new enterprise customers and 63 net new 6-figure customers signaling a return to our typical quarterly ads. The upside to our results was driven by demand for Tenable One, where we continue to exceed expectations with record levels of deals closing and strong pipeline generation. We also saw a high volume of large deals as customers look to reduce risk, consolidate spend and security tools for all the Tenable One.

Our OT business also delivered strong results with notable traction in public sector. Last quarter, we highlighted our competitive differentiation, and we continue to experience a shorter time to tuck win and very strong win rates. We believe this is a direct result of our strategy to broadly use cases for our technologies and enable our customers to discover and secure the proliferation of assets in an increasingly complex environments, including hybrid, multi-cloud, OT, identity and beyond.

As we increase the Tenable One customer base, we continue to experience larger ASPs and adoption of more platform use cases, such as identity and cloud security. During the quarter, we saw Tenable One increase from a teens percentage of new bookings to over 20% and now comprises low double-digit percentage of new and renewal business.

We're also seeing increased Tenable One growth from our on-prem customers, driven by the need to expand coverage of their attack surface coupled with new advanced analytics provided by Tenable One.

For all customers, securing the cloud is a critical objective. The speed and scale of cloud often leave environments with undetected and unremediated exposures such as misconfigurations, system vulnerabilities and excess privileges

In many cases, customers do not even know what assets they have and what access has been granted to those assets. With cloud security as part of Tenable One platform, we can bring greater context to a customer's overall preventive security program so that they can better understand risk and prioritize mitigating actions.

Most organizations operate multi-cloud and hybrid environments. And we can consistently enforce cloud security posture and compliance across their operating environments. With our unified platform, we're helping organizations better measure and communicate improvements in security posture which has become a board-level issue.

During the quarter, we announced our Identity Risk Score. Identity Risk Score uses mature AI and machine learning models to quantify risk. Using modern AI techniques with contextual exposure data, Tenable Solutions can quickly identify and prioritize identity and entitlement-related problems on-prem and in cloud environments.

We believe cybersecurity and exposure management, in particular, are big data problems and that we are best suited to address them. Through our analytics and artificial intelligence, we're helping security teams quickly identify issues and prioritize remediation across the modern attack surface. We've recently expanded Tenable One to allow customers to ingest vulnerability and misconfiguration data from their other security tools. This combined with our expansive coverage across the attack surface and vulnerabilities, misconfigurations and identities allows us to deliver deeper analytics and more insights into customer risk.

In short, we believe that our data lake is the largest repository of contextual exposure data in the world. This data repository helps to power mature and next-gen AI technologies for exposure management. Stay tuned for further announcements and demos at Black Hat.

In addition to Tenable One, we saw strength in both the public sector and OT. Cybersecurity is increasingly a focal point for public policy including systems operational directives for operational technology, presidential decision directives and Defense Authorization Act, all of which mandate improvements in cybersecurity for OT.

As customers in the public sector and broader cyber industry face more rules and regulations, they frequently mature their risk management practices. We have both market-leading product in this area and a deep understanding of both OT and IT converged environments. This combination is necessary as CISOs are increasingly becoming a critical part of the OT security purchasing process. This year, we plan to integrate OT into Tenable One, another milestone for our platform that will further enrich the data and differentiate our offering. We're incredibly excited about our performance, where we are today and where we are going.

We have industry-leading technologies unified in a differentiated platform, we're seeing demand at the top end of the funnel, particularly in cloud and identity, and we're achieving tech validation win at a faster rate. We're doing all of this with our balanced growth strategy and continuing to invest for growth and expanding margins.

I'm particularly proud of our ability to successfully navigate the ongoing uncertainty in the macro environment. We had a great quarter, and we are confident in our strategy and in our ability to execute

I will now turn the call over to Steve for further commentary on our financial results and outlook.

[Steve Vintz, CFO]

Thanks, Amit.

Overall, we are very pleased with our execution this quarter, highlighted by better-than-expected CCB, revenue and earnings attributed to continued traction with our exposure management platform. I will provide more commentary momentarily. But first, please note that all financial results we discuss today are non-GAAP measures with the exception of revenue. As Aaron mentioned, at the start of this call, GAAP to non-GAAP reconciliations may be found in our earnings release issued earlier today.

Now on to our results for the quarter. Calculated current billings, defined as the change in current deferred revenue plus revenue recognized in the quarter grew 15% year-over-year to $200.2 million. A few things to note with regard to our strong results for the quarter.

First, we saw stabilization in banking and financial services, as well as tech and telecom sectors in comparison to Q1. We attribute our success this quarter to a return to a more predictable selling environment. including increased visibility with large deals, which was benefited by a continued focus on lead qualification and an ability to navigate a more rigorous contract approval process.

Second, Tenable One continues to gain momentum and is creating tailwinds with customers seeking to consolidate vendor spend and more broadly understand risk across their attack surface. And just to put matters in perspective, Tenable One grew to over 20% of total new enterprise sales and is helping us inflect ASPs and pipeline hire and achieve tech validation wins faster. It's also worth noting that we recently integrated Tenable One with Security Center, which allows our on-premise customers to access enhanced capabilities and analytics in Tenable One through a flexible hybrid deployment model. This created some tailwinds in the quarter and we believe represents a sizable opportunity for us going forward to upsell our exposure analytics and identity and cloud security solutions to RSC customers.

And third, CCB also reflects better-than-expected early renewals, most notably from our Q3 renewal base. This timing of billings contributed approximately $2 million of upside in the quarter. And as I have mentioned in the past, CCB is a close but not perfect proxy of sales, and it's influenced by a number of other factors such as deal timing, including renewals.

In summary, CCB was stronger than expected. Consequently, we are raising the midpoint of our CCB outlook for the full year today by $3 million, which is the portion of the beat we attribute to our outperformance in the quarter.

In terms of key financial metrics, we continue to take and win share as reflected by our 426 new enterprise platform customers we added in the quarter. Large deals was also strong as we added 63 net new 6-figure customers in Q2. Our dollar-based net expansion rate was 111% in the quarter compared to 113% last quarter. As a reminder, the expansion rate is calculated on an LTM basis and reflects improvement during Q2 in comparison to what we experienced during Q1.

Revenue was $195 million, which represents 19% year-over-year growth. Revenue in the quarter exceeded the midpoint of our guidance range by $5 million. Our percentage of recurring revenue remains high at 95% this quarter, which is consistent with prior periods

I'll now turn to expenses where we continue to demonstrate good cost control and operating leverage. I'll start with gross margin which was 81% this quarter, up from 79% last quarter. We are pleased to see our gross margin expand over the prior quarter, primarily due to the scalability of our public cloud infrastructure.

Looking ahead to the second half of the year, we expect gross margins to be modestly lower as we absorb the initial cost related to the upcoming introduction of new exposure management functionality such as cyber asset management and AI-powered analytics.

Sales and marketing expense was $81.4 million, which was down from $82.8 million last quarter. Sales and marketing expense as a percentage of revenue was 42% compared to 44% last quarter. Sales and marketing expense decreased sequentially, primarily due to the timing of our sales kickoff conference in Q1 and offset by incremental investments in demand generation programs and higher wages and commission expense.

R&D expense was $28.1 million, which was down from $29.3 million last quarter. R&D expense as a percentage of revenue was 14% this quarter compared to 16% last quarter. R&D expense decreased sequentially primarily due to lower personnel costs, namely payroll taxes related to RSU vestings and benefits increased by capitalized software development costs related to innovations in our unified exposure management platform, and efficiency in our public cloud development environment.

G&A expense was $17.8 million, which was down slightly from $18.8 million last quarter. G&A expense as a percentage of revenue was 9% this quarter compared to 10% last quarter, reflecting a greater focus on cost containment and efficiencies as we scale our business.

Income from operations was $30.2 million, which was significantly better than expected as we exceeded the midpoint of our guidance range by $9.7 million. Operating margin for the quarter was 15% which was 470 basis points better than the midpoint of our guidance. The strong beat in earnings this quarter allows us to raise our outlook for the full year and reinvest a portion of the upside in go-to-market and product development in the second half of the year to better position us for future growth and success.

It's also worth noting that our operating margin improved over the same period last year by approximately 800 basis points of which 400 basis points of improvement is related to sales and marketing. All of this resulted in EPS of $0.22, which was approximately $0.09 better than the midpoint of our guided range.

Now let's turn to the balance sheet. We finished the quarter with $645.5 million in cash and short-term investments. Accounts receivable was $154.4 million and total deferred revenue was $650.2 million, including $495.2 million of current deferred revenue, which gives us a lot of visibility into revenue over the next 12 months.

We generated approximately $40 million of unlevered free cash flow during the quarter, which exceeded our expectations and reflects the seasonal pattern of billings year-over-year. We generated approximately $40 million of unlevered free cash flow during the quarter, which exceeded our expectations and reflects the seasonal pattern of billings during the year.

Year-to-date, unlevered free cash flow was $84 million, which puts us well within reach to achieve our annual unlevered free cash flow target for the full year, which we are raising today with 95% recurring revenue, high gross margins, and high renewal rates, we feel confident that we can continue to expand our operating margin and free cash flow margin over the ensuing years.

With the results of the quarter behind us, I'd like to discuss our outlook for the third quarter and full year 2023. For the third quarter, we currently expect revenue to be in the range of $197 million to $199 million. Non-GAAP income from operations to be in the range of $26 million to $27 million. Non-GAAP net income to be in the range of $22 million to $23 million, assuming interest expense of $8.1 million, interest income of $6.5 million and a provision for income taxes of $2.4 million. Non-GAAP diluted earnings per share to be in the range of $0.18 to $0.19, assuming 122.5 million fully diluted weighted average shares outstanding.

And for the full year, we currently expect calculate our current billings to be in the range of $879 million to $887 million, revenue to be in the range of $783 million to $791 million, non-GAAP income from operations to be in the range of $96 million to $100 million, non-GAAP net income to be in the range of $79 million to $83 million, assuming interest expense of $31.5 million, interest income of $25 million and a provision for income taxes of $8.6 million.

Non-GAAP diluted earnings per share to be in the range of $0.65 to $0.69 and assuming 121 million fully diluted weighted average shares outstanding and unlevered free cash flow to be in the range of $180 million to $185 million.

We're very pleased to be raising our full year outlook for top line growth and profitability. We believe our outperformance in Q2 an upward revision to our guidance today reflects the balanced growth approach that we've been taking. Therefore, we're raising our outlook for CCB revenue and earnings for the full year. Specifically, we are raising op income guidance by $5 million for the full year, while also increasing our investment in go-to-market and product in the second half of the year to better position us for success in 2024.

The takeaway here is even in a dynamic environment, we have been able to expand our operating margin as we scale our business by leveraging our market leadership, sizable customer base and broad exposure on management platform.

At this point, I'd like to turn the call back over to Amit for some closing comments.

[Amit Yoran, CEO]

Thanks, Steve.

In summary, Q2 was very successful. We delivered better-than-expected growth, a sizable beat in earnings, and we believe we are well positioned for success in the second half of the year with tailwinds from Tenable One. We have a ton of opportunity ahead of us and look forward to updating you throughout the year. We hope to see many of you at the upcoming Piper conference.

Now I'd like to open the call up for questions. .

[Operator]

[Operator Instructions] Thank you. And our first question comes from the line of Brian Essex with JPMorgan. Please proceed with your question.

[Brad Reback, CECL]

Hi. Good afternoon. Thanks for taking the questions. And congrats on a much better quarter this quarter. I guess, Amit, you pointed to your pipeline, better pipeline growth and better execution this quarter and accelerated tech wins. I guess if you were to compare it to last quarter. Maybe could you highlight what you're seeing in terms of approval to close rate? And maybe frame out some of the measures that you took to improve the performance in the back end of that sales cycle?

[Amit Yoran, CEO]

Yes, listen, obviously, we're pleased with the results. We saw what I would characterize as a return to normalcy in many senses of the word. We said last quarter, demand was strong. We saw a lot of deals entering the pipeline. We saw deals moving through, but we saw, especially at the end of the quarter, and we're back-end loaded in our quarters as many enterprise - software companies are.

There was a significant disruption in the market, regional banking crisis and a number of other factors. This quarter, we saw a return to normalcy in terms of the number of net new customer adds that we've been able to add to our enterprise platforms in terms of the resumption of significant 6-figure deals and being able to transact business.

We continue to maintain a very close eye on the sales process, including much tighter engagement with the finance teams within the buyer. So targeting conversations with CFOs earlier in the process and making sure we've got line of sight into those conversations.

[Brad Reback, CECL]

Got it. That's helpful. And if I could just follow up on the federal. I think you noted some traction there. And as we enter the third quarter, any sense on initiatives that were maybe kicked off or emphasized last year and how traction with those initiatives are tracking this year? And that will do it for me.

[Amit Yoran, CEO]

Yes. Obviously, in the federal space, the engagement, the sales cycles are much longer the planning process for customers is significantly longer. So a lot of the activity that we're seeing as a result of groundwork that has been laid last year and over previous years and periods. So in the federal space, we're really pleased. We saw very strong demand. We outperformed plan in both Q2 and the first half of the year. And we feel like we've got significant pipe and the opportunity to outperform in federal here going into big federal Q3, we're also seeing a significant traction in state and local governments.

Many of those programs, both funded by federal grant dollars and federal programs as well as kind of drafting off a lot of the technology choices, which the U.S. federal government has made. So we saw really good strength in state and local and are optimistic that, that will continue going forward.

[Brad Reback, CECL]

Great. Helpful. Thank you very much.

[Operator]

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

[Andrew Nowinski, Wells Fargo]

Great. Thank you. And congrats on a nice quarter. So I mean, we saw a lot of your interviews at the end of the quarter regarding the MOVEit vulnerability and the reports out this week, I think, talking about how 400-plus companies were impacted by that vulnerability. And I know it was only discovered in the last two weeks of the quarter, but did you see an impact to your calculated billings in Q2 from that, similar to what you saw from Log4j.

[Amit Yoran, CEO]

Yes. I would say it's probably not quite as energetic as what we saw from Log4j, which I think the impact to financial performance and to procurement was just very notable. What we did see was increased engagement with customers, customers leveraging products. And I think this is probably a more typical of a high-profile vulnerability and just points to why there's strong demand environment. There are obviously compliance and regulatory drivers for managing risk, managing and understanding cyber exposures and vulnerabilities in particular.

I think beyond that, strong engagement from security operations, recognizing that when issues like MOVEit manifest themselves, they have to really understand what's happening in their environment, what it means from a risk perspective on where they need to prioritize mitigating actions. So I'd say this is probably more - we didn't see the same type of procurement impact, but more just part of the rationale behind why we see broadly strong demand.

[Andrew Nowinski, Wells Fargo]

Okay. Very good. Thank you for that. And then just maybe a quick follow-up. You talked about - I think you mentioned in your prepared remarks, your SC installed base or on-prem installed base could be converting up to the Tenable One platform. I'm just wondering if you could quantify for us or give us some parameters around how big that SC installed base might be? Thank you.

[Amit Yoran, CEO]

Steve I don't know if you want to start talking about the size of the SC installed base -

[Steve Vintz, CFO]

Well, we have 40,000-plus customers, and that includes a sizable SC customer base and we would quantify it as a several hundred million dollar opportunity to sell Tenable One, the expansionary functionality, whether it's identity, cloud security or even the more expansive analytics back into our SC customer base.

And SC customers, usually, they have a choice, right, either on-prem or cloud and overwhelmingly our SC customers want - have an eye on-premise environment and one of the few companies in our space that can address the needs of customers who want both on-prem but also want additional capabilities in the cloud. So Tenable One certainly has been a catalyst to help us better serve the needs of our on-premise customers.

[Amit Yoran, CEO]

Yes. I guess I would just add to that, slightly saying we only released the ability for SC customers to leverage Tenable One just a short period, shot before the end of quarter. So really sales team and customers with, I think, what I would characterize is pent-up demand and excitement for the convergence and the ability to operate in a hybrid mode.

So keep their SC deployment but start leveraging the enhanced analytics and the capabilities of Tenable One to the point where it did have a little bit of a lift on what we saw with one. And as you saw and heard on the call, the - as a percentage of new sales, Tenable One has now gone from what was mid-teens growth to now over 20%.

[Andrew Nowinski, Wells Fargo]

That's great. Keep up the good work guys. Thanks.

[Operator]

Our next question comes from the line of Rob Owens with Piper Sandler. Please proceed with your question.

[Rob Owens, Piper Sandler]

Great. Thanks for taking my questions. Amit, obviously, a lot of optimism around the OT opportunity. And maybe you could just highlight for us what you're seeing, what competition looks like and the sense of urgency from the buyer.

[Amit Yoran, CEO]

Yes. I'm extremely bullish about our OT business. We don't talk about it every quarter. I think we're now at the point where I believe we have market-leading technology. I think we can go toe-to-toe and win more than our fair share of competitive but that's against even the notable names in the space. And I think in this market being a more sizable company, being public, having the growth, having this ability provides customers extra assurance.

On the technology side, we're seeing that start to play itself out in terms of larger lands, larger OT transactions in terms of seeing more consistency in follow-on procurements once they get past initial deployments. And I think significant line of sight into continued pipeline growth as those procurements and those initial deployments continue to grow. So, I believe significant opportunity and upside for us in the OT business and expect to hear more over the coming quarters.

[Robbie Owens]

Great. I want to sneak one in for Steve real quick. On the $2 million in early renewal, a little unusual in this environment given everyone's kind of clutching dollars. So help us understand where customers incented to do this? You talked about getting back to more normalcy. Is there typically a few million dollars in early renewals? And how are you thinking about that moving forward?

[Steve Vintz, CFO]

Sure, Rob. Good question. And just to clarify, consensus CCB growth coming into the quarter was 12%, and we're reporting 15% today. So we're very pleased with the quarter. It's a $5 million better than expectations. And we did quantify, we did say approximately $2 million of the beat is due to timing, specifically billing related to early renewals. As we said in the past, CCB is a close, but not perfect proxy of the underlying sales of the business and it's influenced by a number of factors such as deal timing, including early renewals.

This quarter, we saw a higher-than-expected percentage of renewals that came in early. We didn't do anything structural or structurally different. We just saw a couple of large deals early Q3 renewals come in early in the quarter. That gives us good backlog and visibility, obviously, as we head into the second half of the year.

Part of the reason why we guide to CCB on a full year basis and not quarterly is that there can be natural fluctuations like this. Raising - we're pleased to be raising our full year CCB outlook, and this will modestly impact CCB growth in the third quarter.

[Robbie Owens]

Great. Thank you very much.

[Operator]

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

[Saket Kalia, Barclays]

Okay. Great. Hi guys, thanks for taking my questions here. Amit maybe just to start with you, great to see that higher mix of Tenable One. I think we said 20% plus of new business. That's a nice increase from prior quarters. Maybe the question is what modules within Tenable One? Or maybe what asset coverage, are you finding customers are opting for most outside of maybe what I'll call traditional VM?

[Amit Yoran, CEO]

Yes. I think. Outside of traditional - so first of all, thank you for the compliment. We're extremely excited. And we believe that, again, we're still in the early innings, September 1 and believe that there's significant opportunity to continue to advance the percentage of transactions and customers that operate on that platform, especially as we continue to innovate and release new product, new capability, new analytic methods on it and happy to chat more about that.

In terms of asset types, we also continue to see a diversity of new asset types. So, I think in prior periods, and historically have been very VM centric. I think in particular, we saw a lot of demand around cloud, in particular, with cloud assets coming online and people looking at us as a best-of-breed ability to assess our vulnerability and cloud environments with the same type of consistency and rigor as they're accustomed to in their on-prem model.

[Steve Vintz, CFO]

Yes. And this is Steve. Sak, the only thing I'll add there is that, as a reminder, the ASPs are notably higher with Tenable One than they are with selling stand-alone VM 70% higher. So we're continuing to get good traction and good uplift. And -- it's also inflecting large deals higher. Today, we're reporting 63 net new six-figure customers.

That's up almost 3x from what we reported sequentially in Q1 and because we're covering more areas of the attack surface and helping customers better understand the risk. We're quickly evolving to become a platform-first company. And obviously, results today certainly are indication of that.

[Saket Kalia, Barclays]

Yes, absolutely. Steve, maybe on that point, maybe for my follow-up for you. Great to see the stabilization in CCB growth this quarter. One of the things you mentioned in your prepared remarks, I think, was just having a little bit more of a higher visibility into some of the bigger deals, right, in the second half. Maybe the question is, how are, you thinking about big deal close rates in the second half or just sort of the levers of upside for CCB in the second half now that we can sort of put some of the one-time finance and telco stuff behind us?

[Steve Vintz, CFO]

Yes. We're delighted with our results in Q2. As we head into the second half of the year, pipeline remains strong. And one of the things that we've been emphatic about is our ability to generate demand. And I think we've had - we have a lot of six-figure opportunities. The third quarter, as we all know, is the seasonally strong quarter for us. We are - the clear leader in U.S. Fed and public sector more broadly.

And we have a ton of opportunity in front of us, both in terms of funded deals and unfunded opportunities. So, we expect certainly expect continued traction with public sector, and that was an area of outperformance in Q2. And I would say if we kind of widen the aperture here, I would say that Tenable One is another catalyst of growth for us. Again, just having a lot of success creating demand for Tenable One, and it now represents, I would say, most of our six-figure opportunities.

As we look at the second half of the year, Tenable One is - well over 50% of that. So overall, I think we're pleased with certainly the print in Q2, the pipeline as we head into the second half of the year. This is still a tough selling environment, but we're demonstrating real value in a market where customers are more discerning about their purchases.

And there's more levels of review uncertainty. I think we're navigating the current environment very well and obviously have a great value prop with the platform as we consolidate vendor spend and help customers better understand risk.

[Saket Kalia, Barclays]

Got it. Very helpful. Thanks guys.

[Operator]

Our next question is coming from the line of Jonathan Ho from William Blair. Please proceed with your question.

[Jonathan Ho, William Blair]

Hi, good afternoon. Just wanted to maybe start out with some of your comments around the AI-powered solutions. Can you help us understand what some of these AI applications will look like sort of the value proposition and maybe how this translates into a revenue opportunity?

[Amit Yoran, CEO]

Yes. I'd like to start off every conversation with AI by talking first about the demand environment. I think we see significant opportunities for AI to be leveraged by threat actors an acceleration of weaponization of vulnerabilities and increased activity, which I think will translate directly into strong market demand for more cybersecurity products, including and in particular, the ability to identify where you have vulnerabilities, where you have exposures and to address them in a timely fashion.

From a tenable use of AI perspective, I'd say there's two main categories that we would bucket them into. The first is leveraging AI to make the product smarter. We have, for instance, and we've used - we've talked about AI a number of times in terms of understanding, which vulnerabilities can be exploited in terms of understanding the criticality of assets in terms of helping us determine the prioritization of vulnerabilities and what to work on.

We've now expanded the use of that AI to also help from an identity risk perspective. So obviously, we've been doing a lot of work in the identity space, Active Directory, Azure AD and other identity stores to be able to look at that, look at the privilege level, look at the access types and make determinations about risks that particular identities post.

We think as you're looking at overall enterprise risk, it's incredibly important to understand the data, the vulnerabilities and how high and privileged access accounts engage with systems, which may have exposures. In the second category of the use of AI. We're also making - we're using generative AIs to make the products smarter and more usable for customers. So for instance, when we highlight a particular issue of particular exposure.

We can provide a lot of research right at the customer's fingertips to understand what it means, what it means in their environments, how they should go about remediating it and really condense their workflow and enhance their experience. And I think all - both of those methods are ones which we expect to monetize.

[Jonathan Ho, William Blair]

Great. Thank you.

[Operator]

Our next question is coming from the line of Matt Saltzman with Morgan Stanley. Please proceed with your question.

[Matthew Saltzman, Morgan Stanley]

Hi team, thanks for taking the questions. Just first question on a clarification around the ASP uplift. So you mentioned that you're still seeing the upper the 70% ASP uplift on Tenable One sales. I'm curious if that applies to only net new business demand or if that also applies to renewal? And then I have a question about the renewal piece after?

[Steve Vintz, CFO]

It applies to both just as a matter of clarification.

[Matthew Saltzman, Morgan Stanley]

Got it. Okay. And then - when you think about the Tenable One platform for existing customers, so customers have now had ample time to evaluate it where maybe on the big renewal cycle in the back half of last year, there just wasn't enough time for them to really sink their teeth in and see the benefits. But kind of as you lap one year of having the product in the market, are you assuming any increased level of contribution from Tenable One on renewals in the updated CCB guide?

[Steve Vintz, CFO]

Yes. We have an asset-based pricing model. So as customers renew, they often look to us to help secure more of their assets. And so there's two ways we get uplift and drive selling prices higher when it comes to Tenable One. Number one is covering more assets within their current environment. And then number 2 would be addressing different asset types. And Amit specifically talked about earlier in the call, the momentum we're having with identity and even cloud security, more broadly.

So our expectation as we go into the second half of the year is that when customers renew that we'll see expansion. Now I will say in this market, right, growth is tougher to transact. We're doing a good job executing. We're delivering upside here in the quarter, and we're raising our outlook. But we know that when it comes to - both expansionary opportunities, while there's a huge opportunity that expansion can be more moderate in an environment like this in comparison to prior years.

So the good news is we have huge opportunities to sell Tenable One and other products back into our base. Those represent larger TAMs and high-growth opportunities for us, and we'll be working hard to do that in the second half of the year.

[Matthew Saltzman, Morgan Stanley]

Yes, it's very helpful. Thank you.

[Operator]

Our next question is from the line of Mike Cikos with Needham & Company. Please proceed with your question.

[Mike Cikos, Needham & Company]

Hi guys. Thanks for taking the questions here. Just wanted to cycle back to the pipeline gen, just because I know we've mentioned it a couple of times on this call. I believe last quarter, the company discussed how with a record quarter for the company as far as pipeline gen. So the question that I have here, first, was 2Q also a record quarter as far as that pipeline gen? And then building on that, can you help us think about these initiatives that you have in place? What is it the company is doing specifically to help build out that pipeline today versus what it was doing maybe a year ago to help ensure that, that pipeline is growing at this healthy pace that you guys are talking to today?

[Steve Vintz, CFO]

Yes Mike, this is Steve. So yes, so Q2 is up sequentially in comparison to Q1. So demand gen continues to remain strong. More importantly, right, as the company grows, you would expect pipeline to continue to grow with it. So - and while pipeline is growing and we see strong demand. It's exceeding our expectations overall in aggregate. So I think that will remain clear about that.

And seeing the expectations of the plan that we developed at the beginning of the year. And I think it's a confluence of a number of factors. Number one, distribution is really important. We've built an expansive network of distributors and partners over the years. And years ago, a low percentage of inbound opportunities came from the channel. Today, it's we said it's well over 40%. So the channel is really working for us, opening doors, right?

Security market is very fragmented, and we have a great relationship with a lot of our channel partners. Also we're investing a lot in go-to-market. We're in more countries. We transact sales in 160 countries. We have feet on the street in 35, so distribution matters in the market, especially in cyber. And then obviously, we continue to get great success doing a number of events and create inbound opportunities.

So overall, we're pleased with the demand that we're seeing. There's a lot of opportunity in front of us. We'll be focused on executing against those opportunities and conversion rates remain healthy. It's taking longer to close some of those opportunities in a market like this, as we've discussed before, but overall, we're really pleased with what we're seeing with the pipeline.

[Mike Cikos, Needham & Company]

Got it. Thank you. And if I could just tack on for a follow-up. Just - I know you were talking about conversion rates, which feeds nicely into my second question here. But as far as the guidance construction, happy to see the raise that we're seeing above and beyond some of the 1Q beat for revenue. And then you called out the timing of the billings and the reinvestment of I guess, some of the upside in 2Q when thinking about that operating profit guide, right? So maybe from a top-down level, how was management viewing macro and sales cycles? Like what are your assumptions for the remainder of the year versus the quarter that we just finished, as a way to help us frame out this guidance construction process that you guys went through? Thank you.

[Steve Vintz, CFO]

Well, with regard to the guide that in our outlook that we're raising today, we're not assuming that there's any improvement in conversion rates. We're not assuming that there's changes in sales cycles. We're looking at the data that's right in front of us, and our outlook reflects a continuation of what we're doing today.

We think we're doing some things really well. And there's certainly an opportunity to even improve on all of those things I just mentioned. So I would characterize the - our outlook really is a reflection of what we're doing today and no change.

[Amit Yoran, CEO]

Yes. I guess I would just add, we're pleased with the return to predictability from a sales process perspective, as Steve said. In a difficult macro, you do see elongated sales cycles. But we're extremely pleased with our competitive win rates. We're extremely pleased with the number of six and seven figure deals and opportunities in pipe. I feel like we're - and especially with what we're seeing with Tenable One, so like we're really well positioned to deliver on the second half of the year.

[Mike Cikos, Needham & Company]

Terrific. Thank you very much guys.

[Operator]

Our next question is from the line of Brad Reback with CECL. Please proceed with your question.

[Brad Reback, CECL]

Great. Thanks very much. As related to the slip deals from 1Q that you guys had mentioned or beginning to close in April, a couple of months ago. Was there any meaningful CCB benefit from that?

[Amit Yoran, CEO]

I'll start off and then Steve jump in. I've been doing this for 30 years. I've never seen deals that slipped in one quarter, just be additive to your performance and your delivery in the following quarter. And that's through across every business that I've been involved in. So, we did close a significant percentage of those slipped Q1 deals. I'm pleased that none of those projects have gotten canceled.

None of those initiatives have been deprioritized, but just simply in industries and in a challenging macro, you see greater scrutiny of procurement practices, specifically from CFOs. And so, I think we've gotten our arms around that. We have our sales teams trained up and engaged with the finance teams of our customers. So, we have more visibility and greater predictability. I don't think that there was any bump in Q2 CCB as a result of slipped deals from - or push deals from Q1. There's just good demand environment and good execution.

[Brad Reback, CECL]

That's great. Thanks very much.

[Operator]

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

[Joshua Tilton, Wolfe Research]

Hi guys. Congrats on the results and thanks for sneaking me in here. I guess - I kind of want to follow up on the last question. Amit, I totally understand where you're coming from with the change in performance on slipped deals. But let's forget about like bumping the performance. I guess if we have some deals slip into this quarter and some deals pulled in from the next quarter, just high level, what gives you guys the confidence that what you saw in 2Q broadly is what you would characterize as a return to normalcy?

[Amit Yoran, CEO]

I guess the way the deals flow and the number and size and impact of those pushed deals from Q1 did not materially impact Q2. A lot of it was typical deal forecasted for Q2 closing in Q2. We feel confident looking at the remainder of the year, we'll be able to deliver on the guidance.

[Joshua Tilton, Wolfe Research]

Super helpful. And then just a quick follow-up. Steve, I know you mentioned kind of a little bit on what's baked into the guidance for the rest of the year. Maybe just how has that changed and specifically with regard to the macro, how is what you're baking into the guidance for the rest of the year changed relative to what you guys or the assumptions that you baked in when you updated the full year guidance for us last quarter? Thanks.

[Steve Vintz, CFO]

Sure. Well, we're raising our outlook for CCB, as I mentioned earlier, to the tune of $3 million. We're guiding to the 13% to 14%. And for us, we're flowing through part of the beat here. And I think our assumptions as we head into the second half of the year, we're trying to take a cautious approach.

That's one thing I want to be very clear about. We're trying to be pragmatic here. This is still a tough selling environment. We're taking conversion rates against the pipeline opportunities we have. And we're getting - you look at growth in the second half of the year, and we feel like we can certainly deliver on that based on the pipeline opportunities we have.

So we're not assuming that conversion rates changed significantly. We're not assuming any major changes in sales cycles, as well as we're now right tier. So we feel like we have good visibility as we enter the second half of the year. We expect a seasonally strong U.S. federal. And I think we're excited about what lies ahead for us. And certainly, Tenable One is a big catalyst of that. We talked about the large 6-figure deals that are in the pipeline, and most of those deals are related to Tenable One. And for us, that is an investment that we've made over the years, and we think it positions us well, and we'll update you over the ensuing quarters.

[Joshua Tilton, Wolfe Research]

Super helpful. And again, congrats on an awesome quarter.

[Steve Vintz, CFO]

Thank you.

[Operator]

Our next question is from the line of Mike Walkley with Canaccord Genuity. Please proceed with your question.

[Mike Walkley, Canaccord Genuity]

Great. Thanks. And my congrats also, Amit, just with you highlighting faster deal wins due to Tenable One, you assume this is mostly weighted to upselling your large customer base. But how are you seeing the longer-term opportunity to land larger customers migrating from competitors, given your differentiated approach in a market where customers are trying to conserve spend and consolidate vendors?

[Amit Yoran, CEO]

Yes. I think Tenable One really plays to the latter comments. So certainly, I believe we can improve and increase we're already compelling win rates against customers because Tenable One is a differentiated platform. We can deliver analytics, we can do all sorts of benchmarking and capabilities on Tenable One that aren't available in competitive VM products.

We also have the ability to consolidate significant spend. So looking at assets, cloud-based assets, looking at money someone might spend on products to help secure active directory, cloud security and even here in the second half of the year as we expect to integrate OT into Tenable One. We have the ability to consolidate vendor, consolidate spend and reduce overall expense for our customers. And we think it's a great position to be in this market.

[Mike Walkley, Canaccord Genuity]

Thanks. And just a quick follow-up, given the vendor consolidation and the strong cash flows your company is generating. What's the appetite for M&A versus investing in the platform? And are you seeing any change in the private company valuations given some are struggling with financing in this market?

[Amit Yoran, CEO]

Yes. Great question. Obviously, we're pleased with the cash flows of the business and natural use for some of that would be to look at investment opportunity, both organically as we've called out. some investments that we will be making into the business as well as inorganic. And I can tell you, we're seeing a lot more at bats, and we're seeing a lot more at that with a very attractive forward leaning, market-leading technologies, which if you rewind the clock a year or two years ago, were priced in an unrealistic and unattainable fashion.

Today, you look at every you report the venture capital going in, follow-on funding rounds are extremely difficult. And we have seen an inflection of private company valuations and a willingness to engage in conversations that wouldn't have happened a year or two ago.

[Mike Walkley, Canaccord Genuity]

Great. Thanks for taking my questions.

[Operator]

Our next question is from the line of Rudy Kessinger with D.A. Davidson. Please proceed with your question.

[Rudy Kessinger, D.A. Davidson]

Hi guys, thanks for taking my questions. Steve, you're taking the revenue guidance - look, as I see you guys take numbers up, I mean you're taking the revenue guidance for the full year by $7 million. You're only taking up current calculated billings by $3 million for the year. Just help explain that there. Did you close deals earlier in the quarter than you expected, and therefore, you got more revenue recognition? Or why aren't you taking up CCB more for the year?

[Steve Vintz, CFO]

Yes. With regard to CCB, I think we talked about that. We beat by $5 million, right? We grew 15% relative to the $12 million in terms of what the consensus was. And some of that was timing. Some of that was outperformance, clearly, which we're reflecting in our outlook for the year for CCB, but we said about $2 million of that is timing. And timing specifically in the way of early renewals.

And so look what we guide to CCB on a full year basis, not on a quarterly basis. We know that there can be some natural variability from quarter-to-quarter. CCB is a close but not perfect proxy of what we sell is influenced by a number of factors. And - so less - so you're not always going to have dollar for dollar increment higher or even lower of CCB relative to revenue.

And revenue, there's a lot of things influence revenue, right? Most of it's recurring revenue and ratable. We do have some professional service engagement. So there's a number of factors that influence revenue growth. So overall rate in outlook for both. We have a lot of confidence in our ability to execute. And I think it reflects just better execution and improved visibility in the business.

[Rudy Kessinger, D.A. Davidson]

Okay. And then I know you said you're reinvesting some of that upside on operating income in the quarter. Just what is your sales capacity additions this year and outlook like? I know a couple of quarters ago, you initially said you wanted to add more capacity this year than last year. You backed off that a little bit last year. How much sales capacity are you looking to add this year at this point?

[Steve Vintz, CFO]

Yes. Well, our goal is each and every year is that sales capacity. We have a massive market opportunity and our expectation is we're going to continue to expand our sales force, spend up network of partners and add quota capacity and feet on the street. And this year is no different.

What we talked about on the last call was really hitting the incremental investments we were going to make. We added a lot in Q1. We said we were going to moderate that over the ensuing quarters. I think our results today give us confidence to go out and invest. We know that when you invest, right, more investment comes with higher expectation. And we certainly understand that.

But we have a massive market opportunity here. We are planning to invest more in the second half of the year now than what we were assuming 90 days ago. And we'll be working hard to add quota capacity.

So investments also of note here, it's not just quota capacity, which we're adding, but investments in partnerships and new routes to market, such as MSSP and some of the other things and marketplace. So there's lots of routes to market for us to continue to sustain and even accelerate growth and the investments that we're making today, we think will position us well for success not only in the second half of the year but also in 2024.

[Rudy Kessinger, D.A. Davidson]

That's helpful. Thanks for taking my questions. And congrats again on the bounce back quarter here.

[Steve Vintz, CFO]

Steve.

[Operator]

Our next question is from the line of Roger Boyd with UBS. Please proceed with your question.

[Roger Boyd, UBS]

Great. Thanks for taking the question. Just on the customer addition side, I think you added 426 new enterprise customers kind of consistent with 1Q on a year-over-year basis and generally a good result in the environment. Would just appreciate any additional color on the mix of when you're seeing. If you think about additions coming from brownfield replacements versus full opportunities as customers kind of move from treating VM as a compliance service or a DIY approach. Just have any color on that mix of greenfield, brownfield. Thanks.

[Amit Yoran, CEO]

Yes, I think we're still - we're seeing fairly consistent results to what we've seen in previous periods in terms of ballpark, call it, 25% to 30% of our new enterprise larger logos coming to us from what we characterize as greenfield. So either do yourself approaches or annual relying on annual assessments from an auditor or security consultancy, which obviously isn't a practical or defensible approach to security in this environment.

And we continue to see significant competitive win rates. Those remain exceptionally healthy. I think our sales team would tell you, if we're going into VM opportunities, their hours to lose and a lot of the engagement with customers is showing them what the power capability of the platform is and trying to educate them on that and deliver higher lands with expand opportunity as they cross over to new and modern asset types. And as I said earlier, significant traction now with cloud security.

[Roger Boyd, UBS]

Very helpful. Thank you.

[Operator]

Thank you. At this time, we have reached the end of our question-and-answer session. And this will also conclude today's conference. You may disconnect your lines at this time, and we do thank you for your participation.