Tenable Holdings Inc

NASDAQ:TENB

Earnings Call Transcript 2022-Q3

[Operator]

Greetings and welcome to Tenable’s Third Quarter 2022 Earnings Conference Call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, that this conference is being recorded.

At this time, I’ll now turn the conference over to Erin Karney, Senior Director, Investor Relations. Erin, you may now begin.

[Erin Karney, Senior Director, Investor Relations]

Thank you, operator, and thank you all for joining us on today's conference call to discuss Tenable's third quarter 2022 financial results. With me on the call today are Amit Yoran, our Chief Executive Officer; and Steve Vintz, our Chief Financial Officer. Prior to this call, we issued a press release announcing our financial results for the quarter. You can find the press release on the IR website at tenable.com.

Before we begin, let me remind you that we will make forward-looking statements during the course of this call, including statements relating to our guidance and expectations for the fourth quarter and full-year 2022, growth and drivers in our business, changes in the threat landscape in the security industry and our competitive position in the market, growth in our customer demand for and adoption of our solutions; 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 a substitute for or superior to measures of financial performance prepared in accordance with GAAP.

There are a number of limitations related to the use of these non-GAAP financial measures versus their closest GAAP equivalent. Our earnings release that we issued today includes GAAP to non-GAAP reconciliations for these measures and is also available on the Investor Relations section of our website.

I will now turn the call over to Amit.

[Amit Yoran, Chief Executive Officer]

Thank you, Erin. Today I will discuss our financial performance in Q3, traction with our exposure solutions and the exciting release of Tenable One, our Exposure Management Platform.

With that, let me first touch on our Q3 results. We delivered strong revenue growth for the quarter at 26% We also delivered non-GAAP EPS of $0.15 and unlevered free cash flow of 34.8 million both significantly above expectations. Additionally, we had another strong quarter for new enterprise customer acquisitions, adding 712, which is a record for us.

We had 89 large net new six figure customers, which grew 44% year-over-year demonstrating particular strength in the enterprise. Underfitting this demand was our Tenable.ep platform, which remained strong at low double digits of new sales, notably EP has only single-digit penetration into our current customer base, providing a significant opportunity for additional expansion.

Overall, we're very pleased with the demand in the quarter as we saw strength in both new logos and upsell to existing customers. In addition to success in the large enterprise market, public sector was also a highlight as we continue to win federal, state, and local markets. We are excited that even in a challenging macro environment, cyber, and vulnerability management remain a key priority.

Customers regularly talk to us about needing more visibility across the attack surface. How to focus efforts on prevention and how to make better cyber risk management decisions. We believe our leadership in vulnerability management earns us the right to not only have these conversations, but also be the leading vendor when they are looking into understanding and managing cyber risk.

Over the last few years, we have broadened our products and launched additional exposure solutions to address other parts of the attack surface such as operational technologies, cloud native, infrastructure's code and cloud security posture management, active directory and identity and external attack surface discovery and management.

Exposure solutions include Tenable.io, which is frequently used to help customers protect mobile and remote workers, probe their external facing assets and assess the integrity of their cloud environment. Combined, these exposure solutions and analytics make up approximately 50% of our overall sales relative to 5% pre-IPO and approximately 30% at 2020.

With the introduction of EP, we made it easier for customers to purchase multiple assessment technologies from us. Over the past year, we have seen the uplift in ASPs for EP reach approximately 70%. We have seen the market demand increase for exposure management through the adoption and consumption of EP. This gives us great confidence that an integrated exposure management platform will be even more compelling.

And this month, we announced the release of Tenable One, the strategic evolution of Tenable EP. Tenable One brings data together from across Tenable's exposure management solutions and delivers new insights and analytics beyond what siloed products are capable of delivering.

Tenable One brings a customer's entire tax surplus whether it's on premise or in the cloud into a single unified view across vulnerability management, cloud security, active directory and identities and external attack surface management to deliver context driven risk analytics, provide actionable intelligence. This holistic approach breaks down silos and [despite] [ph] data sources offering customers a new way to understand and manage their cyber risk, as well as measure their improvement over time.

Tenable One helps our customers analyze the relationship between assets, exposures, privileges, and threats across attack path in order to more completely understand and reduce risk. For customers that prefer to consume individual products, Tenable One also delivers enhanced actionable analytics that differentiate Tenable.

For example, Tenable.io purchased with a standalone license delivers outstanding vulnerability management. Buying Tenable One for VM gives customers enhanced analytics like asset criticality based prioritization and attack path analytics. New analytics that will identify potential lateral movement, the combinations of [unpatched vulnerabilities] [ph] can create.

Tenable One makes each individual product even better. With this month's release, we've introduced three new analytic capabilities that we believe are foundational to exposure management programs. Lumin exposure views, which provides insights into an organization's cyber exposure, attack path analysis enabling securing teams to view attack path from external sources to their most critical systems, and asset inventory, providing users with a centralized view of assets and their context.

The success we've seen with EP gives us great confidence in leading our go to market efforts with Tenable One. Gartner continues to highlight the importance of exposure management. And while using slightly different terminology, other analysts are increasingly talking about cyber risk and operationalizing the process of managing exposures as increasingly critical.

As a platform first company and the leader in vulnerability management, we're helping customers understand, measure, and manage risk across their entire tax surface. IT, cloud, active directory, and beyond. Tenable One represents an unprecedented opportunity to cement our role as the leading Cyber Exposure management platform.

Tenable One represents a major milestone in our vision. And over time, we will ingest and incorporate more data from a variety of sources and can deliver even more actionable analytics and insights. While operating in one of the most challenging environments in many years, we're excited to be able to continue delivering both attractive growth, strong earnings, and an exciting path to transforming cyber risk management.

The value proposition for helping our customers more easily understand and prioritize how to reduce cyber risk is resonating, especially in this economic environment, where many companies are seeking to emphasize efficiency. The investments we have made to develop and broaden our exposure management platform coupled with investments in our go to market efforts give us confidence in our ability to continue delivering on the 20% plus growth target we outlined last year.

Macro aside, we believe that we've never been in a better position to deliver significant growth at scale. We are also on track to meaningfully scale margins and cash flows as we generate leverage from previous investments and increase our focus on driving operational efficiency. We expect to deliver over $120 million of unlevered free cash flow in 2022 and believe we can double that in 2024.

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

[Steve Vintz, Chief Financial Officer]

Thanks, Amit. We are pleased with our results for the third quarter highlighted by good top line growth, a sizable beat in EPS, and strong unlevered free cash flow. I will provide more commentary momentarily, but first please note that all financial results we discuss today are non-GAAP financial measures with the exception of revenue. As Erin mentioned at the start of this call, GAAP to non-GAAP reconciliations may be found in our earnings release issued earlier today, which is posted on our website.

Now, on to the results for the quarter. Calculated current billings defines the change in current deferred revenue plus revenue recognized in the quarter grew 24% year-over-year to 207.3 million and benefited from our continued investment and our platform strategy and go to market efforts. As Amit mentioned earlier, we had one of our best quarters in terms of adding new customers and transacting large deals.

Specifically, we added 712 new enterprise platform customers and 89 net new six figure customers in Q3, which represents 43% and 44% growth year-over-year respectively. Underpinning customer momentum is our exposure solutions, which is helping us become more strategic to our customers and translating to larger deal sizes. New deals aside, our platform is also creating a more compelling upsell path for existing customers and is benefiting our dollar based net expansion rate or DBNER, which was 118% in the quarter.

We plan to disclose our DBNER [Technical Difficulty] going forward in our quarterly filings to provide further visibility into the broader adoption of our platform and other products. While DBNER may fluctuate on a quarterly basis, we generally expect it to be within 110% to 120% range.

Revenue was 174.9 million, which represents 26% year-over-year growth and was up from 23% growth in Q3 last year. Revenue in the quarter exceeded the mid-point of our guided range by 4.9 million. Visibility remains high as our percentage of recurring revenue was 95%, which is consistent with prior periods.

Now, I'll turn to expense where we are achieving operating leverage while continuing to invest for growth. I'll start with gross margin, which was 81% flat compared to last quarter. Cost of goods sold increased sequentially in absolute dollars, primarily due to the increased usage of our cloud based products and the initial costs related to the release of Tenable One, which includes attack path analysis and external attack surface management.

Sales and marketing expense was 74.5 million, which was down from 75.6 million last quarter. Sales and marketing expense as a percent of revenue was 43%, compared to 46% last quarter, reflecting greater efficiency in our go to market efforts. Q3 expense reflects increased quota carrying sales reps, and go to market personnel, as well as higher commission.

R&D expense was 27.4 million, which was down from 28.1 million last quarter. R&D expense decreased sequentially due to lower contractor spend in connection with the recent release of Tenable One, offset by incremental engineering headcount and less capitalized software development costs. R&D expense as a percentage of revenue was 16%, which was slightly lower than last quarter.

G&A expense was 16.7 million, which was down from 17.3 million last quarter. G&A decreased sequentially due to more efficient global operations, partially offset by increased company events and travel. As a percentage of revenue, G&A expense was 10% this quarter, compared to 11% last quarter. Income from operations was 23.1 million, a notable 13.6 million above the mid-point of our guided range, due to the outperformance in revenue and lower operating expenses, including lower payroll costs.

The takeaway here is, as a company, we have a lot of natural leverage in our business and remain focused on increasing the efficiency, with which we build, market, and sell our products while we continue to invest in key growth areas such as sales and R&D. EPS in the quarter was $0.15, which was over $0.11 better than the mid-point of our guided range.

In terms of FX, a stronger dollar resulted in an FX loss of $0.02 per share in other expense in the quarter offset by approximately $0.01 benefit above the line in OpEx, due to lower operating costs in local currency.

Now, let's turn to the balance sheet. We finished the quarter with 548 million in cash and short-term investments. Accounts receivable was 147.9 million and total deferred revenue was 593.7 million, including [447.9] [ph] of current deferred revenue, which gives us a lot of visibility into revenue over the next twelve months.

Now, I would like to discuss interest expense and income. Looking ahead, we are assuming a higher interest rate environment when our floating rate debt facility reset at the end of October. Consequently, our full-year guidance reflects 1.1 million of additional interest expense than our previously provided guidance.

However, earnings on our cash and investment balances provide a natural hedge to interest expense in a rising rate environment. As such, we do not expect that interest expense, net of interest income will have a significant impact on EPS. We generated 34.8 million of unlevered free cash flow, which is a 20% margin. With 95% recurring revenue, high-gross margin, and renewal rates, we feel confident that we can continue to generate attractive levels of cash flow, while continuing to invest in the business.

With the results of the quarter behind us, I'd like to discuss our outlook for the fourth quarter and full-year 2022. For the fourth quarter, we currently expect revenue to be in the range of 180 million to 182 million, non-GAAP income from operations to be in the range of 15 million to 16 million. Non-GAAP net income to be in the range of 7.5 million to 8.5 million, assuming interest expense of 6.8 million and a provision for income taxes of 2.8 million.

Non-GAAP diluted earnings per share to be in the range of $0.06, $0.07 assuming a 118.5 million fully-diluted weighted average shares outstanding. And for the full-year, we currently expect calculated current billings to be in the range of 768 million to 776 million, revenue to be in the range of 678.6 million to 680.6 million, non-GAAP income from operations to be in the range of 62.7 million to 63.7 million, non-GAAP net income to be in the range of 37.6 million to 38.6 million, assuming interest expense of 19 million and a provision for income taxes of 6 million.

Non-GAAP diluted earnings per share to be in the range of $0.32 to $0.33. Our EPS guidance assumes 118 million only diluted weighted average shares outstanding, and unlevered free cash flow to be in the range of 122 million to 125 million. Today, we are reiterating our full-year guidance for calculated current billings of 768 million to 776 million, representing 25% growth at the midpoint.

As we discussed earlier, we are pleased with our execution in the third quarter, but given the backdrop of an uncertain macro, we believe this is a prudent approach. For revenue, which has more visibility, we are raising our full-year guidance by 3.6 million at the mid-point in recognition of the upside we achieved in Q3.

In terms of operating income at the midpoint, we are passing along the [13.6 million] [ph] in Q3 and raising the full-year by approximately 2 million as we continue to scale efficiently across the globe. We are also providing a full-year unlevered free cash flow guide for the first time today, which reflects the confidence we have in our business to significantly grow cash flow over time.

At this point, I like to turn the call back over to Amit.

[Amit Yoran, Chief Executive Officer]

Thanks, Steve. We're very confident in our differentiated technology, our future, and our ability to deliver exceptional results even in a tough market. We hope to see many of you at the BTIG, Needham, and Barclays conferences in the upcoming weeks.

We now like to open the call up for questions.

[Operator]

Thank you. [Operator Instructions] Thank you. And our first question comes from the line of Hamza Fodderwala with Morgan Stanley. Please proceed with your question.

[Hamza Fodderwala, Morgan Stanley]

Hi, team. Thank you for taking my questions, and way to start the earnings season on a strong note. Amit, first question for you. We're hearing a lot from customers around consolidation, particularly in this macro environment. I think a lot of people still view Tenable as just a, you know VM solution and not the, sort of broader cyber exposure platform. And if I think about all the used cases you have now, things like Active Directory, OT security, cloud security, attack surface management, can you talk a little bit about how you're seeing customers really buy into that bundle strategy, especially in this environment? And how should we think about the runway of that consolidation strategy as it relates to your 40,000 plus customers?

[Amit Yoran, Chief Executive Officer]

Thanks, Hamza. I'm going to talk specifically about the enterprise segment to the market where we now have over 500 customers on our EP platform. We're seeing double-digit growth on the EP side. And as you said, there's lots of runway. It still represents 5% – 4.5% of our existing enterprise platform customers. So, there's a lot of traction, there’s a lot of adoption, and there's still lots of runway left. We think we're in a terrific position to be a consolidator.

When people think about and ask about risk, they're really turning toward an expansion of their VM program. So, as we've added a tax surface management capability, as we've added products security, capability, security for active directory and operational technologies. And we feel like we're in a fantastic position to consolidate all things around cyber risk management and really becoming the platform go to company for that.

[Hamza Fodderwala, Morgan Stanley]

Alright. And maybe just a quick follow-up for Steve. Kudos on the margin beat that was solid, how are you thinking about the growth versus profitability, let's say, over the next 12 to 18 months relative to perhaps when we spoke last quarter?

[Steve Vintz, Chief Financial Officer]

Thanks Hamza for the question. We continue to focus on growth, but I think it's fair to say we're very focused on margins and cash flow. So, given our confidence in our growth opportunities, we're adding quota capacity, and we're hiring in R&D, with the backdrop of uncertain macro, we are carefully scrutinizing spend in all areas of our business, notwithstanding the two that I just mentioned.

So, I think our Q3 results are indicative of the, kind of leverage that we expect to see in the business. Today, we're raising EPS by more than the [Q3 EPS] [ph] by over $0.11 and this gives us a lot of confidence. Now, we hit it in the fourth quarter, but also over the next couple of years. And for the first time, we're also providing a free cash flow guide. And we also made some directional comments about cash flow and how that is expected to grow over the next 24 months.

[Hamza Fodderwala, Morgan Stanley]

All right. Thanks for all the detail.

[Operator]

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

[Rob Owens, Piper Sandler]

Great. And thank you guys very much for taking my question this afternoon. Given you guys are hitting lead off here, again for the earnings period, maybe you could help us understand what you saw come out of public sector. You're usually very strong in the federal vertical this quarter, but you also mentioned states and local. So, just wondering if Fed performs typically in-line with where it's been and anything outsized across state and local coming in as well? Thanks.

[Amit Yoran, Chief Executive Officer]

Thanks, Rob. Good to hear from you. We actually saw greater upside and strength in the federal market than we typically comment on. I think that aligns well with the strength that we've seen across the large enterprise market segment. And as you pointed out, over the last couple of quarters and this past quarter, in particular, we saw strength in not only federal, but the rest of public sector, state, local markets, as well as some of the global government sectors.

[Rob Owens, Piper Sandler]

Great. Thank you very much.

[Operator]

Our next question is from the line of Joel Fishbein with Truist. Please proceed with your questions.

[Joel Fishbein, Truist]

Thanks for taking my question and again very good strong execution this quarter. Amit, just one for you and a follow-up for Steve. I mean, on Tenable One, can you just talk about where the [indiscernible] price and maybe I know EP is an upsell for customers, but how will this Tenable One fit in the go to market motion and the potential upsell? That would be helpful. And then Steve, for you, and just in terms of the operating margins, [would you] [ph] perform fantastic this quarter? Is this a new base case or is this just because you're taking more conservative approach because of the macro environment or should we think of the profitability metrics going forward along these lines? Thanks.

[Amit Yoran, Chief Executive Officer]

Joel, we see Tenable One as the natural evolution of EP. So, EP gained customers great flexibility to evolve and embrace new asset types in a very efficient fashion. With Tenable One, we're bringing the data across different asset types to a unified data store. So, we think it becomes more compelling, not just from unified reporting perspective, but also from an analytics perspective.

So, we think we'll continue to see very strong adoption with an [opportunity to] [ph] see similar or better ASP uplift with Tenable One relative to what we were seeing, the 70% that we're seeing with EP, and the opportunity to now also sell additional analytic modules. We have some as part of and some, which are a Tenable One premium edition, which allows us to [reach] [ph] ASPs even further through the sale of additional analytics. So, not just Lumin or Lumin exposure cards, but also saw in attack path analytics and other capabilities.

[Steve Vintz, Chief Financial Officer]

And then, Joel, with regard to your question on operating margins. Obviously, we're delighted with our earnings in the third quarter, significant upside both in terms of operating income, as well as EPS. And we expect this to kind of be the new base case going forward. Our expectations were going to continue to drive leverage in the business. We have 95% recurring revenue with high gross margin, high renewal rates, and so there is a lot of natural leverage.

We are prioritizing spend in very key areas of the business, which is adding quota capacity, adding engineering, and talent on the product side, but we're also taking a very careful approach to other areas of spending in our business. Over the past few years, we've gone into new markets and expanded our go to market capability and that comes with some initial startup costs.

So, the leverage you're seeing today is, what I would characterize is natural leverage in the business where we're able to add quota capacity, more quota capacity and less in other areas. So, we're very pleased with the margins and the cash flow characteristics of the company in both in the third quarter and have confidence to drive higher leverage beyond.

[Joel Fishbein, Truist]

Thank you very much.

[Operator]

Thank you. The next question comes from the line of Saket Kalia with Barclays. Please proceed with your question.

[Saket Kalia, Barclays]

Okay, great. Hey, guys. Thanks for taking my questions here as well. I mean, maybe for you, I'd love to dig into Tenable One just a little bit more. Maybe the question is, is Tenable One something that's complementary to EP or is this more of a higher end SKU than EP? And related to that, does Tenable One maybe help a customer consolidate their budget right from, you know maybe take budget from other areas of their security spend, or is this more of a new need that's going to help the customer from a security perspective?

[Amit Yoran, Chief Executive Officer]

Yes, we think the Tenable One is the natural evolution for EP. So that EP allows for the acquisition of multiple – the assessment technologies and multiple asset types in a much more efficient fashion for our customers. Do, you know understand your exposure against – in these different parts of your environment. And that message will invest in these, which is where we're seeing great traction with the EP.

With Tenable One, it's that natural evolution. So, not only are we bringing unique assessment technologies to the table, we're consolidating the data on the back-end, so that we can do analytics between the users and their [permissions] [ph] and what systems they're coming from and how those systems are exposed and what assets their accessing and what the integrity of those assets looks like and how you can find attack paths from externally finishing resources to your most critical internal assets?

What are the paths that adversaries could take and how can we most efficiently disrupt it. So, we think it's just a very natural evolution of how you think about cyber exposure and cyber risk management. And we think a lot of the market opportunities. A lot of the revenue streams that we'll be able to [comment to] [ph] are actually very tightly coupled with VM and their related market segments.

So, the external attack surface managed is just helping people answer this question about their exposure and their cyber risk management. So, we think being able to tap in to not only the traditional VM budget, but also to go after all of the adjacent budgets with respect to external attack surface management, operational technologies, active directory security, and identity management, cloud security. We're seeing tremendous traction on the platform, helping folks secure their cloud environments.

Again, this is a natural expansion of understanding your enterprise risk. So, it's another reason that just allows customers to consolidate both from a technology standpoint and a budget standpoint.

[Saket Kalia, Barclays]

Got it, got it. That's very clear. Steve, maybe for you, I'd love to just stay on EP for a second. I think it was a 70% uplift that was mentioned earlier and of course that's gone up right ever since EP was introduced, but I know that there are some customers that opt for all the different product to get that uplift and some that don't, maybe the question for you Steve is, just based off that roughly 5% of the customer base, it's still a relatively small sample size. Based on the sample size that you've seen, what's the actual uplift been for those customers that go all-in with – that buy EP?

[Steve Vintz, Chief Financial Officer]

Yes, good question, Saket. And one thing I want to make clear is that the 70% uplift that we're seeing is actual realized price. This is not list price. This is a 70% uplift. So, we're seeing 70% higher selling prices when we sell EP, our exposure platform relative to selling standalone VM. And so, you can see it in the numbers today, we're having tremendous success transacting larger deals, had one of our best quarter ever for net new six figure customers, and the uplift that you're seeing is also positively impacting not only productivity levels, but also margins.

So, it gives us a lot of confidence as we look ahead. We just launched Tenable One and our expectation is that we'll continue to penetrate our sizeable customer base, represent a growing percentage, not only with new customers, but also existing customers back into the base.

[Saket Kalia, Barclays]

Got it. Very helpful. Thanks guys.

[Operator]

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

[Brad Reback, Stifel]

Great. Thanks very much. Gentlemen, with the strength in the results in the quarter, would it be correct to assume that the elongation that you saw in 2Q didn't get any orders and might have gotten actually a little better here in 3Q?

[Steve Vintz, Chief Financial Officer]

Yes, I think, you know we would describe it that we saw stabilization of those elongated sales cycles that we experienced late in Q2.

[Brad Reback, Stifel]

Got it. And then on the enterprise customer adds, obviously a significant step up sequentially year-over-year, should we think about this as a new level going forward or were there some one-time items in the quarter and we settle back down to more of the historical level?

[Amit Yoran, Chief Executive Officer]

Hey Brad, good question. Obviously, we’re pleased. We added over 700 new enterprise platform customers and that continues to exceed expectations for us. I would just say pipeline opportunities can vary from quarter-to-quarter, right, and deal sizes can also fluctuate. So, we're not going to see this as a new norm for us, but we're pleased with demand that we're seeing broadly across the board as our new enterprise platform customers indicate, but there could be some natural fluctuations.

[Brad Reback, Stifel]

That's great. Thanks very much.

[Operator]

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

[Mike Cikos, Needham]

Hey, guys. A bit of a two-parter here, but just wanted to come back to the guidance. I guess for Steve, could you help us frame out, again, I know there were some commentary to end when you laid out your views here, but what was it that specifically led the company to take up its revenue guide by slightly below what that 3Q beat was and why the maintain billings? Can you help put some better parameters around that just so we're aligned as far as you're thinking on that metric? Thank you.

[Steve Vintz, Chief Financial Officer]

Yes. With regard to revenue, we saw a notable outperformance of revenue beat by $4.9 million, almost $5 million. We're very pleased with the outperformance this quarter, which is mainly attributed to strength in our core subscription business. Now, a small portion of the beat was related to slightly better than expected results for AD on prem and our Q4 guide reflects the strength really in our core subscription business, which was passing through, expectations for AD on prem sales for the second half of the year have not changed since our call in June. And then with regard to CCB, again another area of outperformance, delighted with execution in the quarter.

Fourth quarter is seasonally our strongest quarter in terms of absolute dollar sales. And we think it's prudent to reaffirm our guidance for CCD this quarter and we think it's a good set-up for Q4.

[Mike Cikos, Needham]

Thank you for that. And if I could just tack on one more question here. I know there was the question earlier about the deal cycle. So, I'm happy to hear the commentary coming from Amit on that. I did just want to see if you guys could parse out any changes on the customer behavior if we're segmenting by geography? How is Europe performing versus expectations? How is North America performing versus expectations?

[Amit Yoran, Chief Executive Officer]

Yes. We had – I think as I said earlier, we have stabilized and we're pleased with our performance in the quarter in EMEA. North America was still strong and obviously it's not unimpacted by global macro environment, but in terms of sales processes and sales cycles, we continue to see strength in North America globally public sector is strong.

[Mike Cikos, Needham]

Great. Thank you for the color.

[Operator]

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

[Andrew Nowinski, Wells Fargo]

All right. Thank you for taking the question. I'm certainly really excited to watch your progress with all these new products. I know it's a little early, I guess, to discuss the calendar 2023 outlook, but at a high level, you introduced many incremental growth drivers this year, including two acquisitions, Tenable One and you also noted this ramping demand for Tenable EP, so, as we think about our estimates for next year, can you just help us understand maybe the puts and takes that might impact growth next year balancing all these new growth drivers that you have or that you've introduced versus any factors that might cause growth to slow relative to the 26% growth you just guided to for 2022?

[Steve Vintz, Chief Financial Officer]

I'm sorry, [indiscernible] as a point of clarification. So, Amit made some directional comments about our expectation of growth. And so, talked about our confidence in growing 20% plus, and we felt really good about that, certainly a lot of the execution that we're delivering today. We also made some comments about cash flow and how we expect that to grow over the course of the next 24 months. We're not providing an outlook for 2023.

And this call, we'll do so in February, but we feel good about the comments we're making and the progress we're seeing in our business. And obviously, there's – we have a much broader product portfolio. We've become more strategically relevant to our customers. We're adding lots of new customers. We're having success closing larger deals. EP has been a major catalyst for that and it’s kind of the one we expect will certainly be additive.

[Amit Yoran, Chief Executive Officer]

In terms of [indiscernible] for future growth, I guess, the key points I would make are one on the go to market side, just the continued maturity and growth of our sales team, the secular drivers in the market, the criticality of understanding cyber risk in today's environment and the complexity of doing that using siloed products. And then the things specific to assemble from a technology standpoint as you said, we've entered a number of really exciting markets from a tax surface management, operational technology, active directory, and identity cloud security, CSPM, container security infrastructure is [closed] [ph].

So, a lot of new capabilities and capabilities that are really being brought together in a unified cyber exposure management platform that is resonating with customers and the sales team. So, we thought there's lots of reason for excitement.

[Andrew Nowinski, Wells Fargo]

That's great. Just as a follow-up to that, given the broader platform that you have relative to your competitors in all these adjacent markets, I'm wondering if you could just comment on maybe the competitive landscape to your typical two competitors that you see the most and if there's anything that's changed from that perspective, have you seen any improvement in win rates because of your broader platform and all these new products that you have that they may not have? Thanks.

[Amit Yoran, Chief Executive Officer]

Yes. I think that in the core VM opportunities, there's very little change in the competitive dynamics. We have exceptional win rates. We continue to invest and we've invested heavily in this market and our sales team, our go-to-market teams exceptionally confident that VM deals are basically our [indiscernible]. When it comes to broader conversations at they CECL level about cyber risk, about understanding cyber exposure, again, we feel like we've got a very compelling story to tell that's resonating and that speaks to the momentum we're seeing with both higher ASPs and more customers on the land and a lot of excitement there.

[Andrew Nowinski, Wells Fargo]

Thank you very much. Keep all the good work guys.

[Amit Yoran, Chief Executive Officer]

Thank you.

[Operator]

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

[Jonathan Ho, William Blair]

Hi, good afternoon and congrats on the strong results. I guess, one thing I wanted to understand a little bit better about the Tenable One platform is, will you be leading with this now to, kind of tackle these other maybe faster growing markets or is this still more of an upsell or attach type of emotion through the core VM product?

[Amit Yoran, Chief Executive Officer]

No, I think that for the first time, we're extremely confident that we'll be leading our go-to-market efforts with Tenable One and this cyber exposure management platform. We feel like it's a differentiated story. It resonates in the enterprise. We've seen the momentum through EP sales and customer both existing and new customers gravitating to it in expansion opportunities and in larger [initial land] [ph]. So, it has quickly become the default lead motion for us as a company. We've got great confidence doing it.

[Jonathan Ho, William Blair]

Got it. And then just as a quick follow-up around the operating leverage around, sort of the free cash flow commentary, can you give us a sense of where you expect that leverage to come from? What types of lines from a spending basis? Anything qualitative would be helpful as well? Thanks, Steve.

[Steve Vintz, Chief Financial Officer]

Well, I think it's most notably in, I'll say, sales and marketing. Right now, our sales and marketing spend as a percent of revenue was, let's say, around mid-40s and our long-term target has a free handle on it. So, we're in the 30% range and we have a lot of confidence. Years ago, we were spending over 60% of our revenue in sales and marketing. So, we've made tremendous progress on that, and we're still early in the journey there and there's a lot more leverage to go. Also, some efficiency on R&D and we're also fully absorbing some costs in G&A and that will tick down over the course of time. So, I think we demonstrated a lot of leverage to date. There's a lot more leverage to go. We have a great business model, lots of recurring revenue, good rental rates, and we're having success not only landing customers at a very high rate, but also growing that relationship over the course of time.

[Jonathan Ho, William Blair]

Great. Thank you.

[Operator]

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

[Joshua Tilton, Wolfe Research]

Hey, guys. Thanks for taking my question. So I first kind of just wanted to follow-up on the last free cash flow question. How should we think about your ability to double free cash flow by 2024 in context of your 20% growth target? Basically, can you still grow above 20% and hit doubling your free cash flow? And then also just rank for us, give us like a level, like how confident are you in your ability to hit not a target, but hit what you said you guys can do because it does, kind of imply that the stock is pretty attractive here?

[Steve Vintz, Chief Financial Officer]

We are very confident in our ability to grow free cash flow. And for the first time, we are providing a guide around free cash flow for the year. We're making directional comments about cash flow and how it's going to grow over the course of the next two years. We're very confident. And we also talked about 20% top line growth.

And so, the clear inference there is that free cash flow margins will grow at a higher rate than top line growth. And that is a natural evolution of an enterprise software company, a company that has high recurring revenue, high gross margins, high renewal rates, and so, we're very confident that we would not be making these comments today if we were not.

[Joshua Tilton, Wolfe Research]

And then maybe just kind of step back a little bit. There was – there does seem to be a significant tone change from last quarter's call. So, maybe just help me understand exactly what changed between 2Q and 3Q that's kind of leading you guys sound so much more positive this quarter? And then maybe just given the macro backdrop and all the uncertainty in the environment, like what's giving you guys the confidence that this strength is sustainable?

[Amit Yoran, Chief Executive Officer]

Yes. In the second quarter, we saw significant changes in the [indiscernible] of the international markets. There was significant change in global macro environment. We saw that impacting and elongating sales cycles continue to deliver strong quarter. We saw that impacting the sales cycles. I think now with another quarter under our belt, we've got great confidence that we understand the changes in the sales cycles.

We feel like the sales teams may be appropriate adjustments and understand forecasting proven that we can continue to land exceptional results in terms of top line growth, in terms of new customer adds, six figure adds, performance in the enterprise, performance in the global public sector, and other market segments and as well as outperform on the bottom. So, we feel good about where we're at and the path forward.

[Joshua Tilton, Wolfe Research]

Thank you, guys. Very helpful.

[Operator]

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

[Rudy Kessinger, D.A. Davidson]

Great. Thanks for taking my questions, guys. I guess on Tenable EP or Tenable One now, I'm curious, when you look at your sales of customers that go with EP or kind of One, are more of those conversations and the reason those customers opt for that platform focused around lower TCO and vendor consolidation or are they're more focused around improved security outcomes by having all these products with the single vendor and kind of the synergies between those product and the lower TCO and consolidation just comes as an added benefit to it, which is really driving the decisions to opt for that bundled platform?

[Amit Yoran, Chief Executive Officer]

Yes. I think it really is customer dependent and in some cases it's choice to be all of the development. But certainly, we feel like having the data and we're demonstrating the customers how having external attack surface is mapped against access controls, mapped against all the abilities in your cloud environments can show new things and provide additional insight or simply just you can't do with siloed data sets.

So, we're seeing that as a significant driver. And same way, we're also seeing the [inverse of time] [ph] where they're looking at spend in individual areas, be it cloud, or tax surface management and say, hey, look, this is naturally part of my 4 billion management, my risk management program and I can consolidate spend and have [indiscernible] and lower cost of ownership and better vendor management.

[Rudy Kessinger, D.A. Davidson]

That's helpful. Steve, just maybe kind of a cleanup, follow-up to a question earlier, you said, going back last quarter, you took out 4 million to 5 million for on-premise license sales for AD, you said a bit better than expected in Q3, but the second half, you know what's baked into your full-year guide for the second half for AD remains unchanged. And so, most of the upside in the full-year guide revision came from subscription. I have that right?

[Steve Vintz, Chief Financial Officer]

That’s correct.

[Rudy Kessinger, D.A. Davidson]

Okay. Got it. That's it for me. Thanks guys.

[Operator]

Our next question is from the line of Shebly Seyrafi with FBN Securities. Please proceed with your question.

[Shebly Seyrafi, FBN Securities]

Yes, thank you very much. I just want to be clear on this. Does Tenable One replace EP? And if not, how much do you think it's going to be incremental?

[Amit Yoran, Chief Executive Officer]

At Tenable One is the evolution of EP. So – and when it comes with now, even the recent launches, [the March] [ph] we had to set the analytics.

[Steve Vintz, Chief Financial Officer]

Yes. So, with Tenable One, you have access to the expanded asset coverage of different asset types, the data comes into unified data store for consolidated reporting integration into other products applications, workflows, consistent APIs, and then we have depending on which package of [indiscernible] Tenable One you get, we have additional use an uplift into new analytic forms that weren't previously available on EP, specifically a [TapCAP] [ph] analytics and expanded set of exposure scores.

[Shebly Seyrafi, FBN Securities]

So, to be clear, you're not going to be selling both, you're going to just be selling Tenable One, not EP?

[Steve Vintz, Chief Financial Officer]

Correct. Tenable One is the evolution.

[Shebly Seyrafi, FBN Securities]

Got it. I just want to be clear there. Okay. The other question I had was your accounts receivable grew by 35% sequentially and your revenue grew by 6% sequentially. So, can you just talk about the linearity of the quarter how back-end loaded it was?

[Amit Yoran, Chief Executive Officer]

Sure. This quarter was a little different than last. In our Q2 call, we discussed that we experienced more levels of review and inspection from customers, specifically the last two weeks, which tends to be our busiest time in the quarter. I think it's fair to say that we saw relative to June, the last couple of weeks, the continuation of that trend in the early months of the quarter, but September was very strong for us, and we closed a lot of our large deals in September and we're very encouraged as we head into the fourth quarter.

[Shebly Seyrafi, FBN Securities]

Okay. Thank you.

[Operator]

Our next question is from the line of Gray Powell with BTIG. Please proceed with your questions.

[Gray Powell, BTIG]

Great. Thanks for taking the questions. Yes, I just wanted to understand the guidance correctly. So, if I'm just doing the math right, it looks like the high-end of your full-year billings guidance implies 18% growth in Q4 that's below your 20% long-term growth rate. Just how should we think about that? Is there some extra conservatism in there because of macro?

[Amit Yoran, Chief Executive Officer]

I think it's a copy of – consistent with what we talked about earlier. So, if you look at our guide for the full-year for CCB, we left it unchanged with delays with the results in the third quarter, certainly better than what we expected going to the fourth quarter and it's our largest quarter and there's a backdrop of an uncertain macro. We have confidence in our execution, but we think it's appropriate to reaffirm the guidance today.

[Gray Powell, BTIG]

Okay, cool. I'll leave it there. Thank you very much.

[Operator]

Thank you. At this time, this concludes our question-and-answer session and this will also conclude today's conference. Thank you for your participation. You may now disconnect your lines at this time. Have a wonderful day.