TENB - NASDAQ

Greetings. Welcome to the Tenable Q4 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] I will now turn the conference over to your host, Erin Karney, the Vice President of Investor Relations. You may begin.

Thank you, operator. And thank you all for joining us on today's conference call to discuss Tenable's fourth quarter and full-year 2023 financial results. With me on the call today are Amit Yoran, our Chief Executive Officer, and Steve Vintz, 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 first quarter and full-year 2024, 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 Tenable One, planned innovation and new products and services, the potential benefits and financial impact of our recent acquisition of Ermetic, and our expectations regarding the cost savings associated with optimizing our go-to-market efforts and 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, our quarterly report on Form 10-Q for the quarter ended September 30, 2023, and subsequent reports that we file with the SEC, which are available on the SEC website at sec.gov. In addition, during today's call, we will discuss non-GAAP financial measures. These non-GAAP financial measures are in addition to, and not a substitute for, or superior to, measures of financial performance prepared in accordance with GAAP. There are a number of limitations related to the use of these non-GAAP financial measures versus their closest GAAP equivalents. Our earnings release that we issued today includes GAAP to non-GAAP reconciliations for these measures and is also available on the Investor Relations section of our website. I'll now turn the call over to Amit.

Thank you, Erin. Today I'll touch on our financial performance in the quarter, discuss the evolution of the business, and the momentum we're seeing in our unified platform and broader exposure solution. We're very pleased with our results in Q4, which came in better than expected and included 14% CCB growth and 17% operating margin. For the full year, operating margin was 15%, an over 500 basis point improvement year-over-year. We continue to be focused on delivering balanced growth, and Q4 is a good example of what we can achieve. Underlying our strong results is healthy customer demand. In Q4, inclusive of Ermetic, we added 156 new six figure customers and we had another great quarter for seven figure customers. The takeaway here is that we're increasingly landing larger customers and helping our customers secure additional asset types across their attack surface. This is a testament to the importance of exposure management, our market leading products and the vendor consolidation we can deliver to our customers. To that end, we continue to see great traction with Tenable One, OT, cloud and identity, which collectively represent 50% of our new business in the quarter. This momentum gives us the confidence to make additional changes in the business. Since our IPO, we have successfully broadened our offerings. Through a balance of organic and inorganic investments, we have significantly scaled our business. Today, we are winning deals, not just in VM, but also in cloud, OT and identity. Perhaps more exciting is that we're able to take all of this data across multiple products and asset types and bring it together in our unified platform. These individual products have proven themselves to be highly competitive or best-in-class technologies, and they are now core to our offerings and selling motions. This evolution has now put us in a position to begin optimizing our go-to-market efforts, including reducing our reliance on sales specialists, overlay teams, and streamlining layers of management. This is a natural maturation for Tenable, and we're making these changes with an eye toward driving higher levels of productivity and efficiency for our sellers. These changes to our go-to-market and supportive functions resulted in a 5% reduction of our workforce, which is reflected in our guidance today. We're striking the right balance between efficiently running the business and investing in areas that can drive future growth. With that, I'll dive a little deeper into some of our product updates. I'll start with Tenable Cloud Security, a key area of focus for companies as more and more workloads move to the cloud. This represents one of our largest opportunities, over $16 billion in total addressable market, and is growing faster than the overall cyber market. Specifically, we have been committed to delivering highly competitive CNAPP to simplify and efficiently cut through the complexity of cloud environments, so that security teams can identify difficult-to-detect problems and remediate them. Tenable Cloud Security is helping organizations address some of the most difficult challenges in cybersecurity, by enabling security professionals to understand the complex relationships across assets, identities, and entitlements. Customers are using Tenable Cloud Security to reduce risk associated with an explosion in the volume and permission of users and machine identities in the cloud. Since the acquisition of Ermetic, we've integrated platform capabilities and migrated over 1,000 customers on to our consolidated CNAPP capability. Feedback from these customers has been incredibly positive. Customers are highlighting the ease of deployment and the seamlessly integrated experience they're having with our full CNAPP solution. Additionally, we are hearing that Tenable Cloud is delivering value and critical insights that other vendors miss. Many of these customers are already increasing the number of cloud resources they are assessing. Another area where we're seeing strong demand and competitive differentiation is in OT. We're increasingly recognized as a key player in this market. We close deals with some of the largest global energy, healthcare and leading manufacturing companies. We believe our success is the result of a number of factors including the competitive capabilities of our product and a very large and global customer base. These customers rely on us to help evaluate cyber risk, and our ability to provide that coverage and understanding across both OT and IT is a major strategic differentiator. Between our technology leadership and our significant customer base and distribution, we are winning and taking share in this critical market. We will continue to be committed to providing market leading discrete products to customers. That said, over time, we expect to have more and more of our customer engagements driven by Tenable One as our platform matures and as the diversity of data and analytics continue to improve. When combined, these highly competitive products bring even more context and understanding through our unified platform. Tenable One continues to be one of our fastest growing products. [indiscernible] solutions, even those that are best-in-class, cannot deliver the insights customers need to efficiently and effectively secure their environment. Tenable One delivers differentiated analytics and critical attack path analysis. Customers are finding tremendous value in the clarity and analytics that we can deliver for some of their vulnerable and critical assets. Additionally, customers are able to leverage Tenable One to consolidate multiple use cases and products on a single platform to address our broader use case. As a result, Tenable One doubled this year and is over 20% of our new business and mid-teens in total sales. And we continue to see customers shifting to convert multiple asset types as [indiscernible] and cloud are two of the areas that drove outperformance in the quarter. Last quarter, we talked about using the next few quarters to execute on our product roadmap and integrator Ermetic. We're really pleased with our progress in optimizing business, integrating Ermetic and expanding the value proposition of our platform. As companies, regulators and society as a whole continue to focus on cybersecurity, understanding and managing risks will remain an increasingly important area of focus. We believe we help customers understand and manage risk better than anyone. And we'll continue to be laser focused on delivering best-in-class products. We intend to do this with an approach that balances growth and margin. I'll now turn the call over to Steve for further commentary on our financial results and outlook.

Thank you. As Amit mentioned earlier, we are pleased to cap the year on a very positive note with strong top line growth and operating margin. I will provide more commentary momentarily. But, first, please note that all operating 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 on our earnings release issued earlier today. As a reminder, our financial results reflect the results of operations from Ermetic, which closed October 2. Now on to the results for the quarter. Calculated current billings, defined as revenue recognized in the quarter plus change in current deferred revenue, grew 14% year-over-year to $271.6 million and benefited from Tenable One which was 22% of total new sales. Exposure solutions, which include Tenable One, as well as standalone sales of cloud security, identity security and operational technology security, represented 50% of our total new enterprise sales. This reflects the continued traction in our exposure management platform and our ability to help customers translate asset, vulnerability and threat data across IT and OT assets, cloud resources, web apps and identity platforms and to business insights and actionable intelligence. As expected, Ermetic contributed minimally to CCB as our primary focus was integrating the two cloud security product platforms in Q4. As I've mentioned on prior calls, CCB is typically a close, but not perfect, proxy for sales in the quarter and is influenced by a number of factors, such as mix of business, deal timing, including early renewals. Notably, CCB in the quarter was more closely correlated to current RPO growth of 16%. In terms of key metrics, we added 597 new enterprise platform customers in the quarter, inclusive of Ermetic customers, which is up sequentially from the 386 we added last quarter. Mid-market stabilized this quarter and produced modest CCB upside, helping them select new platform customers higher. In terms of large deals, we added 156 net new six figure customers in Q4, and that numbers more than 2x higher than what we reported last quarter. Our dollar based net expansion rate was 111% in the quarter, and is consistent with last quarter. And as a reminder, the expansion rate is calculated on an LTM basis. Revenue was $213.3 million, which represents 16% year-over-year growth. Revenue in the quarter exceeded the midpoint of our guidance range by $7.3 million. Revenue from Ermetic was less than 1% of total revenue in the quarter, which was derived primarily from the acquired deferred revenue. Our percentage of recurring revenue remains high at 95% this quarter, which is consistent with prior periods. I'll turn to expenses now. Let's start with gross margin, which was 81% this quarter compared to 80% last quarter, and approximately 250 basis points better than expected. As previously discussed, we are integrating Ermetic public cloud infrastructure into ours. While this process introduces some additional costs, the progress out of the gate has been strong and exceeded our initial expectations and helped drive margins higher in the quarter. Gross margin for the full year was 80%, consistent with last year. Looking ahead, we continue to expect gross margins to be in the high 70s, low 80% range as we add new intelligence and functionality to Tenable One and our standalone cloud security offering. Sales and marketing expense was $88.5 million, which was up from $79 million last quarter. Sales and marketing expense as a percentage of revenue was 41% compared to 39% last quarter. Sales and marketing expense is seasonally higher in the fourth quarter, and increased sequentially, primarily due to increased personnel costs, incremental investments in marketing to build our brand, and higher sales commissions and variable compensation attributed to our strong sales performance and renewal base in the quarter. For the full year, sales and marketing expense as a percent of revenue was 42%, down from 44% last year, representing a 240 basis point improvement. R&D expense was $27.8 million, which was flat compared to last quarter. R&D expense as a percentage of revenue was 13% this quarter compared to 14% last quarter. R&D expense increased sequentially, primarily due to increased personnel, public cloud costs and Ermetic facility costs that was offset by foreign R&D tax credits. For the full year, R&D expense as a percentage of revenue was 14% compared to 16% last year. G&A expense was $19.5 million, which was up from $18.5 million last quarter. G&A expense as a percentage of revenue was 9% this quarter and flat relative to last quarter. G&A expense was 9% for the full year, down from 10% in 2022. We will continue to make investments in G&A on an absolute dollar basis to support the growth and scale of our business. Income from operations was $36.1 million, which was significantly better than expected and exceeded the midpoint of our guidance range by $12.6 million. Operating margin for the quarter was 17%, which was 550 basis points better than the midpoint of our guidance. The sizeable upside in earnings this quarter reflects the strength of our business model and our ability to cost effectively acquire customers and expand those relationships over time. Operating margin for the full year was 15%, which was a 520 basis point increase from last year, and is 400 basis points better than our expectations going into the year. It also represents a very significant increase from 6% operating margin that we reported in 2020, and reflects our ability to effectively balance growth with profitability, all while investing in expansionary TAM opportunities, including executing on a successful M&A strategy. All of this resulted in EPS of $0.25, which was approximately $0.115 better than the midpoint of our guided range. Now, let's turn to the balance sheet. After paying $243 million net cash for Ermetic, we finished the quarter with $474 million in cash and short term investments. Accounts receivable was $220.1 million and total deferred revenue was $750.5 million, including $4 million of acquired deferred revenue from Ermetic. Current deferred revenue was $580.8 million, which gives us a lot of visibility into revenue over the next 12 months. We generated $43.3 million of unlevered free cash flow during the quarter and $175.4 million for the full year, which is up from $128.1 million last year. With 95% recurring revenue, high gross margins and renewal rates, we feel confident that we can continue to expand our operating margins and free cash flow margins over the ensuing years. Also in November, we announced a $100 million share repurchase program pursuant to which we repurchased 356,000 shares of common stock, with an aggregate purchase price of $14.9 million. We are taking a programmatic approach to partially offsetting our share creep and we'll continue to evaluate the size of the program going forward based on valuation of our common stock as well as other factors. With the results of the quarter behind us, I'd like to discuss our 2024 outlook. For the first quarter, we currently expect revenue to be in the range of $212 million to $214 million, non-GAAP income from operations to be in the range of $27 million to $29 million, non-GAAP net income to be in the range of $20 million to $22 million, assuming interest expense of $8.2 million, interest income of $5.2 million and a provision for income taxes of $3.9 million. Non-GAAP diluted earnings per share to be in the range of $0.16 to $0.18, assuming 123 million fully diluted weighted average shares outstanding. And for the full year, we currently expect calculated current billings to be in the range of $982 million to $992 million, revenue to be in the range of $895 million to $905 million; non-GAAP income from operations to be in the range of $152 million to $160 million; non-GAAP net income to be in the range of $129 million to $137 million, assuming interest expense of $32.2 million, interest income of $21.7 million and a provision for income taxes of $10.6 million; non-GAAP diluted earnings per share to be in the range of $1.03 to $1.10 a share, assuming 125 million fully diluted weighted average shares outstanding; and unlevered free cash flow to be in the range of $220 million to $230 million. Now, I'd like to provide some commentary regarding our outlook today. Our CCB guide represents a range of 12% to 14% growth for the full year, which is consistent with the directional comments I made during our last call. In terms of quarterly flow, we expect growth to accelerate modestly during the course of the year as we finalize the Ermetic product integration and continue to build pipeline opportunities for our more expansive CNAPP offering. Our guidance tonight also reflects an operating margin in the 17% to 18% range, which at the midpoint is a 220 basis point improvement over the prior year. We also expect to follow the same seasonal spending patterns as prior years, with incremental investment more weighted in the first half of the year, resulting in higher operating margin in the second half of the year. This is a strong initial guide for the year, which is benefited by the optimization plan Amit spoke of earlier. Accordingly, I want to provide some clarifying remarks on the model impact of the restructuring costs. It's worth noting that we recognize $4.5 million of these costs in the fourth quarter and expect to recognize an additional $2 million to $3 million in the first quarter related to the reduction in force that took place in January. Further, we are currently in negotiations to sublease a portion of our real estate, which could result in a non-cash impairment charge of $6 million to $7 million, bringing total restructuring expenses to $12.5 million to $14.5 million. Please note that all restructuring expenses are excluded from our non-GAAP results. And in terms of cash flow for 2024, our guidance includes a $6 million to $7 million reduction for the cash outlay related to the restructuring charges. While these charges will not be given pro forma treatment for cash flow purposes, such amounts should be taken into consideration when determining the normalized cash flows of the business. It's also worth noting that our guidance of $220 million to $230 million of unlevered free cash flow represents a doubling from the initial guide of $120 million to $125 million that I provided on our October 2022 call when considering the $10 million to $15 million of dilution associated with the Ermetic acquisition. Looking ahead, we expect unlevered free cash flow margin to generally ramp through the year, with Q2 as the typical seasonal low point. Also, as a reminder, we do not plan to update our free cash flow guide quarterly as the timing of collections and payments can vary from quarter to quarter. Our next update is expected to be mid-year on our Q2 call. At this time, I'd like to turn the call over to Amit for some closing comments.

Thanks, Steve. In summary, Q4 was marked by a healthy balance of growth and margin. We're excited about where we are as a company and the opportunity in front of us. As we take advantage of the investments we have made, we look forward to updating you on our next call. We hope to see you at the Morgan Stanley conference in the coming weeks. Additionally, we still expect to have our Investor Day in the first half of 2024. We'd now like to open the call up for questions.

[Operator Instructions]. And our first question comes from the line of Rob Owens with Piper Sandler.

Amit, I was hoping you could drill down a little bit into your CNAPP offering, much more holistic now with your Ermetic acquisition, and just the competitiveness, where you're seeing wins and why you're seeing wins.

We're super excited about the Ermetic acquisition and candidly how the initial innings of the integration between Tenable's cloud capabilities and what Ermetic brought to the table. Combined, we've got a very elegantly integrated CNAPP platform. And we're in the early innings of bringing it to market. We've got a lot of early momentum. We talked about least one or multiple six figure wins with our cloud security platform. I'd say a lot of momentum around POBs [ph] where we are taking down opportunities, we're getting technical wins against some of the market leading CNAPP providers out there, which many of you are familiar with, and excited about how the competition will play out over time.

When there's a competitive win, is there anything that people are honing in on when you talk about these technical wins? Is there something germane to your platform versus others that you're seeing customers migrate to?

Yeah, I think there's two key differentiators, which we hear about consistently. The first is much greater insight into access, which accounts had access to systems to which – the level of detail and accuracy around entitlements that we can deliver into cloud environments, even ones which are using existing CSPM and CNAPP platforms, is compelling. And the second is, we are consistently about how well integrated the CNAPP platform is. When you go to a Palo Alto or some other solution, you've got to look at multiple streams, you've got to go to multiple interfaces to try and piece together things which might combine or not combine, and you've got to intuit how these things will interact with one another to decide whether it's a problem or not. Whereas we have very simple, intuitive, easy to use – this is a toxic combination, this is creating pain, and elegant reporting, which brings all of the pertinent data together into a single workflow. So I think those are the two differentiators which seem to be consistently compelling POBs.

Our next question comes from the line Joel Fishbein with Truist Securities.

I have a similar question, but related to the OT market. Can you discuss what's happening, Amit, in the OT market, competitive dynamics same as the CNAPP space, a lot of funding in startups has been there. And I'm really looking forward to hearing how that's shaping up and how the pricing is holding up in the OT market.

Yeah, we haven't seen a lot of pricing pressure on the OT side. It's still an early [indiscernible] market. The way I would describe it is moving from a nascent stage – I think we've got increased awareness. We've got people starting in organizations starting to shift from a trial initial pilot deployment to deployments that are more pervasive, phase one/phase two types of deployments. We've seen seven figure transactions. We're seeing them more consistently on the OT side. From a competitive standpoint, we feel like we're extremely well positioned. If you look at some of the market analyst reports that have come out over the last quarter or two, Tenable is very clearly positioned, I would say, as the top line leader. I feel like we've got the platform. We've got the platform, we've got the customer base, we've got the coverage model, and we're the only OT vendor which can provide the sort of seamless visibility between converged IT and OT environment. When you look at a factory floor, when you look at a pipeline, when you look at a manufacturing operation, they are never just OT components. They're OT components combined with and leveraging general purpose compute platforms and general purpose computers and operating systems and applications. And so, when you look at that type of environment, you're trying to assess risk to your factory floor or to your operation. We really have a strategic advantage in our ability to provide that converged view. And the regulatory mandates for this are only starting to accelerate. We saw this past quarter, US federal government mandating that departments and agencies are able to accurately inventory and procure tools to accurately inventory their OT environments. So we think we're in the early innings of what could be a very, very large opportunity and feel like we're in pole position at this point.

Our next question comes from the line of Mike Cikos with Needham & Company.

Steve, I just want to revisit one of your earlier remarks. But I think one of the things that was cited as far as the CCB performance we saw this quarter was slight upside coming from mid-market. So the question is, can you discuss what the trends with mid-market organizations is today or your expectation for the durability of this, I guess, quasi-recovery, just given some of the weakness we cited on the September quarter? And then also, how is this playing into your guidance construction? What's your outlook specific to mid-market when we think about the guidance that we have in hand today?

As we highlighted earlier, and you noted, mid-market came in better than expected. I would say the upside this quarter is due to our ability to close some deals that previously pushed, but really more so due to strength with large deals. Specifically, we closed several 100K plus deals, and almost a dozen deals in the 80K to 100K range. And that was aided by Tenable One/ The mid-market is a cost effective selling motion for us. It continues to be an area of focus. And in terms of what we're reflecting in our outlook for the year, I think it's fair to say that the spending environment there is still very fluid, and we're trying to take a cautious approach to our outlook. So we're not assuming the strength in the mid-market in Q4. It will be pervasive and continue into 2024.

Maybe just two more quick ones, if I could. But with respect to the guidance, just wanted to see, I think previously the company has noted that is expected Ermetic to get to breakeven in 4Q of calendar 2024. Is that still the underlying assumption there? And then the second, I know you would called out some dynamics for full year unlevered free cash flow with respect to the restructuring. And I just wanted to make sure the potential for the sublease portion of real estate is not currently embedded in that unlevered free cash flow guide, correct?

That is correct. It will have no impact on unlevered free cash flow because it's a non-cash charge…

Right, right. And then the Ermetic profitability?

In terms of our expectations for Ermetic, our outlook for Ermetic in 2024 has not changed since we announced the acquisition in September. So I'll refer listeners to our press release, specifically the FAQ that we included in the press release announcing the acquisition. And, yes, we do expect to be breakeven on a free cash flow basis in the fourth quarter of this year.

Our next question comes from the line of Jonathan Ho with William Blair.

One thing I wanted to start out with this, can you help us understand a little bit better some of your decision around showing more margin versus balancing growth opportunities? And you could even, in particular, give us a little bit more color on the opportunities that you saw to drive more efficiency in the model?

I think consistent with the philosophy that we've operated under and have talked about over time, as we have seen growth moderate over time, said we're going to lean in a little bit more heavily on margin, and I think we have the opportunity to do that. We have tremendous leverage in the business. And still invest as required for growth. And we're seeing opportunities to create leverage. So for instance, we saw great growth with a lot of our strategic priority products with success, early momentum, with cloud security, momentum with OT, identity offering and certainly with Tenable One. Along with that, we feel like both product functionality and competitiveness are now compelling. We feel like these are core products for us now. They're not add-on products for a company that historically has been very VM oriented. And we're at the point where our core sales team is capable of picking up a lot of that load. Now, we're still providing them specialists, we're still providing them focus specialists, SEs and additional support. We saw there's an opportunity to just drive additional efficiency on the go-to-market side, and so we're taking advantage of that momentum and improving the market profile.

In terms of the US federal government opportunity, can you talk about what your expectations are for 2024 and maybe what you're seeing with customers today?

We see some variance quarter by quarter. But if you look back at our business over time, it's been ballpark 15% of our business coming from public sector. We do see tremendous opportunity – continued opportunity, public sector. Historically, that's really come very focused on the VM side of things. Lately, we've been talking a little bit more about success that we've seen with OT, identity. We're just now at the point where we can start bringing some cloud security capability to the federal marketplace. So we see a lot of opportunity for that to expand. A lot of that market is completely untapped from our perspective outside of VM. And so, we'll see how all that plays out. In the near term, we're viewing it as more [indiscernible] expected as our commercial business continues to grow. I think we're just treating the – public sector business will remain ballpark 15%.

Our next question comes from the line of Matt Saltzman with Morgan Stanley.

Just first one, really quick on the 2024 CCB guide. Steve, could you shed some light on the assumptions you're making around the mix of new customer contribution versus existing expansion in the year ahead?

I think some of the dynamics that we saw in 2023 are flowing through our guide for the full year 2024. Our net dollar expansion rate for the quarter is up there at 11%. So when customers renew, they spend incrementally more. We're not expecting any more or any less than the expansion rate that we experienced in 2023. And of course, we continue to add a lot of new customers. This quarter, we added almost 600 new enterprise platform customers. That's up sequentially from Q4. And for the year, we added a good pace of new customers, the markets in which we compete are greenfield. They're sizable opportunities to continue to take and win share. So we're reflecting kind of that pace of expansion with new customers. So, overall, our outlook assumes really more of the same in 2024. We think this is a good initial guide for the year.

Amit, just a quick one on product for you. One of the key differentiators that you guys talk about a lot on the Tenable One platform is just the attack path analysis that you guys can do and just the overall level of analytics that you bring with the platform. I'm curious, what are you guys doing on that front today that competitors can't or aren't doing yet? And I guess, like, in other words, aside from breadth of asset coverage, like, what is the main differentiator of the product from a capability standpoint versus peers?

Well, I think there's, as you put it, it's breadth of coverage. So, it's visibility not just into your cloud environments and the attack paths that might happen within cloud, but a recognition among security practitioners and customers that even a pristine cloud environment, if it's being accessed by a DevOps person coming in from a laptop or a system, which is vulnerable or which is compromised, results in and could result in the compromise of cloud based infrastructure, even though that cloud may be properly configured. And that's not a hypothetical. That's something that we've seen play itself out over time in even some very high profile breaches. Certainly, it's incredibly important to have the breadth of visibility. We bring that to the table today, Tenable One, with our own products, with that breadth of coverage, and over time, through adjusting third party data, data from other security products and platforms and infrastructure which our customers might be using. And the second is in the form of analytics, right? You mentioned two of them in limited exposure scorecards and also with the attack path analytics, and we're constantly adding new applications, new insights into the platform. So, [indiscernible] a lot of the talk has been around the cyber asset management application that we've built on top of Tenable One. As we do that, all of the data in Tenable One and all of the insights from that asset management application are then made available to our Tenable One customers, but also can be leveraged by the customers of other individual products that we're using. So, we think it's a great differentiator, and we think it's a great accelerant to continued innovation.

Our next question comes from the line of Brian Essex with J.P. Morgan.

Maybe for Steve, I was wondering if we could circle back on cost rationalization. And I guess as you went through the thought process, was there any process with regard to benchmarking or evaluation of costs relative to peers that kind of drove that decision? And then maybe the follow up on that, I think, particularly in regard to sales and marketing, I know some have asked me, what are the differences between you and others, and you tend to have maybe a higher touch with sales and marketing efforts and customer success? Is there any shift in the philosophy of, I guess, the focus that you put on sales and marketing to drive close rates in pipeline velocity? I'll leave it there. Interested in your thoughts around that?

Tenable has evolved quite a bit over the years. As Amit out earlier, we have introduced new products over the years, both organically and inorganically, and these newer products have become part of our mainstream selling motion. So some of the changes that Amit spoke of earlier in terms of go-to-market was just really a natural evolution of go-to-market for us. So, we look at our own business and say, okay, what are the opportunities to create a more cohesive go-to-market motion, deliver a clear and consistent message to our customer. So some of this is just a natural consequence of some of the changes that we made to the business, and not a result of any arbitrary goal that we have. So, our guidance today reflects continued expansion in the operating margin. We're expecting sales and marketing as a percent of revenue to improve by approximately 400 basis points on a year-over-year. I think there's a lot of natural leverage in the business. And overall, we feel good about the guide then. Clearly, we're having success selling some of these newer products. And these are in some of the biggest areas in all of cyber – cloud, OT, identity, and of course, the intersection of all those things that we call Tenable One. So, for us, it's part of our natural evolution, our ability to drive margins higher and the ability to continue to drive good sustainable growth and the result of our ability to make this a core part of our selling motion.

Our next question comes from the line of Dan Ives with Wedbush Securities.

Amit, a question for you. When you're talking to customers, does it feel like there's a big shift, if you look back six, nine months ago to today, in terms of just where Tenable is viewed more strategic and just even some of the individual you're talking to within customers or potential customers? Can you kind of contrast that for us? Just from your perspective.

I think there's been a shift. If I rewind, maybe a little bit more than six to nine months, you go back a couple of years, I think Tenable was very squarely – had our sights on becoming the market leading VM company. And then we went through this transition where it was, we're a real market leading VM company, we've added a couple of additional products to the portfolio. And some of those products were market-leading, other products were technology which we purchased, which was still earlier in its maturation, earlier in terms of customer adoption and stuff like that. To me, the biggest shift is in the last six to nine months, just the maturity of some of the newer product lines where they're really now able to go toe to toe with market leaders that are highly competitive, are best of breed, and we're able to win deals. And when we're able to win deals in individual knife fights in each one of these product areas and then we have the platform capability that we can talk about, we can help them with vendor consolidation and be much more strategic, then I think it starts becoming a much more exciting conversation. So I think it's going from this, hey, I really love you guys on VM to now being a much more strategic partner to a lot of our CSOs.

Is that like, from a partner perspective, even just different inbounds, in terms of more and more partners work with you?

It is. And we've seen the inbound, the channel in number continue to increase. It's now basically sitting at – half of our business is now what we'd categorize as a channel in, which is up significantly from where it was in quarters and years past where we just started embarking on this channel journey. So playing more strategic roles with our channel partners and we'll play a more strategic role with our CSO customers.

Our next question comes from the line of Brad Reback with Stifel.

Steve, your comment on 400 basis point improvement in sales and marketing, I'm assuming that's the exit rate for 2024.

Your audio was a bit unclear, but sales and marketing in 2023 for the quarter and for the year is about 41%, a little more, 41 and change, as a percent of revenue. And our guidance assumes for full year 2025 that there's 400 basis point improvement. And of course, sales and marketing in terms of absolute dollars will increase on a year-over-year basis, but approximately a 400 basis point improvement in sales and marketing spend as a percent of revenue on a year-over-year basis is what we're assuming in our guidance.

Our next question comes from the line of Stephen Schwartz with Wells Fargo.

Just one on Tenable One, it looks like you're seeing strong adoption there, but how do those results compare to your internal expectations this quarter?

Tenable One was a source of upside in the quarter. So we beat CCB by a good margin. We're seeing strong demand, added over 500 new customers, almost 600 new enterprise customers. We did 150 approximately net new six figure customers. So, Tenable One continues to be a major source of traction for us and one of the big reasons why we're able to close large deals in the quarter. So, came in better than expected.

Our next question comes from the line Saket Kalia with Barclays.

Sorry in advance if some of these questions were asked. I was just trying to call late. Steve, maybe for you, just a little bit of a housekeeping question. Within the 12% to 14% CCB outlook for 2024, can you just remind us how much of that is from Ermetic versus organic?

Saket, our outlook for Ermetic has not changed for 2024. So I would refer listeners to our press release announcing the acquisition of Ermetic in September where we discuss it more formally. But specifically, with regard to CCB, we're expecting Ermetic to contribute approximately 2 points of growth. And revenue, we expect Ermetic to contribute one point of growth. And we expect to be cash flow positive in the fourth quarter of this year as well.

Maybe for my follow-up for you, Amit. A lot of good stuff to talk about just in the broader platform. Just to just to go to sort of that foundational VM business. Can you just talk a little bit about the competitive backdrop there? I think the landscape here is well established. Every once in a while, you hear some noise from some of the endpoint guys, just kind of curious what you see if any changes at all.

I think on the competitive side, certainly from a VM perspective, there's very little noise. It's been remarkably consistent between ourselves, Qualys, Rapid. I think we've each invested in the VM market to different degrees. We continue to feel good about how we're positioned competitively, continue to feel like we're winning more than our fair share against both of those in the different market segments. Outside of VM, we're obviously seeing Wiz and Palo Alto a lot more on the cloud side as we bring our new cloud security capability to market. Seeing them a lot in POVs, and excited about how that competition will play itself out.

Our next question comes from the line of Rudy Kessinger with D.A. Davidson.

I just want to be clear again. Some of us joined the call a bit late. I don't know if this was addressed, but 400 basis points of improvement on sales and marketing spend next year. Just on this 5% risk, did you guys make cuts in sales and marketing? Did you reduce your sales capacity at all? Did you just split out kind of where the cuts were made?

Amit commented on it earlier, but this was really about mainstreaming some of our specialty products and making it part of our core selling motion. So it's really, the focus areas for the changes we made in go-to-market are first on sales overlays and second is removing layers of management, if you will. So, overall, we think it creates a more cohesive go-to-market motion. It resulted in a 5% reduction in force, about $20 million of savings, a little more so on an annualized basis. And that's pretty much the extent of it. Very little impact on quota capacity.

[indiscernible] specialty products are now highly competitive, if not best of breed. We feel like we're winning in those markets, and they're all integrated into the Tenable One platform. So to that end, they're not really specialty products, they're products that our core team needs to be able, and it's proven that they're able to sell. So we'll continue to feed them with specialists, with SE specialists, and additional support, but these are now core sales motions for us.

I guess just as we think about the CCB guide, kind of low teens versus the mid-teens preliminary outlook you gave last quarter, this 5% risk, how did that kind of impact the outlook you're giving today? And when you consider the positive things you guys are saying about the VM market, win rates, Tenable One, et cetera, investors will frequently ask, they'll look at your growth rate, 10% to 12% ex-Ermetic, organic on CCB, and it's not that much higher than some of your VM peers. And so, what would you say to those investors who would maybe call that into question as well?

In short, we had a good quarter. We delivered a 14% CCB growth and it was better than expected. If we look out in 2024, if you look at our guidance, our range calls for 12% to 14% growth. Keep in mind, we closed on the acquisition of Ermetic. So we expect Ermetic to add 2 points to CCB growth. So we're trying to take a cautious outlook, but we're also trying to reflect realities of our business. We think this is a really strong guide for the year. It comes with higher operating margins. It comes with strong free cash flow. And we continue to see good outperformance in some of these major areas of spend in cyber, such as cloud, identity and OT. So, we think the guidance is appropriate. And it certainly gives us the ability to execute well throughout the year and strike the right balance between growth and profitability.

Our next question comes from the line of Brian Colley with Stephens, Inc.

Amit, you talked about how the new SEC reporting requirements could be a demand tailwind for the platform. I'm curious if you're seeing that start to show up in the pipeline yet. And kind of when we should expect to see that maybe start to show up in the numbers here?

I don't know we're at the point where we can see specific pipeline that's being driven by the SEC reporting requirements. But, certainly, the types of things the SEC are asking for, not so much on the beach side, but more on the risk management side, are absolutely the types of things that we can deliver from a technical perspective and that people would do more naturally turned to their VM program to help them identify and address. So we feel like it could be a potential tailwind for us, looking at 2024 and beyond.

Our next question comes from the line of Trevor Rambo with BTIG.

This is Trevor on for Gray Powell with BTIG. Just a quick one. I know it's early in the quarter, but how do you guys feel on visibility of your pipeline so far? And then, how's your ability to call the business today versus around this time last year?

The visibility is strong, top of the funnel, in particular. So we continue to add new opportunities and we're pleased with what we're seeing. Obviously, when we give our guidance on the earnings call, we take everything into consideration, not just the results for the prior quarter, but also what we're seeing in the current month leading up into the quarter. So, overall, we're pleased with top of the funnel and we'll expect to continue to expand our pipeline coverage and create opportunities with a more expansive CNAPP platform. I think we talked about that on the call. We expect our sellers to continue to drive pipeline and we expect growth from Ermetic to kind of ramp throughout the year as our sellers look to create opportunities and identify certainly needs within our customer base.