Tenable Holdings, Inc.
Q2 2021 Earnings Call Transcript

Published: 27 Jul 2021

[Operator:]

Greetings and welcome to Tenable's Second Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn this conference over to your host Ms. Erin Karney, Senior Director of Investor Relations. Thank you, ma'am, you may begin your presentation.

[Erin Karney:]

Thank you, operator and thank you all for joining us on today's conference call to discuss Tenable's second quarter 2021 financial results. With me on the call today's call are Amit Yoran, Tenable's Chief Executive Officer; and Stephen, 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 Tenable's guidance and expectations for the third quarter and full year 2021; growth and drivers in Tenable's business; changes in the threat landscape and 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; Tenable's expectations regarding long-term profitability; and the impact of COVID-19 on our business and on the global economy. 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 quarterly report on Form 10-Q and subsequent reports that we file with the SEC, which are available on the SEC website at sec.gov. In addition, during today's call, we will discuss non-GAAP financial measures. These non-GAAP financial measures are in addition to and not a substitute for or superior to measures of financial performance prepared in accordance with GAAP. There are a number of limitations related to the use of these non-GAAP financial measures versus their closest GAAP equivalent. Our earnings release that we issued today includes GAAP to non-GAAP reconciliations for these measures and is also available on the Investor Relations section of our website. I'll now turn the call over to Amit.

[Amit Yoran:]

Thank you, Erin and thank you all for joining us today. Today I want to highlight our strong Q2 results and continued leadership in the market, the traction we're seeing in cross sell, and how our differentiated approach to cyber exposure is successfully addressing a critical need in the market.

[Stephen Vintz:]

Thanks, Amit. As Amit mentioned earlier, we're very pleased with our results for the second quarter highlighted by an acceleration in top line growth due to strong cloud adoption and a sizable increase in the number of large deals. And on the bottom line, we're very pleased with a substantial beat in non-GAAP EPS and strong free cash flow. We also recently completed a debt issuance in July which bolsters our balance sheet and provides us with the added flexibility to continue to invest in growth. I will discuss the impact of our 425 million term loan and revolver in greater detail during my remarks about our outlook for the year. Please note that all financial results we will discuss today are on a non-GAAP financial measure basis 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 our results for the quarter. Revenue for the quarter was 130.3 million, which represents 22% year-over-year growth. Revenue in the quarter exceeded the midpoint of our guided range by approximately 5 million. Visibility remains high as a percentage of our recurring revenue is 94%, which is primarily a result of our annual prepaid subscription model. In terms of the trend line, we saw a sequential uptick in revenue for the quarter notwithstanding the contribution from Alsid, which is a very important milestone for Tenable

[Amit Yoran:]

Thanks, Steve. The profile of cyber exposure continues to elevate, as digital transformation and recent events highlight the importance of cybersecurity and Zero Trust. Further, these events have proven that we can't rely on strong perimeter defenses, but need to assess risk across the entire enterprise. Our message has been very consistent. For Tenable, our core strength in understanding cyber risk has driven our success. It's aided our natural expansion across the surfaces attack, improving the security posture of cloud, OT deployments and now AD. We believe our strengthening platform of capabilities positions us for long-term success as our customers continue to shift to hybrid and cloud environments. We hope to see many of you virtually at the DA Davidson, Piper Sandler and Jefferies conferences in the coming weeks. We now like to open the call for questions.

[Operator:]

At this time, we will be conducting a question-and-answer session. Our first question comes on to Brian Essex with Goldman Sachs. You may proceed with your question.

[Brian Essex:]

Hi, good afternoon. Congrats on the results and thank you very much for taking the question. I guess, Steve, I was wondering maybe if we could start with the results in the quarter, really nice subscription revenue growth. Could you talk about, maybe, tax rates where you're seeing contribution there? And maybe a little bit of insight around perpetual license growth? Is that just renewals and how to think about that going forward?

[Stephen Vintz:]

Sure, Brian. Thanks for your question. As I commented earlier, we're very pleased with the results of the second quarter, as we saw performance in both CCB and revenue. We believe our risk-based platform is resonating with customers Q2 was strong. With regard to demand, we got a lot of new enterprise platform customers, 399 to be exact, we're seeing momentum with larger deals. They're up 30%, approximately on a year-over-year, as organizations are increasingly turning to us to secure a wider range of network connected devices and associate with user permissions. We also talked about momentum in the US public sector here, as we closed over a dozen six figure deals in the quarter across civilian and defense. In terms of the attach rates, one thing I will note here is that our newly launched Tenable.ep, which brings together vulnerability management, web application security, container security and lumen into a single offering, has been a catalyst of growth here and for larger deals, and validates our holistic approach to assessing risk. This is just one example of where we're having success, both with attach rates, as well as on the expansion side, where we saw continued traction with our net dollar renewal rate. So I think this quarter, given the growth in the top line demonstrates our ability to see higher tax rates for newly launched products. And we're having success there and obviously pleased with the print for the quarter.

[Brian Essex:]

Got it. And maybe if I could follow up in terms of revenue, I guess, growth by geo, how did that play out in the quarter? I mean, we had conversations in the core that seemed to imply that things are much worse in Europe than they are domestically here in the US. So was wondering if you're seeing the same and how you maybe position in that market relative to where we may. We might have a little bit more visibility in the US with good visibility to government what's going on here, but how does - how to geode outside the US ?

[Amit Yoran:]

We're very pleased with the results in Europe and specifically, in particular, if you look at EMEA and the Middle East, so we continue to have traction there. We're seeing outperformance specifically in that theater. And I think, one of the reasons why we saw the acceleration of growth is because we're also seeing acceleration in new business that comes from in terms of both new customers, as well as upsell from existing customers. So larger deals, traction with Tenable.ep, the ability to have higher tax rates and cross-sell on some of the products that we've launched really over the past couple of years, has since been instrumental there. So pleased with EMEA, pleased with Middle East in particular, obviously, also seeing good traction domestically here in the US and overall it was a pretty balanced quarter.

[Brian Essex:]

God I when I said worse than in Europe, I meant threat environment not your performance, so just wanted to make that clear. That's very helpful.

[Amit Yoran:]

Thank you.

[Brian Essex:]

Thank you very much. All right.

[Operator:]

Our next question comes from the line of Hamza Fodderwala with Morgan Stanley. You may proceed with your question.

[Hamza Fodderwala:]

Hey, guys. Thank you for taking my questions. It really seems like the demand environment is improving even versus sort of recently, quarterly trends. Just curious if you could sort of stack rank some of the drivers for us between existing customers, kind of expanding their asset coverage. I don't know, if I caught an exact sort of net dollar retention rate, Steve. And then also that versus new, perhaps, Greenfield opportunities in the mid market or elsewhere, how would you kind of rate the two, is there more net expansion versus net new customer adoption, or vice versa? Any color you can give it there?

[Amit Yoran:]

Well, in terms of the mid market, it's approximately 25% of our total sales, which is, I think the number that we disclosed earlier. So, we're continuing to outperformance there, which is the good news. As reminder, we have a pretty compelling go to market model where we have a product in essence that has broad adoption and use across the mid as well as a large market. It's ubiquitous, creates a cost effective on ramp to a larger platform sale. So we saw some really good pull throw in the mid-market and then flywheel of masses continues to help us. That comes on the heal of more investment in the sales organization, as well, not just in the mid market, but also the large. But we're an enterprise software company, so a little more than 50% of our sales comes from large market customers. And that's what's creating the inflection point for us. And I would say in terms of Greenfield, every quarter we survey our largest deals and ask what products and what solutions were they using before and it's still about a-third of our largest deals are Greenfield opportunities using no enterprise, the program and so that has remained fairly constant for us. So I would say a combination of new deals and upsell are probably the biggest catalyst we see with contributions in the mid market, which continues to do well for us and I think what's driving, all of this is probably your digital transformation, the need for assessing risk holistically, and just complexity and compute and our ability to assess risks across the entire attack surface, whether it's web applications, cloud infrastructure, operational technology, and I think this is resonating well with customers.

[Hamza Fodderwala:]

Got it. I would just sneak in a follow up. Seems like really strong early traction on the federal side. I mean, I was wondering if you could give us maybe a preview of Q3, obviously, that being sort of the federal fiscal year close our sort of the pipeline trends looking for q3.

[Amit Yoran:]

Yeah, I think the pipeline for Q3 looks healthy. We've had and continue to have a very strong federal year, perhaps more linear than we've seen in previous periods. And that's sort of evidence by itself with over a dozen six figure deals in the quarter across both civilian and defense. And then obviously, a lot of momentum with the EO calling for key initiatives around visibility and early detection of vulnerabilities, we think that bodes very well for the opportunity for us in Federal. We're also extremely excited about the attention being paid to Zero Trust initiatives, where NIST has recently selected Tenable as one of 18 technologies, that they're demoing as part of their Zero Trust initiative concepts in demos, in lab. So we think there's tremendous opportunity for continued growth in federal, we think we're exceptionally well positioned to capitalize on that.

[Hamza Fodderwala:]

Great, thank you very much.

[Operator:]

Our next question comes from one of Rob Owens with Piper Sandler. You may proceed with your question.

[Rob Owens:]

Great. Thank you for taking my question. I guess just to just to cut to it and given some of your comments, are you actually seeing budgets increase as a result of the environment or do you think that this is playing out kind of as you would have expected with a better second half? So are we seeing - I mean, we've seen a lot of these major breaches, historically, and I think a few have led to an increase in spending, but I think your prepared comments seemed a little more bullish. So at this point in time, are we seeing wallets open up even more for security and security budgets increase or is it more of a typical second half?

[Amit Yoran:]

No, I think the security budgets and the market has never been hot or more open to security spend. I think your executive level awareness from the President, Boards of Directors, CEOs, audit risk committees, cyber is front and center to they are thinking cyber risk is integral part of their calculus of risk more broadly. I think that's perhaps in part why we've seen an acceleration in the commercial market for us. And we anticipate that in the enterprise market where there's longer sales cycles, budget is available, resources are available, it's just a matter of going through the prioritization, the timing of transactions and deals and enterprise sales cycles. I think we remain extremely bullish about the opportunity, given the increased awareness visibility and priority of cyber security more broadly.

[Rob Owens:]

Great, and then second around your Active Directory solution, how much market education is required here? Does the end customer understand all the vulnerabilities with Active Directory and so it's more of an easy sales cycler or is there a lot of education that still having to happen up front, both the customers and with the channel?

[Amit Yoran:]

Yeah, having been in the enterprise security market for almost 30 years, this is one of the weirdest dynamics to describe that I've ever seen. I think there is incredibly broad awareness that Active Directory is a critical gap in security programs. 80 plus percent of ransomware specifically targets Active Directory when you see things like Colonial Pipeline and other breaches causing significant business outages. That translates directly to Active Directory. And I think most CSOs and most security teams recognize that they have a significant issue with Active Directory, configuring it properly in any large and complex environment is an incredibly difficult task and there is an incredible gap or lack of mature capabilities and tools available to them. So you'll see sophisticated organizations turning to a consultant to look at their AD environment and see if it's well configured on some kind of periodic audit basis. And that's just not acceptable, it's not getting the job done. So our sales teams are having great success, engaging with customers, they know they have issues they want, and they're having a good hit rate, getting meetings, getting proof of concepts deployed, having conversations around budget. And again, this is a solution in acquisition that wants to close midway through last quarter, so it will take time. It is an enterprise sales cycle but we're extremely excited about our position in the market and the capabilities that we're bringing to the table with a market that has great need and does not have great alternatives available.

[Rob Owens:]

Great, thank you.

[Operator:]

Our next question comes from the line of Sterling Auty with JPMorgan, you may proceed with your question.

[Sterling Auty:]

Thanks. Hi, guys. So I want to be absolutely clear. The 399 platform customers you added did not include the 91 from Alsid, is that correct?

[Stephen Vintz:]

That is correct.

[Sterling Auty:]

I think that makes it the largest Q2 net ads that you've had since coming public. So I'm kind of curious in terms of how much of that productivity is coming direct versus some of the channel programs that you've had and any comments that you might have about the durability of those net ads into the back half of the year?

[Stephen Vintz:]

Well I think in short, we're pleased with the results for the quarter, we saw some of our highest achievement rates in many years this quarter, so achievement rates and productivity continues to go higher. It comes on the heels of more investment in sales and marketing, we had a quota capacity in the second half of the year, we plan to continue to add quota capacity - had quota capacity in Q2 and expect to continue to add quota capacity in the second half of the year. So we're certainly making the kinds of investments that we think are necessary to sustain attractive long-term growth. We feel really good about our business. So given the fact that productivity levels are high, achievement rates are high, we're adding sales capacity, given the backdrop of heightened threat environment, we feel really good about the business. But, yes, it's one of our strongest quarters. And what's underpinning that? We call it out earlier, but a few things. Number one, we continue to see strengths in the public sector and I think some of the investments in product are also happening where we're seeing higher attach rates or we're seeing the expansion rates increase as well and Tenable.ep is certainly playing the role of that. And then we're hard at work building pipeline opportunities, we have more six figure deals in our pipeline now than perhaps at any time during our history. So, look, we're pleased with our ability to add new customers, we think it speaks to the growing demand and importance of VM and the customer's ability to assess risk holistically. And we're excited about the about the second half of the year.

[Sterling Auty:]

Sounds good. Thanks, guys. That's it for me.

[Operator:]

Our next question comes from one Saket Kalia with Barclays. You may proceed with your question.

[Saket Kalia:]

Hey, guys, thanks for taking my questions here. Maybe for you Amit, one thing we didn't talk about is capital allocation. I'm kind of curious, how are you and the Board sort of thinking about capital allocation, particularly with the new credit facility? And where I'm going there specifically with M&A, I mean, it feels like Tenable always has been thoughtful in terms of M&A in the past. How do you think about that M&A strategy sort of going forward? Does that make sense?

[Amit Yoran:]

Absolutely. I think the capital is certainly a major portion of as to continue to invest in the business with increased confidence we're seeing and the opportunity that's in front of us in the market. So you'll see that occur both organically through continued innovation, adding new feature function capability, differentiation in our core market, as well as adding new asset types, greater visibility, improved analytics to the products. You'll also see, I think, a continued focus on inorganic moves. We're really excited about the position that we have with OT, the pace with which that market is starting to wake up and recognize, especially in light of the outages caused by the convergence of IT and OT around Colonial Pipeline. I talked a little bit earlier about our Active Directory solution and the incredible opportunities that exist there and make no mistake about it, it is a bear to secure and we have market-leading technology there, and there's great market awareness. And those - securing those identities is absolutely core to cloud-based deployments, it's absolutely core to remote work. It's absolutely core to Zero Trust initiative, so there's phenomenal opportunity around there. And we think that there's other key areas of technology where we can make very exciting acquisitions and continue to position the company for long-term growth.

[Saket Kalia:]

Got it. That's really helpful. Steve, maybe for my follow-up for you, you touched on EP a little bit and realizing it's still early, can you just talk about any sort of early observations on how it's sort of impacting an average deal size, anything else that you're sort of seeing in bundling, generally? Anything on EP and sort of bundling would be helpful, because it sounds like it's off to a good start?

[Stephen Vintz:]

Well, it is. And what we're excited about is it addresses a larger problem for our customers, our ability to assess risk holistically as EP includes VM, WAS, Container security and Lumen. The one thing that I'll say about EP is that it is driving higher deal sizes. There is no surprise that we're announcing really strong six figure deals. I talked about the pipeline that we're building, even specifically for EP, not only 100k but 250k plus deals. And the average deal size is about 55% to 60% higher than if we would sell core VM on a standalone basis. So over the past few years, we've made a lot of investments in R&D, we've brought new product to market. The pricing and the packaging of those products, we think, are going to continue to be a good catalyst and an enabler of growth. And our sales team is having success selling that into the account base, and also winning new opportunities as well. So you'll see that continuing to evolve. EP does not include Active Directory, does not include OT, does not include some other things. So we think there's - we are demonstrating ability to monetize some of the investment in R&D and we think there's also ample opportunity to continue to see further monetization and even higher selling prices.

[Saket Kalia:]

Very helpful. Thanks, guys.

[Operator:]

Our next question comes from the line of Mike Cikos with Needham & Company. You may proceed with your question.

[Mike Cikos:]

Hey, guys. Thanks for taking the time and the questions here, I really appreciate it. First question I wanted to tap into, I know that you guys are making these investments, you're calling out in the sales and marketing arm. Specific to adding quota carrying reps, just curious, can you give us a feel for the order of magnitude at which you're growing the headcount there? And then, I guess, the build on to that would be, how long does it take for these new hires to become fully productive? What is it you guys are doing to ensure that these new hires are maintaining or improving the productivity rates that Tenable is usually delivering?

[Stephen Vintz:]

Yes, this is Steve. So, we are adding quota carrying sales reps, it is something we talked about at the beginning of the year. We continue to add quota capacity in Q2. Our plan is to, probably in the second half of the year, well, our expectation is that we'll add more quota capacity in the second half than even in the first half. So just given the quality of the print, the confidence of the business, we feel like that is the right thing to do. We're doing this in a way that still allows us to generate the kinds of margins and free cash flow that are necessary in the company. The average ramp is about 10 months, so it give you a sense of when we expect reps to be fully ramped and contribute. And the last thing that that I would say there is it's not all about just direct investment and direct extension of the sales force. We are the only company in our space that has made 100% commitment to the channel and the channel continues to bring us more inbound opportunities, perhaps than any other time, so. And not within the investments that we made in channel, we're also continuing to make investments in MSSP. So the combination of adding quota capacity and the expansion of the sales force continuing to optimize and tune the channel that drive higher levels of performance, they allow us to open doors and to opportunities that we probably wouldn't otherwise see and then also, the investment in doubling down of MSSP, which is, even though it's on a small base of business is one of the fastest growing areas of our company, and it's a new route to market for us. We're trying to - we're pulling all the levers and that's what's flowing through in the spent for sales and marketing and we expect that to pick up sequentially in the second half of the year.

[Mike Cikos:]

Very helpful. Thank you for that. If I could just tack on one more, I'm trying to think about Tenable.ep, and I understand it's a much more strategic, holistic decision making process for your customers, especially with Board members, this team top of mind, or the C suite getting involved, can you help me tie all that back into what you guys are seeing on sales cycles. I'm just trying to course through those two items, because obviously your results are telling us something different but I would have expected that these more strategic decisions would be extending your sales cycles to a certain extent.

[Amit Yoran:]

I think that's probably a fair observation that there - it is a more strategic decision and there have been maybe some impact to sales cycles, because you're seeing it as a more strategic procurement from the customers. Hopefully, that also results in an early indication resulting in significantly larger transactions, and probably stickier relationships with the customer. From our perspective, EP is beyond just, hey, there's an enterprise licensing component to it and it really is a platform-based sale, and aligning our capabilities across the platform with our customers' desire for increased visibility and increased understanding of cyber risk. So again, we're no longer focused on this web application scanner versus that web application scanner, it's really being able to bring together an understanding of web app scanning, and container security and cloud security and other IP asset visibility and understanding, what the correlation is between those and how those translate into enterprise risk. So as cyber risk becomes a more strategic conversation between the CSO and the Board, we think this platform-based approach is critical and the sales team has gravitated toward it and embraced it and I think, in part because customers understand it, and seem to be embracing this concept as well.

[Mike Cikos:]

Very helpful. Thank you, guys.

[Operator:]

Our next question comes from one of Jonathan Ho with William Blair, you may proceed with your question.

[Jonathan Ho:]

Hi, good afternoon, and congrats on the strong results. I think you've indicated in the prepared remarks that IO was outgrowing SC. Is there an inflection point here? And is there any sort of potential impact to either billings or revenue that we should be thinking about if we do see maybe a faster shift over to IO?

[Amit Yoran:]

Yeah, Jonathan. I think the work from home movement has certainly created demand and pull through for our IO platform. But one of the things that customers really like is its flexible deployment, so we can go on-prem in the cloud, so we don't often customers choose both and its ease of use. So for us, we're continuing to grow the top line at very healthy levels and we continue to see customers increasingly choose IO and standardize on IO as their VM platform versus on-prem, but often we sell both. And it's something we first added a couple of years ago, even when we went public, we just said in a few years that we'll just - given how workloads are moving to the cloud and just buying preferences that we will continue to see a higher mix of business for IO relative to on-prem offerings. The good news is that we're flexible in terms of how we deploy and how we serve customers. Some markets customers have a bias towards on-prem and other markets, clearly, there's a bias towards buying and delivering from the cloud.

[Jonathan Ho:]

Got it. And then like, can you maybe give us a little additional color around sort of your comments with OT, how do we think about sort of the Colonial Pipeline breach? And maybe in specifically the timing of when companies start to increase their spent or when those companies start to fall into the pipeline, are you seeing your phone is ringing off the hook? I'm just trying to understand sort of how to think about the timing of when that maybe translates into bookings or revenue. Thank you.

[Amit Yoran:]

Yeah. Well, I think that there's a number of things. Great question, Jonathan. I think there's a number of things happening in the OT world, which are characterized as a broader awakening. Certainly, Colonial Pipeline, front and center and the thing that Colonial Pipeline really highlighted was the convergence of IT and OT, it's something that we've been vocal about for years but you cannot assess the security of a pipeline without also understanding the IT environment that is integral to that, to those control systems and into that operational environment. So we think we're coming from a position of strengthening the customers, are certainly in prospects of certainly understanding of that. So it has increased awareness. A number of - and not just Colonial Pipeline but the water treatment facilities and attacks against pharmaceuticals and folks in the healthcare industry recently, really highlight the convergence and the opportunity in front of us. These are not overnight conversations; these are processes and sales cycles that are very deliberate. What we're seeing now is a lot of pilots, a lot of evals. We're seeing early deployments. So a facility or an organization, which may have 250 facilities around the world is deploying in 15 facilities first, and testing the products and understanding what is the most efficient path for deployment, the most efficient method for managing a larger architecture like this, and over time with success, we believe we're going to see - and they're going through the budget cycles, we believe they're going to translate into much larger opportunities down the road. Outside of high profile breaches and attacks, there have also been, in addition to the cyber EO, the administration has also released a another executive order specific to the energy sector and you're seeing 100 day sprints, first in the energy sector, and then soon to be in other sectors, really looking for capability and trying to jumpstart a focus on cybersecurity in some of these industries which historically have lagged behind in progress around fiber and certainly lacked role behind the threat that they're dealing with.

[Jonathan Ho:]

Excellent, thank you.

[Operator:]

Our next question comes from the line of Joelle Fishbein with Truist. You may proceed with your question.

[Joelle Fishbein:]

Hi, thanks for taking my question. Amit, just for you, I wanted to see if you can expand on the Deloitte partnership and some of the system integrators and some of the programs that you're doing with them and how that might be driving some of the larger deals.

[Amit Yoran:]

Yeah, Joel, great to hear from you. So I think highlighting the partnership with Deloitte specifically around an initiative they have for smart cities and smart infrastructure where we've deployed our OT solution alongside other capabilities that they're showcasing and touring customers through and prospects as they educate them on the full imagining of what technologies can bring to the table. So we're excited about that partnership in particular, but the systems integrator is more broadly helping their customers understand cyber risk and we think we're an integral part of that understanding, so both on the OT side as well as on the IT side.

[Joelle Fishbein:]

Great, thanks.

[Operator:]

Our next question comes from the line of Brad Reback with Stifel. You may proceed with your question.

[Brad Reback:]

Great, thanks very much. On the growth in quota carrying capacity, any reason we shouldn't expect that to expand at least in line with revenue if not faster?

[Amit Yoran:]

Well, different reps have different quotas and they're different geo, so while there is some relationship, it takes time to ramp and there's not a perfect corollary. And as I also mentioned earlier some of this is going to be on the commercial side, which is our mid-market business. We're applying some of the lessons and best practices that we learned during COVID, which is our ability to continue to close and transact deals here remotely and even larger deals to our go to market motion. But there is obviously a relationship, it is one of the reasons why we call it out and we're continuing to make investments in that capacity. But in addition to that, it is continuing to get traction with the channel even doubling down on our efforts via MSSP.

[Brad Reback:]

Okay, thanks very much.

[Operator:]

Our next question comes from the line of Kingsley Crane with Berenberg. You may proceed with your question.

[Kingsley Crane:]

Thanks so much and congrats on a great quarter with customer adds, even excluding Alsid. So if you look at revenue growth and CCB growth, can you provide me more clarity on those figures, ex-Alsid.

[Amit Yoran:]

I'm sorry, you broke up and were inaudible. Can you repeat the question please?

[Kingsley Crane:]

Yes, can you provide any more color on revenue growth in CCB, ex the Alsid acquisition?

[Amit Yoran:]

So Alsid closed late April, so the results that we're reporting today only reflect about 60 days of activity. And really, during that time, we've been hard at work on integrating the businesses, creating enablement programs for our sales team, and hard work on building pipeline opportunities. And one thing I will say is that out of the gate, we have some really good momentum, and pipeline and the activity levels are high, and we're excited about the second half of the year. And keep in mind as well, just given sales cycles, you're more likely to see a greater contribution from Alsid, Q4 versus Q3.

[Kingsley Crane:]

Okay, that's fair. And just one quick follow up. So, great to hear the traction with Tenable.ot, as a public utility company, as a result of a cross-sell. So when you look at the revenue base for Tenable.ot, today, how often are customers cross selling into that product and then how often are you landing with OT?

[Amit Yoran:]

Yeah, I don't know that I have a percentage of the cross sell or how often we're landing with OT, but certainly our sales motion contemplates that we've got a very large customer base, 35,000 plus customers around the world and thousands of those on the enterprise platforms, and where they have very strong degree of trust and confidence in the Tenable brand and also come to rely on Tenable for helping them understand their cyber risk. Increasingly, over the last 18 to 24 months, we've seen CSOs being given more and more responsibility for operational technologies and operating environments. And so having a mature capability in that segment of the market allows them to expand their relationship with us into those environments and gain the visibility that they are looking for, in a way that they're used to consuming it and processing it and understanding it. So we feel like we have a very strong go to market motion, we're getting a fair number of add backs and then differentiating ourselves with the ability to assess both IT and OT in these operating environments, which have both platforms and ultimately can be susceptible to both forms of risk and exposure. So we think that is a key differentiator for us and seems to be playing itself out pretty consistently with add back. It's just a matter, these are slow moving markets and early in their adoption cycles, and we anticipate there to be much stronger long-term growth there over time.

[Stephen Vintz:]

And then this is Steve, the one thing I will say is, looking at the investments the second half of the year, we're absolutely focused on investing more in OT. Penetration is still relatively modest and market opportunity is large. We do know that when we're first entering an opportunity that success rates and close rates tend to go up, so you're going to be seeing incremental investment from us to focus on greater coverage and greater focus in this market. So, given the strength of what we saw the first half of the year, and by the way, OT is helping drive the expansion . You're going to see incremental investment in the second half of the year, specifically in the OT side of the business.

[Kingsley Crane:]

Thank you. That's so helpful and congrats again.

[Operator:]

Our next question comes to the line of Gray Powell with BTIG. You may proceed with your question.

[Gray Powell:]

Great. Thanks for welcoming me into the call here and yeah, congratulations on the good numbers. So I want to follow up on an earlier question. You mentioned cloud adoption and Tenable.io a couple of times, as a driver of upside. Can you maybe give us a sense, even a ballpark sense is just sort of a mix of new and add-ons in Tenable.io, or maybe just how much faster it's growing versus the overall business in sort of the low 20% range?

[Amit Yoran:]

So today, we're reporting CCB growth of roughly 23%. I think it's fair to say, just given the mix, the change in mix that we're seeing greater growth in IO and related-cloud products. And so, that's something that we anticipated over the last couple of years, so kind of reflects how workloads are moving to the cloud. So yeah, we're seeing higher growth, I think it's fair to say in terms of cloud. That sort of corresponds with greater investment, greater focus for us but absolutely, unequivocally, our on-prem and SC offering is paramount to our success where we have high renewal rates and highest customer satisfaction rates. So I think it's really the combination of both together and our ability to deploy both in terms of on-prem and in the cloud that's really resonating well with customers.

[Gray Powell:]

Understood, okay. And then the last one, it was great to hear the positive commentary on US Fed, Can you remind us just ballpark like the mix of revenue you drive there and do you see that changing significantly in the next 6 to 12 months?

[Stephen Vintz:]

Ballpark plus or minus 15% and it's been a high performing segment of the market for us for some time. We think we have a very significant position of strength in that market and we see that continuing. I don't think at this point we can point to any specific indicator and say this - we expect this percentage to vary or change significantly in the near term.

[Gray Powell:]

Understood. Alright, thank you very much.

[Operator:]

Our last question comes from a line of Shebly Seyrafi with FBN Securities. You may proceed with your question.

[Shebly Seyrafi:]

Yeah, thank you very much. So, in terms of gauging the upside here, both on the revenue and the number of enterprise customers added, I think you called that public strength and investment in products, I think that you meant Tenable.ep ramping, it came out in February. So which of those two factors public or Tenable.ep was he larger factor, would you say in terms of driving the upside?

[Stephen Vintz:]

I would take public sector only because the deal sizes tend to be much, much larger. I mean, they're very sizable, and not just six figure, but also seven figure deals. We've always had a very strong foothold in US public sector. We served most three letter federal agencies, both on the defense and the civilian side. So certainly that was of note that's one of the reasons why we call that out. And our momentum in large deals is certainly apparent here and given the strength in the quarter. But there's also sizable opportunities we've had success with Tenable.ep and this is a product that we launched in the end of February, and we're able to close some deals in the first quarter but now with a full quarter under our belt, even it has only been just a few months, we are pleased with the success and it's helping us in terms of sales cycles as well. Yes, there are larger ASPs, there's a clear corollary between selling prices and sales cycles. The larger the deal, the longer the sales cycle tends to be. But we now have - with EP, we have a single integrated offering and it's a much smarter way for customers to consume technology as opposed to selling our card and separate skews on a purchase order which often comes with more scrutiny and more review. So notwithstanding the higher selling prices, we're actually having success selling an EP to larger enterprises in a way that allowing us to impact our growth here at short term.

[Shebly Seyrafi:]

Okay and last one, you said your gross margin, you expect it to be similar in the back half from Q2. Q2 gross margin did tick down. Was that tick down due to ramping IO or were there other factors? And when do you think you can return the gross margin back to, like, last year's levels at like 83% plus?

[Stephen Vintz:]

Yeah, I think just directionally, in terms of gross margin for us, one of the things we've talked about years ago is that we expect the gross margin to settle low at the high 70% range. And just given the mix of business and the shifts that we're seeing we do, we think that's fairly consistent. I think we have confidence we will be at the higher end of that range versus the lower end. I think what you're seeing in terms of gross margins in the second quarter is that even though the Alsid acquisition is new, reflects two months of incremental expense associated with Alsid. And a lot of these costs here, not just Alsid, but also in our business as we continue to expand our geographic and international footprint, a lot of the costs for these public cloud platforms are semi fixed, so they're not variable, so requires investment upfront. And then those are costs that you'll fully absorb over time, as you achieve scale and growth and there's GL . For now, we're saying, hey, it's going to be flat for the second half of the year, just given the growth and the investments that we're making. But we also feel good over the past couple of years that our gross margins have exceeded our own expectations and the guidance that we gave when we went public.

[Shebly Seyrafi:]

Thank you.

[Operator:]

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Enjoy the rest of your evening.