Greetings, and welcome to Tenable's Q3 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder this conference is being recorded. It is now my pleasure to introduce your host, Erin Karney, Vice President, Investor Relations. Thank you, Ms. Karney, you may begin.

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

Thank you. As Amit discussed earlier, we are pleased with the underlying performance of the business this quarter, which is not reflected in our calculated current billings. I will provide more commentary momentarily, but first, please note that all financial results we 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. Now on to the results for the quarter. Calculated current billings, defined as revenue recognized in the quarter, plus the change in current deferred revenue grew 8% year-over-year to $224.7 million. As I have mentioned on prior calls, CCB is typically a close but not perfect proxy for sales in the quarter and is influenced by a number of factors such as mix of business, deal timing, including early renewals. Since our IPO, CCB growth has generally tracked in line with the underlying sales growth of the business. However, this is the first quarter in which there was such a large disparity. Current IPO growth in the quarter was 15% and is a closer approximation of the underlying performance of the business this quarter. During the quarter, we saw significant outperformance in the public sector, specifically in U.S. Federal, which benefited from a robust spending environment related to the September 30 fiscal year-end. We closed a few strategic agency-wide seven-figure deals on both the defense and the civilian side, some of which are listed on public procurement sites. Consequently, the outperformance in U.S. Federal resulted in a higher mix of public sector sales and overall, a much higher mix of professional services and perpetual licenses that either did not contribute or minimally contributed to CCB in the quarter. The total impact here was approximately $12 million of lower CCB in the quarter. To provide a little more color, these services were sold primarily with our VM and OT offerings that are tied to large government programs and included initial software purchases as part of deployment planning exercises that we expect will result in additional product purchases over the next several quarters. We believe these large strategic wins not only demonstrate our leadership position in the federal market but also give us a very significant opportunity to sell additional software in future periods. Also, please note that perpetual license software sales are recognized over five years, not upfront. So $0.04 of the annual contract is excluded from CCB. Another major highlight was Tenable One, which represented 20% of new sales in the quarter and grew over 100% year-over-year. Despite these strengths, we did start to see some headwinds in the mid-market where spending was constrained, particularly with new logos. It's important to note that while the top of the funnel remains strong, there appears to be a more cautious outlook from buyers in this market related to the broader macro, which impacted our conversion rates in the quarter. In terms of key metrics, we added 386 new enterprise platform customers in the quarter. Also, as discussed earlier, large deals were strong as we added 58 net new six-figure customers in the quarter. And we also closed a record number of seven-figure deals in the quarter, which reflects strength in the large enterprise market as well as the public sector. Our dollar-based net expansion rate was 111% in the quarter, compared to 111% last quarter. As a reminder, the expansion rate is calculated on a last-twelve-month (LTM) basis. Revenue was $201.5 million, which represents 15% year-over-year growth. Revenue in the quarter exceeded the midpoint of our guided range by $3.5 million. Our percentage of recurring revenue remains high at 95% this quarter, which is consistent with prior periods. I'll now turn to expenses. I'll start with gross margin, which was 80% this quarter compared to 81% last quarter. As I mentioned on the last call, we expect margins to be modestly lower in the second half of the year as we absorb the initial public cloud costs related to the upcoming relief of cyber asset management and AI-powered analytics. Sales and marketing expense was $79 million, which was down from $81.4 million last quarter. Sales and marketing expense as a percentage of revenue was 39%, compared to 42% last quarter. Sales and marketing expense decreased sequentially, primarily due to lower personnel costs and event marketing spend related to the timing of industry conferences, partially offset by higher commission expense. R&D expense was $27.8 million, which was down from $28.1 million last quarter. R&D expense as a percentage of revenue was 14% this quarter, flat in comparison to last quarter. R&D expense decreased sequentially primarily due to lower personnel costs, partially offset by increased public cloud costs. G&A expense was $18.5 million, which is up from $17.8 million last quarter. G&A expense as a percentage of revenue was 9% this quarter and flat relative to last quarter. Income from operations was $36.6 million which was significantly better than expected and exceeded the midpoint of our guided range by approximately $10 million. Operating margin for the quarter was 18% and which was 470 basis points better than the midpoint of our guidance. The sizable upside in earnings this quarter reflects the strength of our business model and our ability to cost-effectively acquire customers and expand those relationships over time. It's also worth noting that our operating margin improved over the same period last year by approximately 490 basis points. Additionally, you will note $6.5 million of other expense net this quarter. Included in this amount is a $5 million impairment charge related to a strategic investment in a privately held company. All of this resulted in EPS of $0.23, which was approximately $0.045 better than the midpoint of our guided range. Now let's turn to the balance sheet. We finished the quarter with $693 million in cash and short-term investments. Accounts receivable was $179.4 million and total deferred revenue was $681.5 million, including $518.4 million of current deferred revenue, which gives us a lot of visibility into expected revenue over the next 12 months. We generated approximately $48 million of unlevered free cash flow during the quarter. Year-to-date, unlevered free cash flow was $132 million, which pushed us well within reach to achieve our annual unlevered free cash flow target for the full year, which we are raising today after adjusting for the Ermetic acquisition. With 95% recurring revenue, high gross margins, and renewal rates, we feel confident that we can continue to expand our operating and free cash flow margins over the ensuing years. With the results of the quarter behind us, I'd like to discuss our outlook for the fourth quarter and full year 2023, which reflects the estimated impact of the Ermetic acquisition that closed on October 2. For the fourth quarter, we currently expect revenue to be in the range of $204 million to $208 million, non-GAAP income from operations to be in the range of $23 million to $24 million. Non-GAAP net income to be in the range of $16 million to $17 million, assuming interest expense of $8.3 million, interest income of $4.9 million and a provision for income taxes of $3 million. Non-GAAP diluted earnings per share to be in the range of $0.13 to $0.14, assuming 123.5 million fully diluted weighted average shares outstanding. And for the full year, we currently expect calculated current billings to be in the range of $862 million to $870 million, revenue to be in the range of $789.4 million to $793.4 million. Non-GAAP from operations to be in the range of $107.9 million to $108.9 million, non-GAAP net income to be in the range of $83 million to $84 million assuming interest expense of $31.5 million, interest income of $24.2 million and a provision for income taxes of $9.1 million. Non-GAAP diluted earnings per share to be in the range of $0.68 to $0.69 per share, assuming 121 million fully diluted weighted average shares outstanding and unlevered free cash flow to be in the range of $168 million to $173 million. I'd like to provide some commentary regarding our outlook today. The trends we observed in the mid-market in Q3 are expected to persist. So we think it's appropriate to revise our CCB range for the year to reflect a more cautious outlook in Q4 as well as the flow-through of our CCB results in the third quarter. Revenue, which is recurring in nature, reflects a $3.5 million beat in Q3 and a $1 million rate. Also as a reminder, Ermetic is not expected to contribute materially to the top line in the fourth quarter. In terms of profitability, we are increasing our outlook for income from operations for the full year by $10 million, which reflects a $15 million beaten raise for Tenable and less $5 million related to the impact of the Ermetic acquisition. Net income for the full year reflects a $10 million beat in rate for Tenable, less $8 million related to the impact of Ermetic, which includes $3 million of foregone interest income. We're also revising our outlook for unlevered free cash flow to reflect a $3 million rate Tenable due to the operational efficiencies we continue to realize in our business, less $15 million of costs due to the impact of the acquisition. In terms of 2024, we will provide guidance for Q1 and the full year on our earnings call in February, but we believe mid-teen CCB growth, which reflects the contribution from Ermetic and the current selling environment in the mid-market, is a fair expectation of growth for the upcoming year. Q4 is an important input to setting expectations for the upcoming year, so we want to have that data point in hand before we discuss the business in more specific terms. All of that said, we will continue to effectively balance growth with profitability and expect unlevered free cash flow to grow approximately 25% next year, which reflects the anticipated impact of Ermetic. We expect Ermetic to be breakeven and unlevered free cash flow in the fourth quarter of 2024 and be accretive to EPS for the full year in 2025. At this point, I'd like to turn the call back over to Amit for some closing comments.

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

Thank you. We will now be conducting a question-and-answer session. The first question comes from Brian Essex with JPMorgan. Please go ahead.

Hi, good afternoon and thank you for the question. Steve, I really appreciate the insights regarding the developments with CCB. Amit, I have a question for you, and I’ll keep it to one. Concerning code to cloud security, we are noticing that many different companies are entering this market, including larger platform vendors and specialized vendors. Who do you typically compete against? How are you succeeding in this market? Also, what is your outlook for gaining market share as we consider your potential to enter this space in the coming years?

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

That's great. Maybe a quick follow-up. Are you currently seeing those vendors competitively now? Or is it mostly greenfield treatment?

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

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

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

Yes. Hi, Rob, we talked about the strong performance in the public sector, which affected CCB. Specifically, in the U.S. Federal sector, our business mix this quarter was twice as high as any previous quarter since going public. There's a significantly larger proportion of business, with federal procurement leaning more toward perpetual licenses. These deals tend to be large, complex, and strategic, and they include a greater level of services. This combination of perpetual licenses and professional services is not fully captured in CCB. Regarding perpetual licenses, these are amortized over five years for revenue recognition. Therefore, only one-fifth of the annual contract value from these deals appears in calculated current billings. The professional services will be provided over the next several quarters and, unlike those for enterprise customers, these services cannot be billed upfront, so they are not included in CCB.

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

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

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

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

We are very optimistic about our OT business. This positive outlook follows several consecutive quarters where we've reported securing larger six-figure and seven-figure deals. We are winning significant opportunities in the public sector related to OT and maintaining momentum in critical infrastructure. We believe these markets will increasingly matter from a cybersecurity standpoint. One of our key advantages is our extensive, robust, and diverse global customer base. Clients rely on us to assess their cyber risk. The visibility we offer across both OT and IT is a strategic edge, as many OT vendors tend to focus narrowly on control systems. In environments like factory floors, pipelines, and data center automation, it's essential to recognize that operations involve both OT and IT. It's ineffective to evaluate risk by only considering control systems. Therefore, we have a highly competitive product that is strategically differentiated by our ability to assess risk by integrating IT and OT. Our significant customer base and distribution capabilities position us well in this rapidly growing market.

Great, thank you.

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

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

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

Yes. I guess the only thing I would add to that is, look, we saw exceptional strength in the quarter on a number of fronts in terms of Tenable One's growth both as a percentage of product and growth overall, the large enterprise traction, the seven-figure deals, $0.5 million deals, all record numbers for us, the strength in federal. And I think candidly, just the competitiveness of the product, if you look products. If you look at our portfolio across the board, whether it's in identity, in OT, our capabilities in cloud security and our ability to differentiate both in core VM as well as in this unified platform sale, our confidence in the sales team's confidence in what they're seeing has never been stronger. So that gives us confidence going into 2024. And like Steve said, we'll see how Q4 plays out and look forward to updating folks on the plan as we get into the Q1 call.

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

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

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

Thank you, Steve. I have a question regarding the larger customers who spend over $100,000. It appears you added 58 this quarter, which is a decrease compared to last year. Considering you have Tenable One, which I understand has a higher price point and potentially larger deal sizes, was there any weakness that may have led to a decline in new large customer additions year-over-year?

Yes, I guess I would just start off by saying, listen, any time you're in a tougher macro environment and I think what you're hearing consistently from us and other software companies is that new logo ads is typically weaker in tougher markets. That said, we're still adding more than 300-plus logos onto our enterprise platforms, still a solid number of six-figure adds. On top of that record number of $7 million and $0.5 million plus deals. So we have strength in the more mature customer base, the larger enterprises that really value and understand security a little bit better. And solid performance even in the tougher mid-market.

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

Great. Thanks very much. Amit, high-level question, given the breadth and depth of the product portfolio at this point and the vagaries of the mid-market which kind of is always that way up and down. What's the thought of pivoting the sales force to more of an upmarket focus?

We definitely consider this carefully and aim for a balanced approach. As you may remember, we utilize a hybrid sales strategy that includes inside sales representatives targeting mid-market customers, which is a cost-effective method. We are fully committed to our channel partners, as all our transactions are conducted through them, allowing us to scale effectively and keep costs down in the mid-market. Additionally, we have a direct sales team that collaborates closely with these partners to pursue larger enterprise opportunities. We also operate on the e-commerce front for higher volume transactions. Our goal is to find the right balance for cost-effective growth and opportunity, as our solution is broadly applicable. We will continue to evaluate this as we move into next year to ensure we are optimizing our go-to-market spending for the best possible return.

Got it. And then given the valuation of the stock and the significant amount of free cash flow that you all are generating at this point. What's the Board's thought on share repurchase activity?

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

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

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

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

Appreciate the color. Thank you.

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

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

Yes, as we approach Q4, we anticipate an increase in CCB on an absolute dollar basis compared to what we're currently presenting. The fourth quarter typically shows strong seasonal performance, often accounting for over 30% of our total sales. We do expect budget flush during this period. While some of the selling conditions we faced in the mid-market may continue, we are generally confident in the guidance we are providing today. Comparing this year to last, it’s important to recognize that we are entering a new budget cycle and fiscal year, which makes it more challenging to secure new logos in this environment. However, we are excited to see significant momentum, particularly with Tenable One, which is growing over 100%, alongside rising selling prices. Additionally, we have seen strong performance in large deals, achieving a record number of seven-figure agreements as well as deals valued at $0.5 million and above. The value we offer to our customers is becoming increasingly significant, leading to larger transactions.

I would also like to emphasize less about the macro environment and focus more on our competitive product offerings. This includes our ability to compete effectively in cloud security, identity, and the integration of these capabilities. Our sales and go-to-market teams have never been more confident in the products we are introducing, and we believe we can clearly differentiate ourselves from the competition. This gives us plenty of reasons to feel optimistic.

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

Hi, thanks for taking my questions. I wanted to dig deeper into the comments about the mid-market. Can you clarify if there were fewer new clients in the mid-market or if it was more about expanding existing business? Additionally, is some of this due to heightened competition in the mid-market?

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

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

I did, 20% approximately of total new enterprise sales.

Thank you. Next question comes from the line of Garrett Burkam on for Jonathan Ho with William Blair. Please go ahead.

Hi, thanks for taking my question. This is Garrett Burkam on for Jonathan Ho. So you noted success with selling Tenable One as a strength in the quarter. So how has pricing been for those specific deals? Have you been able to realize as much pricing as you anticipated? Or has there been a lot of discounting involved? I would just like to get some color there. Thanks.

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

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

Hey guys, this is Matt Calitri on from Mike Cikos over at Needham. Thanks for taking our question. I wanted to ask about how pipeline looked in Q3 both in comparison to the first two quarters, which I believe are both record quarters and also in terms of linearity throughout the quarter?

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

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

Yes, the net dollar expansion rate was 111%, which is consistent with the previous quarter. It's important to remember that this metric represents a trailing twelve months figure, encompassing sales and upgrades from prior quarters. The market was a bit stronger last year compared to this year, so we are encouraged to maintain the 111% rate. There may be some fluctuations in the future, as it's not our goal to optimize for just one metric. Pipeline opportunities can vary from quarter to quarter between new clients and upsell chances, so there is variability, but we've aimed for transparency in our quarterly reporting. The positive aspect is that our core metrics are strong, and as customers renew, they tend to expand their engagement with us. We anticipate ongoing growth not only in Q4 but also for the entire year.

Mr. Calitri?

Yes, great, thanks so much.

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