UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

__________________

FORM 10-Q

__________________

☒			Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended September 30, 2023

or

☐			Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from _____ to _____

Commission file number 001-38600

__________________

TENABLE HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

__________________

Delaware						47-5580846
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification Number)

6100 Merriweather Drive, Columbia, Maryland 21044

(Address of principal executive offices, including zip code)

(410) 872-0555

(Registrant’s telephone number, including area code)

__________________

Securities registered pursuant to Section 12(b) of the Act:

Title of each class			Trading Symbol(s)			Name of each exchange on which registered
Common Stock, par value $0.01 per share			TENB			The Nasdaq Stock Market LLC

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   ☒      No      ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes   ☒     No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Emerging growth company

☐

Smaller reporting company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes    ☐      No    ☒

The number of shares of the Registrant's common stock outstanding as of November 3, 2023 was 116,934,931.

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TENABLE HOLDINGS, INC.

TABLE OF CONTENTS

						Page
PART I – FINANCIAL INFORMATION
Item 1.			Financial Statements
			Consolidated Balance Sheets			3
			Consolidated Statements of Operations			4
			Consolidated Statements of Comprehensive Loss			5
			Consolidated Statements of Stockholders' Equity			6
			Consolidated Statements of Cash Flows			7
			Notes to Consolidated Financial Statements			8
			1. Business and Summary of Significant Accounting Policies			8
			2. Revenue			9
			3. Cash Equivalents and Short-Term Investments			10
			4. Fair Value Measurements			11
			5. Property and Equipment, Net			12
			6. Goodwill and Intangible Assets			12
			7. Leases			13
			8. Debt			14
			9. Commitments and Contingencies			15
			10. Stock-Based Compensation			15
			11. Income Taxes			17
			12. Net Loss Per Share			18
			13. Geographic Information			18
			14. Subsequent Events			19
Item 2.			Management’s Discussion and Analysis of Financial Condition and Results of Operations			20
Item 3.			Quantitative and Qualitative Disclosures About Market Risk			36
Item 4.			Controls and Procedures			37
PART II – OTHER INFORMATION
Item 1.			Legal Proceedings			39
Item 1A.			Risk Factors			39
Item 2.			Unregistered Sales of Equity Securities and Use of Proceeds			41
Item 6.			Exhibits			42
			Signatures			43

Where You Can Find More Information

Investors and others should note that we may announce material business and financial information to our investors using our investor relations website (https://investors.tenable.com), our filings with the Securities and Exchange Commission (SEC), our website, webcasts, press releases, and conference calls. We use these mediums, including our website, to communicate with investors and the general public about our company, our products, and other issues, and for complying with our disclosure obligations under Regulation FD. It is possible that the information that we make available on our website may be deemed to be material information. We therefore encourage investors and others interested in our company to review the information that we make available on our website, in addition to following our SEC filings, our webcasts, press releases, and conference calls. The information we post through these channels is not a part of this Quarterly Report on Form 10-Q. These channels be may updated from time to time on our investor relations website.

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PART I. FINANCIAL INFORMATION

Item 1.        Financial Statements

TENABLE HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS

			September 30, 2023						December 31, 2022
(in thousands, except per share data)			(unaudited)
Assets
Current assets:
Cash and cash equivalents			$	445,316					$	300,866
Short-term investments			247,658						266,569
Accounts receivable (net of allowance for doubtful accounts of $225 and $1,400 at September 30, 2023 and December 31, 2022, respectively)			179,432						187,341
Deferred commissions			46,132						44,270
Prepaid expenses and other current assets			52,529						58,121
Total current assets			971,067						857,167
Property and equipment, net			44,076						46,726
Deferred commissions (net of current portion)			65,412						67,238
Operating lease right-of-use assets			35,989						38,495
Acquired intangible assets, net			66,169						75,376
Goodwill			316,520						316,520
Other assets			25,213						38,008
Total assets			$	1,524,446					$	1,439,530
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and accrued expenses			$	26,880					$	18,722
Accrued compensation			44,850						52,620
Deferred revenue			518,372						502,115
Operating lease liabilities			5,655						5,821
Other current liabilities			4,986						4,882
Total current liabilities			600,743						584,160
Deferred revenue (net of current portion)			163,086						162,487
Term loan, net of issuance costs (net of current portion)			359,941						361,970
Operating lease liabilities (net of current portion)			49,382						52,611
Other liabilities			7,621						7,436
Total liabilities			1,180,773						1,168,664
Stockholders’ equity:
Common stock (par value: $0.01; 500,000 shares authorized; 116,470 and 113,056 shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively)			1,165						1,131
Additional paid-in capital			1,146,435						1,017,837
Accumulated other comprehensive loss			(540)						(1,351)
Accumulated deficit			(803,387)						(746,751)
Total stockholders’ equity			343,673						270,866
Total liabilities and stockholders’ equity			$	1,524,446					$	1,439,530

The accompanying notes are an integral part of these consolidated financial statements.

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TENABLE HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

			Three Months Ended September 30,												Nine Months Ended September 30,
(in thousands, except per share data)			2023						2022						2023						2022
Revenue			$	201,529					$	174,851					$	585,404					$	498,560
Cost of revenue			45,754						38,582						134,774						109,549
Gross profit			155,775						136,269						450,630						389,011
Operating expenses:
Sales and marketing			94,759						88,123						289,750						258,119
Research and development			37,052						36,131						113,080						106,649
General and administrative			31,877						24,973						85,614						77,969
Total operating expenses			163,688						149,227						488,444						442,737
Loss from operations			(7,913)						(12,958)						(37,814)						(53,726)
Interest income			7,662						1,803						19,323						2,746
Interest expense			(8,119)						(5,082)						(23,208)						(12,246)
Other expense, net			(6,502)						(2,073)						(7,993)						(4,880)
Loss before income taxes			(14,872)						(18,310)						(49,692)						(68,106)
Provision for income taxes			693						420						6,944						2,629
Net loss			$	(15,565)					$	(18,730)					$	(56,636)					$	(70,735)
Net loss per share, basic and diluted			$	(0.13)					$	(0.17)					$	(0.49)					$	(0.64)
Weighted-average shares used to compute net loss per share, basic and diluted			115,954						111,937						114,967						110,843

The accompanying notes are an integral part of these consolidated financial statements.

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TENABLE HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)

			Three Months Ended September 30,												Nine Months Ended September 30,
(in thousands)			2023						2022						2023						2022
Net loss			$	(15,565)					$	(18,730)					$	(56,636)					$	(70,735)
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on available-for-sale securities, net			161						(13)						811						(1,563)
Other comprehensive income (loss)			161						(13)						811						(1,563)
Comprehensive loss			$	(15,404)					$	(18,743)					$	(55,825)					$	(72,298)

The accompanying notes are an integral part of these consolidated financial statements.

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TENABLE HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(Unaudited)

															Additional Paid-in Capital						Accumulated Other Comprehensive Loss												Total Stockholders’ Equity
			Common Stock																								Accumulated Deficit
(in thousands)			Shares						Amount
Balance at June 30, 2023			115,529						$	1,156					$	1,101,928					$	(701)					$	(787,822)					$	314,561
Exercise of stock options			123						1						883						—						—						884
Vesting of restricted stock units			611						6						(6)						—						—						—
Vesting of performance stock units			13						—						—						—						—						—
Issuance of common stock under employee stock purchase plan			194						2						6,308						—						—						6,310
Stock-based compensation			—						—						37,322						—						—						37,322
Other comprehensive income			—						—						—						161						—						161
Net loss			—						—						—						—						(15,565)						(15,565)
Balance at September 30, 2023			116,470						$	1,165					$	1,146,435					$	(540)					$	(803,387)					$	343,673
Balance at December 31, 2022			113,056						$	1,131					$	1,017,837					$	(1,351)					$	(746,751)					$	270,866
Exercise of stock options			289						3						2,418						—						—						2,421
Vesting of restricted stock units			2,541						25						(25)						—						—						—
Vesting of performance stock units			78						1						(1)						—						—						—
Issuance of common stock under employee stock purchase plan			506						5						16,219						—						—						16,224
Stock-based compensation			—						—						109,987						—						—						109,987
Other comprehensive income			—						—						—						811						—						811
Net loss			—						—						—						—						(56,636)						(56,636)
Balance at September 30, 2023			116,470						$	1,165					$	1,146,435					$	(540)					$	(803,387)					$	343,673
Balance at June 30, 2022			111,574						$	1,116					$	944,799					$	(1,856)					$	(706,534)					$	237,525
Exercise of stock options			158						2						1,977						—						—						1,979
Vesting of restricted stock units			482						4						(4)						—						—						—
Issuance of common stock under employee stock purchase plan			187						2						5,907						—						—						5,909
Stock-based compensation			—						—						33,185						—						—						33,185
Other comprehensive loss			—						—						—						(13)						—						(13)
Net loss			—						—						—						—						(18,730)						(18,730)
Balance at September 30, 2022			112,401						$	1,124					$	985,864					$	(1,869)					$	(725,264)					$	259,855
Balance at December 31, 2021			108,929						$	1,089					$	869,059					$	(306)					$	(654,529)					$	215,313
Exercise of stock options			1,090						11						10,644						—						—						10,655
Vesting of restricted stock units			1,939						19						(19)						—						—						—
Issuance of common stock under employee stock purchase plan			443						5						14,786						—						—						14,791
Stock-based compensation			—						—						91,394						—						—						91,394
Other comprehensive loss			—						—						—						(1,563)						—						(1,563)
Net loss			—						—						—						—						(70,735)						(70,735)
Balance at September 30, 2022			112,401						$	1,124					$	985,864					$	(1,869)					$	(725,264)					$	259,855

The accompanying notes are an integral part of these consolidated financial statements.

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TENABLE HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

			Nine Months Ended September 30,
(in thousands)			2023						2022
Cash flows from operating activities:
Net loss			$	(56,636)					$	(70,735)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization			18,900						15,911
Stock-based compensation			108,812						89,954
Other			1,838						2,102
Changes in operating assets and liabilities:
Accounts receivable			9,084						(10,727)
Prepaid expenses and other assets			17,524						20,355
Accounts payable, accrued expenses and accrued compensation			447						(8,829)
Deferred revenue			16,856						61,731
Other current and noncurrent liabilities			(5,475)						(529)
Net cash provided by operating activities			111,350						99,233
Cash flows from investing activities:
Purchases of property and equipment			(1,299)						(5,132)
Capitalized software development costs			(4,707)						(8,778)
Purchases of short-term investments			(217,239)						(190,440)
Sales and maturities of short-term investments			242,864						163,340
Business combinations, net of cash acquired			—						(66,993)
Net cash provided by (used in) investing activities			19,619						(108,003)
Cash flows from financing activities:
Payments on term loan			(2,813)						(2,813)
Proceeds from loan agreement			424						572
Proceeds from stock issued in connection with the employee stock purchase plan			16,224						14,791
Proceeds from the exercise of stock options			2,421						10,655
Other financing activities			(213)						(10)
Net cash provided by financing activities			16,043						23,195
Effect of exchange rate changes on cash and cash equivalents and restricted cash			(2,562)						(4,276)
Net increase in cash and cash equivalents and restricted cash			144,450						10,149
Cash and cash equivalents and restricted cash at beginning of period			300,866						278,271
Cash and cash equivalents and restricted cash at end of period			$	445,316					$	288,420
Supplemental disclosure of cash flow information:
Cash paid for interest			$	26,786					$	10,619
Cash paid for income taxes, net of refunds			6,166						7,630
Supplemental cash flow information related to leases:
Cash payments for operating leases			$	6,797					$	3,641

The accompanying notes are an integral part of these consolidated financial statements.

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TENABLE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Business and Summary of Significant Accounting Policies

Business Description

Tenable Holdings, Inc. (the “Company,” “we,” "us," or “our”) is a provider of exposure management solutions, which is an effective discipline for managing, measuring and comparing cybersecurity risk in today's complex IT environments. Our solutions provide broad visibility into security issues such as vulnerabilities, misconfigurations, internal and regulatory compliance violations and other indicators of the state of an organization’s security across IT infrastructure and applications, cloud environments, Active Directory and industrial internet of things and operational technology environments.

Basis of Presentation

The accompanying consolidated financial statements include the accounts of Tenable Holdings, Inc. and our wholly owned subsidiaries and have been prepared in conformity with United States generally accepted accounting principles (“GAAP”) for interim financial information. All intercompany accounts and transactions have been eliminated in consolidation.

The consolidated statements are unaudited and should be read in conjunction with the consolidated financial statements and related notes included in our 2022 Annual Report on Form 10-K ("10-K") filed with the Securities and Exchange Commission on February 24, 2023. The consolidated financial statements have been prepared on a basis consistent with the audited annual consolidated financial statements included in the 10-K and, in the opinion of management, include all adjustments of a normal recurring nature necessary to fairly state our financial position, our results of operations, and cash flows.

The results for the three and nine months ended September 30, 2023 are not necessarily indicative of the operating results expected for the year ending December 31, 2023 or any other future period.

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates include, but are not limited to, the determination of the estimated economic life of perpetual licenses for revenue recognition, the estimated period of benefit for deferred commissions, the useful lives of long-lived assets, the fair value of acquired intangible assets, the valuation of stock-based compensation, the incremental borrowing rate for operating leases, and the valuation of deferred tax assets and investments. We base these estimates on historical experience and on various other assumptions that we believe to be reasonable. Actual results could differ significantly from these estimates.

Significant Accounting Policies

Our significant accounting policies are described in our 10-K. During the nine months ended September 30, 2023, there were no material changes to our significant accounting policies from those described in our 10-K.

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2. Revenue

Disaggregation of Revenue

The following table presents a summary of revenue:

			Three Months Ended September 30,												Nine Months Ended September 30,
(in thousands)			2023						2022						2023						2022
Subscription revenue			$	183,268					$	156,764					$	531,133					$	446,257
Perpetual license and maintenance revenue			12,200						12,658						36,535						38,214
Professional services and other revenue			6,061						5,429						17,736						14,089
Revenue			$	201,529					$	174,851					$	585,404					$	498,560

Concentrations

We sell and market our products and services through our field sales force that works closely with our channel partners, which includes a network of distributors and resellers, in developing sales opportunities. We use a two-tiered channel model whereby we sell our products and services to our distributors, which in turn sell to resellers, which then sell to end-users. We derived 93% of revenue through our channel network in the three and nine months ended September 30, 2023 and 92% of revenue through our channel network in the three and nine months ended September 30, 2022. One of our distributors accounted for 36% of revenue in the three and nine months ended September 30, 2023 and 38% of revenue in the three and nine months ended September 30, 2022. That same distributor accounted for 37% and 36% of accounts receivable at September 30, 2023 and December 31, 2022, respectively.

Contract Balances

We generally bill our customers in advance and accounts receivable are recorded when we have the right to invoice the customer. Contract liabilities consist of deferred revenue and include customer billings and payments received in advance of performance under the contract. In the three months ended September 30, 2023 and 2022 and the nine months ended September 30, 2023 and 2022, we recognized revenue of $185.9 million, $156.3 million, $430.8 million and $350.6 million, respectively, that was included in the deferred revenue balance at the beginning of each of the respective periods.

Remaining Performance Obligations

At September 30, 2023, the future estimated revenue related to unsatisfied performance obligations was $697.2 million, of which $528.4 million is expected to be recognized as revenue over the next twelve months, and the remainder is expected to be recognized over the four years thereafter.

Deferred Commissions

The following summarizes the activity of deferred incremental costs of obtaining a contract:

			Three Months Ended September 30,												Nine Months Ended September 30,
(in thousands)			2023						2022						2023						2022
Beginning balance			$	109,582					$	100,000					$	111,508					$	99,949
Capitalization of contract acquisition costs			14,527						12,837						36,819						35,240
Amortization of deferred contract acquisition costs			(12,565)						(11,561)						(36,783)						(33,913)
Ending balance			$	111,544					$	101,276					$	111,544					$	101,276

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3. Cash Equivalents and Short-Term Investments

The following tables summarize the amortized cost, unrealized gain and loss and estimated fair value of cash equivalents and short-term investments:

			September 30, 2023
(in thousands)			Amortized Cost						Unrealized Gain						Unrealized Loss						Estimated Fair Value
Cash equivalents
Money market funds			$	103,979					$	—					$	—					$	103,979
Total cash equivalents			$	103,979					$	—					$	—					$	103,979
Short-term investments
Commercial paper			$	86,244					$	—					$	(32)					$	86,212
Corporate bonds			54,769						—						(264)						54,505
Asset backed securities			16,410						—						(52)						16,358
Certificates of deposit			10,000						—						—						10,000
Yankee bonds			6,893						—						(59)						6,834
U.S. Treasury and agency obligations			73,882						11						(144)						73,749
Total short-term investments			$	248,198					$	11					$	(551)					$	247,658

			December 31, 2022
(in thousands)			Amortized Cost						Unrealized Gain						Unrealized Loss						Estimated Fair Value
Cash equivalents
Money market funds			$	201,476					$	—					$	—					$	201,476
Total cash equivalents			$	201,476					$	—					$	—					$	201,476
Short-term investments
Commercial paper			$	144,093					$	2					$	(377)					$	143,718
Corporate bonds			37,778						—						(194)						37,584
Asset backed securities			19,723						11						(161)						19,573
Certificates of deposit			10,000						—						—						10,000
Supranational bonds			4,017						—						(67)						3,950
U.S. Treasury and agency obligations			52,309						—						(565)						51,744
Total short-term investments			$	267,920					$	13					$	(1,364)					$	266,569

We considered the extent to which any unrealized losses on our short-term investments were driven by credit risk and other factors, including market risk, and if it is more-likely-than-not that we would have to sell the security before the recovery of the amortized cost basis. At September 30, 2023 and December 31, 2022, our unrealized losses were due to rising market interest rates compared to when the investments were initiated. We do not believe any unrealized losses represent credit losses, and it is unlikely we would sell the investments before we would recover their amortized cost basis.

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The contractual maturities of our short-term investments are as follows:

			September 30, 2023												December 31, 2022
(in thousands)			Amortized Cost						Estimated Fair Value						Amortized Cost						Estimated Fair Value
Due within one year			$	232,140					$	231,721					$	243,430					$	242,129
Due between one and two years			16,058						15,937						24,490						24,440
Total short-term investments			$	248,198					$	247,658					$	267,920					$	266,569

At September 30, 2023 and December 31, 2022, cash and cash equivalents included $5.8 million of restricted cash primarily related to collateral for our outstanding letters of credit.

4. Fair Value Measurements

We measure certain financial instruments at fair value using a fair value hierarchy. In the hierarchy, assets are classified based on the lowest level inputs used in valuation into the following categories:

•Level 1 — Quoted prices in active markets for identical assets and liabilities;

•Level 2 — Observable inputs including quoted market prices for similar assets and liabilities in active markets, quoted prices for identical assets and liabilities in inactive markets, or inputs that are corroborated by observable market data; and

•Level 3 — Unobservable inputs.

The following tables summarize assets that are measured at fair value on a recurring basis:

			September 30, 2023
(in thousands)			Level 1						Level 2						Level 3						Total
Cash equivalents
Money market funds			$	103,979					$	—					$	—					$	103,979
Total cash equivalents			$	103,979					$	—					$	—					$	103,979
Short-term investments
Commercial paper			$	—					$	86,212					$	—					$	86,212
Corporate bonds			—						54,505						—						54,505
Asset backed securities			—						16,358						—						16,358
Certificates of deposit			—						10,000						—						10,000
Yankee bonds			—						6,834						—						6,834
U.S. Treasury and agency obligations			—						73,749						—						73,749
Total short-term investments			$	—					$	247,658					$	—					$	247,658

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			December 31, 2022
(in thousands)			Level 1						Level 2						Level 3						Total
Cash equivalents
Money market funds			$	201,476					$	—					$	—					$	201,476
Total cash equivalents			$	201,476					$	—					$	—					$	201,476
Short-term investments
Commercial paper			$	—					$	143,718					$	—					$	143,718
Corporate bonds			—						37,584						—						37,584
Asset backed securities			—						19,573						—						19,573
Certificates of deposit			—						10,000						—						10,000
Supranational bonds			—						3,950						—						3,950
U.S. Treasury and agency obligations			—						51,744						—						51,744
Total short-term investments			$	—					$	266,569					$	—					$	266,569

At September 30, 2023 and December 31, 2022, we had $10.0 million and $15.0 million, respectively, of non-marketable simple agreements for future equity ("SAFE") investments with privately held companies, which are included in other assets on our consolidated balance sheets. We record our SAFE investments at cost, less any impairment, plus or minus observable price changes for similar investments of the same issuer. During the three months ended September 30, 2023, we identified impairment indicators for one of our SAFE investments and determined our investment was impaired, resulting in an impairment loss of $5.0 million that was recorded in other expense, net on our consolidated statement of operations.

We did not have any liabilities measured and recorded at fair value on a recurring basis at September 30, 2023 and December 31, 2022.

5. Property and Equipment, Net

Property and equipment, net consisted of the following:

(in thousands)			September 30, 2023						December 31, 2022
Computer software and equipment			$	22,247					$	22,424
Internally developed software			29,362						23,479
Furniture and fixtures			5,949						5,940
Leasehold improvements			28,532						28,214
Total			86,090						80,057
Less: accumulated depreciation and amortization			(42,014)						(33,331)
Property and equipment, net			$	44,076					$	46,726

Depreciation and amortization related to property and equipment was $3.2 million, $2.7 million, $9.7 million and $7.6 million in the three months ended September 30, 2023 and 2022 and the nine months ended September 30, 2023 and 2022, respectively.

6. Goodwill and Intangible Assets

At September 30, 2023 and December 31, 2022, our goodwill balance was $316.5 million.

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Acquired intangible assets subject to amortization are as follows:

			September 30, 2023																		December 31, 2022
(in thousands)			Gross Carrying Amount						Accumulated Amortization						Net Carrying Amount						Gross Carrying Amount						Accumulated Amortization						Net Carrying Amount
Acquired technology			$	97,037					$	(30,868)					$	66,169					$	97,037					$	(21,738)					$	75,299
Trade name			490						(490)						—						490						(413)						77
			$	97,527					$	(31,358)					$	66,169					$	97,527					$	(22,151)					$	75,376

Amortization of acquired intangible assets was $3.0 million, $3.1 million, $9.2 million and $8.3 million in the three months ended September 30, 2023 and 2022 and the nine months ended September 30, 2023 and 2022, respectively. At September 30, 2023, our acquired intangible assets are expected to be amortized over an estimated remaining weighted average period of 6.0 years.

At September 30, 2023, estimated future amortization of acquired intangible assets is as follows:

(in thousands)
Year ending December 31,
2023(1)			$	3,044
2024			12,175
2025			12,175
2026			11,990
2027			9,960
Thereafter			16,825
Total			$	66,169

_______________

(1)    Represents the three months ending December 31, 2023.

7. Leases

We have operating leases for office facilities. The components of lease expense were as follows:

			Three Months Ended September 30,												Nine Months Ended September 30,
(in thousands)			2023						2022						2023						2022
Operating lease cost			$	1,900					$	1,977					$	5,690					$	5,564

Rent expense for short-term leases in the three and nine months ended September 30, 2023 and 2022 was not material.

Supplemental information related to leases was as follows:

			September 30, 2023						December 31, 2022
Operating leases
Weighted average remaining lease term			7.6 years						8.2 years
Weighted average discount rate			5.6%						5.6%

			Three Months Ended September 30,												Nine Months Ended September 30,
(in thousands)			2023						2022						2023						2022
ROU assets obtained in exchange for lease obligations
Operating leases			$	—					$	3,863					$	1,234					$	4,256

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Maturities of operating lease liabilities at September 30, 2023 were as follows:

(in thousands)
Year ending December 31,
2023(1)			$	1,890
2024			8,934
2025			9,476
2026			8,821
2027			8,359
Thereafter			30,790
Total lease payments			68,270
Less: Imputed interest			(13,233)
Total			$	55,037

_______________

(1)    Represents the three months ending December 31, 2023.

8. Debt

Credit Agreement

In July 2021, we entered into a credit agreement ("Credit Agreement") which is comprised of:

•a $375.0 million senior secured term loan facility ("Term Loan"); and

•a $50.0 million senior secured revolving credit facility ("Revolving Credit Facility").

The table below summarizes the carrying value of the Term Loan:

(in thousands)			September 30, 2023
Term loan			$	368,438
Less: Unamortized debt discount and issuance costs			(5,807)
Term loan, net of issuance costs			362,631
Less: Term loan, net, current (1)			(2,690)
Term loan, net of issuance costs (net of current portion)			$	359,941

_______________

(1)    Term loan, net current is included in other current liabilities on our consolidated balance sheets.

On June 1, 2023, we began using the Secured Overnight Financing Rate ("SOFR") instead of LIBOR. The Term Loan bears interest at a rate of 2.75% per annum over SOFR, subject to a 0.50% floor, plus a credit spread adjustment depending on the interest period. The Term Loan is being amortized at 1% per annum in equal quarterly installments until the final payment of $350.6 million on the July 7, 2028 maturity date.

Our Term Loan is recorded at its carrying value. At September 30, 2023, the fair value of our Term Loan was approximately $367.5 million. In the fair value hierarchy, our Term Loan is classified as Level 2 as it is traded in less active markets.

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The maturities of the Term Loan at September 30, 2023 were as follows:

(in thousands)
Year ending December 31,
2023(1)			$	938
2024			3,750
2025			3,750
2026			3,750
2027			3,750
Thereafter			352,500
Total			$	368,438

_______________

(1)    Represents the three months ending December 31, 2023.

We may be subject to mandatory Term Loan prepayments related to the excess cash flow provisions. These prepayments would only be required if our first lien net leverage ratio (as defined in our Credit Agreement) exceeds 3.5 at the end of each year. At September 30, 2023, our first lien net leverage ratio was 1.21.

The Revolving Credit Facility bears interest at a rate, depending on first lien net leverage, ranging from 2.00% to 2.50% over SOFR and matures on July 7, 2026. Additionally, we pay a commitment fee during the term ranging from 0.25% to 0.375% per annum of the average daily undrawn portion of the revolving commitments based on the first lien net leverage ratio. The Revolving Credit Facility contains a $15.0 million letter of credit sublimit. At September 30, 2023, we had $0.2 million of standby letters of credit outstanding under our Revolving Credit Facility related to one of our operating leases. At September 30, 2023, we were in compliance with the covenants under the Credit Agreement.

9. Commitments and Contingencies

Commitments

In July 2021, we entered into a contract with Amazon Web Services, Inc. ("AWS") for cloud services from August 2021 through July 2024. Under the terms of the contract, we committed to spend $43.7 million, $46.8 million and $50.1 million in contract years one, two and three, respectively, for a total of $140.6 million. If we do not meet the minimum purchase obligation during any of those years, we will be required to pay the difference. We met our commitments for both the first and second years of our contract with AWS, and as of September 30, 2023, we have spent $12.9 million of our third year commitment.

Letters of Credit

At September 30, 2023, we had $5.7 million of standby letters of credit related to our grant agreements with the State of Maryland and our operating leases.

10. Stock-Based Compensation

Under the evergreen provision in our 2018 Equity Incentive Plan, in January 2023 we reserved an additional 5.7 million shares of our common stock. At September 30, 2023, there were 24.0 million shares available for grant.

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Stock-based compensation expense included in the consolidated statements of operations was as follows:

			Three Months Ended September 30,												Nine Months Ended September 30,
(in thousands)			2023						2022						2023						2022
Cost of revenue			$	3,011					$	2,341					$	8,542					$	5,968
Sales and marketing			15,805						13,589						46,622						36,420
Research and development			9,242						8,754						27,871						23,294
General and administrative			8,777						7,959						25,777						24,272
Total stock-based compensation expense			$	36,835					$	32,643					$	108,812					$	89,954

At September 30, 2023, the unrecognized stock-based compensation expense related to unvested restricted stock units ("RSUs") was $282.4 million, which is expected to be recognized over an estimated remaining weighted average period of 2.6 years.

At September 30, 2023, the unrecognized stock-based compensation expense related to unvested performance stock units ("PSUs") was $7.4 million, which is expected to be recognized over an estimated remaining weighted average period of 3.1 years.

At September 30, 2023, the unrecognized stock-based compensation expense related to our 2018 Employee Stock Purchase Plan ("2018 ESPP") was $7.4 million, which is expected to be recognized over an estimated weighted average period of 0.6 years.

RSUs and PSUs

A summary of our RSU and PSU activity is presented below:

			RSUs												PSUs
(in thousands, except for per share data)			Number of Shares						Weighted Average Grant Date Fair Value						Number of Shares						Weighted Average Grant Date Fair Value
Unvested balance at December 31, 2022			6,894						$	43.26					196						$	44.97
Granted			3,491						43.19						188						43.24
Performance adjustment(1)			—						—						12						44.97
Vested			(2,541)						41.86						(78)						44.97
Forfeited			(501)						45.16						—						—
Unvested balance at September 30, 2023			7,343						43.58						318						43.95

_______________

(1)    Represents adjustments due to the achievement of predefined financial performance targets.

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Stock Options

A summary of our stock option activity is presented below:

(in thousands, except for exercise prices and years)			Number of Shares						Weighted Average Exercise Price						Weighted-Average Remaining Contractual Term (in years)						Aggregate Intrinsic Value
Outstanding at December 31, 2022			5,485						$	8.96					4.5						$	160,135
Granted			—						—
Exercised			(289)						8.38												10,265
Forfeited/canceled			—						—
Outstanding and exercisable at September 30, 2023			5,196						8.99						3.7						186,092

2018 Employee Stock Purchase Plan

Under the evergreen provision in our 2018 ESPP, in January 2023 we reserved an additional 1.7 million shares of our common stock. At September 30, 2023, there were 8.7 million shares reserved for issuance under our 2018 ESPP.

In the nine months ended September 30, 2023, employees purchased 506,390 shares of our common stock at a weighted average price of $32.04 per share, resulting in $16.2 million of cash proceeds. At September 30, 2023, there was $4.3 million of employee contributions to the 2018 ESPP included in accrued compensation.

The fair value of the 2018 ESPP purchase rights was estimated on the offering or modification dates using a Black-Scholes option-pricing model and the following assumptions:

			Nine Months Ended September 30,
			2023						2022
Expected term (in years)			0.5 — 2.0						0.5 — 2.0
Expected volatility			46.9% — 58.1%						42.8% — 61.0%
Risk-free interest rate			4.8% — 5.4%						0.1% — 3.4%
Expected dividend yield			—						—

11. Income Taxes

In the nine months ended September 30, 2023, the provision for income taxes included $4.3 million of income taxes in foreign jurisdictions in which we conduct business and $2.8 million of discrete items primarily related to withholding taxes on sales to customers, partially offset by $0.2 million of deferred tax benefits related to the Alsid acquisition.

In the nine months ended September 30, 2022, the provision for income taxes included $3.1 million of income taxes in foreign jurisdictions in which we conduct business, $2.1 million of current expense from the restructuring of our research and development operations in Israel, partially offset by $1.8 million of deferred tax benefits related to the Alsid acquisition. Additionally, the provision included $1.7 million of discrete items primarily related to withholding taxes on sales to customers, which was more than offset by a benefit of $2.5 million from partially releasing the valuation allowance associated with the Bit Discovery acquisition.

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12. Net Loss Per Share

The following table sets forth the computation of basic and diluted net loss per share:

			Three Months Ended September 30,												Nine Months Ended September 30,
(in thousands, except per share data)			2023						2022						2023						2022
Net loss			$	(15,565)					$	(18,730)					$	(56,636)					$	(70,735)
Weighted-average shares used to compute net loss per share, basic and diluted			115,954						111,937						114,967						110,843
Net loss per share, basic and diluted			$	(0.13)					$	(0.17)					$	(0.49)					$	(0.64)

The following potentially dilutive securities have been excluded from the diluted per share calculations because they would have been antidilutive:

			September 30,
(in thousands)			2023						2022
RSUs			7,343						7,515
Stock options			5,196						5,569
Shares to be issued under the 2018 ESPP			128						58
PSUs			130						—
Total			12,797						13,142

13. Geographic Information

We operate as one operating segment. Our Chief Executive Officer, who is our chief operating decision maker, reviews financial information on a consolidated basis for purposes of making operating decisions, allocating resources and evaluating financial performance.

Revenue by region, based on the address of the end user as specified in our subscription, license or service agreements, was as follows:

			Three Months Ended September 30,												Nine Months Ended September 30,
(in thousands)			2023						2022						2023						2022
The Americas			$	127,016					$	111,227					$	368,510					$	315,706
Europe, Middle East and Africa			51,397						44,117						150,437						128,779
Asia Pacific			23,116						19,507						66,457						54,075
Revenue			$	201,529					$	174,851					$	585,404					$	498,560

Customers located in the United States accounted for 55% of revenue in the three and nine months ended September 30, 2023 and 57% of revenue in the three and nine months ended September 30, 2022. No other country accounted for 10% or more of revenue in the periods presented.

Our property and equipment, net by geographic area is summarized as follows:

(in thousands)			September 30, 2023						December 31, 2022
United States			$	38,610					$	39,843
International			5,466						6,883
Property and equipment, net			$	44,076					$	46,726

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14. Subsequent Events

In October 2023, we acquired Ermetic Ltd. ("Ermetic"). Ermetic is an innovative cloud-native application protection platform company and a leading provider of cloud infrastructure entitlement management. This acquisition will add capabilities to our Tenable One Exposure Management Platform and Tenable Cloud Security solution to deliver contextual risk visibility, prioritization and remediation across infrastructure and identities, both on-premises and in the cloud. We acquired Ermetic for a total purchase price of approximately $244 million, subject to customary purchase price adjustments.

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Item 2.        Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with (1) our consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q, or this Form 10-Q, and (2) our consolidated financial statements, related notes and management's discussion and analysis of financial condition and results of operations in our Annual Report on Form 10-K for the year ended December 31, 2022, or the 10-K, filed with the Securities and Exchange Commission on February 24, 2023. This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These statements are often identified by the use of words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “will,” “would” or the negative or plural of these words or similar expressions or variations. Such forward-looking statements are subject to a number of risks, uncertainties, assumptions and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified herein, and those discussed in the section titled “Risk Factors,” set forth in Part I, Item IA of the 10-K, in Part II, Item 1A of this Form 10-Q and in our other filings with the SEC. You should not rely upon forward-looking statements as predictions of future events. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

Overview

We are a leading provider of exposure management solutions. Exposure management is an effective discipline for managing, measuring and comparing cybersecurity risk in today's complex IT environments.

Our Tenable One Exposure Management Platform, or Tenable One, unifies a variety of data sources into a single exposure view to help organizations gain visibility, prioritize efforts and communicate cyber risks. Building on our existing products, Tenable One is designed to take advantage of the integrations that already exist with our partners and form the foundation of an exposure management program, alongside the other tools, such as endpoint detection and response and firewalls, and required business processes.

With Tenable One, organizations can translate technical data about assets, vulnerabilities and threats into clear business insights and actionable intelligence for security executives and practitioners. The platform combines broad, industry-leading vulnerability coverage in the industry, spanning IT assets, cloud resources, containers, web apps and identity systems. Tenable One builds on the speed and breadth of vulnerability coverage from Tenable Research and adds aggregated exposure view analytics, guidance on mitigating attack pathways and a centralized asset inventory.

Tenable One incorporates Tenable Vulnerability Management, Tenable Web App Scanning, Tenable Lumin, Tenable Cloud Security, Tenable Identity Exposure, Tenable Attack Surface Management and Tenable Security Center. All of these products are also offered as standalone solutions, alongside Tenable OT Security and Tenable Nessus.

Our platform offerings are primarily sold on a subscription basis with a one-year term. Our subscription terms are generally not longer than three years. These offerings are typically prepaid in advance. To a lesser extent, we recognize revenue ratably from perpetual licenses and from the related ongoing maintenance.

We sell and market our products and services through our field sales force that works closely with our channel partners, which includes a network of distributors and resellers, in developing sales opportunities. We use a two-tiered channel model whereby we sell our enterprise platform offerings to our distributors, which in turn sell to our resellers, which then sell to end users, which we call customers.

Revenue in the three months ended September 30, 2023 and 2022 and the nine months ended September 30, 2023 and 2022 was $201.5 million, $174.9 million, $585.4 million and $498.6 million, respectively, representing year-over-year growth of 15% and 17% in the quarterly and year-to-date periods, respectively. Our recurring revenue, which includes revenue from subscription arrangements for software (both revenue recognized ratably over the subscription term and upon delivery) and cloud-based solutions and maintenance associated with perpetual licenses, represented 95% of

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revenue in the three and nine months ended September 30, 2023 and 2022. Our net loss in the three months ended September 30, 2023 and 2022 and the nine months ended September 30, 2023 and 2022 was $15.6 million, $18.7 million, $56.6 million and $70.7 million, respectively, as we continue to invest in our business and market opportunity. Our cash flows from operating activities was $42.4 million, $35.9 million, $111.4 million and $99.2 million in the three months ended September 30, 2023 and 2022 and the nine months ended September 30, 2023 and 2022, respectively.

Financial Highlights

Below are our key financial results:

			Three Months Ended September 30,												Nine Months Ended September 30,
(in thousands, except per share data)			2023						2022						2023						2022
Revenue			$	201,529					$	174,851					$	585,404					$	498,560
Loss from operations			(7,913)						(12,958)						(37,814)						(53,726)
Net loss			(15,565)						(18,730)						(56,636)						(70,735)
Net loss per share, basic and diluted			(0.13)						(0.17)						(0.49)						(0.64)
Net cash provided by operating activities			42,411						35,853						111,350						99,233
Purchases of property and equipment			(201)						(1,896)						(1,299)						(5,132)
Capitalized software development costs			(1,894)						(2,451)						(4,707)						(8,778)

Key Operating and Financial Metrics

To supplement our consolidated financial statements, which are prepared and presented in accordance with GAAP, we use and monitor the following operating and financial metrics, which include non-GAAP financial measures, to understand and evaluate our core operating and financial performance.

Calculated Current Billings

We use the non-GAAP measure of calculated current billings, which we believe is a key metric to measure our periodic performance. Given that most of our customers pay in advance, we typically recognize a majority of the related revenue ratably over time. We use calculated current billings to measure and monitor our ability to provide our business with the working capital generated by upfront payments from our customers.

Calculated current billings consists of revenue recognized in a period plus the change in current deferred revenue in the corresponding period. We believe that calculated current billings, which excludes deferred revenue for periods beyond twelve months in a customer’s contractual term, more closely correlates with annual contract value. Variability in total billings, depending on the timing of large multi-year contracts and the preference for annual billing versus multi-year upfront billing, may distort growth in one period over another.

Calculated current billings may vary from period-to-period for a number of reasons, and therefore has a number of limitations as a quarter-to-quarter or year-over-year comparative measure. Calculated current billings in any one period may be impacted by the timing and amount of new sales transactions, the timing and amount of renewal transactions, including early renewals, the mix of the amount of subscriptions and perpetual licenses, the timing of billing professional services, as well as the timing and amount of multi-year prepaid contracts, all of which could favorably or unfavorably impact quarter-to-quarter and year-over-year comparisons. For example, an increasing number of large sales transactions, for which the timing has and will continue to vary, may occur in quarters subsequent to or in advance of those that we anticipate. Additionally, our calculation of calculated current billings may be different from other companies that report similar financial measures. Because of these and other limitations, you should consider calculated current billings along with revenue and our other GAAP financial results.

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The following table presents a reconciliation of revenue, the most directly comparable financial measure calculated in accordance with GAAP, to calculated current billings:

			Three Months Ended September 30,												Nine Months Ended September 30,
(in thousands)			2023						2022						2023						2022
Revenue			$	201,529					$	174,851					$	585,404					$	498,560
Deferred revenue (current), end of period			518,372						447,863						518,372						447,863
Deferred revenue (current), beginning of period(1)			(495,199)						(415,378)						(502,115)						(408,443)
Calculated current billings			$	224,702					$	207,336					$	601,661					$	537,980

_______________

(1)    Deferred revenue (current), beginning of period for the nine months ended September 30, 2022 includes $0.9 million related to acquired deferred revenue.

Free Cash Flow

We use the non-GAAP measure of free cash flow, which we define as GAAP net cash flows from operating activities reduced by purchases of property and equipment and capitalized software development costs. We believe free cash flow is an important liquidity measure of the cash (if any) that is available, after purchases of property and equipment and capitalized software development costs, for investment in our business and to make acquisitions. We believe that free cash flow is useful as a liquidity measure because it measures our ability to generate or use cash.

Our use of free cash flow has limitations as an analytical tool and you should not consider it in isolation or as a substitute for an analysis of our results under GAAP. First, free cash flow is not a substitute for net cash flows from operating activities. Second, other companies may calculate free cash flow or similarly titled non-GAAP financial measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of free cash flow as a tool for comparison. Additionally, the utility of free cash flow is further limited as it does not reflect our future contractual commitments and does not represent the total increase or decrease in our cash balance for a given period. Because of these and other limitations, you should consider free cash flow along with net cash provided by operating activities and our other GAAP financial measures.

The following table presents a reconciliation of net cash provided by operating activities, the most directly comparable financial measure calculated in accordance with GAAP, to free cash flow:

			Three Months Ended September 30,												Nine Months Ended September 30,
(in thousands)			2023						2022						2023						2022
Net cash provided by operating activities			$	42,411					$	35,853					$	111,350					$	99,233
Purchases of property and equipment			(201)						(1,896)						(1,299)						(5,132)
Capitalized software development costs(1)			(1,894)						(2,451)						(4,707)						(8,778)
Free cash flow(2)			$	40,316					$	31,506					$	105,344					$	85,323

_______________

(1)    Capitalized software development costs were previously included in purchases of property and equipment.

(2)    Free cash flow for the periods presented was impacted by:

			Three Months Ended September 30,												Nine Months Ended September 30,
(in thousands)			2023						2022						2023						2022
Cash paid for interest and other financing costs			$	(7,843)					$	(3,253)					$	(26,786)					$	(10,619)
Employee stock purchase plan activity			(2,236)						(4,845)						(2,507)						(4,538)
Acquisition-related expenses			(571)						(398)						(830)						(2,395)
Costs related to intra-entity asset transfers			—						—						—						(838)
Tax payment on intra-entity asset transfers			—						—						—						(2,697)

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Free cash flow for the nine months ended September 30, 2022 was benefited by approximately $8 million from prepayments of software subscription costs, insurance and rent in prior quarters.

Customer Metrics

We believe that our customer base provides a significant opportunity to expand sales of our enterprise platform offerings. The following tables summarize key components of our customer base:

			Three Months Ended September 30,
			2023						2022						Change (%)
Number of new enterprise platform customers added in period(1)			386						508						(24)%

_______________

(1)    We define an enterprise platform customer as a customer that has licensed Tenable One, Tenable Vulnerability Management, Tenable Cloud Security, Tenable Identity Exposure, Tenable OT Security or Tenable Security Center for an annual amount of $5,000 or greater. New enterprise platform customers represent new customer logos during the periods presented and do not include customer conversions from Tenable Nessus Expert to enterprise platforms.

			September 30,
			2023						2022						Change (%)
Number of customers with $100,000 and greater in annual contract value at end of period			1,565						1,280						22%

Dollar-Based Net Expansion Rate

Our dollar-based net expansion rate reflects both our customer retention and ability to drive additional sales to our existing customers. Our dollar-based net expansion rate has historically fluctuated and is expected to continue to fluctuate on a quarterly basis as a result of a number of factors, including existing customers' satisfaction with our solutions, existing customer retention, the pricing of our solutions, the availability of competing solutions and the pricing thereof, and the timing of customer renewals. In addition, our sales pipeline opportunities vary from quarter to quarter between new customers and expansion from existing customers, and we do not prioritize one over the other to maximize the dollar-based net expansion rate.

Our dollar-based net expansion rate is evaluated on a last twelve months, or LTM, basis, and is calculated as follows:

•Denominator: To calculate our dollar-based net expansion rate as of the end of a reporting period, we first determine the annual recurring revenue, or ARR, from all active subscriptions (both revenue recognized ratably over the subscription term and upon delivery) and maintenance from perpetual licenses as of the last day of the same reporting period in the prior year. This represents recurring payments that we expect to receive in the next 12-month period from the cohort of customers that existed on the last day of the same reporting period in the prior year.

•Numerator: We measure the ARR for that same cohort of customers representing all subscriptions and maintenance from perpetual licenses based on customer orders as of the end of the reporting period.

We calculate dollar-based net expansion rate by dividing the numerator by the denominator.

The following table presents our dollar-based net expansion rate:

			September 30,
(in thousands)			2023						2022
Dollar-based net expansion rate			111		%				118		%

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Non-GAAP Income from Operations and Non-GAAP Operating Margin

We use non-GAAP income from operations along with non-GAAP operating margin as key indicators of our financial performance. We define these non-GAAP financial measures as their respective GAAP measures, excluding the effects of stock-based compensation, acquisition-related expenses, costs related to the intra-entity asset transfers resulting from the internal restructuring of legal entities and amortization of acquired intangible assets. Acquisition-related expenses include transaction and integration expenses, as well as costs related to the intercompany transfer of acquired intellectual property.

We believe that these non-GAAP financial measures provide useful information about our core operating results over multiple periods. There are a number of limitations related to the use of the non-GAAP financial measures as compared to GAAP loss from operations and operating margin, including that non-GAAP income from operations and non-GAAP operating margin exclude stock-based compensation expense, which has been, and will continue to be, a significant recurring expense in our business and an important part of our compensation strategy.

The following table presents a reconciliation of loss from operations, the most directly comparable financial measure calculated in accordance with GAAP, to non-GAAP income from operations, and operating margin, the most directly comparable financial measure calculated in accordance with GAAP, to non-GAAP operating margin:

			Three Months Ended September 30,												Nine Months Ended September 30,
(dollars in thousands)			2023						2022						2023						2022
Loss from operations			$	(7,913)					$	(12,958)					$	(37,814)					$	(53,726)
Stock-based compensation			36,835						32,643						108,812						89,954
Acquisition-related expenses			4,598						322						4,728						2,376
Costs related to intra-entity asset transfers(1)			—						—						—						838
Amortization of acquired intangible assets			3,055						3,080						9,208						8,292
Non-GAAP income from operations			$	36,575					$	23,087					$	84,934					$	47,734
Operating margin			(4)		%				(7)		%				(6)		%				(11)		%
Non-GAAP operating margin			18		%				13		%				15		%				10		%

________________

(1)    The costs related to the intra-entity asset transfers resulted from our internal restructuring of Cymptom.

Non-GAAP Net Income and Non-GAAP Earnings Per Share

We use non-GAAP net income, which excludes stock-based compensation, acquisition-related expenses and amortization of acquired intangible assets, as well as the related tax impacts, and the tax impact and related costs of intra-entity asset transfers resulting from the internal restructuring of legal entities as well as deferred income tax benefits recognized in connection with acquisitions, to calculate non-GAAP earnings per share. We believe that these non-GAAP measures provide important information because they facilitate comparisons of our core operating results over multiple periods.

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The following table presents a reconciliation of net loss and net loss per share, the most comparable financial measures calculated in accordance with GAAP, to non-GAAP net income and non-GAAP earnings per share:

			Three Months Ended September 30,												Nine Months Ended September 30,
(in thousands, except for per share amounts)			2023						2022						2023						2022
Net loss			$	(15,565)					$	(18,730)					$	(56,636)					$	(70,735)
Stock-based compensation			36,835						32,643						108,812						89,954
Tax impact of stock-based compensation(1)			(1,207)						318						1,046						1,572
Acquisition-related expenses(2)			4,598						322						4,728						2,376
Costs related to intra-entity asset transfers(3)			—						—						—						838
Amortization of acquired intangible assets(4)			3,055						3,080						9,208						8,292
Tax impact of acquisitions(5)			(48)						(958)						(161)						(4,307)
Tax impact of intra-entity asset transfers(6)			—						508						—						2,121
Non-GAAP net income			$	27,668					$	17,183					$	66,997					$	30,111
Net loss per share, diluted			$	(0.13)					$	(0.17)					$	(0.49)					$	(0.64)
Stock-based compensation			0.32						0.29						0.94						0.81
Tax impact of stock-based compensation(1)			(0.01)						—						0.01						0.01
Acquisition-related expenses(2)			0.04						—						0.04						0.02
Costs related to intra-entity asset transfers(3)			—						—						—						0.01
Amortization of acquired intangible assets(4)			0.02						0.03						0.08						0.08
Tax impact of acquisitions(5)			—						(0.01)						—						(0.04)
Tax impact of intra-entity asset transfers(6)			—						0.01						—						0.02
Adjustment to diluted earnings per share(7)			(0.01)						—						(0.02)						(0.01)
Non-GAAP earnings per share, diluted			$	0.23					$	0.15					$	0.56					$	0.26
Weighted-average shares used to compute GAAP net loss per share, diluted			115,954						111,937						114,967						110,843
Weighted-average shares used to compute non-GAAP earnings per share, diluted			121,473						117,334						120,273						117,524

________________

(1)    The tax impact of stock-based compensation is based on the tax treatment for the applicable tax jurisdictions.

(2)    The tax impact of acquisition-related expenses is not material.

(3)    The costs related to the intra-entity asset transfers resulted from our internal restructuring of Cymptom.

(4)    The tax impact of the amortization of acquired intangible assets is included in the tax impact of acquisitions.

(5)    The tax impact of acquisitions for all periods presented includes the deferred tax benefits of the Alsid acquisition. Additionally, the tax impact of acquisitions for the nine months ended September 30, 2022 includes a reversal of the $2.5 million income tax benefit recognized for GAAP purposes related to the partial release of our valuation allowance associated with the Bit Discovery acquisition.

(6)    The tax impact of the intra-entity transfers is related to current tax expense based on the applicable Israeli tax rates resulting from our internal restructuring of Cymptom.

(7)    An adjustment to reconcile GAAP net loss per share, which excludes potentially dilutive shares, to non-GAAP earnings per share, which includes potentially dilutive shares.

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Components of Our Results of Operations

Revenue

We generate revenue from subscription arrangements for our software and cloud-based solutions, perpetual licenses, maintenance associated with perpetual licenses and professional services.

Our subscription arrangements generally have annual or multi-year contractual terms to use our software or cloud-based solutions, including ongoing software updates during the contractual period. For software subscriptions that are dependent on ongoing software updates and the ability to identify the latest cybersecurity vulnerabilities, revenue is recognized ratably over the subscription term given the critical utility provided by the ongoing updates that are released through the contract period. When the critical utility of our software does not depend on ongoing updates, we recognize revenue attributable to the license at the time of delivery and the revenue attributable to the maintenance and support ratably over the contract period.

Our perpetual licenses are generally sold with one or more years of maintenance, which includes ongoing software updates. Given the critical utility provided by the ongoing software updates and updated ability to identify network vulnerabilities included in maintenance, we combine the perpetual license and the maintenance into a single performance obligation. Perpetual license arrangements generally contain a material right related to the customer’s ability to renew maintenance at a price that is less than the initial license fee. We apply a practical alternative to allocating a portion of the transaction price to the material right performance obligation and estimate a hypothetical transaction price which includes fees for expected maintenance renewals based on the estimated economic life of perpetual license contracts. We allocate the transaction price between the cybersecurity subscription provided in the initial contract and the material right related to expected contract renewals based on the hypothetical transaction price. We recognize the amount allocated to the combined license and maintenance performance obligation over the initial contractual period, which is generally one year. We recognize the amount allocated to the material right over the expected maintenance renewal period, which begins at the end of the initial contractual term and is generally four years. We have estimated the five-year economic life of perpetual license contracts based on historical contract attrition, expected renewal periods, the lifecycle of our technology and other factors. This estimate may change over time.

Professional services and other revenue is primarily comprised of advisory services and training related to the deployment and optimization of our products. These services do not result in significant customization of our products. Professional services and other revenue is recognized as the services are performed.

We have historically experienced, and expect in the future to experience, seasonality in entering into agreements with customers. We typically enter into a significantly higher percentage of agreements with new customers, as well as renewal agreements with existing customers, in the third and fourth quarters of the year. The increase in customer agreements in the third quarter is primarily attributable to U.S. government and related agencies, and the increase in the fourth quarter is primarily attributable to large enterprise account buying patterns typical in the software industry. The ratable nature of our subscription revenue makes this seasonality less apparent in our overall financial results. At the end of the first quarter of 2023, we experienced longer sales cycle times in the purchasing and approval phases of our sales cycle, and this trend has continued during 2023 and may continue into 2024.

Cost of Revenue, Gross Profit and Gross Margin

Cost of revenue includes personnel costs related to our technical support group that provides assistance to customers, including salaries, benefits, bonuses, payroll taxes, stock-based compensation and any severance. Cost of revenue also includes cloud infrastructure costs, the costs related to professional services and training, depreciation, amortization of acquired and developed technology, hardware costs and allocated overhead costs, which consist of information technology and facilities.

We intend to continue to invest additional resources in our cloud-based platform and customer support team as we grow our business. The level and timing of investment in these areas could affect our cost of revenue in the future.

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Gross profit, or revenue less cost of revenue, and gross margin, or gross profit as a percentage of revenue, have been and will continue to be affected by various factors, including the timing of our acquisition of new customers and our renewals of and follow-on sales to existing customers, the costs associated with operating our cloud-based platform, the extent to which we expand our customer support team and the extent to which we can increase the efficiency of our technology and infrastructure through technological improvements.

We expect our gross profit to increase in absolute dollars but our gross margin may fluctuate from period to period depending on the interplay of all of these factors, particularly as it relates to cloud infrastructure costs, as we expect revenue from our cloud-based subscriptions to increase as a percentage of revenue.

Operating Expenses

Our operating expenses consist of sales and marketing, research and development and general and administrative expenses. Personnel costs are the most significant component of operating expenses and consist of salaries, benefits, bonuses, payroll taxes, stock-based compensation and any severance. Operating expenses also include depreciation and amortization as well as allocated overhead costs, including IT and facilities costs.

Sales and Marketing

Sales and marketing expense consists of personnel costs, sales commissions, marketing programs, travel and entertainment, expenses for conferences, meetings and events and allocated overhead costs. We capitalize sales commissions, including related fringe benefit costs, and recognize the expense over an estimated period of benefit, which ranges between three and four years for subscription arrangements and five years for perpetual license arrangements. Sales commissions on contract renewals are capitalized and amortized ratably over the contract term, with the exception of contracts with renewal periods that are one year or less, in which case the incremental costs are expensed as incurred. Sales commissions on professional services arrangements are expensed as incurred as the contractual periods of these arrangements are generally less than one year.

We intend to continue to make investments in our sales and marketing teams to increase revenue, further penetrate the market and expand our global customer base. We expect our sales and marketing expense to increase in absolute dollars annually and to be our largest operating expense category for the foreseeable future. However, as our revenue increases, we expect our sales and marketing expense to decrease as a percentage of our revenue over the long term. Our sales and marketing expense may fluctuate from period to period due to the timing and extent of these expenses, including sales commissions, which may fluctuate depending on the mix of sales and related expense recognition.

Research and Development

Research and development expense consists of personnel costs, software used to develop our products, travel and entertainment, consulting and professional fees for third-party development resources as well as allocated overhead. Our research and development expense supports our efforts to continue to add capabilities to our existing products and enable the continued detection of new network vulnerabilities.

We expect our research and development expense to continue to increase annually in absolute dollars for the foreseeable future as we continue to invest in research and development efforts to enhance the functionality of our cloud-based platform. However, we expect our research and development expense to decrease as a percentage of our revenue over the long term, although our research and development expense may fluctuate from period to period due to the timing and extent of these expenses.

General and Administrative

General and administrative expense consists of personnel costs for our executive, finance, legal, human resources and administrative departments. Additional expenses include travel and entertainment, professional fees, insurance, allocated overhead and acquisition-related costs.

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We expect our general and administrative expense to continue to increase in absolute dollars and decrease as a percentage of our revenue over the long term, although our general and administrative expense may fluctuate from period to period due to the timing and extent of these expenses.

Interest Income, Interest Expense and Other Expense, Net

Interest income consists of income earned on cash and cash equivalents and short-term investments. Interest expense consists primarily of interest expense in connection with our senior secured term loan facility, or Term Loan, unused commitment fees on our senior secured revolving credit facility, or Revolving Credit Facility, and letter of credit fees. Other expense, net consists primarily of foreign currency remeasurement and transaction gains and losses and an impairment loss if one of our SAFE investments is determined to be impaired.

Provision for Income Taxes

Provision for income taxes consists of income taxes in all foreign jurisdictions in which we conduct business and the related withholding taxes on sales with customers. We have recorded deferred tax assets for which a full valuation allowance has been provided, including net operating loss carryforwards and tax credits. We expect to maintain this full valuation allowance for the foreseeable future as it is more likely than not that some or all of those deferred tax assets may not be realized based on our history of losses.

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Results of Operations

The following tables set forth our consolidated results of operations for the periods presented:

			Three Months Ended September 30,												Nine Months Ended September 30,
(in thousands)			2023						2022						2023						2022
Revenue			$	201,529					$	174,851					$	585,404					$	498,560
Cost of revenue(1)			45,754						38,582						134,774						109,549
Gross profit			155,775						136,269						450,630						389,011
Operating expenses:
Sales and marketing(1)			94,759						88,123						289,750						258,119
Research and development(1)			37,052						36,131						113,080						106,649
General and administrative(1)			31,877						24,973						85,614						77,969
Total operating expenses			163,688						149,227						488,444						442,737
Loss from operations			(7,913)						(12,958)						(37,814)						(53,726)
Interest income			7,662						1,803						19,323						2,746
Interest expense			(8,119)						(5,082)						(23,208)						(12,246)
Other expense, net			(6,502)						(2,073)						(7,993)						(4,880)
Loss before income taxes			(14,872)						(18,310)						(49,692)						(68,106)
Provision for income taxes			693						420						6,944						2,629
Net loss			$	(15,565)					$	(18,730)					$	(56,636)					$	(70,735)

_______________

(1)    Includes stock-based compensation expense as follows:

			Three Months Ended September 30,												Nine Months Ended September 30,
(in thousands)			2023						2022						2023						2022
Cost of revenue			$	3,011					$	2,341					$	8,542					$	5,968
Sales and marketing			15,805						13,589						46,622						36,420
Research and development			9,242						8,754						27,871						23,294
General and administrative			8,777						7,959						25,777						24,272
Total stock-based compensation expense			$	36,835					$	32,643					$	108,812					$	89,954

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Comparison of the Three Months Ended September 30, 2023 and 2022

Revenue

The following table presents the increase in revenue:

			Three Months Ended September 30,												Change
(dollars in thousands)			2023						2022						($)						(%)
Subscription revenue			$	183,268					$	156,764					$	26,504					17		%
Perpetual license and maintenance revenue			12,200						12,658						(458)						(4)		%
Professional services and other revenue			6,061						5,429						632						12		%
Revenue			$	201,529					$	174,851					$	26,678					15		%

The increase in revenue of $26.7 million included $30.6 million from existing customers at October 1, 2022, net of a decrease from new customers of $3.9 million. U.S. revenue increased $12.7 million, or 13%. International revenue increased $14.0 million, or 18%.

Cost of Revenue, Gross Profit and Gross Margin

			Three Months Ended September 30,												Change
(dollars in thousands)			2023						2022						($)						(%)
Cost of revenue			$	45,754					$	38,582					$	7,172					19		%
Gross profit			155,775						136,269						19,506						14		%
Gross margin			77		%				78		%

The increase in cost of revenue of $7.2 million was primarily due to:

•a $3.4 million increase in third-party cloud infrastructure costs;

•a $2.6 million increase in personnel costs, including a $0.7 million increase in stock-based compensation; and

•a $0.6 million increase in depreciation and amortization expenses.

Operating Expenses

Sales and Marketing

			Three Months Ended September 30,												Change
(dollars in thousands)			2023						2022						($)						(%)
Sales and marketing			$	94,759					$	88,123					$	6,636					8		%

The increase in sales and marketing expense of $6.6 million was primarily due to:

•a $3.2 million increase in personnel costs, including a $2.2 million increase in stock-based compensation;

•a $1.3 million increase in expenses for demand generation programs, including advertising, sponsorships and brand awareness efforts;

•a $1.3 million increase in selling expenses, including a $0.7 million increase in travel and meeting costs;

•a $0.4 million increase in allocated overhead; and

•a $0.4 million increase in sales commissions.

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Research and Development

			Three Months Ended September 30,												Change
(dollars in thousands)			2023						2022						($)						(%)
Research and development			$	37,052					$	36,131					$	921					3		%

The increase in research and development expense of $0.9 million was primarily due to:

•a $1.2 million increase in third-party cloud infrastructure costs; and

•a $0.2 million increase in allocated overhead; partially offset by

•a $0.5 million decrease in personnel costs.

General and Administrative

			Three Months Ended September 30,												Change
(dollars in thousands)			2023						2022						($)						(%)
General and administrative			$	31,877					$	24,973					$	6,904					28		%

The increase in general and administrative expense of $6.9 million was primarily due to:

•a $4.3 million increase in acquisition-related expenses;

•a $1.5 million increase in personnel costs largely associated with an increase in headcount and a $0.8 million increase in stock-based compensation;

•a $0.6 million increase in professional fees;

•a $0.4 million increase in bank fees; and

•a $0.2 million increase in indirect taxes such as VAT.

Interest Income, Interest Expense and Other Expense, Net

			Three Months Ended September 30,												Change
(dollars in thousands)			2023						2022						($)						(%)
Interest income			$	7,662					$	1,803					$	5,859					325		%
Interest expense			(8,119)						(5,082)						(3,037)						60		%
Other expense, net			(6,502)						(2,073)						(4,429)						214		%

The $5.9 million increase in interest income was due to higher interest rates on an increased amount of cash and cash equivalents and short-term investments. The $3.0 million increase in interest expense was primarily related to an increase in the variable rate of our Term Loan. The $4.4 million increase in other expense, net was primarily due to a $5.0 million impairment loss on one of our SAFE investments, partially offset by a $0.6 million decrease in foreign exchange losses.

Provision for Income Taxes

			Three Months Ended September 30,												Change
(dollars in thousands)			2023						2022						($)						(%)
Provision for income taxes			$	693					$	420					$	273					65		%

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In the three months ended September 30, 2023, the provision for income taxes included:

•$0.6 million of discrete items primarily related to withholding taxes on sales to customers; and

•$0.1 million of income taxes in foreign jurisdictions in which we conduct business.

In the three months ended September 30, 2022, the provision for income taxes included:

•$0.5 million of current expense from the restructuring of our research and development operations in Israel;

•$0.2 million of income taxes in foreign jurisdictions in which we conduct business; and

•$0.7 million of discrete items primarily related to withholding taxes on sales to customers; partially offset by

•$1.0 million of deferred tax benefits related to the Alsid acquisition.

Comparison of the Nine Months Ended September 30, 2023 and 2022

Revenue

The following table presents the increase in revenue:

			Nine Months Ended September 30,												Change
(dollars in thousands)			2023						2022						($)						(%)
Subscription revenue			$	531,133					$	446,257					$	84,876					19		%
Perpetual license and maintenance revenue			36,535						38,214						(1,679)						(4)		%
Professional services and other revenue			17,736						14,089						3,647						26		%
Revenue			$	585,404					$	498,560					$	86,844					17		%

The increase in revenue of $86.8 million included $95.3 million from existing customers at October 1, 2022, net of a decrease from new customers of $8.5 million. U.S. revenue increased $42.8 million, or 15%. International revenue increased $44.0 million, or 20%.

Cost of Revenue, Gross Profit and Gross Margin

			Nine Months Ended September 30,												Change
(dollars in thousands)			2023						2022						($)						(%)
Cost of revenue			$	134,774					$	109,549					$	25,225					23		%
Gross profit			450,630						389,011						61,619						16		%
Gross margin			77		%				78		%

The increase in cost of revenue of $25.2 million was primarily due to:

•an $11.2 million increase in personnel costs, largely associated with an increase in headcount and including a $2.6 million increase in stock-based compensation as well as support for cloud-based products;

•a $10.0 million increase in third-party cloud infrastructure costs;

•a $1.6 million increase in depreciation and amortization expenses;

•a $0.9 million increase in amortization of intangible assets due to acquired intangible assets; and

•a $0.6 million increase in allocated overhead.

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Operating Expenses

Sales and Marketing

			Nine Months Ended September 30,												Change
(dollars in thousands)			2023						2022						($)						(%)
Sales and marketing			$	289,750					$	258,119					$	31,631					12		%

The increase in sales and marketing expense of $31.6 million was primarily due to:

•an $18.3 million increase in personnel costs, largely associated with an increase in headcount and a $10.2 million increase in stock-based compensation;

•an $8.1 million increase in selling expenses, including a $6.7 million increase in travel and meeting costs;

•a $4.9 million increase in expenses for demand generation programs, including advertising, sponsorships and brand awareness efforts; and

•a $0.9 million increase in allocated overhead; partially offset by

•a $0.8 million decrease in sales commissions.

Research and Development

			Nine Months Ended September 30,												Change
(dollars in thousands)			2023						2022						($)						(%)
Research and development			$	113,080					$	106,649					$	6,431					6		%

The increase in research and development expense of $6.4 million was primarily due to:

•a $4.0 million increase in third-party cloud infrastructure costs;

•a $2.7 million net increase in personnel costs, largely associated with an increase in headcount, including a $4.6 million increase in stock-based compensation and net of increased support for cloud-based products;

•a $0.5 million increase in allocated overhead; and

•a $0.4 million increase in travel and meeting costs; partially offset by

•a $0.9 million increase in tax credits.

General and Administrative

			Nine Months Ended September 30,												Change
(dollars in thousands)			2023						2022						($)						(%)
General and administrative			$	85,614					$	77,969					$	7,645					10		%

The increase in general and administrative expense of $7.6 million was primarily due to:

•a $2.6 million increase in personnel costs, largely associated with an increase in headcount and a $1.5 million increase in stock-based compensation;

•a $2.4 million increase in acquisition-related expenses;

•a $1.4 million increase in professional fees;

•a $1.0 million increase in indirect taxes such as VAT;

•a $0.8 million increase in bank fees; and

•a $0.3 million increase in travel and meeting costs; partially offset by

•a $0.8 million decrease in intra-entity asset transfer costs related to Cymptom.

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Interest Income, Interest Expense and Other Expense, Net

			Nine Months Ended September 30,												Change
(dollars in thousands)			2023						2022						($)						(%)
Interest income			$	19,323					$	2,746					$	16,577					604		%
Interest expense			(23,208)						(12,246)						(10,962)						90		%
Other expense, net			(7,993)						(4,880)						(3,113)						64		%

The $16.6 million increase in interest income was due to higher interest rates on an increased amount of short-term investments and cash and cash equivalents. Interest expense increased $11.0 million due to an increase in the interest rate on our Term Loan. Other expense, net increased $3.1 million primarily due to a $5.0 million impairment loss on one of our SAFE investments, partially offset by a $1.7 million decrease in foreign exchange losses.

Provision for Income Taxes

			Nine Months Ended September 30,												Change
(dollars in thousands)			2023						2022						($)						(%)
Provision for income taxes			$	6,944					$	2,629					$	4,315					164		%

In the nine months ended September 30, 2023, the provision for income taxes included:

•$4.3 million of income taxes in foreign jurisdictions in which we conduct business; and

•$2.8 million of discrete items primarily related to withholding taxes on sales to customers; partially offset by

•$0.2 million of deferred tax benefits related to the Alsid acquisition.

In the nine months ended September 30, 2022, the provision for income taxes included:

•$3.1 million income taxes in foreign jurisdictions in which we conduct business;

•$2.1 million of current expense from the restructuring of our research and development operations in Israel; and

•$1.7 million of discrete items primarily related to withholding taxes on sales to customers; partially offset by

•a $2.5 million benefit from partially releasing the valuation allowance associated with the Bit Discovery acquisition; and

•$1.8 million deferred tax benefits related to the Alsid acquisition.

Liquidity and Capital Resources

At September 30, 2023, we had $445.3 million of cash and cash equivalents, which consisted of bank deposits and money market funds, and $247.7 million of short-term investments, which consisted of commercial paper, asset backed securities, certificates of deposit, U.S. Treasury and agency obligations and corporate and Yankee bonds.

Since our inception, we have primarily financed our operations through cash provided by operations, including payments received from customers using our software products and services. Prior to our IPO, we did not raise any primary institutional capital, and the proceeds of our Series A and Series B redeemable convertible preferred stock financings were used to repurchase shares of capital stock from former stockholders. We have generated significant operating losses as reflected by our accumulated deficit of $803.4 million at September 30, 2023.

We typically invoice our customers annually in advance and, to a lesser extent, multi-years in advance. Therefore, a substantial source of our cash is from such prepayments, which are included in deferred revenue on our consolidated balance sheets. Deferred revenue consists primarily of the unearned portion of billed fees for our subscriptions and perpetual licenses, which is subsequently recognized as revenue in accordance with our revenue recognition policy. At September 30, 2023, we had deferred revenue of $681.5 million, of which $518.4 million was recorded as a current

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liability and is expected to be recognized as revenue in the next 12 months, provided all other revenue recognition criteria are met.

Our principal uses of cash in recent periods have been funding our operations, expansion of our sales and marketing and research and development activities, investments in infrastructure, and acquiring complementary businesses and technology. In October 2023, we acquired Ermetic for approximately $244 million in cash. We may in the future enter into arrangements to acquire or invest in other complementary businesses, services and technologies, including intellectual property rights.

We expect to continue incurring operating losses in the near term. Even though we generated positive cash flows from operations and free cash flow in the nine months ended September 30, 2023, we may not be able to sustain these cash flows. We believe that our existing cash and cash equivalents and short-term investments will be sufficient to fund our operating and capital needs for at least the next 12 months and for the foreseeable future. Our future capital requirements will depend on many factors, including our revenue growth rate, subscription renewal activity, the timing and extent of spending to support further infrastructure and research and development efforts, the timing and extent of additional capital expenditures to invest in new and existing office spaces, the expansion of sales and marketing and international operating activities, any acquisitions of complementary businesses and technologies, the timing of our introduction of new product capabilities and enhancements of our platform and the continuing market acceptance of our platform. It may be necessary to seek additional equity or debt financing to fund our operating and capital needs. In the event that financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, or if we cannot expand our operations or otherwise capitalize on our business opportunities because we lack sufficient capital, our business, operating results and financial condition would be adversely affected.

Term Loan and Revolving Credit Facility

In July 2021, we entered into a credit agreement, or the Credit Agreement, which is comprised of a $375.0 million Term Loan and a $50.0 million Revolving Credit Facility, with a $15.0 million letter of credit sublimit. On June 1, 2023, we began using SOFR instead of LIBOR. The Term Loan bears interest at a rate of 2.75% per annum over SOFR, subject to a 0.50% floor, plus a credit spread adjustment depending on the interest period.

From January to September 2023, interest rates on our Term Loan have been between 7.16% and 8.20%. In October 2023 and November 2023, the Term Loan has interest rates of 8.18% and 8.19%, respectively. The Term Loan is being amortized at 1% per annum in equal quarterly installments until the final payment of $350.6 million on the July 7, 2028 maturity date. We may be subject to mandatory Term Loan prepayments related to the excess cash provisions in the Credit Agreement if our first lien net leverage ratio (as defined in the Credit Agreement) exceeds 3.5. At September 30, 2023, our first lien net leverage ratio was 1.21.

The Revolving Credit Facility bears interest at a rate, depending on first lien net leverage, ranging from 2.00% to 2.50% over SOFR and matures on July 7, 2026. We pay a commitment fee during the term ranging from 0.25% to 0.375% per annum of the average daily undrawn portion of the revolving commitments based on the first lien net leverage ratio. The Credit Agreement contains customary representations and warranties and affirmative and negative covenants. Additionally, if at least 35% of the Revolving Credit Facility is drawn on the last day of the quarter, the total net leverage ratio cannot be greater than 5.50 to 1.00. At September 30, 2023, we were in compliance with the covenants and had $0.2 million of standby letters of credit outstanding under the Revolving Credit Facility.

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Cash Flows

The following table summarizes our cash flows for the periods presented:

			Nine Months Ended September 30,
(in thousands)			2023						2022
Net cash provided by operating activities			$	111,350					$	99,233
Net cash provided by (used in) investing activities			19,619						(108,003)
Net cash provided by financing activities			16,043						23,195
Effect of exchange rate changes on cash and cash equivalents and restricted cash			(2,562)						(4,276)
Net increase in cash and cash equivalents and restricted cash			$	144,450					$	10,149

Operating Activities

Our largest source of cash provided by operating activities is cash collections from sales of our products and services, as we typically invoice our customers in advance. Our primary uses of cash are employee compensation costs, third-party cloud infrastructure and other software subscription costs, demand generation expenditures and general corporate costs.

Investing Activities

Net cash provided by investing activities increased by $127.6 million, primarily due to a $67.0 million decrease in cash paid for acquisitions, a $52.7 million net increase in sales of short-term investments, a $4.1 million decrease in capitalized software development costs and a $3.8 million decrease in purchases of property and equipment.

Financing Activities

Net cash provided by financing activities decreased by $7.2 million, primarily due to a $8.2 million decrease in proceeds from the exercise of stock options, which was partially offset by a $1.4 million increase in proceeds from stock issued in connection with our employee stock purchase plan.

Contractual Obligations

We have certain contractual obligations for future payments. Refer to Note 7 to our consolidated financial statements for our required operating lease payments and Note 9 for our required payments to Amazon Web Services, Inc. for cloud services.

At September 30, 2023, there were no other material changes in our contractual obligations and commitments from those disclosed in our 10-K.

Critical Accounting Policies and Estimates

Our financial statements are prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, as well as related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates.

There have been no material changes to our critical accounting policies and estimates as described in our 10-K.

Item 3.        Quantitative and Qualitative Disclosures about Market Risk

We are exposed to market risks in the ordinary course of our business, including interest rate, foreign currency exchange and inflation risks.

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Interest Rate Risk

At September 30, 2023, we had $445.3 million of cash and cash equivalents, which consisted of cash deposits and money market funds. We also had $247.7 million of short-term investments, which consisted of commercial paper, asset backed securities, certificates of deposit, U.S. treasury and agency securities and corporate and Yankee bonds. Our investments are carried at their fair market values with cumulative unrealized gains or losses recorded as a component of accumulated other comprehensive loss within stockholders' equity. The primary objectives of our investment activities are the preservation of capital, the fulfillment of liquidity needs and the fiduciary control of cash and investments. We do not enter into investments for trading or speculative purposes. Interest-earning instruments carry a degree of interest rate risk; however, a hypothetical 10% change in interest rates during any of the periods presented would not have had a material impact on our financial statements.

In July 2021, we entered into the Credit Agreement comprised of a $375.0 million Term Loan and a $50.0 million Revolving Credit Facility. From January to September 2023, interest rates on our Term Loan have been between 7.16% and 8.20%. In October 2023 and November 2023, the Term Loan has interest rates of 8.18% and 8.19%, respectively. A one percentage point increase in the rate would increase 2023 interest expense by $0.3 million.

Foreign Currency Exchange Risk

Substantially all of our sales contracts are denominated in U.S. dollars, with a limited number of contracts denominated in foreign currencies, including foreign denominated leases. A portion of our operating expenses are incurred outside the United States, denominated in foreign currencies and subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the Euro, British Pound, Australian dollar, Israeli New Shekel and Indian Rupee. Strengthening of the U.S. dollar compared to other currencies could result in lower international sales as our products would seem more expensive and could result in lower international operating costs as the U.S. dollar is the functional currency for all of our international subsidiaries. Additionally, fluctuations in foreign currency exchange rates may cause us to recognize remeasurement and transaction gains (losses) in our consolidated statements of operations. As the impact of foreign currency exchange rates has not been material to our historical operating results, we have not entered into derivative or hedging transactions, but we may do so in the future if our exposure to foreign currencies becomes more significant.

Inflation Risk

While we do not believe that inflation has had a material effect on our business, results of operations, or financial condition through September 30, 2023, our costs, specifically employee-related and third-party cloud infrastructure costs, may become subject to significant inflationary pressures, and our inability or failure to fully offset such higher costs could harm our business, results of operations, or financial condition.

Item 4.        Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain “disclosure controls and procedures,” as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act, that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act ), as of the end of the period covered by this Form 10-Q. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that at September 30, 2023, our disclosure controls and procedures were effective to provide reasonable assurance that the information required to be disclosed by us in this Form 10-Q was (a) reported

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within the time periods specified by SEC rules and regulations, and (b) communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding any required disclosure.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the period covered by this Quarterly Report on Form 10-Q that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Internal Controls

In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs. Our management, including our Chief Executive Officer and Chief Financial Officer, believes that our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives and are effective at the reasonable assurance level. However, our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud.

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PART II. OTHER INFORMATION

Item 1.        Legal Proceedings

From time to time, we may be subject to legal proceedings and claims in the ordinary course of business. We are not presently a party to any legal proceedings that, if determined adversely to us, would individually or taken together have a material adverse effect on our business, results of operations, financial condition or cash flows. We have received, and may in the future continue to receive, claims from third parties asserting, among other things, infringement of their intellectual property rights. Future litigation may be necessary to defend ourselves, our partners and our customers by determining the scope, enforceability and validity of third-party proprietary rights, or to establish our proprietary rights. The results of any current or future litigation cannot be predicted with certainty, and regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.

Item 1A.    Risk Factors

Except for the risk factors disclosed below, there have been no material changes to the risk factors disclosed in Part 1, Item 1A. "Risk Factors" of our of our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the United States Securities and Exchange Commission ("SEC") on February 24, 2023. Our business is subject to risks and events that, if they occur, could adversely affect our financial condition and results of operations and trading price of our securities. In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors described in Part I, Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2022. We may disclose additional changes to risk factors or disclose additional factors from time to time in our future filings with the SEC. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations.

The nature of our business requires the application of complex accounting rules and regulations and public reporting and corporate governance requirements. If there are significant changes in current principles, financial reporting standards, interpretations or public reporting and corporate governance requirements, or if our estimates or judgments relating to our critical accounting policies or reporting or governance requirements prove to be incorrect, we may experience unexpected financial reporting fluctuations or increased compliance costs and strain on our resources and our results of operations could be adversely affected.

The accounting rules and regulations that we must comply with are complex and subject to interpretation by the Financial Accounting Standards Board, the SEC, and various bodies formed to promulgate and interpret appropriate accounting principles. In addition, many companies’ accounting disclosures are being subjected to heightened scrutiny by regulators and the public. Further, the accounting rules and regulations are continually changing in ways that could impact our financial statements.

The preparation of financial statements in conformity with generally accepted accounting principles in the United States, or U.S. GAAP, requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, as provided in the section of this report titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Significant assumptions and estimates used in preparing our consolidated financial statements include the determination of the estimated economic life of perpetual licenses for revenue recognition, the estimated period of benefit for deferred commissions, useful lives of long-lived assets, the valuation of stock-based compensation, the incremental borrowing rate for operating leases, and the valuation of deferred tax assets. Our results of operations may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our results of operations to fall below the expectations of securities analysts and investors, resulting in a decline in the trading price of our common stock.

As a public company, we are also subject to the reporting and corporate governance requirements of the Exchange Act, the listing requirements of the Nasdaq Stock Market and other applicable securities rules and regulations, including the Sarbanes-Oxley Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act. Compliance with these

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rules and regulations increases our legal and financial compliance costs, makes some activities more difficult, time-consuming or costly and increases demand on our systems and resources.

Additionally, we regularly monitor our compliance with applicable financial reporting standards and SEC and applicable listing standard requirements and review new pronouncements, drafts and interpretations thereof that are relevant to us. We might be required to change our accounting policies, alter our operational policies and implement new or enhance existing systems, or we may be required to restate our published financial statements, as a result of new standards or requirements, changes to existing standards or requirements and changes in their interpretation. Such changes to existing standards or requirements or changes in their interpretation may have an adverse effect on our reputation, business, financial position and profit, or cause an adverse deviation from our revenue and operating profit target, which may negatively impact our financial results. Additionally, we may incur substantial professional fees and expend significant management efforts, and we may need to hire additional staff with the appropriate experience and compile systems and processes necessary to adopt these new standards and disclosure or governance requirements.

For example, in July 2023, the SEC adopted rules requiring the disclosure of information about a material cybersecurity incident on Form 8-K within four business days of determining that the incident is material, unless the US Attorney General concludes that such a disclosure would pose a substantial risk to national security or public safety. Additionally, these rules require disclosures describing the processes used to identify, assess and manage cybersecurity risks, management's role in assessing and managing material risks from cybersecurity threats and the board of directors' role in overseeing cybersecurity risks.

Recent and future acquisitions could disrupt our business and adversely affect our business operations and financial results.

We have acquired products, technologies and businesses from other parties, such as our October 2023 acquisition of Ermetic, and we expect to expand our current business by acquiring additional businesses or technologies in the future. Acquisitions involve many risks, including the following:

•an acquisition may negatively affect our financial results because it may require us to incur charges or assume substantial debt or other liabilities, may cause adverse tax consequences or unfavorable accounting treatment, may expose us to claims and disputes by third parties, including intellectual property claims and disputes, or may not generate sufficient financial return to offset additional costs and expenses related to the acquisition;

•we may encounter difficulties or unforeseen expenditures in integrating the business, technologies, products, personnel or operations of any company that we acquire, particularly if key personnel of the acquired company decide not to work for us;

•an acquisition may disrupt our ongoing business, divert resources, increase our expenses and distract our management;

•an acquisition may result in a delay or reduction of customer purchases for both us and the company acquired due to customer uncertainty about continuity and effectiveness of service from either company;

•we may encounter difficulties in, or may be unable to, successfully sell any acquired solutions;

•an acquisition may involve the entry into geographic or business markets in which we have little or no prior experience or where competitors have stronger market positions;

•our use of cash to pay for an acquisition would limit other potential uses for our cash;

•the issuance of additional stock in connection with an acquisition could result in substantial dilution to our existing stockholders; and

•if we incur debt to fund such acquisition, such debt may subject us to material restrictions on our ability to conduct our business as well as financial maintenance covenants.

Acquired businesses have had, and may in the future have a less mature cybersecurity program than our own. While we take steps designed to ensure our data and system security protection measures cover the acquired business, there may be cybersecurity risks and vulnerabilities arising from those acquired or integrated entities’ systems, technologies and services, that could also impact our existing systems, technologies and services and increase our cybersecurity risks.

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The occurrence of any of these risks could have a material adverse effect on our business operations and financial results. In addition, we may only be able to conduct limited due diligence on an acquired company’s operations. Following an acquisition, we may be subject to unforeseen liabilities arising from an acquired company’s past or present operations and these liabilities may be greater than the warranty and indemnity limitations that we negotiate. Any unforeseen liability that is greater than these warranty and indemnity limitations could have a negative impact on our financial condition.

In addition, Ermetic principally operates in Israel and the recent conflict there may also have the effect of heightening the risks identified above.

Our business, financial condition and results of operations could be materially adversely affected by the recent conflict in Israel and subsequent hostilities in the region, as well as any negative impact on the regional or global economies and capital markets resulting therefrom or from the ongoing conflict between Ukraine and Russia and any other geopolitical tensions.

U.S. and global markets have experienced volatility and disruption following the escalation of geopolitical tensions, including the conflict in Israel and the ongoing conflict between Ukraine and Russia. The length, scale and impact of these military conflicts are highly unpredictable and could continue to result in market disruptions, including significant volatility in commodity prices, credit and capital markets, disruption in the energy market as well as supply chain interruptions.

Furthermore, our research and development teams for Tenable OT Security and for Ermetic are located in Tel Aviv, Israel. Recent and ongoing hostilities in the region may have a material impact on our ability to deliver on our product roadmaps for these solutions.

It is impossible to predict the extent to which our operations, or those of our partners or customers, will be impacted in the short and long term, or the ways in which these conflicts may impact our business. The extent and duration of the military action, sanctions and resulting market disruptions are impossible to predict, but could be substantial.

Item 2.        Unregistered Sales of Equity Securities and Use of Proceeds

Unregistered Sales of Equity Securities

None.

Use of Proceeds

None.

Items 3, 4 and 5 are not applicable and have been omitted.

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Item 6.        Exhibits

The following is a list of Exhibits filed as part of this Quarterly Report on Form 10-Q:

Exhibit Number

Description

Location

2.1

Share Purchase Agreement, dated as of September 7, 2023, by and among Tenable, Inc., Ermetic Ltd., the shareholders of Ermetic identified on the signature pages thereto and Shareholder Representative Services LLC.

Previously filed as Exhibit 2.1 to the Company's Current Report on Form 8-K (File No. 001-38600) on September 7, 2023

3.1

Amended and Restated Certificate of Incorporation of Tenable Holdings, Inc.

Previously filed as Exhibit 3.1 to the Company's Current Report on Form 8-K (File No. 001-38600) on July 30, 2018

3.2

Amended and Restated Bylaws of Tenable Holdings, Inc.

Previously filed as Exhibit 3.4 to the Company's Registration Statement on Form S-1 (File No. 333-226002) on June 29, 2018

4.1

Common Stock Certificate of Tenable Holdings, Inc.

Previously filed as Exhibit 4.1 to the Company's Registration Statement on Form S-1 (File No. 333-226002) on July 16, 2018

10.1

Form of Restricted Stock Unit Grant Notice and Agreement under the 2018 Equity Incentive Plan

Filed herewith

31.1

Certification of the Principal Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Filed herewith

31.2

Certification of the Principal Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Filed herewith

32.1*

Certification of the Principal Executive Officer and the Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Furnished herewith

101.SCH

Inline XBRL Taxonomy Extension Schema Document

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document

104

Cover Page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101.SCH, 101.CAL, 101.DEF, 101.LAB and 101.PRE)

________________

(*)    This certification is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

						TENABLE HOLDINGS, INC.
Date:			November 8, 2023			By:			/s/ Amit Yoran
									Amit Yoran
									Chairman and Chief Executive Officer
									(On Behalf of the Registrant and as Principal Executive Officer)
Date:			November 8, 2023			By:			/s/ Stephen A. Vintz
									Stephen A. Vintz
									Chief Financial Officer
									(Principal Financial Officer and Principal Accounting Officer)

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