Tenable Holdings, Inc. — Q2 2018 Form 10-Q
Business context and reporting period. Tenable provides cybersecurity software and cloud-based Cyber Exposure solutions, including Tenable.io, SecurityCenter and Nessus. This unaudited report covers the quarter and six months ended June 30, 2018; comparisons are with the same 2017 periods. Tenable completed its IPO on July 30, after quarter-end, so the June 30 balance sheet does not include the IPO proceeds or preferred-stock conversion.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $63.6 million | $44.1 million | $122.7 million | $84.6 million |
| Gross profit / margin | $53.7 million / 84% | $38.8 million / 88% | $104.1 million / 85% | $74.8 million / 88% |
| Operating loss | $16.4 million | $9.2 million | $31.9 million | $18.0 million |
| Net loss | $17.2 million | $9.2 million | $33.0 million | $18.0 million |
| Net loss per share, basic and diluted | $0.73 | $0.43 | $1.41 | $0.85 |
| Operating cash flow | $0.2 million | $(1.0) million | $0.7 million | $0.2 million |
Revenue and costs. Revenue grew 44% in Q2 and 45% in the first half. Subscription revenue drove most of the increase: Q2 subscription revenue was $48.7 million, up from $30.8 million; first-half subscription revenue was $93.1 million, up from $58.5 million. In Q2, sales and marketing expense rose 51% to $41.8 million, research and development rose 30% to $17.8 million, and general and administrative expense rose 61% to $10.5 million. Gross margin declined as cloud infrastructure costs and personnel costs increased.
Cash flow and liquidity. First-half investing cash outflow was $3.0 million, primarily for property and equipment; financing cash outflow was $0.8 million. Cash and cash equivalents were $23.7 million at June 30, 2018. Deferred revenue totaled $247.1 million, including $174.3 million current. The company reported no borrowings under its $25 million revolving credit facility, available through May 2020. It reported a $11.8 million construction financing obligation for its new headquarters. After quarter-end, the IPO generated $265 million in net proceeds; pro forma total assets were $433.2 million and stockholders’ equity was $144.4 million.
Changes versus prior period
- Q2 revenue increased $19.4 million; management attributed 44% of the increase to existing customers and the remainder to customers added since July 1, 2017. First-half revenue increased $38.1 million, with 52% of the increase from existing customers.
- Q2 gross margin fell 4 percentage points to 84%; first-half margin fell 3 points to 85%, largely as cloud-related costs increased.
- Q2 net loss widened by $7.9 million; first-half net loss widened by $15.0 million. Management cited continued investment in growth.
- Current deferred revenue increased to $174.3 million from $154.9 million at year-end 2017. First-half operating cash flow was supported by a $21.3 million increase in deferred revenue.
- Following the IPO, all 55.4 million preferred shares converted to common stock. The IPO also triggered recognition of $0.7 million cumulative stock-based compensation on restricted stock units; $15.1 million remained unrecognized.
Outlook, commentary and risks
- No quantified revenue or earnings guidance is provided. Management expected near-term operating losses and negative operating cash flow, but believed cash, IPO proceeds and facility availability would fund operating and capital needs for at least 12 months.
- Management planned continued investment in sales and marketing, research and development, international expansion, cloud infrastructure and public-company compliance. It expected sales and marketing and R&D expenses to increase in absolute dollars; it also expected cloud subscriptions to pressure gross margin as a share of revenue.
- Management identified seasonal customer contracting patterns, with more new and renewal agreements typically in Q3 and Q4. It cautioned that period results may fluctuate and that first-half results are not necessarily indicative of full-year results.
- Revenue concentration is notable: 87% came through channel partners in Q2 and the first half, and one distributor represented 46% of revenue and 48% of accounts receivable at June 30. The filing also highlights customer renewal, competition, product performance, cloud-service availability, international operations and the ability to manage growth as risks.
- The company reported no current legal proceedings expected to have a material adverse effect. It was evaluating the impact and adoption approach for the new lease accounting standard effective for it in 2019.
Important facts for investors to verify
- Whether subscription growth, customer renewals and customer expansion can sustain revenue growth as the company scales.
- Whether gross margins stabilize despite rising cloud infrastructure and support costs.
- How quickly operating losses and cash requirements change after the IPO, including use of IPO proceeds and headquarters spending.
- Exposure to the leading distributor and channel sales model, and whether customer and receivable concentration changes.
- The potential effects of stock-based compensation dilution, including the post-IPO RSU expense and outstanding equity plans.
- Whether deferred-revenue-driven operating cash flow translates into durable cash generation; first-half operating cash flow was positive despite the net loss.