Tenable Holdings, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Tenable provides cybersecurity software and cloud services, including Tenable.io and SecurityCenter. The company completed its IPO on July 30, 2018, raising $264.8 million net; preferred shares converted into common stock.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $69.4m | $49.0m | $192.1m | $133.6m |
| Gross profit | $57.3m | $41.6m | $161.4m | $116.4m |
| Gross margin | 82% | 85% | 84% | 87% |
| Operating loss | $(21.1)m | $(11.2)m | $(53.0)m | $(29.1)m |
| Net loss | $(20.9)m | $(11.3)m | $(53.9)m | $(29.4)m |
| Net loss per share | $(0.28) | $(0.51) | $(1.34) | $(1.36) |
Revenue grew 42% year over year in Q3 and 44% for the nine-month period. Subscription revenue drove most of the increase: up $18.6 million in Q3 and $53.1 million year to date. Sales to existing customers accounted for 42% of Q3 revenue growth and 57% of nine-month growth. International revenue increased 59% in Q3 and 61% year to date.
Operating expenses increased substantially year over year. Q3 sales and marketing rose 51% to $44.6 million, research and development rose 30% to $20.6 million, and general and administrative rose 82% to $13.3 million. Stock-based compensation was $8.8 million in Q3, versus $2.0 million a year earlier.
Cash flow, liquidity, and obligations
- At September 30, cash and cash equivalents were $253.0 million and short-term investments were $34.1 million. Current assets were $381.3 million and current liabilities were $220.3 million.
- For the first nine months, operating cash flow was $(1.0) million, capital expenditures were $4.1 million, and free cash flow was $(5.1) million. Q3 operating cash flow was $(1.8) million and free cash flow was $(2.9) million.
- Nine-month operating cash use was modest relative to the reported net loss, aided by a $39.9 million increase in deferred revenue, reflecting advance customer billings. Deferred revenue totaled $265.7 million at quarter-end.
- The company reported no borrowings under its $25 million revolving credit facility, which expires in May 2020, and stated it was in compliance with its covenants. The balance sheet included a $23.1 million financing obligation related to construction of the new headquarters.
- Management said existing cash, including IPO proceeds, and credit-facility availability should fund operating and capital needs for at least 12 months.
Outlook, commentary, and notable risks
- No specific numerical revenue or earnings guidance was provided. Management expects near-term operating losses and negative operating cash flow, while continuing to invest in sales and marketing, research and development, international expansion, and infrastructure.
- Management expects gross profit to rise in dollars but gross margin may decline as cloud subscriptions become a larger share of revenue. The filing also notes seasonal sales patterns, typically stronger in the third and fourth quarters.
- Remaining performance obligations were $267.9 million; 72% was expected to be recognized over the next 12 months. This is a contractual measure, not reported revenue or a guarantee of future collections.
- Customer and channel concentration is material: one distributor represented 46% of Q3 revenue and 47% of accounts receivable at quarter-end. The company derived 88% of Q3 revenue through its channel network.
- Principal disclosed risks include continued losses, the ability to sustain growth and renewals, intense competition, product reliability and security, reliance on third-party cloud infrastructure, channel dependence, and the execution and cost of scaling operations. The company also highlighted potential volatility from seasonality and the transition to cloud delivery.
- The new headquarters lease is expected to involve $68.2 million of payments, with lease payments expected to commence in 2021. The building was under construction and accounted for as a build-to-suit arrangement; final sale-leaseback treatment remained to be assessed at completion.
Most important facts for investors to verify
- Whether strong subscription growth and customer renewals continue to offset rising operating expenses and losses.
- Whether gross-margin pressure from cloud infrastructure costs develops as management anticipates.
- The sustainability and quality of cash generation, including the contribution of advance billings and deferred revenue.
- Exposure to the leading distributor and broader channel network, and any change in revenue or receivables concentration.
- Capital requirements and accounting implications for the new headquarters, including adoption of lease accounting in 2019.
- Potential share dilution and trading effects following the IPO, including the filing’s disclosure that substantial shares could become eligible for sale after lock-up restrictions expire.