Tenable Holdings, Inc. quarterly report, Q2 FY2018

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

MetricQ2 2018Q2 2017Six months 2018Six 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.