Tenable Holdings, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Tenable provides cybersecurity and Cyber Exposure software, primarily through subscriptions and a two-tier distributor/reseller channel. Financial figures below are in U.S. dollars; amounts are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | H1 2020 | H1 2019 |
|---|---|---|---|---|
| Revenue | $107.2 | $85.4 | $209.9 | $165.7 |
| Gross profit | $88.1 | $71.5 | $172.0 | $138.5 |
| Gross margin | 82% | 84% | 82% | 84% |
| Operating loss | $(10.6) | $(22.2) | $(32.2) | $(44.9) |
| Net loss | $(12.0) | $(21.6) | $(34.9) | $(43.1) |
| GAAP diluted loss per share | $(0.12) | $(0.23) | $(0.35) | $(0.45) |
| Operating cash flow | $17.0 | $(2.1) | $21.5 | $(3.0) |
| Free cash flow, non-GAAP | $6.6 | $(5.2) | $10.5 | $(8.3) |
Q2 revenue rose 26% year over year; H1 revenue rose 27%. Subscription revenue was $92.0 million in Q2, up from $69.4 million, and $178.4 million in H1, up from $134.1 million. Recurring revenue represented 93% of total revenue in both 2020 periods, versus 91% in 2019. Perpetual license and maintenance revenue declined year over year in both periods.
At June 30, 2020, cash and cash equivalents were $136.5 million and short-term investments were $105.6 million, totaling $242.1 million. Current assets were $379.8 million against current liabilities of $320.8 million. Deferred revenue totaled $365.3 million, including $275.0 million current. Accumulated deficit was $600.1 million. The company reported no outstanding borrowings under its prior revolving facility at quarter-end.
H1 operating cash flow benefited from non-cash stock compensation of $28.7 million, depreciation and amortization of $5.3 million, customer collections, and $8.6 million in lease-incentive proceeds. H1 property and equipment purchases were $11.0 million. Free cash flow is a company-defined non-GAAP measure.
Material changes versus prior period
- Revenue growth was driven primarily by subscriptions. Management attributed 31% of Q2 growth and 42% of H1 growth to existing customers; the remainder came from customers added since July 1, 2019.
- Gross margin declined by two percentage points to 82% in both comparative periods, with higher cloud infrastructure and personnel costs among the reported drivers.
- Operating and net losses narrowed year over year, while expenses increased in research and development and general and administrative functions. Sales and marketing expense was slightly lower in Q2 but higher for H1.
- Operating cash flow and free cash flow turned positive in H1 compared with cash use in H1 2019. The filing notes that 2020 cash generation included lease incentives and collections; it cautions that positive cash generation may not be sustained.
- Customers with annual contract value of at least $100,000 increased 33% to 715. The company added 341 new enterprise platform customer logos in Q2 versus 352 a year earlier, a 3% decline.
Outlook, risks, and notable items
- COVID-19: Management warned that the pandemic and economic conditions could reduce or delay customer spending, affect billings and revenue growth, and affect partners and customers. Field sales and professional services were largely conducted remotely. The extent and duration of impact were uncertain.
- Management outlook: The company expected near-term operating losses and said it would continue investing in sales, marketing, research and development, cloud infrastructure, and international growth. Management expected cash and short-term investments to cover operating and capital needs for at least 12 months. No specific revenue or earnings guidance was provided in the supplied filing text.
- Capital spending: For H2 2020, management expected approximately $8 million of headquarters-related capital expenditures and approximately $6 million of tenant improvement reimbursements, for an estimated net project cash outflow of about $2 million.
- Credit facility subsequent event: In July 2020, Tenable entered a new $45 million senior secured facility, maturing July 24, 2022, with a minimum quick-ratio covenant of 1.5:1.0. The company said it did not then intend to draw on it. This facility replaced the prior $25 million revolver, whose maturity had been extended to August 3, 2020; $5.5 million of borrowing capacity under the old facility was reserved for standby letters of credit at June 30.
- Concentration: Channel partners generated 91% of revenue in H1. One distributor accounted for 43% of revenue and 40% of accounts receivable, creating material distributor and collection concentration risk.
- Other notable matters: The company received $8.6 million in lease-incentive proceeds during H1. It adopted the expected-credit-loss accounting standard in January 2020 with no material financial-statement impact. The filing also highlighted the invalidation of the EU-U.S. Privacy Shield and uncertainty around cross-border data transfers, which could raise compliance costs or affect operations.
- Key risks: Ongoing losses and uncertain profitability; pandemic-related demand and execution risk; competitive pressure and customer renewals; dependence on channel partners and cloud infrastructure; cybersecurity product reliability and service availability; privacy, regulatory and intellectual-property exposure; and potential volatility from seasonality and sales timing. The filing reported no legal proceedings expected to have a material adverse effect.
Most important facts for investors to verify
- Whether subscription growth, renewals, and expansion among existing customers remain strong, particularly as COVID-19 effects flow through deferred revenue and future periods.
- Whether the lower gross margin persists as cloud subscriptions and related infrastructure costs grow.
- How much of reported cash generation is repeatable, excluding lease incentives and working-capital timing; monitor cash use, capital spending, and headquarters reimbursements.
- Whether distributor concentration remains high and whether the new credit facility’s covenant is maintained, especially if the facility is drawn.
- How the company manages recurring stock-based compensation, dilution, and continued operating losses while pursuing growth.