Tenable Holdings, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Tenable provides cybersecurity risk-management software and services, principally through subscription offerings. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $91.9 | $69.4 | $257.5 | $192.1 |
| Gross profit / margin | $76.6 / 83% | $57.3 / 82% | $215.1 / 84% | $161.4 / 84% |
| Operating loss | $(18.3) | $(21.1) | $(63.2) | $(53.0) |
| Net loss | $(17.6) | $(20.9) | $(60.7) | $(53.9) |
| Net loss per share, diluted | $(0.18) | $(0.28) | $(0.64) | $(1.34) |
| Operating cash flow | $(4.7) | $(1.8) | $(7.7) | $(1.0) |
Revenue increased 32% for Q3 and 34% year to date. Subscription revenue was $75.5 million for Q3, up from $53.5 million, and $209.6 million year to date, up from $146.6 million. For Q3, existing customers contributed 49% of the revenue increase; for the nine-month period, they contributed 62%. Management attributed growth primarily to subscriptions and reported international revenue growth of 46% in Q3 and 47% year to date.
Operating expenses rose to $94.9 million in Q3 from $78.4 million; year-to-date expenses increased to $278.4 million from $214.4 million. The largest expense was sales and marketing ($56.7 million in Q3). Year-to-date stock-based compensation was $31.2 million, versus $14.2 million a year earlier. Non-GAAP operating loss was $7.7 million in Q3 and $31.6 million year to date; these measures exclude stock-based compensation and intangible amortization.
Liquidity, debt and cash flow
At September 30, Tenable held $171.3 million in cash and cash equivalents and $125.3 million in short-term investments. Current liabilities were $285.2 million, including $246.0 million of current deferred revenue. Total deferred revenue was $329.4 million. The company reported $123.2 million in stockholders’ equity and an accumulated deficit of $526.8 million.
Nine-month free cash flow, defined by the company as operating cash flow less property and equipment purchases, was negative $17.9 million, compared with negative $5.1 million in 2018. Investing cash outflow was $15.5 million, while financing provided $30.6 million, principally from employee stock-plan proceeds and option exercises. Cash and cash equivalents plus restricted cash increased $6.2 million to $171.6 million; the balance sheet separately reports $171.3 million of cash and cash equivalents.
No revolving-credit borrowings were outstanding. A $25 million facility with Silicon Valley Bank was available through May 4, 2020; the company said it was covenant-compliant. Tenable reported no other long-term debt. Operating lease liabilities totaled $41.8 million. The new Maryland headquarters lease generated an initial $32.0 million lease liability; stated future payments are $67.7 million, with payments expected to begin in Q1 2021.
Changes, outlook and risks
- Year-to-date revenue grew 34%, while net loss widened to $60.7 million from $53.9 million and operating cash use increased. The lower quarterly loss per share partly reflects a larger weighted-average share count; the company completed its IPO in 2018.
- Management expected near-term operating losses and negative operating cash flow, but believed cash and short-term investments would fund operating and capital needs for at least 12 months. It forecast $5 million–$7 million of headquarters-related capital expenditures in Q4 2019.
- Management expected dollar-based net expansion to remain above 110%; no specific revenue or earnings guidance is provided in the supplied filing text. It expected continued investment in sales, marketing and R&D, and noted that greater cloud-subscription mix could pressure gross margin.
- Calculated current billings were $110.6 million for Q3, up from $86.7 million, and $289.9 million year to date, up from $228.8 million. Management cautioned that billings can fluctuate with contract timing and upfront payment patterns.
- Customer and channel concentration is notable: one distributor represented 43% of Q3 and year-to-date revenue and 40% of accounts receivable at September 30. The channel network generated 90% of year-to-date revenue.
- Key disclosed risks include persistent losses and uncertain profitability, intense competition, customer renewal and expansion dependence, cloud-service reliability and third-party hosting dependence, cybersecurity or product defects, international and regulatory exposure, and reliance on channel partners. The company also cited seasonality in customer agreements, particularly in Q3 and Q4.
- No material legal proceeding was reported, and management concluded disclosure controls were effective. The company said it would cease to qualify as an emerging growth company on December 31, 2019.
Important facts for investors to verify
- Whether subscription growth, customer renewals and expansion support the stated expectation for net expansion above 110%.
- How the concentrated distributor relationship and channel dependence evolve, including any change in revenue or receivables concentration.
- Whether operating cash flow and free cash flow improve as revenue grows, given rising expenses and capital needs.
- The cost, timing and cash-flow implications of the new headquarters lease and planned capital expenditures.
- The effects of stock-based compensation, share-count growth, and the transition from emerging-growth-company status on reported results and compliance costs.