Tenable Holdings, Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; quarterly comparisons below cover the unaudited three months ended December 31, 2018. The company completed its IPO in July 2018.
Business context
Tenable sells cybersecurity and vulnerability-management products, including Tenable.io, Tenable.sc and Nessus. Its strategy is to expand enterprise platform adoption, increase coverage within existing customers, develop products such as planned Tenable.io Lumin, and grow internationally. Customers exceeded 27,000 at year-end, versus over 24,000 a year earlier. No customer represented more than 2% of annual revenue.
Key financial metrics
| Metric | FY 2018 | FY 2017 | Q4 2018 | Q4 2017 |
|---|---|---|---|---|
| Revenue | $267.4 million | $187.7 million | $75.2 million | $54.1 million |
| Gross profit | $224.2 million | $162.1 million | $62.8 million | $45.7 million |
| Gross margin | 84% | 86% | 83.5% | 84.5% |
| Operating loss | $(72.6) million | $(40.8) million | $(19.6) million | $(11.6) million |
| Net loss | $(73.5) million | $(41.0) million | $(19.6) million | $(11.7) million |
- FY revenue grew 42%; subscription revenue was $205.8 million, up from $132.9 million. Management attributed $72.9 million of the annual revenue increase to subscriptions. Revenue from existing customers accounted for 68% of the increase.
- Operating expenses rose to $296.8 million from $202.9 million, including sales and marketing of $173.3 million, R&D of $76.7 million and G&A of $46.7 million. Stock-based compensation increased to $22.9 million from $7.8 million.
- Net cash used in operations was $2.6 million, compared with $6.3 million used in 2017. Capital expenditures were $5.7 million; company-defined free cash flow was negative $8.3 million, versus negative $9.0 million.
- Year-end cash and cash equivalents were $165.1 million, with $118.1 million of short-term investments. Working capital was $142.5 million; deferred revenue totaled $289.9 million.
- The $25 million Silicon Valley Bank revolving facility was undrawn at year-end and expires May 2020. The filing reports no other long-term debt. IPO proceeds were $264.6 million net; preferred stock converted to common stock at the IPO.
Changes, outlook and risks
- Compared with 2017, annual revenue growth slowed from 51% to 42%, while net loss widened and gross margin fell from 86% to 84%. Cloud infrastructure costs increased, primarily with Tenable.io adoption.
- Management expects continued operating losses and negative operating cash flow in the near term, while stating existing cash, cash equivalents and short-term investments should fund operating and capital needs for at least 12 months. The filing provides no numerical revenue or earnings guidance.
- Management expects cloud subscriptions to become a larger share of revenue and says this may reduce gross margin. It also expects continued investment in sales and marketing, R&D, international expansion and public-company compliance costs.
- Revenue depends substantially on channel partners: 88% came through the channel in 2018. Ingram Micro represented 46% of revenue and 46% of year-end accounts receivable, creating significant partner and receivables concentration.
- Key risks include intense competition, customer renewal and expansion uncertainty, product errors or security/service disruptions, dependence on AWS and channel partners, scaling costs, and privacy and regulatory compliance. GDPR was in force; the filing describes the California Consumer Privacy Act as due to take effect in 2020.
- The company reported no legal proceedings expected to have a material adverse effect. It adopted ASC 842 in 2018 and reported $88.2 million of contractual obligations, including $68.2 million of future payments for its planned headquarters lease. Management said disclosure controls were effective; the 10-K did not include management’s internal-control assessment or auditor attestation under the transition relief for newly public companies.
Important facts for investors to verify
- Whether subscription growth, customer renewals and customer expansion can sustain growth as annual growth moderates and losses increase.
- How channel and distributor concentration—especially Ingram Micro—affects sales, collections and bargaining risk.
- Whether cloud adoption, infrastructure spending and stock-based compensation weigh further on margins and cash generation.
- The timing and total economics of the new headquarters lease and related build-out costs.
- Progress toward profitability, internal-control reporting requirements, and delivery and market acceptance of planned products such as Tenable.io Lumin.