Tenable Holdings, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Tenable provides cybersecurity exposure management software, primarily through subscription offerings. Financial amounts below are in USD millions unless otherwise stated.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $112.3 | $91.9 | $322.1 | $257.5 |
| Gross profit / margin | $92.9 / 83% | $76.6 / 83% | $264.9 / 82% | $215.1 / 84% |
| Operating loss | $(3.5) | $(18.3) | $(35.7) | $(63.2) |
| Net loss | $(5.9) | $(17.6) | $(40.8) | $(60.7) |
| Basic and diluted loss per share | $(0.06) | $(0.18) | $(0.41) | $(0.64) |
| Operating cash flow | $24.8 | $(4.7) | $46.3 | $(7.7) |
| Free cash flow (non-GAAP) | $16.7 | $(9.6) | $27.2 | $(17.9) |
Q3 revenue rose 22% year over year; nine-month revenue rose 25%. Subscription revenue grew 28% in Q3 to $96.8 million and 31% for the nine months to $275.2 million. Perpetual license and maintenance revenue declined in both periods. Recurring revenue represented 94% of Q3 revenue and 93% of nine-month revenue. The company remained GAAP loss-making, though operating and net losses narrowed year over year.
Financial position and liquidity
- At September 30, cash and cash equivalents were $141.4 million and short-term investments were $127.7 million, totaling $269.1 million in cash and investments.
- Current assets were $421.0 million versus current liabilities of $338.3 million. Deferred revenue totaled $390.2 million, including $296.4 million current.
- For the first nine months, cash increased by $67.0 million. Operating cash flow benefited from $27.1 million of increased deferred revenue, $14.2 million of lease incentives and customer collections; it also included $44.0 million of stock-based compensation.
- The company had no borrowings under its new $45 million senior secured credit facility. The facility matures July 2022; $5.5 million of capacity was reserved for standby letters of credit. Tenable reported compliance with its minimum quick-ratio covenant.
- Stockholders’ equity was $131.1 million; accumulated deficit was $605.9 million. Shares outstanding were 102.8 million at quarter-end.
Material changes and operating indicators
- Q3 gross margin held at 83%, while nine-month gross margin declined to 82% from 84%, primarily as cloud infrastructure and cloud-support costs increased.
- Q3 sales and marketing expense declined 6%, reflecting lower travel and field marketing costs, while research and development expense rose 21%. For the nine months, sales and marketing rose 2%, R&D rose 20%, and general and administrative expense rose 13%.
- Dollar-based net expansion rate was approximately 110% for Q3, which management said reflected a more moderate pace of customer IT-asset and IP-address expansion. New enterprise platform customers added in the quarter fell 13% to 335; customers with annual contract value of at least $100,000 increased 31% to 771.
- Calculated current billings, a non-GAAP measure, were $133.7 million for Q3, up from $110.6 million, and $344.2 million for the nine months, up from $289.9 million.
Outlook, risks and unusual items
- Management said existing cash and investments should fund operating and capital needs for at least 12 months, while anticipating operating losses in the near term. It expected approximately $2 million of Q4 2020 capital expenditures for its new headquarters. No numerical revenue or earnings guidance was provided in this filing.
- COVID-19 effects remained uncertain. Management flagged possible slower billing and revenue growth, customer spending delays or reductions, and continuing expense management, while preserving strategic investment in sales capacity and R&D.
- At September 30, remaining performance obligations were $399.7 million; approximately 76% was expected to be recognized over the succeeding 12 months. This is contracted performance obligation value, not a revenue forecast.
- Channel concentration is significant: 92% of Q3 revenue flowed through channel partners, and one distributor accounted for 43% of revenue and 42% of accounts receivable at quarter-end.
- During Q3, Tenable decided not to exercise an option to terminate an operating lease it had expected to end in 2021, recording $2.5 million of right-of-use assets and a corresponding lease liability. Lease incentives provided $14.2 million of cash in the first nine months.
- Other principal risks include competition, renewals and customer expansion, product reliability and cybersecurity, dependence on third-party cloud infrastructure and channel partners, and privacy and regulatory compliance. The filing reports no legal proceedings expected to have a material adverse effect.
Important facts for investors to verify
- Whether subscription growth, renewals and customer expansion can sustain revenue growth, particularly given the 110% net expansion rate and COVID-related uncertainty.
- The durability of positive operating and free cash flow, including the contribution from deferred-revenue growth and lease incentives, and the substantial non-cash stock-based compensation.
- Exposure to the leading distributor and channel model, including the distributor’s revenue and receivables concentration.
- Cloud-related cost trends and gross-margin performance as subscription adoption increases.
- Liquidity and covenant headroom, including the facility’s borrowing availability after letters of credit and the company’s ongoing capital and headquarters commitments.