Tenable Holdings, Inc. — Q3 2022 Form 10-Q
Business context and reporting period
Quarter ended September 30, 2022; comparisons are year over year unless stated otherwise. Tenable provides cybersecurity Exposure Management solutions. Revenue is predominantly recurring subscription and maintenance revenue, generally sold through distributors and resellers. In October 2022, the company released Tenable One, an evolution of its Exposure Management Platform.
Key financial metrics
| Metric | Q3 2022 | Q3 2021 | Change |
|---|---|---|---|
| Revenue | $174.9 million | $138.7 million | +26% |
| Gross profit / gross margin | $136.3 million / 78% | $111.6 million / 80% | Margin down 2 percentage points |
| Operating loss | $13.0 million | $11.2 million | Loss widened |
| Net loss | $18.7 million | $16.2 million | Loss widened |
| Net loss per share | $0.17 | $0.15 | Loss per share widened |
| Operating cash flow | $35.9 million | $19.6 million | Increased |
| Free cash flow (non-GAAP) | $31.5 million | $18.5 million | Increased |
- For the first nine months of 2022, revenue was $498.6 million, up 27%; net loss was $70.7 million versus $35.6 million; operating cash flow was $99.2 million versus $74.8 million; and non-GAAP free cash flow was $85.3 million versus $71.0 million.
- Q3 subscription revenue rose 28% to $156.8 million; perpetual license and maintenance revenue was essentially flat. Recurring revenue represented 95% of revenue.
- At September 30, cash and cash equivalents were $288.2 million and short-term investments were $259.8 million. Current assets were $785.8 million and current liabilities $520.9 million.
- Term-loan principal was $372.2 million; carrying value net of issuance costs was approximately $365.4 million, including current portion. The $50 million revolving facility had no borrowings. The company reported compliance with debt covenants.
- Deferred revenue totaled $593.7 million. Remaining performance obligations were $612.8 million, approximately 75% expected to be recognized over the next 12 months.
Material changes versus the prior comparable period
- Revenue growth was led by subscriptions and expansion from existing customers: management attributed $31.6 million of Q3’s $36.2 million revenue increase to existing customers. Q3 calculated current billings, a non-GAAP measure, increased to $207.3 million from $166.9 million.
- Gross margin declined from 80% to 78%, primarily amid higher cloud infrastructure costs, personnel costs and acquired-intangible amortization.
- Operating expenses increased 21% in Q3 to $149.2 million, led by sales and marketing. Stock-based compensation was $32.6 million in Q3 versus $20.9 million a year earlier.
- Interest expense and foreign-exchange losses increased. The term loan’s variable rate was 5.56% through October 30, 2022 and 7.16% from October 31, 2022 through January 30, 2023.
- Cash used in investing activities was $108.0 million for the first nine months, including $67.0 million for acquisitions net of cash acquired. Cash generation from operations increased, while financing cash flow fell sharply versus 2021, when the company received $375 million from its term loan.
Outlook, commentary and risks
- No specific quarterly or annual revenue or earnings guidance is included in the provided filing text. Management expects operating losses to continue in the near term, while stating existing cash, cash equivalents and investments should fund operating and capital needs for at least 12 months and the foreseeable future.
- Management expects gross profit to rise in dollars but gross margin to decline over time as cloud subscriptions become a larger share of revenue. It expects continued investment in sales and marketing, research and development, and cloud infrastructure.
- The company reported a 118% dollar-based net expansion rate, compared with 113% a year earlier; management said it generally expects this metric to range from 110% to 120%. New enterprise platform customers increased 43% to 712, and customers with at least $100,000 in annual contract value increased 29% to 1,280.
- Key exposures include reliance on channel partners: 92% of revenue flowed through the channel, and one distributor accounted for 38% of Q3 revenue and 38% of receivables. The company also committed to $140.6 million of AWS cloud services over three contract years; it had spent $19.9 million of its second-year commitment by quarter-end.
- Other risks highlighted include cybersecurity incidents or product failures, competition, customer renewals and spending, data privacy regulation, foreign-exchange and interest-rate movements, and the ability to scale cloud services. The company said the stronger U.S. dollar had negatively affected international sales growth; it had not seen a significant adverse impact from COVID-19, inflation or the Russia-Ukraine war as of quarter-end.
- Acquisitions of Bit Discovery and Cymptom were completed in 2022 for approximately $44 million and $23 million net of acquired cash, respectively. Purchase-price allocations remained preliminary. No legal proceeding was identified as expected to have a material adverse effect.
Important facts for investors to verify
- Whether subscription growth, renewals and the 118% expansion rate persist, and how calculated current billings compare with recognized revenue.
- Whether cloud infrastructure spending and other operating costs stabilize enough to support margins, and how much reported performance depends on stock-based compensation adjustments in non-GAAP measures.
- The effect of the higher variable loan rate on interest expense, and whether debt covenants or excess-cash-flow provisions could require prepayments.
- Distributor concentration and AWS minimum-spend obligations, as well as the integration, purchase accounting and commercial results of the 2022 acquisitions.
- Whether the stated liquidity outlook remains adequate given ongoing losses, acquisition plans and capital requirements.