Cybersecurity software maker Tenable (NASDAQ:TENB) reported Q4 FY2023 results topping analysts' expectations, with revenue up 15.5% year on year to $213.3 million. On the other hand, the company expects next quarter's revenue to be around $213 million, slightly below analysts' estimates. It made a non-GAAP profit of $0.25 per share, improving from its profit of $0.12 per share in the same quarter last year.
Tenable (TENB) Q4 FY2023 Highlights:
- Revenue: $213.3 million vs analyst estimates of $206.7 million (3.2% beat)
- EPS (non-GAAP): $0.25 vs analyst estimates of $0.14 ($0.11 beat)
- Revenue Guidance for Q1 2024 is $213 million at the midpoint, below analyst estimates of $214.4 million
- Management's revenue guidance for the upcoming financial year 2024 is $900 million at the midpoint, missing analyst estimates by 0.7% and implying 12.7% growth (vs 17% in FY2023)
- Free Cash Flow of $35.76 million, down 11.3% from the previous quarter
- Gross Margin (GAAP): 77.1%, up from 75.5% in the same quarter last year
- Market Capitalization: $5.49 billion
Founded in 2002 by three cybersecurity veterans, Tenable (NASDAQ:TENB) provides software as a service that helps companies understand where they are exposed to cyber security risk and how to reduce it.
Tenable’s software scans all computers, servers and other devices on their customer’s network and finds vulnerabilities that can be exploited by malware or hackers, like computers that haven’t had patches installed or unsecured wifi. It then helps companies understand how severe the vulnerabilities are, alerts them if new ones appear and guides them through removing them.
Vulnerability Management
The demand for cybersecurity is growing as more and more businesses are moving their data and processes into the cloud, which along with a major increase in employees working remotely, has increased their exposure to attacks and malware. Additionally, the growing array of corporate IT systems, applications and internet connected devices has increased the complexity of network security, all of which has substantially increased the demand for software meant to protect data breaches.
Cybersecurity is a competitive space and while Tenable is a leader in vulnerability assessment, it faces competition from companies like Qualys (NASDAQ:QLYS), Rapid7 (NASDAQ:RPD) and CrowdStrike (NASDAQ:CRWD).
Sales Growth
As you can see below, Tenable's revenue growth has been strong over the last two years, growing from $149 million in Q4 FY2021 to $213.3 million this quarter.
This quarter, Tenable's quarterly revenue was once again up 15.5% year on year. We can see that Tenable's revenue increased by $11.78 million quarter on quarter, which is a solid improvement from the $6.49 million increase in Q3 2023. Shareholders should applaud the re-acceleration of growth.
Next quarter's guidance suggests that Tenable is expecting revenue to grow 12.8% year on year to $213 million, slowing down from the 18.5% year-on-year increase it recorded in the same quarter last year. For the upcoming financial year, management expects revenue to be $900 million at the midpoint, growing 12.7% year on year compared to the 16.9% increase in FY2023.
Profitability
What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. Tenable's gross profit margin, an important metric measuring how much money there's left after paying for servers, licenses, technical support, and other necessary running expenses, was 77.1% in Q4.
That means that for every $1 in revenue the company had $0.77 left to spend on developing new products, sales and marketing, and general administrative overhead. Tenable's impressive gross margin allows it to fund large investments in product and sales during periods of rapid growth and achieve profitability when reaching maturity. It's also comforting to see its gross margin remain stable, indicating that Tenable is controlling its costs and not under pressure from its competitors to lower prices.
Cash Is King
If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. Tenable's free cash flow came in at $35.76 million in Q4, up 34% year on year.
Tenable has generated $141.1 million in free cash flow over the last 12 months, an impressive 17.7% of revenue. This high FCF margin stems from its asset-lite business model and strong competitive positioning, giving it the option to return capital to shareholders or reinvest in its business while maintaining a cash cushion.
Key Takeaways from Tenable's Q4 Results
It was good to see Tenable beat analysts' revenue expectations this quarter and deliver solid free cashflow. That stood out as a positive in these results. On the other hand, its revenue guidance slightly missed analysts' expectations. Overall, the results were still solid. The stock is up 6% after reporting and currently trades at $50.5 per share.
Is Now The Time?
Tenable may have had a bad quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.
Although we have other favorites, we understand the arguments that Tenable isn't a bad business. We'd expect growth rates to moderate from here, but its revenue growth has been solid over the last two years. On top of that, its bountiful generation of free cash flow empowers it to invest in growth initiatives.
The market is certainly expecting long-term growth from Tenable given its price-to-sales ratio based on the next 12 months is 6.1x. We don't really see a big opportunity in the stock at the moment, but in the end beauty is in the eye of the beholder. And if you like the company, it seems that Tenable doesn't trade at a completely unreasonable price point.
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