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Tenable's (NASDAQ:TENB) Q2 Earnings Results: Revenue In Line With Expectations But Stock Drops 10.5%


Full Report / July 26, 2022
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Cybersecurity software maker Tenable (NASDAQ:TENB) reported results in line with analyst expectations in Q2 FY2022 quarter, with revenue up 26.1% year on year to $164.3 million. However, guidance for the next quarter was less impressive, coming in at $170 million at the midpoint, being 0.71% below analyst estimates. Tenable made a GAAP loss of $27.4 million, down on its loss of $11.6 million, in the same quarter last year.

Tenable (TENB) Q2 FY2022 Highlights:

  • Revenue: $164.3 million vs analyst estimates of $163.2 million (small beat)
  • EPS (non-GAAP): $0.05 vs analyst estimates of $0.01 ($0.04 beat)
  • Revenue guidance for Q3 2022 is $170 million at the midpoint, below analyst estimates of $171.2 million
  • The company reconfirmed revenue guidance for the full year, at $676 million at the midpoint
  • Free cash flow of $25.7 million, roughly flat from previous quarter
  • Gross Margin (GAAP): 78%, down from 79.7% same quarter last year

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.

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 year, growing from quarterly revenue of $130.2 million, to $164.3 million.

Tenable Total Revenue

This quarter, Tenable's quarterly revenue was once again up a very solid 26.1% year on year. But the growth did slow down compared to last quarter, as the revenue increased by just $4.97 million in Q2, compared to $10.3 million in Q1 2022. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.

Guidance for the next quarter indicates Tenable is expecting revenue to grow 22.5% year on year to $170 million, in line with the 23.4% year-over-year increase in revenue the company had recorded in the same quarter last year. Ahead of the earnings results the analysts covering the company were estimating sales to grow 21.5% over the next twelve months.

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 is left after paying for servers, licenses, technical support and other necessary running expenses was at 78% in Q2.

Tenable Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.78 left to spend on developing new products, marketing & sales and the general administrative overhead. This is a good gross margin that allows companies like Tenable to fund large investments in product and sales during periods of rapid growth and be profitable when they reach maturity. It is good to see that the gross margin is staying stable which indicates that Tenable is doing a good job controlling costs and is not under pressure from competition to lower prices.

Cash Is King

If you follow StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. Tenable's free cash flow came in at $25.7 million in Q2, up 71.7% year on year.

Tenable Free Cash Flow

Tenable has generated $91.4 million in free cash flow over the last twelve months, a solid 14.9% of revenues. This strong FCF margin is a result of Tenable asset lite business model and provides it plenty of cash to invest in the business.

Key Takeaways from Tenable's Q2 Results

With a market capitalization of $5.32 billion Tenable is among smaller companies, but its more than $510.9 million in cash and positive free cash flow over the last twelve months give us confidence that Tenable has the resources it needs to pursue a high growth business strategy.

Tenable delivered solid revenue growth this quarter. That feature of these results really stood out as a positive. On the other hand, it was unfortunate to see that the revenue guidance for the next quarter missed analysts' expectations. Overall, it seems to us that this was a complicated quarter for Tenable. The company is down 10.5% on the results and currently trades at $40 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. We think Tenable is a solid business. Its revenue growth has been solid. On top of that, its impressive gross margins are indicative of excellent business economics, and its strong free cash flow generation gives it re-investment options.

Tenable's price to sales ratio based on the next twelve months is 6.7x, suggesting that the market is expecting more steady growth, relative to the hottest tech stocks. There are definitely things to like about Tenable and looking at the tech landscape right now, it seems that it doesn't trade at an unreasonable price point.

The Wall St analysts covering the company had a one year price target of $65.5 per share right before these results, implying that they saw upside in buying Tenable even in the short term.

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