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Tenable (NASDAQ:TENB) Q3: Beats On Revenue, Quarterly Guidance In Line


Full Report / October 25, 2022
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Cybersecurity software maker Tenable (NASDAQ:TENB) reported Q3 FY2022 results beating Wall St's expectations, with revenue up 26% year on year to $174.8 million. The company expects that next quarter's revenue would be around $181 million, which is the midpoint of the guidance range. That was in roughly line with analyst expectations. Tenable made a GAAP loss of $18.7 million, down on its loss of $16.2 million, in the same quarter last year.

Tenable (TENB) Q3 FY2022 Highlights:

  • Revenue: $174.8 million vs analyst estimates of $170.2 million (2.72% beat)
  • EPS (non-GAAP): $0.15 vs analyst estimates of $0.03 ($0.12 beat)
  • Revenue guidance for Q4 2022 is $181 million at the midpoint, below analyst estimates of $182.3 million
  • Free cash flow of $31.5 million, up 22.2% from previous quarter
  • Gross Margin (GAAP): 77.9%, down from 80.4% 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 two years, growing from quarterly revenue of $112.2 million in Q3 FY2020, to $174.8 million.

Tenable Total Revenue

This quarter, Tenable's quarterly revenue was once again up a very solid 26% year on year. On top of that, revenue increased $10.5 million quarter on quarter, a very strong improvement on the $4.97 million increase in Q2 2022, which shows acceleration of growth, and is great to see.

Guidance for the next quarter indicates Tenable is expecting revenue to grow 21.4% year on year to $181 million, slowing down from the 26.1% 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 19.9% 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 77.9% in Q3.

Tenable Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.77 left to spend on developing new products, marketing & sales and the general administrative overhead. Despite it going down over the last year, this is still 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.

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 $31.5 million in Q3, up 70.6% year on year.

Tenable Free Cash Flow

Tenable has generated $104.5 million in free cash flow over the last twelve months, a solid 16.1% 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 Q3 Results

With a market capitalization of $3.64 billion Tenable is among smaller companies, but its more than $548 million in cash and positive free cash flow over the last twelve months put it in a very strong position to invest in growth.

It was good to see Tenable outperform Wall St’s revenue expectations this quarter. And we were also glad to see good revenue growth. Overall, it seems to us that this was a decent quarter for Tenable. The company is flat on the results and currently trades at $34.23 per share.

Is Now The Time?

When considering Tenable, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. Although we have other favorites, we understand the arguments that Tenable is not a bad business. We would expect growth rates to moderate from here, but its revenue growth has been solid, over the last two years. And on top of that, its impressive gross margins are indicative of excellent business economics.

Tenable's price to sales ratio based on the next twelve months is 4.9x, suggesting that the market is expecting more moderate growth, relative to the hottest tech stocks. 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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