Cybersecurity software maker Tenable (NASDAQ:TENB) reported Q2 FY2023 results exceeding Wall Street analysts' expectations, with revenue up 18.7% year on year to $195 million. Guidance for next quarter's revenue was also $198 million at the midpoint, 1.82% above Consensus. Tenable made a GAAP loss of $16 million, improving from its loss of $27.5 million in the same quarter last year.
Tenable (TENB) Q2 FY2023 Highlights:
- Revenue: $195 million vs analyst estimates of $188.5 million (3.47% beat)
- EPS (non-GAAP): $0.22 vs analyst estimates of $0.12 ($0.10 beat)
- Revenue guidance for Q3 2023 is $198 million at the midpoint, above analyst estimates of $194.5 million
- The company reconfirmed revenue guidance for the full year of $787 million at the midpoint
- Free cash flow of $27.7 million, down 25.8% from the previous quarter
- Gross Margin (GAAP): 77.7%, in line with the 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 over the last two years, growing from $130.3 million in Q2 FY2021 to $195 million this quarter.
This quarter, Tenable's quarterly revenue was once again up 18.7% year on year. We can see that Tenable's revenue increased by $6.2 million quarter on quarter, which is a solid improvement from the $4.21 million increase in Q1 2023. Shareholders should applaud the acceleration of growth.
Next quarter's guidance suggests that Tenable is expecting revenue to grow 13.2% year on year to $198 million, slowing down from the 26.1% year-on-year increase it recorded in the same quarter last year. Ahead of the earnings results announcement, the analysts covering the company were expecting sales to grow 11.8% over the next 12 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's left after paying for servers, licenses, technical support, and other necessary running expenses, was 77.7% in Q2.
That means that for every $1 in revenue the company had $0.78 left to spend on developing new products, sales and marketing, and general administrative overhead. Significantly up from the last quarter, 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.
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 $27.7 million in Q2, up 7.47% year on year.
Tenable has generated $123.2 million in free cash flow over the last 12 months, a solid 16.6% of revenue. This strong FCF margin stems from its asset-lite business model, giving it optionality and plenty of cash to reinvest in its business.
Key Takeaways from Tenable's Q2 Results
With a market capitalization of $4.98 billion, Tenable is among smaller companies, but its $645.5 million cash balance and positive free cash flow over the last 12 months give us confidence that it has the resources needed to pursue a high-growth business strategy.
It was great to see Tenable improve its gross margin this quarter. We were also glad that its revenue growth and EPS outperformed Wall Street's expectations. Additionally, both revenue and non-GAAP operating profit guidance for next quarter and for the full year exceeded expectations. Overall, this quarter's results seemed quite positive and shareholders should feel optimistic. The stock is up 10.5% after reporting and currently trades at $48.39 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 Tenable is not a bad business, it probably wouldn't be one of our picks. Its revenue growth has been solid, though we don't expect it to maintain historical growth rates.
The market is certainly expecting long term growth from Tenable given its price to sales ratio based on the next twelve 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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