Tenable: Resilient Business Model Continues To Push Stock Higher (NASDAQ:TENB)

Tenable (TENB) reported a good Q1 with revenue above management’s previous guidance range as well as consensus expectations. Operating margins, while still negative at -8% during the quarter, showed an 800-basis point improvement from the -16% margin in the year-ago period. Revenue growth of 28% showed some strength even during these turbulent economic times.

Not surprisingly, the company did not provide updated 2020 guidance due to the unknown duration of the global pandemic. However, they provided Q2 revenue guidance of $101-103 million, only slightly below expectations for $105 million. Considering Q1 revenue beat by ~$2 million, TENB could see their first two quarters of revenue come in near expectations.

Data by YCharts

TENB was not immune to the late-February stock market pullback as they saw their stock fall by over 40% at one point. However, the stock has since recovered all of those losses and is up over 10% since they reported earnings.

Even though 2020 guidance was not updated, the 28% revenue growth seen in Q1 remained strong and healthy. If we assume a 25% growth over the next 12 months, we could see forward revenue of $470 million which would result in a forward revenue multiple of ~5.3x. Even though TENB’s forward multiple is well below their closest competitor, Qualys (QLYS), I believe the multiples can converge over time as TENB’s operating margins improve.

TENB offers cloud-based vulnerability management services that help protect an enterprise’s assets, such as network containers and web applications. Essentially, the company provides solutions for enterprises to manage and measure cybersecurity risk, specifically focusing on vulnerability assessment and management market. The company looks to quantify how much damage would be caused by a security breach – information that is very valuable to enterprises as security breaches continue to make headlines on a weekly basis.

As software applications are added to an enterprise’s architecture, this can cause challenges determining where certain security risks are and how vulnerable the overall organization is. TENB’s largest competitor is Qualys, which is one of the few companies specializing in vulnerability management. The ability of an enterprise to maintain visibility and control over the security of its assets is now essential. Enterprises are also adapting to newer technologies, such as the Internet of Things, containers, new business models, and more. All of these require increased efficient security and control measures.

Q1 Earnings and Guidance

Revenue during the quarter grew an impressive 28% to $102.6 million, which was ahead of management’s previous guidance range of $100-101 million as well as ahead of consensus estimates for ~$100 million. Even though revenue growth decelerated slightly from the 29% growth seen last quarter, the company was able to maintain strong revenue growth despite economic uncertainties unraveling from the novel coronavirus.

Source: Company Presentation

Subscription revenue continues to be the growth driver for total revenue, growing 33% during the quarter and now represents almost 85% of total revenue. This revenue stream has become even more valuable for the company as investors are focused on sustainable, recurring revenue growth during these uncertain economic conditions. Subscription revenue is naturally recurring in nature and often comes with higher margins, which bodes well for any company attempting to work through a challenged economic environment.

Not surprisingly, perpetual license and maintenance revenue declined slightly during the quarter. Companies are transitioning away from perpetual licenses, as these often are large upfront payments with required software maintenance. Subscription revenue is much like your Netflix (NASDAQ:NFLX) account, that is you pay a monthly fee and don’t have to worry about maintaining the technology or software.

Source: Company Presentation

Billings during the quarter grew 22% to $99.2 million, which was some deceleration from the 28% growth seen last quarter. However, as companies seem to be slowing down their capital expenditures due to the global pandemic, a 22% billings growth seems pretty healthy. One area that seemed to be a little weak was TENB added only 24 net new $100k+ customers during the quarter, which was lower than the 51-52 net new adds during the past two quarters. However, this could be due to many IT software contracts being completed around quarter-end, thus some larger contracts may have been pushed out.

Source: Company Presentation

Gross margins remained strong at 83% and were pretty close to 85% in the year-ago period. Given the company’s software subscription focus, gross margins are likely to remain around 80% for quite some time. Non-GAAP operating margins improved to -8% during the quarter, up from -16% in the year-ago period, demonstrating the company’s ability to better leverage their operating expenses as their revenue base expands. As a result, non-GAAP EPS for the quarter was -$0.09, which was better than expectations for -$0.19.

Source: Company Presentation

Guidance for Q2 includes revenue of $101-103 million, which came in just below expectations for ~$105 million. Non-GAAP operating income is expected to be -$3.5-5.5 million loss, which would result in a -4.5% non-GAAP operating margin loss for the quarter. In addition, non-GAAP EPS for the quarter is expected to be a loss of -$0.04-0.06, which was actually slightly better than expectations for a loss around -$0.10.

Not surprisingly, the company declined to provide updated guidance for 2020 given the uncertainty around the duration of the global pandemic. Given TENB beat Q1 expectations and their Q2 guidance was only ~$2-4 million below expectations, it wouldn’t be surprising to see the company end 2020 near their original revenue guidance of $435-440 million. However, management is being prudent by not providing updated guidance given the uncertainty of when companies will resume normal economic activities.

Valuation

Much like the rest of the stock market, TENB’s stock pulled back in late February and was once down over 40%. However, since reporting earnings, the company’s stock has risen over 10% as investors gained increased confidence in the company’s recurring revenue stream. Clients will likely continue their IT security spend and vulnerability management is one of the simpler ways to have complete oversight on an enterprises’ security threats. In a time when more companies are requiring employees to work from home, a little more scrutiny over one’s IT security control will go a long way to prevent hack attempts.

ChartData by YCharts

TENB, currently, has a market cap of ~$2.75 billion, and with cash/investments of ~$225 million and no debt, the company has a current enterprise value of ~$2.50 billion. Given management declined to provide updated 2020 revenue guidance, we can look at TTM revenue of ~$377 million and grow from there. Given Q1 revenue just grew 28%, I think we can use 25% as a base case revenue growth, which would result in forward revenue of ~$470 million and implies a forward revenue multiple of ~5.3x.

However, some investors maybe a little more bearish on the company and could assume a lower forward revenue growth. Even if we use 15% growth over the next year, forward revenue could be ~$430 million, which would result in a forward revenue multiple closer to ~5.8x. Even at this valuation, I believe the company’s longer-term revenue growth and margin expansion opportunities provide a good long-term investment.

Currently, TENB trades at a lower multiple compared to their closest competitor QLYS because TENB has much lower operating margins. During Q1, TENB reported an operating margin loss of -8%, which is not appealing for many investors. However, as the company gains scale and is better able to leverage their operating expenses, we should see the operating margin expand into positive territory.

With the stock currently trading under $30, I believe this could still be a good entry point for long-term investors. Companies are likely to resume normal capital expenditure projects by the end of the year and we could see increased IT security spending over time as companies invest more in a work-from-home model, as a result of the pandemic. Over the longer term, TENB could see revenue growth above 15% with operating margins expanding.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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