Tenable: Opportunity Available For Long Term Investors – Tenable Holdings, Inc. (NASDAQ:TENB)

Tenable (TENB) reported a strong Q3 with revenue well above consensus expectations and management’s previous guidance. While operating margins were a little soft, EPS came in ahead of expectations given the strong revenue growth. Also, billings growth of 28% remained very strong.

Management also provided Q1 revenue guidance that was slightly above expectations, though non-GAAP operating margin was lower than expected, which was partially why the stock traded down ~4% over the following days after earnings. Management provided 2020 revenue and EPS guidance that as slightly ahead of expectations.

With the stock still down ~4% since reporting earnings, I believe long-term investors still have an opportunity to build up their position in TENB with the stock trading ~$28. The company is expecting revenue growth of 23-24% for 2020, which I believe could be slightly conservative given the company’s history of beating and raising expectations.

When looking at 2020, the revenue multiple of ~5.7x remains below their closest competitor, Qualys (QLYS), even though revenue growth remains pretty close. I believe the divergence comes with TENB’s operating margins expecting to be -8% during 2020, with investors likely expecting more than the initial guidance.

TENB offers cloud-based vulnerability management services which 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 (QLYS) which is one of the few companies specializing in vulnerability management. The ability for 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.

Q4 Earnings and Guidance

Revenue during the quarter grew 29% to $97.0 million, which was ahead of management’s previous guidance range of $93.5-94.5 million as well as ahead of consensus estimates for $94 million. Even though revenue growth decelerated from the 32% last quarter, the $97 million was nicely above expectations.

Source: Company Presentation

Subscription revenue remains the growth driver of the company, growing 37% during the quarter and represents over 80% of the total revenue. Subscription revenue is naturally more recurring in nature and comes with higher margins, both of which investors like to see and tend to place a higher valuation multiple.

Source: Company Presentation

Billings were also very strong during the quarter, growing 28% during the quarter, similar to the 28% growth seen last quarter. TENB also added 52 net new $100k+ customers during the quarter, which was one more than the 51 added last quarter. As the company continues to gain more traction with these larger customers, they continue to increase their revenue visibility over the long-term.

Source: Company Presentation

Gross margins remained strong at 82%, though were down slightly from 85% in the year-ago period. Nevertheless, operating margins expanded from -14% to -11%, demonstrating the company’s ability to leverage their operating expenses as the company scales they revenue. Given the better than expected revenue and margin expansion, non-GAAP EPS for the quarter was -$0.11, which was better than expectations for a loss of -$0.13.

Source: Company Presentation

Guidance for Q1 includes revenue of $100-101 million, which was was slightly above expectations for around $100 million. Non-GAAP operating income is expected to be -$18-19 million, which was worse the expectations for a loss of around -$11 million. This led to Q1 EPS guidance of a loss of $0.18-0.19, lower than expectations for a los of -$0.13.

For the full year, revenue is expected to be $435-440 million, or 23-24% growth, which was ahead of consensus expectations for $436 million. I think investors were expecting a little more upside to guidance, given the company’s history of beating and raising expectations. EPS for the full year is expected to be a loss of -$0.36-0.41, which was slightly better than consensus expectations for a loss of -$0.42. In addition, billings are expected to be $500-510 million, which was near expectations for $505 million at the midpoint. Even though billings did not provide much upside, I believe management could be slightly conservative given the uncertainty around larger deals being signed due to longer sales cycles.

Valuation

Even though valuation has expanded over the past few months, TENB’s valuation remains below peers who have a similar revenue growth profile. TENB’s closest competitor, Qualys (QLYS), trades at a higher forward revenue multiple than TENB, though QLYS has better operating margins, which investors typically place a higher valuation on.

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TENB currently has a market cap of ~$2.75 billion, and with cash/investments of ~$215 million and no debt, the company has a current enterprise value of ~$2.5 billion. Given management’s 2020 revenue guidance of $435-440 million, this implies a 2020 revenue multiple of ~5.7x.

2020 revenue growth is expected to be 23-24% during the year, which could ultimately become conservative if the company continues on its historical beat and raise pattern. I believe we could ultimately see revenue growth be above 25% by the end of 2020.

Assuming a 25% revenue growth for 2020 and some deceleration in 2021, call it 23% revenue growth, we could see 2021 revenue of ~$550 million, implying a 2021 revenue multiple of ~4.5x, which appears to be more than reasonable at the current levels.

Investors currently have a lower revenue multiple on TENB because margins have not expanded as much as similar peers. In 2020, management’s guidance includes an operating loss of -$33-38 million, which represents an operating margin of -8%.

With the stock currently trading ~$28, I believe the revenue growth over the next few years will likely be close to 25%, which could ultimately drive the stock higher. When looking at 2021 revenue, valuation appears to be attractive at ~4.5x revenue, which is well below their peer group, especially their closest competitor, QLYS.

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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