Tenable: Evolving With A Unique Advantage (NASDAQ:TENB)


Source: Tenable

Tenable (TENB) reported impressive results last quarter. All growth metrics highlighted the strength and sustainability of its offerings. The updated product and sales strategy also highlights its strong competitive positioning. My risk factors, which revolve around Tenable’s niche strategy, was partially diluted as Tenable announced new capabilities and innovation to strengthen its moat.

This article highlights the good parts of the evolving growth story and new opportunities. I also examine the evolving financial model and other assumptions.

Tenable is a growth play that has delivered strong results since its IPO. This year has been a great one for the stock amidst macro related risks. Revenue growth was 22% last quarter. The major trends driving this growth include the adoption of cloud platforms, digital transformation initiatives, and the expanding attack surface. Tenable continues to win strong deals in the large enterprise space. It added 335 new enterprise customers in Q3. A significant portion of these customers spend more than $100k/year.

Dollar net expansion was 110% (consistent with the previous quarter), highlighting the strong expansion motion by existing customers. Annual recurring revenue remained high at 94% of overall revenue. More impressive was the billing growth of 21%. This highlights the conviction of customers towards Tenable’s product roadmap.

Source: Tenable

For second quarter in a row, we’re seeing an increased demand for securing cloud workloads, which has resulted in an accelerated adoption of Tenable.io and cloud security modules such as web application security, container security, and Lumin. – Earnings Call

Tenable’s sales strategy continues to benefit from its strong cloud security capabilities. In addition to the recent innovation in risk prioritization, Tenable announced a new capability that significantly improves its competitive posture in the cloud security and VM segments. Frictionless assessment, an agent-less approach toward assessing cloud assets, improves considerably upon the approach adopted by most competitors. This innovation will drive Tenable’s push towards selling more cloud security solutions. It will also secure its customers’ conviction as it evolves the capabilities of its cloud security offering. Readers will recall that cloud security is an attractive segment for vulnerability management players to expand their total addressable market.

Source: Qualys

The chart above is from Tenable’s competitor, Qualys. We can see that Qualys has already recognized the opportunity. Like Rapid7, another major vulnerability management player, Qualys’ approach to cybersecurity involves the deployment of lightweight agents which have minimal impact on system performance.

Source: Seeking Alpha

Tenable’s value metrics are all negative for the right reasons. As we will see in the growth section, Tenable is improving both profitability and growth. These factors will cover the weak value metrics. PE remains meaningless due to the skew of investments towards the initial phase of the business lifecycle. EV/Sales is more attractive and deservedly so due to Tenable’s strong growth factor. The EV/S forward of 8x is about right for a company growing above 20%. EV to EBIT/EBITDA remains uninsightful. Though, we can expect them to improve due to the strong potential for margins expansion.

Source: Seeking Alpha

Tenable growth factor contains attractive metrics that will drive margins expansion and FCF growth. EBITDA and EBIT growth have been tough to calibrate due to the recent slate of investments towards cloud and operational technology. FCF growth has been more impressive due to improved margins and working capital management. The cash flow metric has also benefited from strong billings as Tenable continues to outperform in the large enterprise space. I expect the FCF ramp trend to normalize in the coming quarters. I remain wary of Tenable’s ability to drive billings from VM and cloud security bets. Like I’ve pointed out in my previous thesis, It will be good to see more diversification. The move into the operational technology (OT) segment bodes well; however, it is yet to be established that Tenable can rely on OT to extend its growth momentum in the short term.

Source: Seeking Alpha

Tenable’s gross margin is healthy. It might take a modest hit due to cloud hosting costs. Long term, I expect this number to settle between 80% – 85%. This range is attractive compared to other SaaS players.

On a non-GAAP basis, sales and marketing expenses decreased to 43% of revenue last quarter. S&M was 58% of revenue in the same period the previous year. This represents a significant improvement. Tenable highlighted sales productivity, marketing, and travel-related cost savings as major contributors to margins improvement. In Q4, sales & marketing will grow sequentially to reflect capacity planning for the new year.

R&D expenses continue to reflect the recognition of investment expenses to support cloud and IoT initiatives. G&A expense was sequentially flattish. At 11% of revenue, this represents a significant improvement from 14% of revenue recorded last year. G&A will continue to benefit from operating efficiency and back-office automation initiatives.

Overall, these trends will continue to drive EBITDA margin and net income margin expansion.

Source: Seeking Alpha

Tenable’s momentum factor has been great. Its ability to find new logos in the vulnerability management space highlights its strong competitive positioning and attractive sales strategy. Tenable highlighted its strength in the fed vertical during the last call. It also highlighted competitive displacements. I view these commentaries as signs that the market loves Tenable’s offerings. Readers will recall that Tenable continues to maintain a leading positioning in the vulnerability management space. I expect this trend to be supportive of multiple expansion in the near term.

Analysts have an average price target of $45 on revenue growth of 19.2% in 2021. I believe these estimates are fair given Tenable’s strong momentum within and beyond the vulnerability management space. Its cloud security innovation is attractive against a backdrop of growing competition in the cloud workload and posture management sub-segments of the cloud security market.

Conclusion

Tenable’s growth factor will receive a major boost if its cloud security innovation pans out as expected. Vulnerability Management has performed excellently to do the bulk of the heavy lifting. This erases further doubts about Tenable’s sales strategy and product positioning. Capabilities in IoT/OT security provide room for further growth and margin expansion. The recent billing growth further locks in the conviction that customers appreciate Tenable’s offerings. For these reasons, I expect Tenable to continue to outperform. I find valuation attractive at the current growth rate.

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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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