2023-07-27 08:13:40 ET
Summary
- I recommend a buy rating due to the normalization of the demand environment and the impressive traction of Tenable One platform.
- TENB's 2Q23 results surpassed market expectations with $195m in revenue and $30.2m in operating profit, indicating a positive turning point for the company.
- The Tenable One platform experienced significant growth, contributing to a substantial portion of both new and renewal business, and is expected to continue driving the company's growth.
Overview
I recommend a buy rating for Tenable Holdings ( TENB ) stock as I expect the demand environment to normalize, leading to TENB returning to normalized growth. In addition, I am positive on the Tenable One traction so far, which I expect to continuously drive growth and margin expansion moving forward. This is a revision of my previous hold rating for TENB, in which I believed TENB stock would remain under pressure in the near term due to management's updated guidance back then.
2Q results
TENB announced $195m in revenue and $30.2m in operating profit. Both metrics did better than what the market expected, which is clearly a positive sign as margins expanded with positive growth. This result is significant because it suggests that TENB has resumed its regular pace of adding new customers as it has experienced more stable operating conditions in 2Q23 compared to 1Q23. For reference, TENB gained 426 new enterprise customers and 63 net new six-figure customers. After a successful 2Q23, management increased their FY23 guidance. Non-GAAP operating income is projected to be between $96 and $100 million, and non-GAAP income is projected to be between $79 and $83 million, all for FY23.
After last quarter's dismal performance caused the stock price to plunge by more than 20%, I believe that TENB's 2Q23 clean beat and raise results represent a meaningful positive inflection. While there is still work to be done before billing growth returns to the 20%+ range, I believe 2Q23 performance indicates clear progress to that level. I expect the strong demand traction for Tenable One (which has a 70% uplift in ASP), the normalizing of the macro environment (demand should normalize), and better execution up ahead to continue driving operating performance.
Tenable One platform gaining traction
For recap purpose, Tenable One is the evolution of Tenable EP and a much better whole product. Tenable One unifies the reporting, dashboards and analytics across all the asset classes. As such, it further eases users’ ability to visualize their cyber security defence system. This evolution allowed TENB to tackle other parts of the ecosystem such as cloud security and identity security. While the exact figure varies, I think the sheer size of these two industries, $47 billion and $12 billion , represent significant opportunities for TENB. Even if they were to capture 1% share of it, it is worth almost the entire FY22 revenue.
Throughout the quarter, Tenable One experienced significant growth, rising from a 10+% share of new bookings to surpassing 20%. As a percentage of sales, Tenable One represented high single digits revenue in 1Q23, and I expect that to be inching towards the low-teens region based on the booking’s growth figure. Currently, it contributes to a substantial portion of both new and renewal business, representing a double-digit percentage. I attribute this largely to rising interest in Cloud and Identity use cases, as well as encouraging feedback from current on-premises and hybrid cloud customers. Tenable One will likely continue to play a pivotal role in TENB growth because of its superior contribution, in my opinion. According to company officials on the earnings call for 2Q23:
Yeah, and this is Steve. Saket, the only thing I'll add there is that, as a reminder, the ASPs are notably higher with Tenable One than they are with selling standalone VM 70% higher.
The increase in ASP is significant and, as Tenable One takes a larger share of the business, I expect it to become a key factor in the company's success. Remember how I said that Tenable One now accounts for over 20% of new bookings this quarter? Even better, management has revealed that this growth is coming primarily from on-premises customers who are looking to increase their coverage, and that Tenable One is now responsible for more than 50% of the company's six-figure opportunities in 2H23.
Macro environment impact
Management also noted that macroeconomic conditions were more stable than they were in the previous quarter. This is clearly a much better commentary and signal than the past few quarters, where elongated sales cycles and budget scrutiny were the keywords for many IT companies. Management mentioned a more stable selling atmosphere, which should give TENB better insight into its major deals and help it breeze through the approval procedures for contracts.
Valuation
Own model
Using consensus estimates, I value TENB at $56.63. TENB should be able to continue growing as per guidance in FY23 and follow through with the same rate in the near term given the traction with Tenable One. With that, revenue should hit $1 billion in FY25. I attached it at a 6.2 NTM EV/revenue multiple, which is where it is trading today, as I think it should trade slightly above other Infrastructure Software peers like HashiCorp (HCP) and SentinelOne (S). While some of these peers are growing faster than TENB, I would point out that TENB is also much closer to profitability than them, hence the premium.
Risk
We are not out of the woods yet in terms of the poor macroeconomic environment. As the market (and myself) are already getting upbeat about the coming quarters, actual results and expectations could differ drastically if the macroeconomy flips for the worse.
Conclusion
I am revising my rating to a buy for TENB due to the normalization of the demand environment. The company's impressive 2Q23 results, beating market expectations with expanded margins, indicate a positive turning point. The traction of the Tenable One platform has been exceptional, driving growth and margin expansion, supported by higher ASPs.
For further details see:
Tenable Holdings: Upgrading To Buy As Demand Environment Is Normalizing