Executive Summary: We think Tenable could be headed to Unicorn status, given its financials, improving profitability, and strong investor demand for cybersecurity firms. The Maryland company, whom investors valued at $875 million as of 2015, makes software that enables companies to understand and reduce cybersecurity threats.
Tenable’s planned IPO comes amid a strong climate for cybersecurity startups. Earlier this year, Carbon Black and Zscaler completed successful IPOs that implied a 150 percent premium over private market valuations. And private equity firm Thoma Bravo recently acquired a majority stake in Centrify, a deal that most likely valued the security software company above its private market valuation.
Below are top 10 observations from Tenable’s S-1. Stay tuned as we learn more about the company’s IPO plans via subsequent filings.
1. Tenable seeks to raise $100 million. Morgan Stanley and J.P. Morgan are the lead underwriters. The company plans to trade with Nasdaq under the ticker symbol TENB.
2. Tenable enjoys a robust revenue growth outlook. The company generated $187 million in revenue last year, a 50 percent jump over 2016 and a significant improvement over the 33 percent growth rate it experienced between 2015 and 2016. Based on recent trends, we expect Tenable to increase sales 30 percent over the next 12 months.
3. Tenable benefits from a large and expanding market opportunity. According to the filing, Tenable estimates the Cyber Exposure market to hit $16 billion in 2019 as companies continue to confront a growing array of threats and hacks.
4. Tenable, however, has a long history of losses and cash burn. As of March 31, 2018, Tenable’s total losses exceeded $177 million ($83.8 million in 2015, $37.2 million in 2016, $41 million in 2017, and $15.9 million for the first three months of this year).
5. Tenable faces significant competition from both public and private companies. Tenable’s competitors includes everyone from Qualys, Rapid7, Tanium, and CrowdStrike, to larger players like IBM. These companies focus on specific markets like vulnerability management and assessment, security software and services, endpoint security, and point solutions.
6. Tenable boasts an attractive freemium pricing model. Tenable has successfully executed a “Freemium” SaaS business model in which it acquires new customers with a free version of a popular product and then upsells them value-added licenses over time. As of year-end December 31, 2017, 24,000 customers from 160 countries licensed one of their three main products. Tenable sells its software to 53 percent of Fortune 500 and 29 percent of the Global 2000, including FedEx, U.S. Bancorp, Vodafone, and Amazon.
7. Tenable’s gross margins beats peers. The company posted gross margins of 89 percent in the first quarter 2017 and 85 percent for the three months ended March 31, 2018. By contrast, Carbon Black generated gross margins of 79 percent for the same two quarters, and Zscaler reported gross margins of 79 percent for the quarter ending April 30, 2017 and 81 percent for the same period in 2018.
8. Tenable holds a strong record of customer acquisition and spend metrics. Tenable has increased the number of customers who spent $5,000 or more a year to license its Tenable.io or SecurityCenter products to 1,017 in 2017 from 493 in 2015. The company already boasts 301 such customers in the first quarter of 2018. Further, the number of customers with annual contracts of $100,000 or greater grew to 265 in 2017 from 45 in 2015.
9. Top two institutional holders own roughly 70 percent of Tenable. Insight Venture Partners (35.3 percent) and Accel (34.4 percent) are the company’s largest shareholders. Co-founders Ronald Gula and John C. Huffard Jr. hold an additional 11.5 percent and 5.1 percent respectively. We believe such a proportion of institutional ownership could lead to lower volatility in Tenable’s post-IPO stock performance.
10. Standard 180-day lock-ups. Tenable’s executive officers, directors and holders of substantially all of its common stock and securities that they can be converted to common stock have agreed that, subject to certain exceptions, to not sell their shares for a period of 180 days from the date of the company’s final prospectus.
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