Customers Will Stick to Tenable’s Reliable Cybersecurity Solutions

Equity Analyst

Malik Ahmed Khan

Associate Equity Analyst

Verushka Shetty

We view Tenable as a strong cybersecurity vendor providing vulnerability management and security operations solutions to its clients. The firm’s combined portfolio delivers exposure management, enabling complete assessment of customers’ threat landscape and security posture. We believe this space has a solid growth runway ahead, thereby providing additional uplift to Tenable’s robust demand base. Although Tenable faces stiff competition as it aims to grow its enterprise customer base, we think the firm will continue to benefit from its sticky portfolio.

The cybersecurity space continues to grow in threat complexity and intensity. As firms undergo digital transformations that expand their online footprints, the number of attack vectors is rapidly increasing. In this environment, we see customers opting for vendors that offer multiple security solutions versus point solutions that can inadvertently create data silos. Here, vendors like Tenable can displace point solutions with interoperable modules.

We believe Tenable is well positioned to provide several security needs for its enterprise-leaning customer base across on-premises, cloud and hybrid environments. Tenable began providing vulnerability management solutions under its Nessus software, designed to help firms identify and mitigate weaknesses in their IT environment. However, given the secular shift toward vendor consolidation, the firm has added exposure management tools which complement its vulnerability management offering, delivered under its TenableOne platform.

While the increase in nefarious activity has induced more cybersecurity spending, it has also brought on intense competition among vendors. Tenable competes with larger, more capitalized vendors such as CrowdStrike as well as similar-sized players such as Qualys. Despite the competition, we are impressed with the firm’s solid retention metrics, showing the stickiness of its products.

Tenable has invested in research and sales to enable its own cloud transition and expand its portfolio. As a result, Tenable’s profitability has suffered. We believe margin compression will alleviate as benefits from investments come to fruition in future years.

Business Strategy & Outlook

We assign Tenable a narrow economic moat primarily owing to switching costs present in its security solutions. We believe these switching costs are evidenced by Tenable’s solid retention metrics. While the competitive landscape for Tenable is likely to become more intense as the firm contends against larger players, we believe it is well-positioned to generate excess returns over invested capital over the next decade.

Looking to the broader cybersecurity market, we believe that the complexity and intensity of threats are ever-increasing. As enterprises undergo digital transformations and cloud migrations which expand their digital footprints, the number of attack vectors is rapidly increasing. In response to this escalating threat level, IT teams are adopting more cybersecurity tools for the expanding attack surfaces. However, in many instances, the adoption of more tools creates data silos in which disparate solutions are not interoperable. In fact, based on various reports, we estimate enterprises currently use 60-80 different security solutions from different vendors, but wish to narrow that number down to 15-20 key applications. This presents the opportunity for cybersecurity vendors to provide multiple solutions within one platform, displacing vendors providing only point solutions. As a result, multi-solution vendors like Tenable are able to entrench interoperable solutions across client workflows, and further grow wallet share among customers as their needs evolve in an increasingly digitized world.

As security vendors entrench numerous security solutions into their clients’ IT infrastructure, we see switching costs increase, as it becomes more costly and cumbersome to rip out and replace these security solutions. Further, we believe that any transition to a new vendor, which includes re-training of staff on a new platform, can potentially create a period of increased vulnerability. Organizations have high loss aversion in regard to security which makes switching from a trusted platform unlikely. As well, this loss aversion leads to organizations opting for the most reputable and reliable solution, rather than selecting a vendor solely on price.

Tenable offers an array of cybersecurity solutions, which are built around its expertise in vulnerability management, or VM. Put simply, VM involves regularly scanning internal IT systems and applications for vulnerabilities, assessing the severity of those vulnerabilities, and developing and implementing strategies to mitigate them. We view this space as naturally sticky, given customers’ loss aversion when it comes to IT security. Further, we consider Tenable a top provider of VM, given that its Nessus solution is integrated into higher education programs allowing it to become synonymous with vulnerability management.

Given the secular shift toward digital transformations and cloud migrations, Tenable has expanded its portfolio to provide solutions that complement its core vulnerability management offering. The added modules extend Tenable’s offering from pure vulnerability management to exposure management, which involves continuous assessment of a firm’s complete threat environment and security posture. We believe this multisolution approach will enable increased switching costs, allowing the firm to expand usage within a customer while also entrenching itself further into the customer’s security apparatus. For example, an enterprise may have Tenable’s vulnerability management solution integrated into its IT infrastructure. As the enterprise’s digital footprint expands, as do the number of attack vectors, the IT security team may then onboard additional modules from Tenable such as Lumin, Tenable’s analytics tool which leverages data collected from VM scanning. We see early success of this strategy evidenced in the firm’s billings, as a growing proportion of total billings is generated from broader exposure management applications. 

Tenable has maintained a net retention rate of above 110% since its initial public offering in 2018, demonstrating its ability to expand sales from existing customers thereby increasing stickiness over time. We believe the firm’s solid retention is aided, in part, by its focus toward enterprise-sized customers. In our view, enterprise customers are the gold standard for SaaS companies, given their higher annual contract values and lower susceptibility to budget scrutiny and churn. With this, the firm has meaningfully expanded its installed based through tripling its count of customers with an annual contract value greater than $100,000 since its initial public offering. While Tenable does not provide its gross retention rate, we assume it is around 95%, considering its enterprise-leaning customer base. Here, we compare against competitor Qualys’ reported gross retention rate of 90%. Qualys provides a similar set of VM solutions to Tenable, however its customer base skews more toward small and medium customers, or SMB, where we would assume greater churn.



Despite our confidence in Tenable’s ability to out-earn its cost of capital over the next decade, we highlight that the firm faces a tough competitive landscape. As Tenable aims to expand its enterprise customer base, the firm is up against strong platform vendors such a CrowdStrike and Palo Alto Networks. Here, more-capitalized vendors have a greater arsenal of resources to continually add modules under one platform. As customers move toward consolidating cybersecurity solutions toward a smaller number of vendors, smaller players such as Tenable may have a tougher time winning large customers.

In order to expand its cybersecurity offerings beyond VM, Tenable has undertaken several acquisitions and has been investing heavily in research and sales. As a result, the firm’s profitability has suffered and further caused a decline in return on invested capital. While we expect this trend to continue in the near term, we believe a rebound is in sight, supported by scaling efficiencies, maturing sales cycles, and further benefits to be realized from the firm’s growing cloud mix.

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Economic Moat

Tenable Holdings Inc

Tenable Holdings, Inc. engages in the development of security software solutions. It offers Cyber Exposure which is a discipline for managing and measuring cybersecurity risk in the digital era. Its products include tenable.io, tenable.sc, tenable.ot, and nessus professional. The firm delivers solutions in the field of application security, cloud security, compliance, energy, finance, healthcare, and retail. The company was founded by John C. Huffard, Jr. and Renaud M. Deraison in 2002 and is headquartered in Columbia, MD.

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