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Secureworks Reports Third Quarter Fiscal 2022 Results with 193% Taegis™ ARR Growth and Record Gross Margins


ATLANTA, Dec. 2, 2021 /PRNewswire/ — Secureworks (NASDAQ: SCWX), a global leader in cybersecurity, today announced financial results for its third quarter, which ended on October 29, 2021.

 

Key Highlights

  • Secureworks Taegis grew to $123 million in annual recurring revenue (ARR), an increase of over 20% sequentially and 193% on a year-over-year basis.
  • Ended the third quarter of fiscal 2022 with 800 customers on the Taegis cloud-native security platform.
  • Both GAAP and Non-GAAP gross margins rose to record highs, at 60.4% and 63.6%.
  • Won Frost & Sullivan’s 2021 Best Practices Company of the Year, for the visionary innovation of Taegis XDR and Secureworks’ demonstrated commitment to enabling customers with different needs and maturity levels to benefit from an XDR-powered defense.

“The strength of our Taegis cloud-native security platform is generating strong industry validation and positive customer feedback,” said Wendy Thomas, CEO, Secureworks. “We continue to be encouraged by customer reception to our business model shift and are proud of the expansion we are seeing with Taegis adoption.”

Third Quarter Fiscal 2022 Financial Highlights

  • Taegis revenue grew 161% from the third quarter of fiscal 2021 to $23.9 million.
  • Overall revenue was $133.7 million, a decrease of 5.6% from the third quarter of fiscal 2021, reflective of our continued shift to higher-margin business.
  • GAAP gross margin was 60.4%, compared with 57.9% in the same period last year. Non-GAAP gross margin was 63.6% compared with 60.7% in the third quarter of fiscal 2021.
  • GAAP net loss was $12.9 million, or $0.15 per share, compared with $3.6 million, or $0.04 per share, in the prior year. Non-GAAP net income was $1.2 million, or $0.01 per share, compared with net income of $6.7 million, or $0.08 per share, in the same period last year.
  • Adjusted EBITDA for the quarter was $4.7 million, compared with $11.3 million in the third quarter of fiscal 2021.
  • Ended the third quarter with $205 million in cash and cash equivalents.

“We’re pleased with the continued expansion of our Taegis customer base, resulting in Taegis ARR growth of 193% this quarter,” said Paul Parrish, Chief Financial Officer, Secureworks. “As we actively shift the company to a higher-margin mix of solutions, GAAP subscription gross profit margins are expanding – up this quarter over 300 bps from last year.”

Business and Operational Highlights

  • Recognized as a Leader in the “IDC MarketScape: U.S. Managed Detection and Response Services 2021 Assessment (doc # US48129921, August 2021.)”
  • Recognized as a Leader in the “IDC MarketScape: Worldwide Incident Readiness Services 2021 Assessment (doc # US46741420, November 2021.)”
  • Winner of Security Current’s inaugural CISO Choice Award for Security Analytics recognizing the company for real-world innovation that addresses emerging risks in new and creative ways.
  • Winner of CyberSecurity Breakthrough’s Cloud Based Network Security Solution of the Year award.
  • Released Taegis NGAV next-generation endpoint threat prevention and ManagedXDR Elite to deliver continuous threat hunting with a designated threat hunter.
  • Expanded international operations with new cloud instance in Frankfurt, Germany, for European Union (EU) customers and channel partners.

Financial Outlook

For the fourth quarter of fiscal 2022, the Company expects:

  • Revenue of $128 million to $130 million.
  • GAAP net loss per share of $0.24 to $0.23 and net loss per share performance on a non-GAAP basis of $0.09 to $0.07.

Secureworks is providing the following updated guidance for full fiscal year 2022. The Company expects:


Fiscal Year 2022 Guidance



Taegis ARR

At least $155M

Taegis revenue

$90M to $92M

Total revenue

$535M to $537M

GAAP net income

-$51M to -$50M

-$.62 to – $.60 per share

Non-GAAP net income

-$2M to 0

-$.02 to 0 per share

Adjusted EBITDA

$9M to $11M

Cash from operations

$8M to $10M

 

Conference Call Information

As previously announced, the Company will hold a conference call to discuss its third quarter fiscal 2022 results and financial guidance on Dec. 2, 2021, at 8:00 a.m. U.S. ET. A live audio webcast of the conference call and the related supplemental financial information will be accessible on the Company’s website at http://investors.secureworks.com. The webcast and supplemental information will be archived at the same location.

Operating Metrics

The Company defines annual recurring revenue (ARR) as the value of its subscription contracts as of a particular date. Because the Company uses recurring revenue as a leading indicator of future annual revenue, it includes operational backlog. Operational backlog is defined as the recurring revenue associated with pending contracts, which are contracts that have been sold but for which the service period has not yet commenced.

Non-GAAP Financial Measures

This press release presents information about the Company’s non-GAAP revenue, non-GAAP gross margin, non-GAAP subscription cost of revenue, non-GAAP professional services cost of revenue, non-GAAP gross profit, non-GAAP research and development expenses, non-GAAP sales and marketing expenses, non-GAAP general and administrative expenses, non-GAAP operating income (loss), non-GAAP net  income (loss), non-GAAP earnings (loss) per share and adjusted EBITDA, which are non-GAAP financial measures provided as a supplement to the results provided in accordance with accounting principles generally accepted in the United States of America (“GAAP”). A reconciliation of each of the foregoing non-GAAP financial measures to the most directly comparable GAAP financial measure is provided below for each of the fiscal periods indicated.

Special Note Regarding Forward-Looking Statements

This press release contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. In some cases, you can identify these statements by such forward-looking words as “anticipate,” “believe,” “confidence,” “could,” “estimate,” “expect,” “guidance,” “intend,” “may,” “plan,” “potential,” “outlook,” “should,” “will” and “would,” or similar words or expressions that refer to future events or outcomes. Such forward-looking statements include, but are not limited to, the statements in this press release with respect to the Company’s expectations regarding revenue, GAAP net loss per share, and non-GAAP net loss per share for the fourth quarter of fiscal 2022, and revenue, GAAP net loss, GAAP net loss per share, non-GAAP net loss, non-GAAP net loss per share, Adjusted EBITDA, cash flow from operations, and annual recurring revenue and revenue for its Taegis platform for full year fiscal 2022, all of which reflect the Company’s current analysis of existing trends and information. These forward-looking statements represent the Company’s judgment only as of the date of this press release.

Actual results and events in future periods may differ materially from those expressed or implied by these forward-looking statements because of risks, uncertainties and other factors, including those relating to, among others: the Company’s ability to achieve or maintain profitability; the Company’s ability to enhance its existing solutions and technologies and to develop or acquire new solutions and technologies; the Company’s reliance on personnel with extensive information security expertise; intense competition in the Company’s markets; the Company’s ability to attract new customers, retain existing customers and increase its annual contract values; the Company’s reliance on customers in the financial services industry; the Company’s ability to manage its growth effectively; the Company’s ability to maintain high-quality client service and support functions; terms of the Company’s service level agreements with customers that require credits for service failures or inadequacies; the Company’s recognition of revenue ratably over the terms of its Taegis SaaS applications and managed security services contracts; the Company’s long and unpredictable sales cycles; risks associated with the Company’s international sales and operations; the effect of Brexit on the Company’s operations; the Company’s exposure to fluctuations in currency exchange rates; the effect of governmental export or import controls on the Company’s business; the Company’s ability to expand its key distribution relationships; the Company’s technology alliance partnerships; real or perceived defects, errors or vulnerabilities in the Company’s solutions or the failure of its solutions to prevent a security breach; the risks associated with cyber attacks or other data security incidents; the ability of the Company’s solutions to interoperate with its customers’ IT infrastructure; the Company’s ability to use third-party technologies; the effect of evolving information security and data privacy laws and regulations on the Company’s business; the Company’s ability to maintain and enhance its brand; risks associated with the Company’s acquisition of other businesses; estimates or judgments relating to the Company’s critical accounting policies; the effect of natural disasters, public health issues and other catastrophic events on the Company’s ability to serve its customers, including the coronavirus (COVID-19) pandemic; the Company’s reliance on patents to protect its intellectual property rights; the Company’s ability to protect, maintain or enforce its non-patented intellectual property rights and proprietary information; claims by third parties of infringement of their proprietary technology by the Company; the Company’s use of open source technology; and risks related to the Company’s relationship with Dell Technologies Inc. and Dell Inc. and control of the Company by Dell Technologies Inc.

This list of risks, uncertainties and other factors is not complete. The Company discusses these matters more fully, as well as certain risk factors that could affect the Company’s business, financial condition, results of operations and prospects, under the caption “Risk Factors” in the Company’s annual report on Form 10-K, as well as in the Company’s other SEC filings.

Any or all forward-looking statements the Company makes may turn out to be wrong and can be affected by inaccurate assumptions the Company might make or by known or unknown risks, uncertainties and other factors, including those identified in this press release. Accordingly, you should not place undue reliance on the forward-looking statements made in this press release, which speak only as of its date. The Company does not undertake to update, and expressly disclaims any obligation to update, any of its forward-looking statements, whether as a result of circumstances or events that arise after the date the statements are made, new information or otherwise.

About Secureworks

Secureworks (NASDAQ: SCWX) is a global cybersecurity leader that protects customer progress with Secureworks® Taegis™, a cloud-native security analytics platform built on 20+ years of real-world threat intelligence and research, improving customers’ ability to detect advanced threats, streamline and collaborate on investigations, and automate the right actions.

www.secureworks.com

(Tables Follow)

 


SECUREWORKS CORP.

Condensed Consolidated Statements of Operations and Related Financial Highlights

(in thousands, except per share data and percentages)

(unaudited)




















Three Months Ended




Nine Months Ended




October 29,

2021




October 30,

2020




October 29,

2021




October 30,

2020

Net revenue:















   Subscription

$

102,992





$

108,265





$

309,488





$

320,881



   Professional services

30,707





33,376





97,846





100,417



      Total net revenue

133,699





141,641





407,334





421,298



Cost of revenue:















   Subscription

34,888





40,051





109,423





122,506



   Professional services

18,002





19,562





57,157





59,916



      Total cost of revenue

52,890





59,613





166,580





182,422



Gross profit

80,809





82,028





240,754





238,876



Operating expenses:















   Research and development

32,767





27,608





91,336





75,790



   Sales and marketing

35,008





34,810





106,098





107,886



   General and administrative

28,404





24,508





80,447





73,824



      Total operating expenses

96,179





86,926





277,881





257,500



Operating loss

(15,370)





(4,898)





(37,127)





(18,624)



Interest and other, net

(762)





(79)





(2,270)





944



Loss before income taxes

(16,132)





(4,977)





(39,397)





(17,680)



Income tax benefit

(3,269)





(1,369)





(8,381)





(5,309)



Net loss

$

(12,863)





$

(3,608)





$

(31,016)





$

(12,371)



















Loss per common share (basic and diluted)

$

(0.15)





$

(0.04)





$

(0.37)





$

(0.15)



Weighted-average common shares outstanding

(basic and diluted)

83,297





81,474





82,754





81,276






















Percentage of Total Net Revenue
















Subscription gross margin

66.1

%



63.0

%



64.6

%



61.8

%

Professional services gross margin

41.4

%



41.4

%



41.6

%



40.3

%

Total gross margin

60.4

%



57.9

%



59.1

%



56.7

%

Research and development

24.5

%



19.5

%



22.4

%



18.0

%

Sales and marketing

26.2

%



24.6

%



26.0

%



25.6

%

General and administrative

21.2

%



17.3

%



19.7

%



17.5

%

Operating expenses

71.9

%



61.4

%



68.2

%



61.1

%

Operating loss

(11.5)

%



(3.5)

%



(9.1)

%



(4.4)

%

Loss before income taxes

(12.1)

%



(3.5)

%



(9.7)

%



(4.2)

%

Net loss

(9.6)

%



(2.5)

%



(7.6)

%



(2.9)

%

Effective tax rate

20.3

%



27.5

%



21.3

%



30.0

%

Note:  Percentage growth rates are calculated based on underlying data in thousands

 


SECUREWORKS CORP.

Condensed Consolidated Statements of Financial Position

(in thousands)

(unaudited)




























October 29,



2021




January 29,



2021




Assets:












Current assets:













Cash and cash equivalents





$

205,129





$

220,300





Accounts receivable, net





95,108





108,005





Inventories, net





515





560





Other current assets





14,515





17,349







Total current assets





315,267





346,214



Property and equipment, net





11,048





17,143



Operating lease right-of-use assets, net





18,979





22,330



Goodwill





426,228





425,861



Intangible assets, net





139,853





157,820



Other non-current assets





79,312





75,993







Total assets





$

990,687





$

1,045,361






Liabilities and Stockholders’ Equity:












Current liabilities:













Accounts payable





$

13,063





$

16,769





Accrued and other





85,128





109,134





Short-term deferred revenue





164,359





168,437







Total current liabilities





262,550





294,340



Long-term deferred revenue





5,399





9,590



Operating lease liabilities, non-current





18,461





22,461



Other non-current liabilities





51,946





51,189







Total liabilities





338,356





377,580



Stockholders’ equity





652,331





667,781



Total liabilities and stockholders’ equity





$

990,687





$

1,045,361



 

 

 


SECUREWORKS CORP.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)












Nine Months Ended




October 29,



2021




October 30,



2020

Cash flows from operating activities:







Net loss

$

(31,016)





$

(12,371)



Adjustments to reconcile net loss to net cash provided by (used in) operating activities:







Depreciation and amortization

29,914





30,978



Amortization of right of use asset

3,081





1,577



Stock-based compensation expense

23,677





17,675



Effects of exchange rate changes on monetary assets and liabilities denominated in foreign currencies

2,374





(1,190)



Income tax benefit

(8,381)





(5,309)



Other non cash impacts





150



Provision for credit losses

73





1,871



Changes in assets and liabilities:







Accounts receivable

12,460





2,296



Net transactions with parent

(6,794)





5,586



Inventories

45





56



Other assets

8,107





4,514



Accounts payable

(3,814)





2,668



Deferred revenue

(8,830)





(4,820)



Operating leases, net

(4,266)





(2,202)



Accrued and other liabilities

(18,403)





(13,046)



  Net cash (used)/provided by operating activities

(1,773)





28,433



Cash flows from investing activities:







Acquisition of a Business, net of cash





(15,081)



Software development costs

(4,574)







Capital expenditures

(1,248)





(2,181)



Net cash used in investing activities

(5,822)





(17,262)



Cash flows from financing activities:







Payment of taxes for equity awards

(11,710)





(4,962)



Proceeds from stock option exercises

4,134







Net cash used in financing activities

(7,576)





(4,962)











Net decrease in cash and cash equivalents

(15,171)





6,209



Cash and cash equivalents at beginning of the period

220,300





181,838



Cash and cash equivalents at end of the period

$

205,129





$

188,047



 

 

Non-GAAP Financial Measures

This press release presents information about the Company’s non-GAAP revenue, non-GAAP gross margin, non-GAAP subscription cost of revenue, non-GAAP professional services cost of revenue, non-GAAP gross profit, non-GAAP research and development expenses, non-GAAP sales and marketing expenses, non-GAAP general and administrative expenses, non-GAAP operating income (loss), non-GAAP net income (loss), non-GAAP earnings (loss) per share and adjusted EBITDA, which are non-GAAP financial measures provided as a supplement to the results provided in accordance with GAAP.  A detailed discussion of the Company’s reasons for including these non-GAAP financial measures, the limitations associated with these measures, the items excluded from these measures, and our reason for excluding those items are presented below. The Company encourages investors to review its GAAP results in conjunction with the presentation of non-GAAP financial measures.

The following is a summary of the items excluded from the most comparable GAAP financial measures to calculate our non-GAAP financial measures:

  • Amortization of Intangible Assets. Amortization of intangible assets consists of amortization of customer relationships and acquired technology. In connection with the acquisition of Dell by Dell Technologies in fiscal 2014 and our acquisition of Delve Laboratories, Inc. in fiscal 2021, all of our tangible and intangible assets and liabilities were accounted for and recognized at fair value on the transaction date. Accordingly, amortization of intangible assets consists of amortization associated with intangible assets recognized in connection with each such transaction.
  • Stock-based Compensation Expense. Non-cash stock-based compensation expense relates to both the Dell Technologies and Secureworks equity plans. We exclude such expense when assessing the effectiveness of our operating performance since stock-based compensation does not necessarily correlate with the underlying operating performance of the business.
  • Aggregate Adjustment for Income Taxes. The aggregate adjustment for income taxes is the estimated combined income tax effect for the adjustments mentioned above. The tax effects are determined based on the tax jurisdictions where the above items were incurred.

 

 (Tables Follow)

 


SECUREWORKS CORP.

Reconciliation of GAAP to Non-GAAP Financial Measures

(in thousands, except per share data)

(unaudited)




















Three Months Ended




Nine Months Ended




October 29,

2021




October 30,

2020




October 29,

2021




October 30,

2020

GAAP net revenue

$

133,699





$

141,641





$

407,334





$

421,298



GAAP subscription cost of revenue

34,888





40,051





109,423





122,506



Amortization of intangibles

(4,109)





(3,646)





(11,972)





(10,754)



Stock-based compensation expense

(41)





(84)





(159)





(532)



Non-GAAP subscription cost of revenue

$

30,738





$

36,321





$

97,292





$

111,220



GAAP professional services cost of revenue

$

18,002





$

19,562





$

57,157





$

59,916



Stock-based compensation expense

(103)





(171)





(474)





(476)



Non-GAAP professional services cost of revenue

$

17,899





$

19,391





$

56,683





$

59,440



GAAP gross profit

$

80,809





$

82,028





$

240,754





$

238,876



Amortization of intangibles

4,109





3,646





11,972





10,754



Stock-based compensation expense

144





255





633





1,008



Non-GAAP gross profit

$

85,062





$

85,929





$

253,359





$

250,638



GAAP research and development expenses

$

32,767





$

27,608





$

91,336





$

75,790



Stock-based compensation expense

(2,268)





(793)





(4,908)





(3,181)



Non-GAAP research and development expenses

$

30,499





$

26,815





$

86,428





$

72,609



GAAP sales and marketing expenses

$

35,008





$

34,810





$

106,098





$

107,886



Stock-based compensation expense

(1,493)





(1,072)





(3,241)





(2,695)



Non-GAAP sales and marketing expenses

$

33,515





$

33,738





$

102,857





$

105,191



GAAP general and administrative expenses

$

28,404





$

24,508





$

80,447





$

73,824



Amortization of intangibles

(3,524)





(3,524)





(10,571)





(10,571)



Stock-based compensation expense

(6,157)





(3,961)





(14,895)





(10,791)



Non-GAAP general and administrative expenses

$

18,723





$

17,023





$

54,981





$

52,462



GAAP operating loss

$

(15,370)





$

(4,898)





$

(37,127)





$

(18,624)



Amortization of intangibles

7,633





7,170





22,543





21,325



Stock-based compensation expense

10,062





6,081





23,677





17,675



Non-GAAP operating income

$

2,325





$

8,353





$

9,093





$

20,376



GAAP net loss

$

(12,863)





$

(3,608)





$

(31,016)





$

(12,371)



Amortization of intangibles

7,633





7,170





22,543





21,325



Stock-based compensation expense

10,062





6,081





23,677





17,675



Aggregate adjustment for income taxes

(3,613)





(2,917)





(9,073)





(8,998)



Non-GAAP net income

$

1,219





$

6,726





$

6,131





$

17,631



GAAP loss per share

$

(0.15)





$

(0.04)





$

(0.37)





$

(0.15)



Amortization of intangibles

0.09





0.09





0.27





0.26



Stock-based compensation expense

0.12





0.08





0.28





0.22



Aggregate adjustment for income taxes

(0.04)





(0.04)





(0.11)





(0.11)



Non-GAAP earnings per share *

$

0.01





$

0.08





$

0.07





$

0.22




* Sum of reconciling items may differ from total due to rounding of individual components

GAAP net loss

$

(12,863)





$

(3,608)





$

(31,016)





$

(12,371)



Interest and other, net

762





79





2,270





(944)



Income tax benefit

(3,269)





(1,369)





(8,381)





(5,309)



Depreciation and amortization

10,051





10,106





29,914





30,978



Stock-based compensation expense

10,062





6,081





23,677





17,675



Adjusted EBITDA

$

4,743





$

11,289





$

16,464





$

30,029



 

 

 


SECUREWORKS CORP.

Reconciliation of GAAP to Non-GAAP Financial Measures

(in thousands)

(unaudited)












Three Months Ended




Nine Months Ended



Percentage of Total Net Revenue




October 29,

2021




October 30,

2020




October 29,

2021




October 30,

2020

GAAP gross margin



60.4

%



57.9

%



59.1

%



56.7

%

          Non-GAAP adjustment



3.2

%



2.8

%



3.1

%



2.8

%

Non-GAAP gross margin



63.6

%



60.7

%



62.2

%



59.5

%























GAAP research and development expenses



24.5

%



19.5

%



22.4

%



18.0

%

          Non-GAAP adjustment



(1.7)

%



(0.6)

%



(1.2)

%



(0.8)

%

Non-GAAP research and development expenses



22.8

%



18.9

%



21.2

%



17.2

%























GAAP sales and marketing expenses



26.2

%



24.6

%



26.0

%



25.6

%

          Non-GAAP adjustment



(1.1)

%



(0.8)

%



(0.7)

%



(0.6)

%

Non-GAAP sales and marketing expenses



25.1

%



23.8

%



25.3

%



25.0

%























GAAP general and administrative expenses



21.2

%



17.3

%



19.7

%



17.5

%

          Non-GAAP adjustment



(7.2)

%



(5.3)

%



(6.2)

%



(5.0)

%

Non-GAAP general and administrative expenses



14.0

%



12.0

%



13.5

%



12.5

%























GAAP operating loss



(11.5)

%



(3.5)

%



(9.1)

%



(4.4)

%

          Non-GAAP adjustment



13.3

%



9.4

%



11.3

%



9.2

%

Non-GAAP operating income



1.8

%



5.9

%



2.2

%



4.8

%























GAAP net loss



(9.6)

%



(2.5)

%



(7.6)

%



(2.9)

%

          Non-GAAP adjustment



10.5

%



7.2

%



9.1

%



7.1

%

Non-GAAP net income



0.9

%



4.7

%



1.5

%



4.2

%

 

 


SECUREWORKS CORP.

Reconciliation of GAAP to Non-GAAP Financial Measures

(in millions, except per share data)

(unaudited)
























Three Months Ending




Fiscal Year Ending






January 28, 2022




January 28, 2022






Low End of

Guidance




High End of

Guidance




Low End of

Guidance




High End of

Guidance

GAAP and non-GAAP net revenue



$

128





$

130





$

535





$

537





















GAAP net loss



$

(20)





$

(19)





$

(51)





$

(50)



Amortization of intangibles



8





8





30





30



Stock-based compensation expense



10





10





33





33



Aggregate adjustment for income taxes



(4)





(4)





(14)





(14)



Non-GAAP net (loss)*



$

(8)





$

(6)





$

(2)





$

0





















GAAP net loss per share



$

(0.24)





$

(0.23)





$

(0.62)





$

(0.60)



Amortization of intangibles



0.09





0.09





0.36





0.36



Stock-based compensation expense



0.11





0.11





0.40





0.40



Aggregate adjustment for income taxes



(0.05)





(0.05)





(0.17)





(0.17)



Non-GAAP net (loss) per share*



$

(0.09)





$

(0.07)





$

(0.02)





$

0.00





















GAAP net loss











$

(51)





$

(50)



Interest and other, net











3





3



Income tax benefit











(14)





(14)



Depreciation and amortization











39





39



Stock-based compensation expense











33





33



Adjusted EBITDA*











$

9





$

11





















Other Items

















Effective tax rate















22

%

Weighted average shares outstanding (in millions)















82.9



Cash flow from operations











$8 to $10



Capital expenditures















$7 to $9




*   Sum of reconciling items may differ from total due to rounding of individual components

     Sum of  quarterly guidance may differ from full year guidance due to rounding

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