Q3 2020 Earnings Call
Good morning, and welcome to secure works third quarter fiscal 2020 financial results Conference call. Following prepared remarks, we'll come back a question answer session. If he had the questions. A depressed star then one I know telephone keypad at anytime during the presentation.
At this time, all participants I didn't listen only mode. We I would cost him his call life and if the Q works Investor Relations website, I'll say the completion of the call a recording of the call will be made available on a same site now all the tactical over to parity Mueller, Vice President and Chief Accounting Officer, you may begin.
Good morning, everyone and thank you for joining us today to review secure works financial results for the third quarter fiscal 2020. This call is being recorded.
This call is also being broadcast live over the Internet and can be accessed on the Investor Relations section of secure works website at investors Dot secure works Dot com.
The webcast will be archived at the same location for one year.
This morning's secure works issued a press release announcing results for its third quarter ended November Onest 2019, you can access this press release on the Investor Relations section of the secure works website.
During this call management will make forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
These forward looking statements include but are not limited to guidance with respect to GAAP and non-GAAP revenue and net loss per share as well as adjusted earnings before interest taxes depreciation and amortization.
Our forward looking statements involve risks and uncertainties that could cause actual results to differ materially from those anticipated by these statements.
You can find a description of these risks and uncertainties in this morning's earnings press release and the company's annual report on Form 10-K for the year ended February Onest 2019, which is also available on our Investor Relations website and on the Securities and exchange Commission's website.
All forward looking statements made on this call are based on assumptions that we believed to be reasonable as of this date December Fiveth 2019, we undertake no obligation to update our forward looking statements. After this call as a result of new information or future events.
Some of the financial measures, we use on this call or expressed on a non-GAAP basis. These non-GAAP measures exclude stock based compensation the impact of purchase accounting amortization of intangibles and the related tax effect of these items. We have provided reconciliations of the non-GAAP financial measures to GAAP financial measures in today's earnings press release.
This available on our website.
non-GAAP measures are not intended to be considered in isolation from a substitute for or superior to our GAAP results and we encourage you to consider all measures when analyzing secure works performance.
Also as a reminder, all financial information discussed is non-GAAP and growth rates are compared to the prior year periods unless otherwise stated.
With us on today's call, our Michael CODI, President and Chief Executive Officer of secure work and Wayne Jackson, Chief Financial Officer. Following their prepared remarks, we will take your questions. We would appreciate you limiting your initial questions to too. So that we may allow as many of you to ask questions as possible in our allotted time.
In the event you have additional questions that are not covered by others at please feel free to re queue and we will do our best to come back to you.
Thank you for your cooperation on this.
Now I'd like to turn the call over to Mr. Cody.
Thank you Terry and thank you everyone for joining us this morning for third quarter 2020 earnings call.
We had a very good third quarter, delivering strong financial results, including revenue of $141 million gross margin of 59.2% of revenue, which expanded over 300 basis points from last year.
Earnings per share of one cents.
EBITDA of $6 million and cash flow from operations of $23 million, all exceeding our expectations for the quarter, including our highest revenue and gross margin as a public company.
Additionally, our revenue retention rate was 99% and our average revenue per customer increased 8.5% from the prior year to $108000.
I'm very pleased with our financial results this quarter.
However, we still have work to do on the go to market front to accelerate our revenue growth rate.
The annual value of sales contracts or HCV closed during the quarter was less than our expectations and below last quarter.
The total value of the pipeline remained relatively flat in Q3, but the mix of opportunities in the pipeline is shifting toward our new software offerings.
The total number and dollar value of early stage opportunities in the pipeline for our software offerings is growing.
Although we are in the early stages and the numbers are not yet material I am optimistic about the traction and customer feedback on the TDR and MDR offerings.
We are seeing increasing momentum and the number of the number of deals closed.
We live in a world of accelerating digital transformation increasingly complex technology ecosystems, and a growing number of adversaries that take advantage of the fragmented approaches to security.
Two outpaced and outmaneuver. These adversaries, we're leveraging the combination of machine in human human intelligence combined with more than 20 years of threat intelligence and security operations expertise to rapidly detect and respond to the evolving threats facing our customers.
Our new security analytics platform lays the foundation for changing the way security is done.
Overtime, our new platform will enable our partners and customers to leverage the speed and scale of machine learning.
With crowd powered data and analytics to develop their own applications and detectors delivered through an open marketplace.
We took a significant step towards that vision, when we announced our first cloud native software as a service application on the new platform Red close threat detection and response or TDR.
The software is differentiated by a suite of machine learning deep learning and behavioral based detectors.
And our informed and in risk.
Intelligence and network effect.
TDR supports a variety of endpoint network and cloud based data sources as well as collaborative investigations and automated response actions.
Our recently announced manners detection and response offering leverages TDR and provide optional 24 by seven analysis.
The new platform enables us to decouple software from services and provides our customers with choice, making secure works World class security solutions more broadly accessible.
Feedback from a market for our new software offerings has been positive the pipe is growing and sales are accelerating.
Im proud of the stronger security position, we are providing for our customers.
Our new offerings are also a more natural fit with the Dell technologies sales team and with channel partners.
We are pleased with the momentum gained partnering with the global del Salesforce on the Dell safeguard and response portfolio.
Last month, our TDR offering was launched as part of an expanded del safeguard portfolio, adding the power of advanced security detection and response capability to dell's endpoint products.
TDR is now sold in concert with Vmwares carbon blacks endpoint and next generation Avi product.
And beginning today, our MDR offering is also available to del customers through the Dell safeguard and response portfolio.
In addition to our endpoint partnerships with crowd strike and carbon Black we partnered with Microsoft to extend our advanced detection and response capabilities by providing full landscape visibility to Microsoft advanced threat protection and office 365 customers via our TDR app, helping.
Them discover hard to detect threats without the need to deploy another agent.
We have made significant advancements with the development of our security analytics platform and successfully launched our first software application.
We view our investments in sales marketing and channel as critical to transform the scale and scale our go to market efforts for revenue growth acceleration.
To capitalize on the significant opportunity with Dell technologies and other strategic partners I'm excited to welcome Maureen primarily as our new Chief Channel Officer.
Maureen will take the lead with developing and expanding channel engagement strategy.
Closely aligning our product sales and marketing teams to ensure customer success with the right partners.
Maurice initial focus would be to build upon our recent success and further leverage the significant go to market opportunities across Dell technologies.
Ian Bancroft has led our sales team in EMEA for nearly four years.
He has built a great team and work closely with Dell technologies and other key partners to more than double our revenue in EMEA to over $100 million, representing a compound annual growth rate of approximately 30%.
And is assuming the important role as chief sales officer, leading our global sales organization.
His proven track record developing talent driving sales processes, leveraging the channel and strategic partners and building strong customer relationships will be keys to success in this role.
And Steve Harvey, our new Chief Marketing Officer will lead our global marketing strategy, including product marketing demand generation corporate communications and field marketing to support the direct sales organization and channel programs in a unified manner.
With and Maureen and Steve's leadership and focus on demand generation.
Optimistic we can drive more top of funnel activity enhancing sales productivity and new customer acquisition.
Finally, Paul parish will be joining us Monday, as our new Chief Financial Officer.
Paul brings more than 35 years of financial management experience, including significant software in industry experience I.
I look forward to partnering with Paul to drive the continued trends.
Yes.
And Maureen Paul and Steve All report directly to me.
I'm excited to have them as part of the leadership team and look forward to their impact helping to drive growth.
Our revenue gross margin expansion and operating cash flow, we're all strong in Q3.
As we finished the year, we remain laser focused on building on our progress to date.
I will now turn it over to waiting to talk about our third quarter performance in more detail Wayne.
Thanks, Mike and good morning, everyone.
We continue to maintain our strong financial position, while investing in our new security solutions and related go to market efforts.
In the third quarter, roughly 20 revenue of $141.3 million exceeded the top end of our guidance range represents a 6.2% increase over Q3 of why 19, and a 3.5% increase sequentially.
Gross margin as a percentage of revenue was 59.2% increasing from 56% in the prior year.
EBITDA was $5.8 million also ahead of our expectations driven by higher revenue and gross margins and we generated $22.6 million of cash flow from operations in the quarter, primarily on improved collections of accounts receivable.
We exited the quarter with annual recurring revenue of $442.8 million and we close 10 deals of the total contract value greater than $1 million in the third quarter.
Revenue from our managed security solutions, including increased revenue from the del City, Florida and response offerings grew 8.9% year over year and comprised 77.4% of total revenue.
Consulting revenue decreased slightly year over year as we focused our go to market efforts on our high value subscription and consulting offerings, such as incident response, and technical testing, which continued to be an important component of a comprehensive security solution for our customers.
Finally revenue outside the U.S. represent a 25% of total revenue in the third quarter up from 22% of revenue in Q3 last year on consists consistently strong growth in the UK middle East in Japan.
Gross margin totaled $83.7 million in the third quarter before 20 or 59.2% of revenue.
A 320 basis point increase from the prior year and 290 basis points from Q2.
The higher gross margin is primarily attributable to expanded MSS margin as we further leverage our delivery cost and to the contribution from growth in del safeguard revenue.
Third quarter operating expenses totaled $81.6 million compared with $69.4 million last year.
Research and development expenses totaled 16.3% of revenue in the quarter compared with 15.2% for Q3 of why 19, a 110 basis point year over year increase driven by incremental investments in our software App and platform development activities.
Sales and marketing expenses were approximately 28.3% of revenue in the third quarter compared with 25.5% for prior year Q3, driven primarily by sales costs associated with Dell safeguard and response offerings sold through our partnership with Dell that did not exist last time last year. This time.
General and administrative expenses totaled 13.1% of revenue in the third quarter compared with 11.1% for the same quarter last year.
Adjusted EBITDA in Q3 was $5.8 million compared with $8.6 million last year.
Regarding cash flow and balance sheet items as I mentioned cash flow provided by operating activities was $22.6 million in the third quarter and $35.9 million year to date compared with $26 million of cash provided by operating activities for the first nine months of last year.
DSO was 76 days at the end of Q3 down from 80 days at the end of Q2 and an improvement from 92 days into Q3 last year.
20, we expect both GAAP and non-GAAP revenue of $138 million to $140 million.
We expect non-GAAP net loss per share to be between breakeven and one cents.
For Fytwenty, we now expect the following.
GAAP and non-GAAP revenue to be between 549 and $551 million.
Adjusted EBITDA to be positive for the full year between 11 and $12 million.
non-GAAP net loss to be two to three cents per share.
GAAP net loss to be 45 to 46 cents per share.
For modeling purposes.
We estimate that the tax benefit rate will be approximately 30% for the full year.
Cash provided by operations to be between 45 and $50 million.
And capex to be $14 million to $16 million.
We are still in the planning process for F. Why 21. So it is premature to provide specific guidance at this time.
Qualitatively, though in the near term our revenue growth look is cautious.
Our revenue growth outlook is cautious.
However, as we execute on our security analytics platform as well as our go to market strategy. We should begin to see EMR and then revenue accelerate later this year.
I'll now return the call to Mike.
Thanks swing.
We forgot an exciting journey to transform the cyber security industry by delivering innovative software solutions to secure our customers.
I'm proud of our progress with launching our security analytics platform and software offerings and the traction gain in the marketplace.
Leveraging our powerful partnerships across the Dell technologies family.
And the new leadership and vision and our go to market strategy.
As we continue to execute in these areas I'm confident that will deliver increased value to our customers and accelerate our growth.
Finally, I would like to thank my secure teammates for their dedication to our customers.
On behalf of the entire secure works team. We appreciate your continued interest and support.
Operator, you can now open the lines for questions.
Thank you I will now open the call quick question PC have a question for us.
Juan on your telephone keypad.
As a courtesy to added Keith asks now more than two questions.
Your first question comes from the line of is trailing IP from JP Morgan you May ask your question.
Hi, guys. This is Matt on for Sterling. Thanks for taking my question.
I know in the press release and on the call you guys talked about TDR being sold with carbon black and you've been seeing dollar increasing their activity in the security space. Just wondering if you guys to comment on.
Really where as their focus in security and what additional programs do you see them emphasizing in 2020. Thanks.
So Matt this is Mike Cotoia. It yes, I think your question was if we could comment on dell's focusing security.
Correct will just given that the partnerships and the moves they've made in space. How do you guys kind of see them.
Working with you guys in the future.
Okay, I am I don't think I mean.
Let me comment on our relationship with the Dell technologies family and with the more carbon black specifically I'm not sure in a position to comment on delve overall strategy or security.
We've got a very good relationship with Vmware and carbon black our carbon black partnership goes back several years and our endpoint partnership program.
And as you can see in the announcement, we came out in this past quarter with a joint offering that has our TDR software combined with carbon blacks software as part of the Dell safeguard endpoint partner program.
And in the last we would expect that and are working with the Vmware carbon black team to continue to enhance the capabilities, we can bring to market.
And having said that though I would say that we secure works have been vendor inclusive for the last 20 years to allow us to work with the most effective and come up at the most effective security solutions with our customers installed base.
Of technology infrastructure. So we will continue to work with all of our security partners, including Vmware Dell carbon black crowd strike in the recently announced Microsoft across the various platforms that.
That customers have an infrastructure. So we're excited about about the the strategy that we're heading down and continuing to work with the Dell VM, where carbon black team.
To further and again that go to market team in a manner to further bring a consolidated stronger go to market position and solution security solution.
Great. That's very helpful. And then just one last question from from our side you guys talked about international revenue.
Commission strong this quarter is there any you guys seen any softness in any specific regions or any concerns from customers around the macro environment. Thanks.
Yes, Matt this is way up.
And our business no macro.
EMEA stills is still strong for us as indicated by the by the growth in international revenue.
So the answer is no.
Thank you that's very helpful.
Your next question comes from your line is Alex Henderson from need can you may ask your question.
Great. Just one quick clarification could you just give us from guidance on what the interest another line should be doing.
When negative after being positive guidance on that for the quarter.
Alex This is weighing all of that sort of fluctuation in FX.
And for US effect is primarily UK and certainly all of them, we have a primarily UK.
So the strength in the pound over the course of the quarter might actually help that number.
You're talking about going forward, great well given its already moved.
Two.
Hi, guys.
Yes. So Q3, obviously reflects the movement last quarter if it if it goes the other way it would help but but we try to not forecast that.
Okay, great. So the question I wanted to ask was really around Microsoft Sentinel.
The expanded your.
Your relationship with them, but they also clearly compete can you talk about.
Relative to Microsoft Central offering what your advantages are in.
How you parse between the two.
Customers.
Two companies.
Yes, so Alex I'm, not sure, where you're referring to the competitive nature of it but but we basically.
From our perspective look with the PDR application.
As an eight the Microsoft ATP agent to be a data source for us to help customers through the TDR application to be able to better detect and respond to things that they're seeing.
So we're not looking at this and I think you're referring to us potentially looking to sell the endpoint specifically itself. We're doing looking to do the cross correlation to get the visibility across the full customers environment.
And are able to do that with Microsoft ATP as as the preferred partner and then if I could ask one other question the crowd strike relationship.
See you tighten the relationship substantially with carbon black as a result.
Your parents owning both companies in this in essence.
Has that altered.
The degree to which you're.
Enabling people with the crowd Stryker ridden reduce the amount of business you're doing with cross strike I think Thats was a program that was just starting to really ramp up.
Well, we so.
Thanks appreciate the question this is Mike Cody.
We remain vendor inclusive looking for the market to determine which of the various point products. They want to use we're still working with crowd strike and continue to work with crowd strike as a as a partner and have an installed base, where we're taking the feeds off of the crowd strike and point and.
Including them in the holistic solution that we're providing for our customers as well as managing some of the crowd strike endpoints for those customers with regard to the Dell safeguard relationship the Dell safeguarding relationship was previously.
Used the crowds strike endpoint and has moved to the.
Carbon black endpoint and that it would impact us because of the partnership that we have in the Dell sales organization and the revenue that they're generating so that that traction we're getting with the Dell sales.
Team has gone well and we're continuing to see a lot of optimism in the growth that we'll see in that area.
I see thank you very helpful explanation.
Thank you.
Once again, if we do have a question press star one on your telephone keypad that style Wan to ask the question.
Your next question comes from the line of Brian FX from Goldman Sachs. Your line is open.
Hi, good morning, and thanks for taking the question.
Congrats on the results in the quarter I guess I was just wanted to ask about.
Marine and Steve joining the team.
Both in the channel is in a CMO, maybe if you could point to kind of any initial feedback from them in terms of their thoughts coming in with the fresh set of eyes, and maybe initiatives that they're going to be focused on and how we might anticipate those initiatives would impact the organization both on pipeline spending in any organiser.
Additional changes after there after the higher.
Brian This is Mike Thanks for the next to the question.
Ill try and answer it but I may not have picked up specifically on what you're asking so if I don't.
Molded, we'll give you a mulligan with follow up question.
I think I think as soon as you know we had.
Chief Marketing officer positioned open and look for a while season with US now I think two months roughly.
From from Steve's perspective.
He is very heavily focused on top of funnel activity and demand Jan.
Using.
The the.
More electronics demand gen activity and focusing across the spectrum of the various buyers in influences in the decision process to help enable sales to be much more effective. So he is begun to take steps down that path and I think is excited and optimistic.
About the opportunity to do some things on our branding in.
And repositioning from Achim, coming communication perspective, or comps perspective, and to focus on customer loyalty and beginning to get a customer advisory board and place and Ben.
Prioritizing that list of items.
From Maureen most sees a very big opportunity here her background.
This is working closely with.
And developing a channel within the MC organization and she's close with some of the leaders at the Dell technologies.
Ill team. So she sees a very big opportunity to leverage channel with our new product times offerings in particular to help working closely with our sales organization to increase the effectiveness and efficiency of that sales organization the core sales team.
Hey, Steven most of them to talk already about working in a more fulsome globe go to market team and product approach.
And im not going to give you the numbers, but I ask marine after about a week or two winters. What she thought three years from now would look like and and I was ups.
Pleasantly pleased.
Okay and any maybe this is a quick follow up for either of them as this plug and play within Ics within an existing team do you anticipate any structural changes and others do they do they have a view in terms of any change to the organizational structure of the teams that they work with or is this just.
Complementary.
Initiatives on their behalf.
We have the leadership team on a go to market perspective in place today. They both have relatively small teams and you should expect to see increased investments.
Or I've talked to them about increased investments in both the channel and from a sales and marketing perspective, we'll find leverage to do that elsewhere in the organization, but I would expect them to to continue to.
Invest hopefully in the near term to to drive results quickly from a top of funnel and channel perspective.
All right that's super helpful. Thank you very much.
Your next question comes from the line of Saket Kalia from Barclays. Your line is open.
Hey, Mike key Wayne Thanks for taking the questions here.
Warn you talking first for you Hey morning.
Maybe for you just just a question on the core MSS business I think you set the pipeline was roughly flat compared to last quarter, maybe the knicks as maybe trending towards more your software products like TDR. For example, so can you just talked about maybe what's happening with the core MSS pipeline.
Just just generally are you seeing any difference in competitive landscape. There you see any difference and.
Customers appetite for managed services anything on core MSS would be helpful.
Yes, I don't socket. Thanks to the question I would tell you that from a from a core MSS perspective, and I've been saying this for a while now.
I think the market is I think the internet the cyber security market overall is beginning to become more sophisticated.
And more knowledge more I think thats starting with.
Boards in C suites, we're doing a fair amount of.
Learning lessons and learning sessions, where we're spending a couple of hours either in our office or quite frankly, a board meetings of customers more prospects.
As an increasing desire to understand security at a deeper level and to begin to understand how do we do a better job as an industry. Overall, so I think in the if I take that down to the MSS business. We have made a concerted effort and the last 18 months.
And we'll continue to do so to focus on the higher value side of.
Quote managed security services, but doing that through a software enabled manner with the news platform, we've developed and with our first apt TDR with others to come.
So when I think about the core managed security service businesses. My hope is in desire that we completely transforming change that in the way people are doing it from a value proposition and a perspective too.
Because the reality of this is what we want to do is help them put.
Led automate all that we can or.
Dell has talked about the intrinsic security aspect of it build as much in the systems as we can but with that theres still going to be in need and the desire.
To detect those hard to detect insider threats for example.
Things that happen and respond rapidly being able to predict where the threat actors are going next to build more in so that you are scarce security resources can focus on what really matters.
So weve begun to focus more on from a sales perspective on our IR offerings and the.
Offerings across MSS, and Src that are close more closely tied to providing the value to that our customers that matter.
So from a from a direct MSS perspective in the market itself I think we're not seeing a lot of changes other than an increase continued increased focus and desire on looking for response in automation capabilities and customers are prospects trying to make sure that they're focusing their their employees.
On what really matters in the high value of fighting the threat actors in the most effective manner.
That makes a lot of sense, Mike Thanks, Hey, Wayne maybe for my follow up for you.
Really nice.
Increase on EBITDA and cash flow for the year can you just can you just talked about maybe the two or three biggest drivers for that because then you ended your prepared commentary about talking.
Around maybe maybe some near term caution around the revenue outlook. So is the EBITDA and cash flow sort of raise coming from better expense control or any other factors that.
Dealer are contributing disproportionately that increase in profitability.
So let's talk about EBITDA first the primary driver of EBITDA was was higher revenue and higher margin.
Yes, there at the same time time as we as we looked at the year and we revised the revenue outlook a couple of quarters ago. We did look at spend we spent in the areas that we believe were strategic and and needed to be focused on immune.
And then those that we could delay a quarter two we did but not a lot of deferred maintenance socket in the PML cash flow, it's primarily dsos assist again, leveraging some things we put in place two years ago and continue to drive the DSO.
If I May let me, let me talk to my definition, a cautious because because I think I don't want to and want to be too alarmed I'll just to find that we have visibility the lower of as Mike touched on in his prepared remarks.
Lower trends in HCV.
In in the third quarter, it really impacts the first half of the year. So the caution is really around the first half of the year. We're very excited about all the solutions. We're rolling out we're excited about the new management team might put in place.
The bill safeguard TDR portfolio.
Some of that's going to pivot from.
Different timing from a revenue recognition perspective around TDR in carbon black versus the cross strike.
Program, we had in place. So you factor all that in the focus of the cautious caution is really on the first half of the year, but we're very excited as all of these programs gain momentum about the second half of the year.
Yeah.
Got it thanks that clarification Lynn.
You're welcome.
Your next question comes from the line of Greg how Thats from Stifel.
Good question.
Hi, This is actually Chris bureaus on for Gore.
For Mike you spoke to success of the dental save core offering during the quarter.
Can you detail what about the offering is beginning to really resonating with customers.
So Chris let me make sure I guess I heard your question correctly was basically in the Dell safeguard momentum.
What about the offering is it that is resonating with the customers.
Yes.
Yes, okay.
I think I think the for the full some opportunity to have the security bundled directly with the Dell offering on the box and the attractiveness of having any.
A one stop shop to order it and what you're buying in this case is basically both prevention and detection and response capabilities.
And as we mentioned, we've announced or recently added MDR on top of it. So you can have man's detection and response.
And I think we the scale of the Dell sales team and the breadth of the opportunity. There is very large and we sort of just scratched the surface spent.
The first couple of quarters of this years, we've got this up and running.
Laying the groundwork in working through how to get some momentum in I think under most leadership and the expansion we're going to make in some of our investments to draw a poster there there should be increased opportunities there over time as well.
So from a cousin, Justin just I want to long distance from a customer perspective, just specific to answer your question, it's being able to get prevention detection and response altogether.
In a one stop shop bundled up front, when they're ordering their endpoints devices.
Okay that makes it sounds and.
One more free if M&A can you talk about the opportunity for TDR as it relates to the announced partnership with Microsoft.
Sure. So I think from from a more broadly perspective, I think TDR fits well into the channel.
And what we because it's a packaged software offering that that customers can basically have an opportunity to use as a software.
Getting support from us the.
An online chat feature or have us have the opportunity to management with respect specifically to Microsoft.
Microsoft's we have the ability to tie in now to Microsoft's endpoint agent ATP, So there'll be no incremental agent deployed.
And what it will provide the sensing capabilities are the sense capability to send the data to us and allow us to do if you will what we call sense, making or the detection and prevention capabilities in response using Microsoft ATP.
Great. Thanks, guys.
Sorry, if I had a question at this time with centers you may continue.
Thank you again for joining us on today's call and for all your questions. We appreciate your support and look forward to our fourth quarter call in mid March if we did not get your questions on the kinase Texans into not hesitate to reach out to us for follow up.
Thanks very much.
Ladies and gentlemen that concludes today's conference call can you may all disconnect at this time.
Thanks.
Good morning, and welcome to secure works third quarter fiscal 2020 financial results Conference call. Following prepared remarks, well, we'll come back a question answer session. If we had a question. The press Star then one I know telephone keypad anytime during <unk>.
Sensation at this time, all participants I didn't listen only mode. We I would cost in this call life why they secure works Investor Relations website.
Because they shut off the call a recording of the call will be made available on a same site now all the tied to go over to parity, neither vice President and Chief Accounting Officer, you may begin.
Good morning, everyone and thank you for joining us today to review secure works financial results for the third quarter fiscal 2020. This call is being recorded.
This call is also being broadcast live over the Internet and can be accessed on the Investor Relations section of secure works website investors thought secure works dot com.
The webcast will be archived at the same location for one year.
This morning's secure works issued a press release announcing results for its third quarter ended November 1st 2019, you can access this press release on the Investor Relations section of the secure works website.
During this call management will make forward looking statements within the meaning of the private Securities Litigation Reform Act up 1995.
These forward looking statements include but are not limited to guidance with respect to GAAP and non-GAAP revenue and net loss per share as well as adjusted earnings before interest taxes depreciation and amortization.
Our forward looking statements involve risks and uncertainties that could cause actual results to differ materially from those anticipated by these statements.
You can find a description of these risks and uncertainties in this morning's earnings press release and the company's annual report on Form 10-K for the year ended February Onest 2019, which is also available on our Investor Relations website and on the Securities and exchange Commission's website.
All forward looking statements made on this call are based on assumptions that we believed to be reasonable as of this state December Fiveth 2019, we undertake no obligation to update our forward looking statements. After this call as a result of new information or future events.
Some of the financial measures, we use on this call or expressed on a non-GAAP basis. These non-GAAP measures exclude stock based compensation the impact of purchase accounting amortization of intangibles and the related tax effect of these items.
We have provided reconciliations of non-GAAP financial measures to GAAP financial measures in today's earnings press release available on our website.
non-GAAP measures are not intended to be considered in isolation from a substitute for or superior to our GAAP result, and we encourage you to consider all measures when analyzing secure works performance.
Also as a reminder, all financial information discussed is non-GAAP and growth rates are compared to the prior year period, unless otherwise stated.
With us on today's call or Michael CODI, President and Chief Executive Officer, a secure work and Wayne Jackson Chief Financial Officer.
Following their prepared remarks, we will take your questions. We would appreciate your limiting your initial questions to too. So that we may allow as many of you to ask questions as possible in our allotted time.
Any event you have additional questions that are not covered by others. Please feel free to re queue and we'll do our best to come back to you.
Thank you for your cooperation on this.
Now I'd like to turn the call over to Mr. Cody.
You Terry and thank you everyone for joining us this morning for our third quarter 2020 earnings call.
We had a very good third quarter, delivering strong financial results, including revenue of $141 million gross margin of 59.2% of revenue, which expanded over 300 basis points from last year earnings per share of one cents.
EBITDA of $6 million and cash flow from operations of $23 million, all exceeding our expectations for the quarter.
Putting our highest revenue and gross margin as a public company.
Additionally, our revenue retention rate was 99% and our average revenue per customer increased 8.5% from the prior year to $108000.
I'm very pleased with our financial results this quarter.
However, we still have work to do on the go to market front to accelerate our revenue growth rate.
The annual value of sales contracts or ACB closed during the quarter was less than our expectations and below last quarter.
But total value of the pipeline remained relatively flat in Q3, but the mix of opportunities in the pipeline is shifting toward our new software offerings.
And the total number and dollar value of early stage opportunities in the pipeline for our software offerings is growing.
Although we are in the early stages and the numbers are not yet material I am optimistic about the traction and customer feedback on the TDR and MDR offerings.
We are seeing increasing momentum and enough of a number of deals closed.
We live in a world of accelerating digital transformation increasingly complex technology ecosystems, and a growing number of adversary that take advantage of the fragmented approaches to security.
To outpace announced maneuver. These adversaries, we are leveraging the combination of machine and human human intelligence.
Bind with more than 20 years of threat intelligence and security operations expertise.
Rapidly detect and respond to the evolving threats facing our customers.
Our new security analytics platform lays the foundation for changing the way security is done.
Overtime, our new platform will enable our partners and customers to leverage the speed and scale of machine learning.
With crowd powered data and analytics.
Develop their own applications and detectors delivered through an open marketplace.
We took a significant step towards that vision, when we announced our first cloud native software as a service application on the new platform Red club threat detection and response or TDR.
The software is differentiated by a suite of machine learning deep learning and behavioral based detectors.
And our informed and in risk.
Intelligence and network effect.
TDR supports a variety of endpoint network and cloud based data sources as well as collaborative investigations and automated response actions.
Our recently announced managed detection and response offering leverages TDR and provide optional 24 by seven analysis.
The new platform enables us to decouple software from services and provides our customers with choice, making secure works World class security solutions more broadly accessible.
Feedback from a market for our new software offerings has been positive the pipe is growing and sales are accelerating.
Im proud of the stronger security position, we're providing for our customers.
Our new offerings are also a more natural fit with the Dell technologies sales team and with channel partners.
We are pleased with the momentum gained partnering with the global Bell Salesforce on the Dell safeguarding response portfolio.
Last month, our TDR offering was launched as part of an expanded Dell safeguard portfolio, adding the power of advanced security detection and response capability to delve endpoint products.
TDR is now sold in concert with Vmwares carbon blacks endpoint and next generation Avi product.
And beginning today, our MDR offering is also available so del customers through the Dell safe guarding response portfolio.
In addition to our endpoint partnerships with craft strike and carbon Black we've partnered with Microsoft to extend our advanced detection and response capabilities by providing full landscape visibility to Microsoft advanced threat protection and office 365 customers via our TDR App help.
Thing them discover hard to detect threats without the need to deploy another agent.
We've made significant advancements with the development of our security analytics platform and successfully launched our first software application.
We view our investments in sales marketing and channel as critical to transform the scale and scale. Our go to market efforts from revenue growth acceleration.
To capitalize on the significant opportunity with Dell technologies and other strategic partners I'm excited to welcome Marine Ferrelli as our new Chief Channel Officer.
Maureen will take the lead with developing and expanding channel engagement strategy.
Closely aligning our product sales and marketing teams to ensure customer success with the right partners.
Maurice initial focus would be to build upon our recent success and further leverage the significant go to market opportunities across Dell technologies.
Ian bankrupt has led our sales team in EMEA for nearly four years.
He has built a great team and work closely with Dell technologies and other key partners to more than double our revenue in EMEA to over $100 million, representing a compound annual growth rate of approximately 30%.
And is assuming the important role as chief sales officer, leading our global sales organization.
His proven track record developing talent driving sales processes, leveraging the channel and strategic partners and building strong customer relationships will be keys to success in this role.
And Steve Hardy, our new Chief Marketing Officer will lead our global marketing strategy, including product marketing demand generation corporate communications and field marketing to support the direct sales organization and channel programs and a unified manner.
With and Maureen and Steve's leadership and focus on demand generation.
Optimistic we can drive more top of funnel activity enhancing sales productivity and new customer acquisition.
Finally, Paul Paris will be joining us Monday, as our new Chief Financial Officer.
Paul brings more than 35 years of financial management experience, including significant software in industry experience I.
I look forward to partnering with Paul to drive the continued trends.
Yes.
And Maureen Paul and Steve All report directly to me.
I'm excited to have them as part of the leadership team and look forward to their impact helping to drive growth.
Our revenue.
Gross margin expansion and operating cash flow, we're all strong in Q3.
As we finished the year, we remain laser focused on building on our progress to date.
I will now turn it over to wane to talk about our third quarter performance in more detail Wayne.
Thanks, Mike and good morning, everyone.
We continue to maintain our strong financial position, while investing in our new security solutions and related go to market efforts.
In the third quarter, roughly 20 revenue of $141.3 million exceeded the top end of our guidance range represents a 6.2% increase over Q3 at why 19, and a 3.5% increase sequentially.
Gross margin as a percentage of revenue was 59.2% increasing from 56% in the prior year.
EBITDA was $5.8 million also ahead of our expectations driven by higher revenue and gross margins and we generated $22.6 million of cash flow from operations in the quarter, primarily on improved collections of accounts receivable.
We exited the quarter with annual recurring revenue of $442.8 million and we close 10 deals or the total contract value greater than 1 million in the third quarter.
Revenue from our managed security solutions, including increased revenue from the Bill safeguard and response offerings grew 8.9% year over year and comprised 77.4% of total revenue.
Consulting revenue decreased slightly year over year as we focused our go to market efforts on our high value subscription and consulting offerings, such as incident response, and technical testing, which continue to be an important component of a comprehensive security solution for our customers.
Finally revenue outside the U.S. represent a 25% of total revenue in the third quarter up from 22% of revenue in Q3 last year. While consists consistently strong growth in the UK middle East and Japan.
Gross margin totaled $83.7 million in the third quarter before 20 or 59.2% of revenue.
Athree hundred 20 basis point increase from the prior year and 290 basis points from Q2.
The higher gross margin is primarily attributable to expanded MSS margin as we further leverage our delivery cost and to the contribution from growth in del safeguard revenue.
Third quarter operating expenses totaled $81.6 million compared with $69.4 million last year.
Research and development expenses totaled 16.3% of revenue in the quarter compared with 15.2% for Q3, FY 19, 810 basis point year over year increase driven by incremental investments in our software App and platform development activities.
Sales and marketing expenses were approximately 28.3% of revenue in the third quarter compared with 25.5% for prior year Q3, driven primarily by sales cost associated with Bill safeguard and response offerings sold through our partnership with Dell that did not exist last time last year. This time.
General and administrative expenses totaled 13.1% of revenue in the third quarter compared with 11.1% for the same quarter last year.
Adjusted EBITDA in Q3 was $5.8 million compared with $8.6 million last year.
Regarding cash flow and balance sheet items as I mentioned cash flow provided by operating activities was $22.6 million in the third quarter and $35.9 million year to date compared with $26 million of cash provided by operating activities for the first nine months of last year.
The DSO was 76 days at the end of Q3 down from 80 days at the end of Q2 and an improvement from 92 days into Q3 last year.
We finished the quarter with cash of $138.8 million, which increased from $115.8 million at in the third quarter last year and $117.7 million at end of Q2 of this year.
Capex was $1.4 million for the quarter for the third quarter.
Now for guidance.
In the fourth quarter verify 20, we expect both GAAP and non-GAAP revenue of $138 million to $140 million.
We expect non-GAAP net loss per share to be between breakeven and one cents.
For F. Why 28, we now expect the following.
GAAP and non-GAAP revenue to be between 549 and $551 million.
Adjusted EBITDA to be positive for the full year between 11 and $12 million.
non-GAAP net loss to be two to three cents per share.
GAAP net loss to be 45 to 46 cents per share.
For modeling purposes.
We estimate that the tax benefit ray will be approximately 30% for the full year.
Cash provided by operations to be between 45 and $50 million.
And capex to be $14 million to $16 million.
We are still in the planning process for F. Why 21. So it is premature to provide specific guidance at this time.
Qualitatively, though in the near term our revenue growth look is cautious.
Our revenue growth outlook is cautious.
However, as we execute on our security analytics platform as well as our go to market strategy. We should begin to see EMR and then revenue accelerate later this year.
I'll now return the call to Mike.
Thanks Wayne.
We forgot an exciting journey to transform the cyber security industry by delivering innovative software solutions to secure our customers.
I'm proud of our progress with launching our security analytics platform and software offerings and the traction gain in the marketplace.
Leveraging our powerful partnership across the Dell technologies family.
And the new leadership and vision and our go to market strategies.
As we continue to execute in these areas Im confident that will deliver increased value to our customers and accelerate our growth.
Finally, I would like to thank my secure teammates for their dedication to our customers.
On behalf of the entire secure extreme we appreciate your continued interest and support.
Operator, you can now open the lines for questions.
Thank you I will now open the call for questions PC have a question Brad Star then one on your telephone keypad.
As a courtesy to address these assets no more than two question.
Your first question comes from the line of Sterling Auty from JP Morgan you May ask your question.
Hi, guys. This is Matt I'm sure Sterling Thanks for taking my question.
I know in the press release and on the call you guys talked about TDR being sold with carbon black and we've been seeing dollars increasing.
Our activity in the security space just wondering if you guys can comment on.
Really where as their focus in security and what additional programs do you see them emphasizing in 2020. Thanks.
So Matt this is Mike Cotoia.
Thank you. Your question was if we could comment on dell's focusing security.
Correct, we'll just given the partnerships and the moves they've made in space, how do you guys kind of see them.
Working with you guys in the future.
Okay, I I don't think I.
Let me comment on our relationship with the Dell technologies family and with the more carbon black specifically I'm not sure in a position to comment on dell's overall strategy or security.
We've got a very good relationship with Vmware and carbon black our carbon black partnership goes back several years in our endpoint partnership program.
And as you can say in the announcement, we came out in this past quarter with a joint offering that has our TDR software combined with carbon blacks software as part of the Dell safeguard endpoint partner program.
And in the last we would expect that and are working with the Vmware carbon black team to continue to enhance the capabilities, we can bring to market.
And having said that though I would say that we secure works has been vendor inclusive for the last 20 years to allow us to work with the most effective and come up at the most effective security solutions with our customers installed base.
Of technology infrastructure. So we will continue to work with all of our security partners, including Vmware Dell carbon Black Crown strike in the recently announced Microsoft across the various platforms that.
That customers have an infrastructure. So we're excited about about the strategy that we're heading down and continuing to work with the Dell Vmware carbon black team.
To further and again the go to market team in a manner to further bring a consolidated stronger go to market position and solution security solution.
Great. That's very helpful. And then just one last question from from our side you guys talked about international revenue.
Coming in strong this quarter is there any have you guys seen any softness in any specific regions or any concerns from customers around the macro environment. Thanks.
Yes, Matt this is way.
And our business no macro.
EMEA stills is still strong for us as indicated by the by the growth in international revenue.
So the answer is no.
Thank you Thats very helpful.
Your next question comes from your line is Alex Henderson from need had you may ask your question.
Great just one quick clarification could you just give us some guidance on what the interest another line should be doing.
When negative after being positive can you give guidance on that for the.
Quarter.
Alex This is why all of that sort of fluctuation in FX and for US effect is primarily UK and certainly all of EMEA, but primarily UK.
So the strength in the pound over the course of the quarter might actually help that number.
You're talking about going forward right well given its already moved.
Two.
Hi, guys.
Yes. So Q3, obviously reflects the movement last quarter, if it goes the other way it would help but but we try to forecast that.
Okay, great. So the question I wanted to ask was really around Microsoft Sentinel.
The expanded your.
We are relationship with them, but they also clearly compete can you talk about.
Relative to Microsoft signal offering what your advantages are in.
How you parse between the two.
Customers.
Two companies.
Yes, so Alex I'm, not sure where you're referring to the competitive nature of it but we basically.
From our perspective look with the PDR application.
As eight the Microsoft ATP agent to be a data source for us to help customers through that TDR application to be able to better detect in response to things that they're seeing.
So.
We're not looking at this and I think you're referring to us potentially looking to sell the endpoint specifically itself. We're doing looking to do the cross correlation to get the visibility across a full customers environment and are able to do that with Microsoft HCP as as the preferred partner.
And then if I could ask one other question.
That strike relationship obviously tighten the relationship substantially with carbon black as a result.
Your parents owning both companies in this in essence.
Has that altered.
The degree to which you're.
Enabling people with the crowd strike or reduce the amount of business you're doing with crowd strike I think thats was a program that was just starting to really ramp up.
Well, we so.
Thanks appreciate the question this is Mike Cody.
We remain vendor inclusive looking for the market to determine which of the various point products. They want to use we're still working with crowd striking continue to work with crowd strike as a as a partner and have installed base, where we're taking the feeds off of the crowd strike.
Endpoint and including them in the holistic solution that we are providing for our customers as well as managing some of the crowds strike endpoints for those customers.
With regard to the Dell safeguard relationship the Dell safeguarding relationship was previously.
Used the crowds strike endpoint and has moved to the.
Carbon black endpoint and that it would impact us because of the partnership that we have in the Dell sales organization and the revenue that they're generating so that that traction we're getting with the Dell sales.
Team has gone well and we're continuing to see a lot of optimism in the growth that we'll see in that area.
I see thank you very helpful explanation.
Thank you.
Once again, if we do have a question Brad thought Juan.
The phone keypad that style wanting to ask the question.
Your next question comes from the line of Brian FX from Goldman Sachs. Your line is open.
Hi, good morning, and thanks for taking the question.
Congrats on the results in the quarter I guess I was just wanted to ask about.
Marine and Steve joining the team.
Both in the channel is and as CMO, maybe if you could point to kind of any initial feedback from them in terms of their thoughts coming in with the fresh set of eyes, and maybe initiatives that they're going to be focused on how we might anticipate those initiatives within pack the organization both on pipeline spending in any organization.
Changes after there after your higher.
Brian This is Mike thanks for the thanks for the question.
I'll try and answer it but I may not have picked up specifically on what you're asking so if I don't.
Well that will give you a mulligan with follow up question.
I think I think as soon as you know we had.
Chief Marketing officer physician open and look for a while season with US now I think two months roughly.
From from Steve perspective.
He is very heavily focused on top of funnel activity and demand Jan.
Using.
The the.
More electronics demand gen activity and focusing across the spectrum of the various buyers in influences in the decision process to help enable sales to be much more effective. So he is begun to take steps down that path and I think is excited enough.
Optimistic about the opportunity to do some things on our branding and.
And repositioning from acute communication perspective, or comps perspective, and to focus on customer loyalty and beginning to get a customer advisory board in place and Ben.
Prioritizing that list of items.
From Maureen most sees a very big opportunity to hear her background.
This is working closely with.
And developing a channel within the MC organization and she's close with some of the leaders at the Dell technologies.
Ill team. So she sees a very big opportunity to leverage channel with our new product ties offerings in particular to help working closely with our sales organization to increase the effectiveness and efficiency of that sales organization the core sales team.
Hey, Steven most of them to talk already about working in a more fulsome globe go to market team and product approach.
And im not going to give you the numbers, but I ask marine after about a week or two winters. What she thought three years from now would look like and and I was ups.
Pleasantly pleased.
Okay and any.
Maybe this is a quick follow up for either of them as this plug and play within within an existing team do you anticipate any structural changes and others do they do they have a view in terms of any change to the organizational structure of the teams as they work with or is this just complementary.
Initiatives on their behalf.
I.
We have the leadership team on a go to market perspective in place today. They both have relatively small teams and you should expect to see increased investments or I've talked to them about increased investments in both the channel and from a sales and marketing perspective, we'll find leverage to.
Do that elsewhere in the organization, but I would expect them to to continue to.
Invest hopefully in the near term to to drive results quickly from a top of funnel and channel perspective.
Alright, Thats Super helpful. Thank you very much.
Your next question comes from the line of Saket Kalia from Barclays. Your line is open.
Hey, Mike key Wayne Thanks for taking the questions here Morningstar covers for you Hey morning.
Mike maybe for you just just a question in the core MSS business I think you set the pipeline was roughly flat compared to last quarter, maybe the mix as maybe trending towards more your software products like TDR. For example, so can you just talked about maybe what's happening with the core MSS pipeline.
Just just generally are you seeing any difference in competitive landscape. There you see any difference and.
Customers appetite for managed services anything on core MSS would be helpful.
Yes, I don't Soc and thanks for the question I would tell you that.
From a from a core MSS perspective, and I've been saying this for a while now.
I think the market is.
I think the internet the cyber security market overall is beginning to become more sophisticated.
And more knowledgeable and I think thats starting with.
More than C suites, which are doing a fair amount of.
Learning lessons and learning sessions, where we're spending a couple of hours either in our office or quite frankly, a board meetings of customers or prospects.
As an increasing desire to understand security at a deeper level and to begin to understand how do we do a better job as an industry overall.
So I think in the if I take that down to the MSS business. We have made a concerted effort and the last 18 months and we'll continue to do so to focus on the higher value side of.
Quote managed security services, but doing that through a software enables manner with the news platform, we've developed and with our first apt TDR with others to come.
So when I think about the core managed security service businesses. My hope is and desire that we completely transforming change that in the way people are doing it from a value proposition and a perspective too.
Because of the reality of this is what we want to do is help them.
Let automate all that we can or.
As Dell has talked about the intrinsic security aspect of it build as much in the systems as we can but with that theres still going to be in need and the desire.
To detect those hard to detect insider threats for example.
Things that happen and respond rapidly being able to predict where the threat actors are going next to build more end. So that you are scarce security resources can focus on what really matters.
So we began to focus more on from a sales perspective on our IR offerings and the.
Offerings across Smss, and Src that are close more closely tied to providing the value to our customers that matter.
So from a from a direct MSS perspective in the market itself I think we're not seeing a lot of changes other than an increase continued increase focus and desire on looking for response and automation capabilities and customers are process trying to make sure that they're focusing their their employees.
On what really matters in the high value of fighting the threat actors in the most effective manner.
That makes a lot of sense, Mike Thanks, Hey, Wayne maybe for my follow up for you.
Really nice.
Increase on EBITDA and cash flow for the year can you just can you just talked about maybe the two or three biggest drivers for that because then you ended your prepared commentary about talking.
Around maybe maybe some near term caution around the revenue outlook. So is the EBITDA and cash flow sort of raise coming from better expense control or any other factors that.
Dealer are contributing disproportionately that increase in profitability.
So let's talk about EBITDA first the primary driver of EBITDA was was higher revenue and higher margin.
Yes, there at the same time time as we as we looked at the year and.
We revised the revenue outlook a couple of quarters ago. We do look at spin we spent in the areas that we believe were strategic and and needed to be focused on immediately and then those that we could delay a quarter. Two we did but not a lot of deferred maintenance socket and the PML cash.
Flow, it's primarily Dsos, it's just again leveraging some things we put in place two years ago and continued to drive the DSO.
If I May let me, let me talk to my definition, a cautious because because I think I don't want to and want to be too alarmed I'll just define it we have visibility to lower as Mike touched on in his prepared remarks.
Lower trends in HCV.
In in the third quarter, it really impacts the first half of the year. So the caution is really around the first half of the year. We're very excited about all the solutions. We're rolling out we're excited about the new management team Mike put in place.
The bill safeguard TDR portfolio.
Some of that's going to pivot from different timing from a revenue recognition perspective around TDR carbon black versus the cross strike.
Program, we had in place. So you factor all that in the focus of the cautious caution is really on the first half of the year, but we're very excited as all of these programs gain momentum about the second half of the year.
Got it thanks that clarification Lynn.
Welcome.
Your next question comes from the line of Gur Talpaz from Stifel.
Ask your question.
Hi, This is actually Chris bureaus on for Gore.
For Mike you spoke to the success of the Delta save core offering during the quarter.
Can you detail what about the offering is beginning to really resonate with customers.
So Chris let me make sure I heard your question correctly was basically in the Dell safeguard momentum.
What about the offering is it that is resonating with the customers.
Yes.
Yes, okay.
I think I think the the folsom opportunity to have the security bundled directly with the Dell offering on the box and the attractiveness of having a.
A one stop shop to order is and what you're buying in this case is basically both prevention and detection and response capabilities.
And as we mentioned we've announced our recently added MDR on top of it. So you can have man's detection and response.
And I think we the scale of the Dell sales team and the breadth of the opportunity. There is very large and we sort of just scratched. The surface spent the first couple of quarters of this years, we've got this up and running.
Laying the groundwork in working through how to get some momentum and I think under most leadership and the expansion we're going to make in some of our investments to draw a poster there there should be increased opportunities there overtime as well.
So from a capex just just I want to long distance from a customer perspective, just specific to your question, it's being able to get prevention detection and response altogether.
In a one stop shop bundled up front, when they're ordering their endpoints devices.
Okay.
That makes it sounds and.
One more for use on M&A can you talk about the opportunity for TDR as it relates to the analysis partnership with Microsoft.
Sure. So I from from a more broadly perspective, I think TDR fits well into the channel.
And well, we because it's a packaged software offering that that customers can basically have an opportunity to use as a software.
Getting support from us the.
An online chat feature or have us have the opportunity to management with respect specifically to Microsoft.
Microsoft's we have the ability and tie in now to Microsoft's endpoint agents ATP, so there'll be no incremental agent deployed.
And it will provide the sensing capability or the sense capability to send the data to us and allow us to do if you will what we call sense, making or the detection and prevention capabilities in response using Microsoft ATP.
Great. Thanks, guys.
So no further questions at this time with center you May continue.
Thank you again for joining us on today's call and for all your questions. We appreciate your support and look forward to our fourth quarter call in mid March if we did not get your questions. I think you in apex and they do not hesitate to reach out to us for follow up.
Thanks very much.
Ladies and gentlemen that concludes today's conference call you may all disconnect at this time.