Q4 2020 Earnings Call

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At this time, all parties, if I'm, sorry to listen only mode.

We are webcasting this call liveliness securities.

Investor Relations website. After the completion of the call a recording of the call will be made available on the same site.

At the conclusion of the company's prepared remarks, there will not be alive do you any session.

I'll now turn the call over to Ballparkish Chief Financial Officer.

He became.

Thanks, everyone for joining us with me today is our CEO Mike Jody.

During this call, we will reference non-GAAP financial measures, including non-GAAP revenue gross margin.

Operating expenses operating income.

Net income.

Yes, you at all.

Adjusted EBITDA and adjusted free cash flow.

A reconciliation of these measures to their most directly comparable GAAP measures can be filed a web deck and press release.

Please also note that all growth percentages for two year over year change unless otherwise specified.

Finally, I'd like to remind you that all statements made during this call that relate to future results in a bad or forward looking statements based on current expectations.

The results of events could differ materially from those projected due to a number of risk and uncertainties, which are discussed in this mornings press release and our FTC reports now I'll turn it over to Mike.

Thanks, Paul before we get started I want to take a moment and it's part of the personal thought I know, it's unusual for earnings call, but we're in unusual and Unprecedent time in a world history right now.

I'd like to extend my priority and heartfelt best wishes to those around the world who are dealing with the coated 19 crisis I know many people are experiencing illness in law and our thoughts in sympathy go out them all as the CEO of a global Security Company protection is always at the top of my mind, whether that's protection of data.

For our customers for our team.

We are global company and our teammates partners customers family and friends worldwide are being impacted in many ways. There is and will continue to be a business impact felt globally, but I believe the unit there to strong and we will come out of the tasked with new insights new strength and a stronger can.

The energy for all now I'd like to transition and talk about the care works, our transformation and our plans for the year ahead. This time last year I laid out secure works vision for changing the security industry and our role there in.

I'm pleased to provide an update on our traction on todays call more recently I talked about three areas, where I felt our teacher it was bright.

First the release of our fast based product led quote threat detection and response or TDR and our managed detection response or MDR surface wrapper.

Second the way our new offerings are more natural fit with the Dell technologies sales team and with channel partners.

And finally, I introduced new leadership team mates and Bancroft, our Chief sales Officer, Steve Harvey, Our Chief Marketing Officer, Marine Perrelli, Our Chief Financial Officer, and Paul Parish, our Chief Financial Officer.

Now, let's talk about the secure looks advantage.

Closing of data devices and kind of activity is expanding the attack surface at secure works. We believe in a collaborative approach to cyber security informed by the sharing of analytics data intelligence.

Coupled with industry, leading technology.

This collaboration drives us to innovate and create new technologies that are simpler faster and more capable all of this drives long term value for our customers with unique approach designed to be consume the way customers want based on their business need.

You can do this because we're a security company, bringing solutions to market to software not the other way around and after more than two decade, continuing to be a trailblazer and this ever changing industry is more important to our customers.

Our purpose is to secure human progress by outpacing and out maneuvering. The adversaries, we believe our industry leading model will define the future of security we live our vision by addressing customers mission critical security challenges challenge number one the game is continually changing the number and statistic.

Patient of adversaries and the number of successful exports is not falling down nor is it going to our solution. They spend over 20 years of experience an insight we secure our customers with the actionable intelligence and contact they need to efficiently operate their security programs.

Challenge number two prospects tell us they often feel alone in the fund our solution our platform and global network brings the community together to accelerate the benefit of the network effect across our customers are solutions and our services talents number three.

Not enough trained personnel for every company has adequate staffing this shortage of security expertise to investigate the growing number of alerts lease companies vulnerable Oh solution. We have the best train team focused solely on cyber security, which includes threat intelligence incident response and security operate.

Patients capability that Leverages, the power of machine learning to automate tasks at scale. Our customers are looking for technology solutions, which worked together can be scaled the business needs change and can provide actionable insight businesses need security to be an accelerant to their work not.

Source of friction leveraging deep industry partnerships, we work across the customer security product landscape, tying together a holistic security program I am proud to say that secure it says the business partner that customers can rely on to secure their cyber assets in a digitally connected world. So we understand the challenges.

Customers are facing today, how specifically to secure solar solutions that meet these needs, we give customers the speed and scale of machine learning along with crowd power data and analytics, we work with customers in a way that makes sense to them. We do this by de coupling our software applications and services layers are services.

We believe our customers are looking for access to unique detection response capabilities advisory consulting and incident response.

Our applications, we deliver solutions that can work with leading security products.

This inclusive approach brings more efficiency and a higher ROI to our customers.

And our customers are choosing secure works.

Paul will talk more specifically about the numbers, but I want to tell you about some things, which makes me exceptionally proud of our team and grateful for the customers, who we continue to partner with to secure their businesses.

And together, we can use technology securely to drive human progress.

Let's start with those customers take for example, one of our customers that has a large orthopedics company.

Our organization experienced tremendous growth in both sides in technology over the last year.

They were looking for a company that would protect their growing environment at scale.

We beat the competition because of the strength of our end to end capabilities and a combined go to market effort with Dell technologies.

This is a perfect example of secure orphan del partnering together to meet and exceed our joint customers needs.

Another new customer example, I'd like to share is a large pharmaceutical company in North America, who selected us on a 400000 dollar MDR deal.

This customer solve value in the visibility gained across their entire environment and the ability to leverage secure works for investigation and response efforts secure its ability to automate containment and prevention actions added tremendous value feeling the win.

In Q4, we closed 72 man's detection and response or NDR deals on our new platform up from 19 in the previous quarter, demonstrating the great traction and momentum were seeing for our SaaS based solutions. Our Q4 annual contract value was the highest in our two decade history and our security analytics.

Application solutions, TDR and MDR, our secure its most successful launch why are we seeing customer shift to secure works. It comes down to providing the right solution with the right intelligence in partnership with our customers.

We are targeting our best in class combination of software and skilled professionals can uniquely address the needs of our customers.

Before we go deeper into our financial results I'd like to spend a moment and talk about our strategy.

As I said earlier security is in our DNA. We were born of Security company, It's who we are and who we will always be now as we pay that we're bringing security to the market to software that can be consumed by customers in a variety of ways to meet different needs.

We've been clear from the onset that were in the midst of a transformation. Our vision is to be the essential cyber security company for digitally connected world.

That means we'll continue to innovate with our products services and integrated solutions and we are underpinned by one of the industry's most respected counter threat intelligence units, we are committed to putting our customers first and all we do.

Additionally, we will continue to one make investments in our technology platform to continue driving our transformation to enhance our reputation as the premier differentiated solution provider and three continue to provide exceptional products services solutions and rapid threat response.

For our customers we are unique in this industry and it positions us well for success as cyber security becomes more important in a digitally connected world Here's how we're differentiated our heritage is security operations. We have proven workflows, we know how to make solutions that get the job done because we have the telemetry.

Automation and expertise to detect them to remediate faster than anyone in the last 20 years, we've grown as the need for cyber security has grown we truly believe we have superior analytics threat intelligence and network effect.

Our cloud native platform is the right backbone for our strategy. It works with leading vendors products. We can work with our customers right, where they are and secure them better as I think about what the head in fiscal 21. There are few areas I'm, particularly excited about our software solutions with integrated threat intelligence that.

Can be delivered standalone or what services, we can do this ourselves.

And then through partners, we are overhauling, our marketing capabilities with new talent, a renewed focus on digital demand generation and pipeline acceleration, we're continuing to strengthen our sales training, enabling them to ensure we're meeting that ever changing needs of our customers against the dynamic backdrop.

We are for great software with a superior customer experience. So customers can have collectively smarter technology that enables them to be exponentially safer, we have reoriented, our north American sales force to focus on new customer acquisition, while continuing to build deeper partnerships with our existing customers and we are seeing early.

Proof points that we are gaining traction.

We have historically sold direct we realize more companies around the world need to secure whats advantage. So we are focusing on expanding our reach through our channel program, which is sharing our market leading security expertise. So partners can leverage our products and services to sell their customers a complete security solution.

No one else has the 20 years of cyber security operations experience to put together a complete solution like weekend I believe there's nothing like what we offer out in the market today.

Again, I want to thank each and every one of my security teammates who work to protect the world on behalf of our customers, particularly during these very challenging times now I will turn it over to Paul to take you through a full financial results. Thanks, Mike.

20 was a good year in many ways, we saw improvement in our operating leverage delivered positive adjusted EBITDA each quarter for the first time as a public company now reaching seven consecutive quarters of positive adjusted EBITDA.

And generated record cash flow from operations.

We maintained our strong financial position, while investing in our new security solutions and related go to market efforts as you just heard from Mike.

In the fourth quarter of efflux 20 revenue of $142 million exceeded the top end of our guidance range and represented an 8.6% increase over Q4 F. One night team and a half percent increase sequentially gross margin as percentage of revenue was 57% increasing from 56% in the prior year.

And we generated $43 million of cash flows from operations in the quarter, primarily on improved collections of accounts receivable, we exited the quarter with annual recurring revenue of $437.5 million and we closed a record 21 deals with a total contract value exceeding $1 million in the fourth quarter.

Revenue from our managed security solutions, including increased revenue from Bill safeguard and response offerings grew 10% year over year and comprised 76.3% of total revenue.

Consulting revenue increased slightly year over year, primarily in our incident response and technical testing offerings.

Finally revenue outside the U.S. represent a 26% of total revenue in the fourth quarter up from 24% of total revenue in Q4 last year I'm consistently strong growth in the UK middle East and Japan.

Gross margin totaled $81 million in the fourth quarter about 420 or 57% of revenue.

A 98 basis point increase from the prior year.

In Q4 severance costs negatively impacted gross margin by approximately 100 basis points or $1.4 million.

Also the revenue shift as we transition our del safeguard portfolio mix to be aware carbon black had an approximate 160 basis point negative impact on Q4 gross margin fourth quarter operating expenses totaled $82.5 million compared with $71.8 million last year.

In Q4 severance cost aggregated $4.9 million across operating expenses, primarily in sales and marketing and GSK.

Research and development expenses totaled 15.7% of revenue in the quarter flat to Q4 F. One night soon as we balance incremental investments and our software App platform development activities.

Sales and marketing expenses were approximately 29.2% of revenue in the fourth quarter compared to 27% from the prior year Q4.

The increase driven by 230 basis points severance cost and pack.

General administrative expenses totaled 13.3% of revenue in the fourth quarter compared with 12.2% for the same quarter last year with severance driving 80 basis points of the year over year increase.

Adjusted EBITDA in Q4 was $2.3 million compared with $4.8 million last year.

Severance charges totaled $6.3 million drove our adjusted EBITDA performance slightly lower than guidance.

As I've mentioned cash flow provided by operating activities was a record $43 million in the fourth quarter and $78.8 million year to date compared with $57.2 million of cash provided by operating activities for the full prior fiscal year.

The DSO was 72 days at the end of Q4 down from 76 days at the end of Q3 and an improvement from 98 days at the end of Q4 last year. We finished the quarter with cash of $181.8 million, which increased from $129.6 million at the end of the fourth quarter last year.

And 138.8 million in does Q3 issue and we have an untapped 30 million dollar credit facility, which was recently extended for an additional year on similar terms.

In addition contract provisions allow for the expansion of this credit facility up to an aggregate amount of $60 million by mutual agreement of lender and bar.

Capex for the half a million dollars in the fourth quarter now for F Watch 21.

We have been closely following the early indications of the effect on our business from the co bid my team crisis.

While we're still seeing demand for our products and solutions, our customers and prospects are being impacted in their businesses.

With so much macro uncertainty. We currently don't feel it's prudent to provide full year quantitative guidance for F watch when one.

Although we're not providing guidance on full year for 21 in the first quarter of F. Watch 21, we expect both GAAP and non-GAAP revenue to be in the range of $133.5 million $237.5 billion impacted by del safeguard revenue transitioning to carbon black and the cobot 19 crisis.

Especially on our consulting business and we expect our non-GAAP net loss per share to be between two cents to success. We remain focused on continuing to execute on our strategic plan and they give quantitative full year guidance in future periods. Our immediate focus is on our customers and our employees as we respond to the her needs and as such.

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As we close out todays call I want to reiterate that we're in a unprecedented time in history with coded my team because of that we're all remote on todays call and will not be taking wife QNX. Thanks again to my secure works teammates for their dedication to our customers there will be half of the entire secure works team. We appreciate your key.

Renewed interest and support that wraps up todays call a replay of this webcast will be available on our Investor Relations page obscure works dotcom, along with our Q4 F Watch 20 web deck with additional financial tables.

Thanks for joining us today.

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