Q1 2021 SecureWorks Corp Earnings Call

Good morning, and welcome to the secure work first quarter fiscal 2021 financial results Conference call. Following prepared remarks, we will conduct a question and answer session. If you have a question something plus simply press Star then one on your telephone keypad at anytime during the presentation at this time of course.

As of internal listen only mode. We are webcasting this call live on the secure work Investor Relations website. After the completion of the call a recording of the call will be made available on the same site now I will turn the call over to Paul Parish Chief Financial Officer, you may begin.

Thanks, everyone for joining us with me today is our CEO Mark Jody during this call, we will reference non-GAAP financial measures, including non-GAAP revenue.

Gross margin.

<unk> expenses.

Operating income net income.

Yes, EBITDA adjusted EBITDA and adjusted free cash flow.

A reconciliation of these measures to their most directly comparable GAAP measures can be found in our web deck and press release.

Please also note that all growth percentages referred to 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 and advance our forward looking statements based on current expectations.

Actual results and 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 FCC reports.

Now I'll turn it over to Mark.

Thanks, Paul.

Brassieres Secureworks past couple of months is by renewed commitment to our teammates in our family.

Our customers and the community in which we live.

It's also renewed our commitment to vainly essential cyber security company for digitally connected world.

And secure works, we believe our collaborative approach to cyber security.

Customers partners and security all working together and form by the sharing of analytics.

And intelligence.

We are realizing how security is done.

By developing scalable software solutions powered by analytics.

Created from World class threat intelligence, and backfire industry, leading incident response capabilities.

We are providing more differentiated value to our customers entered security community at large.

We leverage our deep security operations expertise to innovate and create security solutions that are simpler faster and more capable.

Lets simply our purpose is to secure human progress by outpacing and outmaneuvering the adversary.

The security advantage is a unique approach to software and services with security Epicor.

Designed to be concerned delay customers want based on their evolving business needs.

We are singularly focused on security.

This is our only business.

And our only focus is on the protection of our customers.

During the first quarter and in response to covered market demand.

We quickly pivoted to remote delivery methods.

In fact, we moved to remote workforce continuing to deliver our products and solutions seamlessly to our worldwide customer base.

I'm proud of our team's ability.

The flexible and resilient under any circumstance.

We have a connected workplace environment and our prior proactive investment in business continuity processes and digital transformation really paid off.

I recognize challenges remain against the covered backdrop.

But I am pleased with our sales momentum of the Redcoat man's detection and response, our AMDR solution.

In Q1, we added 50 MDR customers on our new SaaS based Redcard platform.

ACB signings in Q1 were below our original plans, but good based on our revised co that expectations.

As we rise to these challenges through fiscal 2001.

You'll see us focus on the following three areas.

We will continue to advance our delivery of new software based solutions to customers.

To further our focus on our customers. We recently promoted Wendy Thomas to president of customer success, underscoring our commitment to delivering a differentiated customer experience.

And our goal is to get solutions in front of more prospects and customers through our go to market evolution.

By expanding our channel partnerships as we announced last month.

Our new software solutions are compelling opportunity for channel partners to grow their business and partnership with the best Cyber security in the industry.

Q1 was a busy quarter for product innovation and expansion.

We continue to evolve our cloud native Red cloud platform and TDR application with a range of new integrations analytics.

And user experience improvements focused on strengthening the ability for organizations to detect and respond to address.

Right. Okay, TDR also aren't high marks in the Mitre attack evaluation.

And I was pleased that TDR performed well across the visibility in detection threat landscape.

Particularly our ability to manage early threat detection.

And we achieved these results just six months after the products launch. Additionally, we recently expanded our MDR service wrapper.

Support for Vmware carbon blacks cloud endpoint standard.

As part of our continued partnerships with leading security point product vendors and to help customers get more value out of their tools.

As part of our broader activities and adjusting the coding we quickly pivoted to identify new ways to partner with our customers by offering remote vulnerability assessment.

Flexible incident management retainers and security assessments.

There is no company better position to keep customers say through the evolving digital landscape.

Let me give you a few customer examples.

First a 4 billion dollar revenue 13000 employee life Sciences customer that partners with physicians to innovate products for structural heart disease and critical care, so patients can live longer healthier and more productive lives.

Our roadmap enable them to integrate simplify and improves the effectiveness and efficiency of their security.

The customer seeing differentiated value for our managed rent club threat detection response software covering a full environment and a complete outcome based solution.

That's a power scalable software with World class security expertise at the core.

Second.

A long time European technology customer with $5 billion in revenue and 17000 employees.

Needed their security operations to scale with a growing business.

They selected our red cloak MDR solution that secures the technology landscape across endpoint network and cloud.

Writing, even greater value with our end to end capabilities.

This is a great example of a longtime customer adopting our new software as they transition to the cloud and finally another customer examples.

Our regional commercial bank with $15 billion of assets under management.

This is a model example of how our consulting services can help create opportunities for our software subscription solutions.

During our engagement to test our security posture, we established a trusted relationship that was ultimately leverage due to the differentiated value in our software driven redcoat MDR solution.

These are just a few examples on our providing value and helping our customers grow their businesses securely.

We are leading the future of security, giving customers the speed and scale of machine learning coupled with crowd power data and analytics backed by a world class Cyber security team.

There is powering momentum from our singular focus on security to bring software driven solutions to market.

So our industry rating threat intelligence.

Through our channel program.

All to protect our customers and make the world safer.

That's why we're here, it's what we do and no one does it better.

Now I'd like to turn it over to Paul to take you through the full financial results.

Thanks, Mike we're pleased with our Q1 financial results in many respects.

Some highlights include strong growth in our subscription business led by our software solutions improved operating leverage and positive adjusted EBITDA for the eighth consecutive quarter.

Maneuvering within our dynamic global environment, we maintained our strong financial position and made progress with our new software solutions and loss, our new channel program as you just heard from Mark.

In the first quarter of acquired 21 revenue of $141.2 million exceeded the top end of our guidance range and represent 6.3% increase over Q1 Fr 20.

Revenue from our managed security solutions, including increased revenue from our TDR MDR offerings grew 7.3% year over year and comprise 75.3% of total revenue.

Consulting revenue increased 3.2% year over year led by double digit sequential and year over year performance or incident response and technical testing offerings.

Finally revenue outside the us talk the $40 million more to the first term representing 29% of total revenue in first quarter up from 24% of total revenue last year on consistently strong growth in the UK middle East and Japan.

We exited the quarter with annual recurring revenue quarter and $38 million.

Gross margin totaled $82.1 million in the first quarter before 21 or 58.1% of revenue of 260 basis point increase from the prior year.

Representing our seventh consecutive quarter of year over year non-GAAP gross margin improvement.

First quarter operating expenses totaled $80 million compared with $76.3 million last year.

Research and development expenses stayed steady as a percent of revenue totaling 16.1% of revenue in the quarter compared to 16.2% in Q1 Airwatch one.

Sales and marketing expenses or 26% of revenue during the first quarter compared to 28.2% for the prior year Q1.

In Q1, or 21, we incurred lower travel related costs associated with increased remote activities as a result of kogut.

General administrative expenses totaled 14.5% of revenue in first quarter compared with 13.1% for the same quarter last year.

The increase costs were primarily attributable to professional fees and consulting costs incurred in Q1 for 21.

Adjusted EBITDA in Q1 was <unk> point $6 million compared with $6.8 million last year.

Cash flow used in operating activities was $20.3 million in the first quarter compared with a $3 million use of cash in Q1 acquired 20.

Relative to other quarters, our first quarter cash flow from operations is impacted by the payment of annual bonus compensation.

Unique to Q1 for 21, Dsos slightly increased to 75 days from 72 days in Q4.

The current quarter DSO increase was primarily related to the payment delay request from our customers, whose operations were impacted by coated.

At the end of Q1, Oclock 21, 6% of our accounts receivable were under such repayment modification request.

We finished the quarter with cash of $156 million, which increased from $111 million at the end of the first fiscal quarter last year.

Capex was $1 million in the first quarter, and our 30 million credit facility remains untapped.

Now for guidance.

In the second quarter for 21, we expect both GAAP and non-GAAP revenue to be in the range of $135 million to $137 million and we expect non-GAAP net income per share performance to be between one to three pennies.

We remained focused on continuing to execute our strategic plan and May give quantitative full year guidance in future periods.

Our immediate focus is on our customers and our employees as we respond to their needs in this situation I know you share concerning this matter.

As we move into Q1 day I want to reiterate Mike's thanks to our secure works teammates for their dedication to our customers there will be half of the entire secure works team. We appreciate your continued interest and support.

When dethomas will join my cannot during the Q and a session.

Operator, please open the lines for the questions.

Okay.

Okay.

I will now open the call for questions. Thank you have a question. Please press Star then one of your telephone keypad as a courtesy to other please ask to now more than two questions.

Our first question comes from the line of Sterling Auty from JP Morgan. Your line is now open.

Yes, Thanks, Hi, guys Im wondering if the.

Strength internationally in the strengths and incident response for the same another words was the strength internationally driven by incident response or other parts of the product and services portfolio.

Good morning, Sterling, It's Mike Cody.

During the question they were not connected.

There's nothing unusual we continued to see strong performance out of.

Our European operations and out of Japan.

Not specifically IR related.

Got it and then the one follow up is.

How do you what are the marketing plans and sales motions to help convert.

The strength that you saw on incident response into further managed service and product sales moving forward.

Hi, this is there any comments.

So it's a great question and definitely something that we look to enter leverage there's there's really two things that are important to us around incident response.

Really too many of our strategic testing services. So one is of course, a source of lead gen. When you're in the trenches with those customers.

Being able to then help them build out a and ongoing security program to secure them is definitely what we do.

And the other thing about those for US is that they help us make our underlying platform more intelligence, we immediately protect all in our customers with the learnings that we get from those incident response engagement.

Got it thank you.

Thanks Sterling.

Thank you Sir our next question comes from the liner that keep calia from Barclays capital.

Your line is now thanks.

Okay, Hey, good morning, guys. Thanks for taking my questions here, who help everyone's doing well.

Good morning.

Hey, Good morning, Mike, Mike, maybe maybe just to start with you.

Can you just talk a little bit more about TDR and just the general increasing software offerings here.

Makes a ton of sense for customers that that might want a DIY solution.

Im curious who you feel.

TDR is potentially replacing at a customer when when you're in a competitive situation any thoughts and thats sort of competitive backdrop with TDR realizing that it's still early.

Yes, so great question I appreciate it I'm going to take the first part of this and then XL bounce it over to when the Atlanta or add a few things.

I think.

Starting with the fact that from a from a pipeline perspectives as we've shifted to the new cloud based software and I will put PDR in a bucket and then our new managed detection response offer and is really us either managing our co managing that with our customers. So they can be in a position where they can effectively take it all over themselves.

And I think it's important to remember when you say DIY. This is really a crowd source community effort, whereas you're working on the platform or the PDR application on the overall platform that we've talked about now for little while you'll have the ability to work collectively or you currently have utility work collectively and cooperatively across.

The the environment.

But our pipeline today is we've shifted to the new cloud based offering and TDR size, how many are grown almost 400%.

And is currently represents about 25% of the overall pipe.

And thats in the last six months that growth and as the end of acute from the end of Q ones. It today, it's up another 13%. So we're seeing in the overall economic environment, we're seeing good.

Demand for it.

And when do you sort of bounce in the second part of the question of kind of the overall the competitive landscape and sort of how we see this evolving over time.

Sure. Thank you look we see conversions and many of the kind of individual security product markets are industry quadrant.

In place today, even our own in terms of Im sorry.

As things converge into whatever you want to common equity our security analytics program and what we see is our unique advantage to take advantage of that conversion is that one we.

Dave is not enough.

And so having data doesn't mean, you're actually know how to secure an organization to cool leading that is insufficient. What we do is really take advantage of the fact that we have worked with leading security.

Point chronic tools in Atlanta tree for many years now we understand it weve tied to and we can cost currently across that data.

In order to provide really holistic visibility and carry for customers.

And so our customers consistently tell us that the value. They see is in our security analytics and remediation expertise to both our technology and our team bringing to bear across all of their environment.

So.

And the fact that security is really what we do so we're not using security Ana.

So infrastructure or something else that might leave caps that.

Customers can't close on their own and Thats really where we bring a holistic solution to bear across.

Across.

Things that were previously Standalone products.

Got it that makes a lot of sense, maybe for my follow up for for you Paul.

Can you just talk a little bit about sort of broad brush economics with MDR.

Versus your traditional MFS offering I'm not sure. If that's a that's sort of a contrast that view that you guys think about internally but.

I think about sort of mdrs kind of a a step up above sort of your traditional MSS prevention and detection. So the question is are your MSS customers are traditional NFS customers, maybe willing to pay more for that MDR sort of service wrapper or is that something that maybe you see your MDR customers, perhaps retain at higher rates how.

The thing about the economics, I guess with MDR, specifically does it make sense.

It doesn't and Thats, a we focus on had a lot. It's very good question for us to.

We see Mdrs higher margins for us, it's a quicker install with MMS LS, it's usually a little more lengthy process mdrs very fast and it's actually getting faster and faster as the product continues to mature we have an average higher a revenue per unit.

And our sales cycles continue to fluctuate a little bit around that but it's very much faster cell cycle around selling MDR than it is the traditional MSS.

Got it that's very helpful. Thanks, guys.

Thank you joining I'd add to the end of that Paul is that it also fits well into the channel strategy in the things that morning is driving force yes.

Thank you Sir our next question comes on the line of Brian Essex from Goldman Sachs. Your line is now open.

Hi, Good morning, and thank you for taking my question Hope everything has been one as well.

Mike I just wanted to ask you think you know last quarter, when we spoke it sounded like some some.

Vessel services engagements were getting pushed down it seems like that's maybe where.

Some of the better performance better than expected performance came from this quarter can you talk a little bit about what you're seeing on professional services side and how sustainable.

Some of that performance might be relative to what I think.

I was was with expected to be down this quarter actually came in kind of low single digit growth.

So Brian I. Appreciate the question I I think we sort of said in the prepared remarks, and I was really pleased and quite frankly proud of.

Our team and the way, we fluctuated over a weekend they fluctuate the way we moved over a weekend to a fully remote workforce continuing to deliver on.

The products and solutions, including our consulting solutions around the globe and it really underscores kind of the ability of not only our teams resilience in this environment, but how quickly our customers were able to adapt with consulting solutions and services.

Which we were more concerned about than we were the subscription because those have been delivered remotely and the new software applications, but our consulting solutions, where we were able to took quite frankly deliver remotely without missing a beat.

Great.

That's helpful and then on the maybe to follow up maybe a little bit of color on the margin I think that gross margins a bit better than we had expected, particularly given the mix that we see in their revenue.

Maybe a little color and where the strength there came from within and was that a function of renewals and pricing.

Power in the quarter due to the kind of macro environment was there something else kind of moving the margin that.

Yes, we think it's from the efficiencies just gain from managing in a remote environment able to do more work remotely you cut out the travel you cut out some of the last time and delivering those services our customers basically the same labor force that we had delivered the higher labor or higher work, thus the efficiencies from that fill electro bottom line.

Great. Thank you very much.

Thank you Brian.

Thank you. Our next question comes from the line up backlog Salami from New via your line is now open.

Good morning, Thank you for taking questions.

Paul I'll start with you you quantified the exposure.

Or impact rather to your accounts receivable as a result of customers requesting that payment term flexibility into our concessions I'm wondering if we take a step back if you can talk to us a little bit about your exposure at the revenue and maybe bookings level.

You said at a more challenged industries and to what extent or or.

So what extension you described churn.

And or renewal behavior in characteristics within these verticals on over the last six months and have a follow up and when do you if any.

Okay. Thanks for the question and we're focused on that through the our process of understanding the impact our business from what's going on often covert Andrew recall, we have no customer segment, but exceeds 10% of our revenue. So as you look across the different.

Sectors are impacted by coded your thoughts go first to the travel and entertainment space and so we took a hard look at that and and we have customers in that space and they are as some of the customers that are asking for some of the.

You know understanding around there.

Receivables and we don't have a large number in any one industry, but we took into consideration as we set our reserves are and Thats why I referenced the 6% of our receivables having that type of request around it. So we feel comfortable that weve appropriate looked at this and the risk there of around.

The ability of our customers to pay or are acceptable to us than we think we have appropriately reserved.

I appreciate that and when do you for you on under your per view around customer success.

I wanted to get a better sense of what initiatives are efforts you have in place Q2 arrives.

Overall that retention rates higher as we think about.

An increasing number of software offerings ex flowing into the mix, maybe balancing that with services level churn on the very.

Lower end NSS side, and then certainly with.

The some of the more sophisticated in complex IR engagements that.

You are involved with would love to kind of understand the most sensitive leveraged within those to really get dollar net retention backup to.

Over 100% Thats It from me thank you.

Sure glad to.

So clearly you've heard us talk about evolving our approach to security as the industry has evolved in our product portfolio, which has led to the last few years has really been focused on evolving to put tools in the hands of our customers and upland software and really evolving our service offerings to align with.

Different levels of security expertise or the organizations, we serve freight to some have their own teams and they want access to our deep expertise in some really need us to to handle things on their behalf.

What we haven't spoken to you about is this customer experience as a differentiator.

And for US the focus areas on that we've done a good bit of work around ramping up our listening post across the customer journey and really accelerating our real time feedback and engagement loops. So we see opportunities there to really start create a more connected customer experience, especially as customers evolve their solution.

That's with that so were really focused on is especially as we move towards more of the software product side.

Things around.

Ensuring high levels of of adoption and checking in with customers often creating opportunities for them to give us a real time feedback on products and features and usage in their experience.

So that the initiatives around.

Not just improving our level of real time customer sentiment and engagement, but also around focused on adoption and product support you'll hear more about that as we kind of build out the program here, but we think this is a great opportunity for us as we evolve as a company.

That's very clear I appreciate that thank you.

Thank you Sir our next question comes from the line of Hamza Fodderwala from Morgan Stanley. Your line is now open.

Hi, Good morning. Thank you for taking my question I was wondering if I could start of the bigger broader question first.

You know just were broadly how are you seeing.

Budget priorities within security start to be perhaps reprioritize.

Environment, and how do you see that.

Which parts of the portfolio within two years due to that benefiting and which parts of the portfolio do you think are being deemphasized perhaps.

So this is Mike first of all thanks to the question and it's and it's a good question an interesting one I can't say that we've seen a wholesale shifts.

In in budgets from a security effective.

At least in the customer base and prospect base, we're dealing with clearly work from home was where everybody ran quickly to ensure that they had.

The infrastructure set up for those that Didnt, but I think most.

Of the large organizations had some part of their employee base working from home and security clearly followed quickly behind.

And ensuring as we kind of laid out the strategy with what we're doing on the right click platform with TDR to ensure we cover network endpoints, the cloud and business systems.

We have continued to see an interest across the spectrum. We also offered some unique consulting opportunities to help make sure people as they move contributed to the work from home had an opportunity to to test and understand and ensure that there, but they have a proper controls in place and at those controls working as expect.

Good.

So.

May I guess, that's what I said Arnaud.

That.

Go ahead.

Does that that's helpful and just one follow up question I know that.

You're not giving quantitative guidance for the full year, but any color you can give us on based on your pipeline today, what you're seeing sort of into the back half of the year and what would you have to see in your pipeline or.

From your customers to give that full year guidance.

Again going forward.

Yes, so its 10th grade question and.

I think what I would tell you is the bigger issue is not necessarily.

The view from our customers I think the overhang from the economic environment on a global basis.

And as people talk about you know we've heard last 90 days the VW this switch the.

You the.

Yes.

I think I think the uncertainty and the macro environment from an uncertainty perspective is sort of bigger question that we're trying to get our arms around.

We are going I gave some preliminary data on our pipeline since the beginning of Q2 and I think we're feeling pretty good about how things are are shaping up but there's still a lot of work to doing a lot of uncertainty around when people will actually makes the buying decisions.

That would give us comfort going in and we did give guidance on Q2, so kind of comfort going into Q3 Q4.

Got it thank you very much.

Thank you. Our next question comes on line of Gur Talpaz from Stifel. Your line is now open.

Hi, this is actually crispier as on for Gore.

For taking my question and congrats on the quarter.

Mike can you talk about the demand that you're seeing for the delta safeguard offering and how the safeguard pipeline is shaping up for the rest of the year.

Sure I'll, let me take it actually facies she manages that.

Okay great.

Yes, so that that relationship is strong and really that was born as sort of an initial partnership with the Dell technologies family footwear.

A unified and secures set of workspace solutions.

So we're pretty proud of that partnership now with kind of black has been a longtime partner Abbas than previously as part of them are now and so while it's early days since the third launch can you kind of November December timeframe.

With carbon black we have seen good growth there good traction quickly and more importantly, see a lot of opportunities to expand our footprint with with those.

Organization to come in through that program, but then.

Really need extended security across their entire platform.

And one more for Mike can you talk about the secure works and new global partner program and the initial feedback that you've received on the issue from the channel.

Sure. Thanks, Chris So were we launched this two weeks ago accident. It was two weeks ago today, we had no.

Over 200 attendees on the launch the virtual launch we held we've had a lot of interest actually have signed up 25, new partners already so marine and her team are very busy there is a conversations ongoing with over another 100 partners.

And we've been excited to see the media interest around the globe in the early interest in opportunity from a momentum perspective. So you know in a short period of time, I think marine and her.

And her team has done a really good job getting us out of the gate.

Great. Thanks.

Thank you at this time I'm showing no further questions I would like to turn the call back over to call pairs for closing remarks.

That wraps up todays call a replay of this webcast will be available on our Investor Relations page a secure works dot com along with our Q1 F., while 21 web deck with additional financial tables.

Thanks again for joining us today.

Ladies and gentlemen that concludes today's call you may now disconnect at this time.

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