Q3 2020 SecureWorks Corp Earnings Call
Secure works third quarter fiscal 2021 financial results conference call.
Following prepared remarks, we will conduct a question and answer session. If you have a question simply press Star then one on your telephone keypad at any time during the presentation at.
At this time all participants are in a listen only mode.
We are web.
During this call live on the secure network secure works Investor Relations Web site. After the completion of the call a recording of this call will be made available on the same site.
Now I'll turn the call over to Paul Perez Chief Financial Officer, you may begin.
Thanks, everyone for joining us with me today is my Cody, our CEO and Wendy Thomas President of customer success will join us for questions at the end of our prepared remarks.
During this call will reference non-GAAP financial measures, including non-GAAP revenue gross margin operating expenses.
Operating income net income EPS, EBITDA, adjusted EBITDA and cash flow from operations.
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 refer 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 events are forward looking statements based on current expectations.
Actual results and events could differ materially from those projected due to a number of risks and uncertainties, which are discussed in this mornings press release and our SEC reports.
Now I will turn it over to Mike.
Thanks, Paul the events of 2020 to underscore how transformative technology can be to help adapt innovate and increased productivity.
Cybercrime continues to accelerate as the explosion of data and devices have expanded the attack surface.
And the shift to work from home has required additional cyber security controls and operational changes.
These same events have created an opportunity for cyber criminals to exploit and capitalize on the expanding number of vulnerabilities.
Our recently published incident response report highlighted increased risk areas in direct response to the pandemic.
These included an increased risk with more people accessing SaaS applications delays in vulnerability patching.
Circumvention of DTN connections and increasing attacks.
This is the first time, we've seen cyber criminals globally focused on one issue.
With threat actors using COVID-19 theme tactics to exploit vulnerabilities.
Against this backdrop I continue to be incredibly proud of the resiliency determination and adaptability of my teammates in serving our customers and partners every day.
For many years the security industry has been overrun with thousands of point products that do not enable organizations to Mount a holistic defense against adversaries, whose unrelenting attacks only have to succeed once.
Through a variety of means the adversary has consistently been able to navigate between security controls going undetected and undeterred and organizations that lack integrated detection and response capabilities across their environment.
We believe that the ability to outpace the adversary at scale requires an integrated security platform that closes the gap between point products.
Puts security Detections in context of risk to an organization and automates the remediation process with agility.
Our superior threat detection on remediation capabilities, our accelerated with deep learning machine learning and workflow automation.
To detect security risks to an organization quickly with high fidelity and to reduce both adversarial dwell time and meantime to remediate.
Our cloud native platform takes a different approach bill.
Building on our expertise as a global leader in managed security over the last 20 years, but.
Because we fundamentally believe that the only way to win this fight is through the combined power of the community working together.
Why.
Because the adversaries work together, albeit in a mercenary way.
Increasingly leveraging the same data science and technology capabilities that the security industry does.
Our integrated inclusive holistic approach.
Continues to gain momentum by allowing customers to one.
Detect and respond to threats across the complete environment, including endpoints network business systems and cloud infrastructures.
Regardless of the underlying point product technologies.
To provide accurate and prioritized insights through automated asset discovery and classification vulnerable.
Vulnerability assessment and risk prioritization.
Three leverage our deep security operations expertise.
To automate and simplify investigations on.
For for straight and automate responses on workflows.
And enable collaboration across security and it functions.
In a single platform that sits at the heart of their security operations.
Our holistic approach means customers benefit from the capabilities of our platform without having to rip and replace existing point products.
Nor shift to a single vendor ecosystem.
We also see a near term future where.
What are now individual security product markets, such as store Sim vulnerability management and more.
Increasingly become integrated features or capabilities of a holistic security analytics platform.
We've built to this vision.
And as this trend continues I believe we are well positioned to be successful in the emerging STR market that anticipates convergence across historically standalone technology segments.
In Q3, we continued to focus on our software products and our transformation.
Gross margin grew 150 basis points over Q3 fiscal year, 20% to 61%.
Paul will share more details on our financial progress in a moment, but.
But I'd first like to update you on the progress we've made across three transformational pillars ex.
Expanding our go to market.
Ensuring customer success and accelerating our software roadmap.
In Q3, we continued to make great progress and expanding our go to market efforts focusing on customer success, and attracting new logos to our cloud native platform.
Im pleased to report that we reached nearly 300 customers on our new security analytics platform.
New customers on the platform grew 36% sequentially in the third quarter and represented 45% of our new subscription customers during the quarter.
One such new customer example of global European Chemicals company with operations in more than 100 countries was seeking a security partner to focus on threat detection and response.
They were concerned about ransomware attacks.
They purchased our TDR software to give them a unified approach to managing their security program.
With holistic detection and automated investigation capabilities across endpoints networks and cloud activity in a single dashboard.
Another new customer is a privately held video streaming company in North America that focuses on live customizable E commerce applications for.
The company desire a security solution to help minimize risk and established confidence and trust. They chose our new VP product because of the simplicity to get up and running quickly.
And automation to the vulnerability management and prioritization processes, which provides substantial time and resources savings.
Last quarter I updated you on our progress in launching and building our channel efforts with our global partner program.
We're investing in training and enablement marketing and demand generation to ensure our growing partner community is equipped to sell market and support our software solutions.
Our new software portfolio represents a fantastic opportunity for the channel to take our superior detection and response capabilities and surround it with their own service and value added offerings.
In addition, as a historical leader and the MSP market. We believe there is new and compelling opportunity for us to scale, our cloud native software platform that enables a broader community of managed security service providers.
Allowing the growing community access to our software analytics and expertise.
Accelerating the adoption of our cloud native platform.
And as a community to combat the adversary at scale.
Last month, we hosted our industry analysts summit with tier one analyst from around the world to continue to tell our software transformation story.
And on December the day, we'll be hosting an Investor Day conference as we continue that discussion with each of you.
Core to all we do is customer success.
I talked a moment ago about the progress we are making in attracting new customers to our platform.
We are also deeply focused on ensuring that existing customers see the value of our latest capabilities and leverage more of our portfolio.
For example in North America, a 2 billion dollar manufacturing company was looking for security partner that could provide visibility and controls to reduce their cyber security risk.
They chose TDR defined unknown and advanced threats and to make informed decisions.
They also used our built in real time chat to collaborate with our threat experts during live investigations.
A second existing customer example, a $50 million in North American company that works with state and local government agencies to provide document management payment processing customer services financial systems and case management was looking for a cloud native turnkey software solution.
To provide full visibility on endpoint cloud and network systems.
They appreciated how TDR provides their leadership with the latest threat intelligence insights and research from our counter threat unit to meet the dynamic changes in cyber security and inform their overall security strategy.
In each of these examples customers benefited from having full visibility of their security environment with technology solutions that work together to protect their business.
We've made great progress in extending our portfolio, adding another application and more capabilities to increase differentiated value for our customers.
We recently announced significant feature enhancements to TDR with the addition of log management and search for importing capabilities for users to have an integrated contemporary alternatives to traditional Sims.
We also extended our platform with the addition of a vulnerability detection and prioritization application.
As a result of our acquisition of Delta.
Our CDP product provides contextual awareness to vulnerabilities within ml, driven prioritization engine to focus on the highest risk to an organization.
NVP automates most of that historically manual vulnerability management processes.
To free up security resources and reduce human error.
You will have the opportunity to hear more about these capabilities at our upcoming Investor day.
We are transforming our business to strengthen the security community and beat the adversarial scale.
We have taken over 20 years of security operations experience threat intelligence and technological advancements to Reimagine, how security should be done.
This is a multiyear journey and we will continue to focus our transformation on expanding our go to market advancing the delivery of our cloud native platform and ensuring the success of our community customers and partners to be a force for good.
Thank you I will now turn it back to Paul.
Yes, Mike we are pleased with our Q3 financial results. Some highlights include record gross margin.
Our 10th consecutive quarter of positive adjusted EBITDA and $22 million of positive cash flow from operations, resulting in cash balance of 188 million.
Maneuvering within a dynamic global environment.
We maintained our strong financial position, we continued the significant growth and investment in our new SaaS solutions, we exited the quarter with annual recurring revenue of $443 million and we made progress with our channel program as you just heard for Mike.
In the third quarter of efflux 21 revenue of $141.6 million exceeded the top end of our guidance range and represents a 2.3% sequential increase over Q2.
Gross margin totaled $85.9 million in the third quarter of for 21 or 60.7% of revenue both records.
Our margin composition continues to reflect our shift to more software driven threat detection and response services that provide differentiated value.
Our gross margin progression over the past several quarters reflects our focus on expanding gross margins through scale, continuing automation of delivery capabilities for MDR and purposeful reductions in non strategic low margin business of note our cloud based SaaS security analytics platform now represents approximately eight.
Percentage of customers approximately 10% of they are approximately 40% of ending Q3 pipeline and although it's still early we are encouraged by initial customer reception and feedback, particularly regarding differentiated value.
Third quarter operating expenses totaled $77.6 million compared with $81.6 million last year.
Largely driven by reduced travel.
Research and development expenses increased as a percentage of revenue totaling 18.9% of revenue in the quarter compared to 16.3% in Q3 for 20, as we accelerate our cloud native platform development.
Sales and marketing expenses were 23.8% of revenue in the third quarter compared to 28.3% for prior year Q3.
Decreased primarily due to lower travel and a reduction of safeguard marketing spend with Dell technologies.
General administrative expenses totaled 12% of revenue in the third quarter compared with 13.1% for the same quarter last year.
Adjusted EBITDA in Q3 was $11.3 million compared with $5.8 million last year.
This improved performance is driven by a combination of gross margin gains as well as from reduced opex as we navigate the current environment and the business continues to fall on creative efficient ways to engage our customers.
We'll continue to invest for strategic growth balance from the R&D investment in the new software platform and expansion of our new partner program, while expanding profitability.
I mentioned earlier cash flow by operating activities was $22.4 million in the third quarter, just slightly down from prior years Q3 performance of $22.6 million.
Dsos improved to 69 days from 71 days in Q2.
We finished the quarter with cash of $188 million. After the purchase of Delta laboratories, an increase from $181.5 million in Q2 and from $138.8 million at the end of the third fiscal quarter last year.
Capex was $500000 in the third quarter, and our 30 million credit facility remains untapped.
Now for guidance.
In the fourth quarter for 21, we expect both GAAP and non-GAAP revenue to be in the range of 138 million to $139 million and we expect non-GAAP net income per share performance to be between breakeven and two cents.
For for 21, we expect the following GAAP and non-GAAP revenue to be in the range of 515 on to 560 million.
Adjusted EBITDA to be positive for the full year in the range of $32 million to $34 million.
Non-GAAP net income per share to be 22 to 24 cents per share.
GAAP net loss per share to be in the range of 26 to 28 cents for.
For modeling purposes, we estimate that the tax benefit rate will be approximately 28% for the remainder of the year.
Cash provided by operations for full year to be between 55, and 60 million and Capex for the full year to be in the range of $3 million to $4 million.
Before we move to Tonight, just a reminder, that our virtual investor and analyst conferences next week Tuesday December eight and we look forward to your participation in that event.
Which features discussion and Q on a with our broader secure works leadership team.
Finally, I want to reiterate Mike's things to our secure works team mates for their dedication to our customers and on behalf of the entire secure works team. We appreciate your continued interest and support.
When do Thomas will join Mike and on during the Q on a session.
Operator, please open the lines for questions.
Okay.
I will now open the call for questions. If you have a question press Star then one on your telephone keypad.
Courtesy to others. Please ask no more than two questions.
Our first question comes from Keith Kalia with Barclays. Your line is open.
Okay, Great Hey, guys. Good morning, and thanks for taking my questions here how are you more.
Good morning Simon.
Hey morning, Mike maybe first for you.
Yes can you just talk a little bit about the competitive dynamics with TDR, specifically I guess the question is are you finding yourselves more and more in competitive bake off for Sim and if so who do you find your ripping and replacing it with some consistency.
Socket. Thanks for the question. This morning, I'm going to take this out but when they go into a little more detail I think that the first thing I'd sort of say to share. The thing I'd say is sort of teed up for Wendy is we've got a much bigger vision as you sort of heard in my prepared remarks than just.
On the same aspect of things, it's really working with the other products that exist in the marketplace and taking where the industry is going from a from an ex the RFP will perspective, but I'll, let wendy drill drill into a little more the details on a going to outfit or maybe some of the customer examples that I talked about.
Sure. So we take it from really the customer use case perspective, which is that they need a holistic approach to managing their security program and so the approach we've taken with our platform and SAS applications are really address their design to address that that holistic need and in terms of traditional sense.
And then.
Disappointing in terms of the difficulty in cost of ingesting it normalizing security relevant data.
Does that for you.
And frankly uses our knowledge of the telemetry current from those products to to to really.
Make sure that what we're looking at is on nourishment security perspective, but when do you have on that day that clearly you have to know how to detect and hunt for advanced threat and that obviously the second place for our customers have been disappointed with those on to send because TDR completes a swing on that right is delivering the high fidelity prioritize detection.
But then add on with automated investigation and remediation capabilities.
So what what we lead with is solving the customer need for per crew security management, what we announced earlier. This week was the addition of basically features on TV for that cover what I'll call basic some use cases from low retention on both the.
On the type on now and length of retention of that data as well as some additional search on reporting capabilities and from a customer perspective, that's for they've been telling us what would kind of let them.
Be able to have a holistic security outcome, and frankly with a better ROI on with with a standalone on TDR option.
Got it that's very helpful.
Hey, Paul maybe maybe for my follow up for you just maybe on the AMDR part of the business.
I guess the question is how does NDR should have compared to the traditional MSS in sizing and and and can you talk about the even qualitatively sort of the relative gross margins as that shift from NSS to MDR sort of continuous does that make sense. The adjusted doesn't I'll reference our average revenue per customers.
You'll see on our Q is $113000 per customer and we're seeing that the average revenue per customer through selection goes on our new system is about 25% higher so from a revenue sizing we see this as a favorable volume.
Sizing for decrease revenue tours in the gross margins are improved.
In the new platform and as you'll hear in the analyst day, we talked about long term, our gross margins approaching something along 73% to 77% range overtime and so think in terms of of MDR tracking longer.
Very helpful. Thanks, guys.
Second.
Thank you. Our next question comes from Sterling Auty with JP Morgan Your line is on.
Hey, guys. Thanks.
So.
I apologize on.
Im on the road. If you can believe that so I don't have my model on front, but I'm just curious what would be the main drivers that could cause revenue to be down sequentially. In this next fiscal quarter.
Yes, it's us focusing on the type of customers were serving as I've mentioned in my comments there focusing on we're looking at customers as to the value of our product and it will reward us and we help them in there on what they need to do on their business and so we're going through our customer base and looking at where those lower margin type.
Customers are and then working with them on different alternatives.
Sort of ties Sterling into the question socket asked when you talked about the MSS vs MDR market, whereas some of the some of the services from NSS traditional MSS perspective that are lower margin less value add or things that we will not look to expand and if the margin is on profitable for us we're not going to look to continue to do.
And then my follow up question it kind of ties nicely into that so when you talked about going out and partnering with NSS I would think traditionally they would look at you as a core competitor why would they want to do that is it because you're exiting some of that lower margin business, and perhaps creating opportunities for them and they see less as a competitor.
We're willing to look at you on the product side.
Yes.
Yes, and the other the other key aspect to that Sterling is really getting the scale, but it's being able to take what we have done is the leader in the MSS space and bring that capability to the market and allow others to do it.
As well as we do we did and we do and have us really focus on the expertise and analytics, where we can add real value at it at a much greater scale.
Got it thank you so much.
Thank you for our next question comes from Walter Pritchard with Citi. Your line is open.
Hi, Thanks, I am wondering just as you've rolled out a lot. This year and you look into next year. How are you thinking about the budget categories, you've been able to access this year and have some of these new products sort of fit into traditional.
Peas, and so for the customers have had and how are you thinking about that as you look towards fiscal 2002.
Hi, alter its on the I'll take that one just on just to make sure on clear on your question are you talking about.
Sort of let product categories cuts for here for.
Then when will you have a vulnerability capability now you have a greater analytics capability and so their traditional line items there that that.
Customers put I've put out or a piece around and I'm, just curious you've been able to get into that mix or if it's been a little bit more missionary selling as these products have ramped and you're looking for the budget or peak on it.
Selling as you look into next year.
Yes, I don't have that RFP stats in front of me clearly we participate in those win when they make sense for on the.
I definitely think that the shift towards.
The new platform on those capabilities has tended to address customer use cases.
In a more focused way and so sometimes those kind of bespoke outsourcing of labor type RFP that necessarily where we want to go but what we do is we are able to position that the outcome. We can drive EBITDA at a higher ROI for customers are really the best alternative there I think our sales team has been successful positioning.
Positioning that with customers and frankly trying to get in front of some of those.
Right.
Right.
And then for Paul just generally on the on the profitability front I mean, obviously, you're investing here a bit on can you help us understand sort of duration of investment sort of what your goals are what you're looking for there in terms of.
Kind of the.
The return on on what you're doing right now.
Yes, and so on sort of how long low yes.
We see great potential on what we're doing that's why we're investing in that we see the rate that we're spending on R&D, which is on the elevated rate will continue out into the near term on long term wise that should return back down to something and long terms beyond the next 12 months, but long term returned back down to somewhere in the 14% to 16% less.
But we see continuing this talk to reduce spend right now to reach the market in a more gain in the market that we see we can yes.
Great. Thank you.
Thank you. Our next question comes from Brian Essex with Goldman Sachs. Your line is open.
Okay, great. Thank you for thank you for taking the question.
I was wondering maybe if you could dig in a little bit to some of the puts and takes on sales and marketing spend particularly as you pursue these kind of new go to market initiatives and try to penetrate the channel, but you're also seeing a mix shift in terms of revenue you down a little bit sequentially. So maybe just want to understand some of the puts and takes.
There for sales and marketing how to think about that going forward into next year.
Yes, so we have been primarily focused as a direct sales selling company using our sales people to work with our customers. That's a higher cost sales mix, but as we move to the channel there are some.
Startup cost higher cost initially as we move over to get that kick started and running and so we see some type of elevated spend for a period of time as we get channel going but ultimately as channel grows and becomes a larger part of our business within the efficiencies that we get off of that water network will reduce the sales and marketing.
We're also this is Mike I'd add on.
With the new.
Sales model that has kind of evolved as a result of the pandemic.
We're also putting more focus in the marketing area and.
Electronic demands and kind of moving the sales process where.
Well, we think people really want to now we're much more of it is digitized and the actual sellers are getting engaged later in the in the sales cycle.
Got it Thats helpful and maybe just how to how to think about how our.
Kind of flat year over year, but you're getting progress with with PBR and MDR.
It is it that shift towards more profitable customers. That's that's affecting that that that kind of rate or is there something else credit, which kind of keep an eye on.
Yes overtime, it's clearly the mix of that business over time, we'll see that benefit of what we see right now on near term. What's happened is we've been more efficient at managing the business and focusing on what do we do to effectively efficiently on serve our customers, which are clearly on track with where we are seeing the business going as that continues to grow and our new.
Business, we'll get that mix and the benefit of that mix on our gross margin and I think the key this is Mike just adding I think is part of the key preview. We gave was the fact that Paul talked about.
8% of customers now on on the new platform about 10% of they are are we.
We had a I think it was 35, 36% growth in customers new logo customers added in the quarter on the new platform and I think we'll begin to flush that out more over time for you.
Got it thats helpful and format for color I appreciate it.
Thank you and again, if you would like to ask a question. Please press. The Star then the one key on your Touchtone telephone on.
Next question comes from Alex Henderson with Needham Your line is open.
Thanks, I wanted to ask a question relative to the logging functionality that you talked about.
Clearly logs are very expensive and splunk is known as.
One of the highest price to.
People out on the planet.
So how.
How much are you saving the customer in terms of that logging expense.
On the one hand and on the other hand logs are used in a lot of things other than security for instance, they use the network.
Management they use the network.
Troubleshooting can.
Can you talk a little bit about.
How do you tie into that aspect of it.
What what companies need the logs for.
In the case that they choose to.
To stop using Splunk conserved to use you for logging function.
Sure I'll I'll step back to that to the first question around cost and we do think that this is an advantage that we have as much around predictability of cost as it is around the cost it does lower cost itself on.
Everything that we do in terms of the way that we price those TDR application and then the.
Extension of Baird.
Yes.
Retention.
On collection option is still correlated back to endpoints because customers are able to predict how many users they're going to have on on the on.
On the platform and then we have tiers.
Data amount.
They can opt into sort of large tiers around that with 30 days of notices for there they've been tripping that net here.
And it's just more flex flexible in simple than splunk suffering because for us.
The point of view, we have around.
The log for team from a security efficacy perspective.
Obviously, a different point of view them on that just hope log for as you were mentioning kind of t. or even broad compliance perspective. So we can give customers options there depending on.
So that they don't store data that they don't need for security purposes on the IP side, we certainly have capabilities around.
Ensuring that both IP and other practitioners can keep a pulse on the health of those data sources I will not say right now that we have extended into trying to enable some on the network management side, if you will.
Thats, certainly something we'll always listen to our customers about but right now we really stay focused on the security.
Side first and hopefully address most of these cases for customers, who don't have an extreme extreme and use case.
I see could shift gears little bit over to the opex side of things.
Five point improvement in EUR 5.2 topics.
Play per hour.
Related to a combination of things, but big chunk of that sounds like cuts are related to lack of travel in TV and I get the idea that this is a much more frictionless model more direct digital.
On how sustainable is that five points or is that going to come back in.
Over the course of CYI 21.
As increased.
Cost here in New York.
View.
Yes.
Every company is looking at this and we're pretty excited about the things that we've learned through this process as revenue we have to go through something like the coated.
Pandemic to figure out how you do things more efficiently and we have found were very effective very efficient working remotely and we're continuing to explore how that continues on the future now of course.
Things loosen up and the vaccines out there in the world.
Of course, we'll see some cost come back end, but we wanted to walk through this process and so we're excited about continuing the savings on in the future.
Okay. Thanks.
Thank you. Our final question comes from Saket Kalia with Barclays. Your line is open.
Hey, folks sorry to get back in queue here, but just had one quick housekeeping question, though that I think the benefit the group as well Paul maybe just for all of our models can can you just can you remind us what was the split of.
On the Src vs. I don't want to just call. It managed services like I guess on cold subscription what was the split between those two revenue lines.
76% was the MSS and Src was 24.
Got it very helpful. Thanks.
Thanks Saket.
Thank you and there are no other questions in the queue I'd like to turn the call back to management for any closing remarks.
All right. Thank you operator.
That wraps up today's call a replay of this webcast will be available on our Investor Relations page at secure works dotcom, along with our Q3 for 21 web deck with additional financial tables.
So again for joining us today good day.
Thank you.
Ladies and gentlemen. This concludes today's call you may all disconnect everyone have a great day.
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