Q2 2022 SecureWorks Corp Earnings Call
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Good morning, and welcome to Secureworks second quarter fiscal 2022 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 and any.
Time during the presentation.
At this time all participants are in a listen only mode. We are webcasting. This call live on the secure works 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 Andrew Storm, Vice President of Investor Relations you may begin.
Thanks to everyone for joining us I'm, Andrew Storm VP of Investor Relations at secure works with me or Wendy Thomas our CEO as of Tomorrow, and Paul Parrish, Our CFO. During this call we will reference non-GAAP financial.
Measures, including non-GAAP revenue gross profit gross margin operating expenses operating income net income earnings per share EBITDA, adjusted EBITDA and cash flow from operations. A reconciliation of these measures to the most directly comparable GAAP measures can be found on our web deck and press release, which are available on our IR website. Please also note that all growth percentages refer to year over year change.
So 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 our press release web deck and SEC filings, we assume no obligation to update our forward looking statements now I will turn it over to Wendy.
Thank you Andrea and welcome everyone.
First one to say what a privilege it is to serve as the CEO of secure works. This company has a remarkable history and the security industry constantly evolving just care in ever changing technology landscape.
Pacing and outmaneuvering the adversary.
Our approach is grounded in solving customer security pain points.
And the three themes that we always hear is that they're looking to reduce overall risk to the organization.
Optimizing their security investments.
I have a gating the shortage of security talent.
To reduce their risk customers need a grid of security controls to protect their data and applications and they need the technology to enable the prevention detection and protection capabilities to respond to todays security threats efficiently and effectively across their entire technology environment.
Listening to our customers' Redeveloped Tejas and integrated cloud native security platform.
Provides customers with both the security controls and the operational enablement, they need to achieve superior threat prevention vulnerability reduction rapid detection across the full range of threats and the fastest time to remediation.
Within these pain points for our customers create significant opportunity for us and.
And the emergence of xdr extended detection and response and M. D. R. A security categories validates this vision.
In our view Xdr will become the primary security offering with the current suite of Standalone security tools and applications, becoming features that we offer enhancing our tam to over $40 billion by 2025 of the endpoint protection, Sam vulnerability assessment and other products become features a holistic xdr.
Solutions, while competitors are making claims in the market every day there are three clear reasons CIO and <unk> are choosing us.
First our software was purpose built to be and xdr solution <unk>.
<unk> at its core is really a big data challenge and opportunity to use data science to solve security problems and what your design software for the architecture, you build to support it matters a lot.
Architected designed and developed Tejas Xdr from day zero with the Xdr vision in mind.
Our solution takes all the relevant security deployments vary from our own proprietary data sources as well as third party sources across our customers' entire I T ecosystem endpoint network cloud and business systems for comprehensive and timely visibility Tejas.
<unk> supports both streaming and batch data ingestion, enabling advanced detectors to identify malicious activity assets received this provides analysts timely detections coupled with one click response actions to drive efficiency and faster time to remediation.
Our second advantage is the powerful combination of our security platform with analytics and Detections fueled by the deep security expertise that comes from staying in the fight with our customers each day.
Security is one of the few arenas, where you regularly face a highly motivated human adversary empowered with technology and collaborating amongst themselves to hone their craft, we do the same with.
We constantly enhance our detection and prevention capabilities by leveraging what we learned about the threat actor behavior their techniques tactics and procedures each day.
We see adversarial behavior from every angle through our daily security investigations incident response engagements and adversarial testing opportunities.
Further our counter threat unit data science teams conduct proactive research on threat actors and their changing targets and tools to ensure we're keeping our customers aware of and prepared for the latest most relevant threats.
All of this knowledge has turned into machine readable software that accelerates the protections for all of our customers.
And the end result is an incredible breadth and depth of automated detectors and threat context to help our global customer outpace and out maneuver the adversary at scale.
And if a customer needs an expert opinion, they can simply use the intuitive built in chat functionality, we provide that makes it easy to collaborate with experts 24 by seven for live personal health.
And lastly, our fundamental understanding of how to manage and efficiently run a security operation at scale is a powerful powerful differentiator.
Secure works as efficiently run first class security operations as an industry recognized leader for over two decades.
With changes, we are putting that expertise in the hands of our customers and partners.
One example, we continue to expand our library of orchestration Playbooks and connectors and changes xdr.
These playbooks and connectors enable our customers partners and our own security analysts to work efficiently by integrating with a variety of third party tools and automating what would otherwise be manual tasks. These.
These capabilities enable us to deliver services at higher margins than peers, and we're sharing this knowledge with partners.
Customers are looking to optimize their investment in security with a platform that integrates with their security controls unified visibility across their entire environment and that enables highly efficient and effective security workflows to optimize limited security resources.
And partners see that we can help them build a profitable quality business around security services.
To bring this all to life, let me give an example recent.
Recently, an employee at a large manufacturing customer was pumped it to Ron what turned out to be a fake update to their Google Chrome browser design.
Designed to allow the adversary to collect information about the system and its users to send back to their command and control node.
Tejas detected this pattern of activity within minutes and central alert showing the expected attack chain.
By quickly isolating the host and resetting the credentials of impacted users we were able to prevent the script from installing cobalt strike a popular tool often used to set up future ransomware deployments.
<unk> enabled the rapid shutdown of the entire attack early in the kill chain here.
Here's another important part those very same customer also had endpoint protection from another vendor in place that did not prevent the attack and the customer didn't hear about it from them until about 10 hours later.
While some believe endpoint protection is enough marrying our holistic visibility with our breadth and depth of detection is table Stakes in today's security environment detecting attacks earlier in the kill chain is the key to preventing costly breaches.
To translate this to success in the market, we're proud to share the Tejas just two years. After its launch has crossed the $100 million in air RF front tripling from a year ago.
I'd like to put that in the context of our total business for you are.
Our total revenue and gross margin reflect one our success in shifting our Cte P MSS customer base to cages.
And two the shift away from some non strategic offerings.
First shifting C T P customers to pages.
We call this re solution because tejas is fundamentally different.
Our holistic approach to security that extends from detection to automated investigations and response capabilities.
When a secure works customary solutions take up shift their entire security posture, they expand to full coverage of their estate gain access to the best security run books for detection and response and they can easily collaborate with our security experts.
We make the planning and implementation and the overall transition and upgrade experience.
And we typically gain higher average revenue per customer or <unk>.
P C.
Our overall RPC, including the subscription services on our counter threat platform is 117000.
Our tejas re solution customers spend a 156000 on average with us.
I'll share a recent example every solution.
We've historically secured firewalls for this large well known public company for several years and when the colonial pipeline attack happened. They made the decision to invest in expanding security across their entire environment, particularly for endpoints.
During an evaluation process that engaged and assessed the top end point and security providers. They test drove changes and we're impressed not only with our endpoint security, but also how easy are product, what's to us and our ability to secure their entire environment. No. One else can compete on that front and the result was a multi.
The year multimillion dollar deal for us.
Plus as part of the engagement, we connected them with one of our service partners to provide them with managed firewall services a solution. We no longer offer. The end result is that we have a customer getting a great security outcome and we've improved the quality of our revenue mix. This example, also illustrates the second area of.
Formation in our business, we've chosen to move on from certain bespoke and outsourcing type security services.
And we've been reducing our exposure to non integrated third party resales. These revenues are simply not strategic to us long term and have been typically lower margin contracts for us.
We're moving a pace to both transition TTP customers to changes and exit non strategic service lines.
Our expectation is that pages are our will eclipse C. T. P. A R in mix next year.
And that by the end of next year, we will have transitioned the substantial majority of our current C. T. P air are off of that platform.
<unk> is the xdr in MTR markets come into their own industry analysts are evaluating competition and tejas is consistently showing up as a market leader.
Frost <unk> Sullivan or did us the 2021 customer value leadership award for the global Xdr market with special recognition for a meaningful degree of automation.
We were referenced as number eight in the top 100 software companies of 2021, and the highest rank security software pure play by the software report recently Forrester named US a leader in their first M. D. Our wave assessment as did I D. C for their first U S. M D. Our assessment.
These are proof points of the agile and customer driven way secure works is transforming.
As part of that transformation I'd be remiss, if I did not recognize congratulate and thank our incredible employees for their tremendous execution.
Their unwavering commitment to our mission now I'll turn the call over to Paul Parrish, our CFO. Thanks.
Thanks, Wendy as noted <unk> marked an important milestone for us.
Ara or crossing $100 million and representing.
Approximately a quarter of total <unk>.
We added $30.0 million, a year or this quarter up from $22.0 million last quarter.
We are raising our full year guidance to at least $155 million, just a year or.
Can you just revenue was $23.0 million up 33% sequentially.
We also understand the relationship of <unk> revenue to pages IRA or re solution customers revenue was classified as changes once a customer converts to contagious platform.
This conversion creates a lag between <unk> and revenue.
The average revenue per customer was approximately $149000 versus $102000 for managed security services customers showing our transition continues to result in broader customer relationships.
Hey, just customers increased from 500 to 700 sequentially offsetting declines in our managed security subscription customer base.
This quarter, we increased our disclosure, providing a breakout of subscription and professional services revenues and cost of sales.
<unk> total revenue was down 3% subscription revenues were down three 6%. This.
This is primarily where we're intentionally reducing certain non strategic areas of the business, while we're growing Tigers.
Professional services revenues were flat.
Revenues were lower sequentially following a surge in short term engagements in Q1.
Gross profit margins were 61, 1% up 140 basis points year over year.
The year over year, a pickup in margin was primarily driven by improved cost and subscription revenues.
Since the start of last fiscal year subscription gross margins have expanded by approximately 400 basis points. While total revenue has been flat evidence that our transformation is working.
Moving to operating expenses, we are investing in key areas of the business to capture the opportunities ahead of us R&D increased to 21, 5% of road.
From 16, 6% last year, and we capitalized $5.0 million in incremental R&D spend as we accelerate investments in our security platform sale.
Sales and marketing was 25, 1% of revenue consistent with last year.
We will invest in sales and marketing on the second half to continue.
Accelerating growth in charges.
Adjusted EBITDA margin was two 7%.
Cash flow provided by operations was $20.0 million for the quarter Capex was $2 million for the second quarter, including $5.0 million of capitalized R&D investments into guidance.
We ended the quarter with $197 million of cash.
Untapped credit facilities.
Moving to guidance.
There is additional detail in the press release, but the Big picture is we're raising today, just a year or more in the total revenue range and tightening the high and low end of adjusted EBITDA guidance.
We are rapidly transforming the business and our guidance is reflective of our successful execution.
Wendy will now join US again as we begin the Q&A.
Operators can you. Please introduce the first question.
Thank you and I will now open the call for questions. If you have a question press Star then one on your telephone keypad as a courtesy to others. Please ask no more than two questions.
We'll take our first question from SEC keeps calia with Barclays.
Okay, great Great Hey, good morning folks thanks for taking my questions here.
Good morning.
Hey, Good morning, Hey, Wendy maybe just to start with you.
Great to see the improving growth in <unk>.
I think you alluded to this a little bit in your prepared remarks, but can you just talk about how much of this is coming from from.
From those those CCP slush MSS customers that are shifting and sort of how you see that path kind of going forward as that shift continues.
Sure. So we do as we have seen both of those contributing to the growth in a balanced way.
The important element, which I mentioned in terms of the the re solution customers that does not just dollar for dollar moving over to the tedious platform, but.
Creating incremental.
Average revenue per customer as they make that transition where they're getting more value.
And we're getting a greater share of their wallet. So there's benefit from that too. We also see as new customers are on the platform. They too have a coverage and higher average revenue per.
<unk> solutions customers simply because of that same state coverage opportunity.
And so we expect as I mentioned to see the substantive majority of CDP transition complete by the end of next year. So that will obviously continue to be an important contribution to the <unk> growth and then of course towards the end of next year and after that it will be primarily new and upsell them.
On existing cases customers that contribute.
Got it that's very helpful.
Paul maybe for my follow up for you.
Can you just can you just touch on gross margins a little bit sequentially. I know there were up very nicely year over year, but I was just wondering if there was just anything to consider from a a pro serv or subscription.
<unk> with gross margins, maybe just down slightly sequentially. How do you sort of think about some of the puts and takes there.
Yes excellent question.
The reason why we're giving our new disclosures around our margins and so when you drill into the overall gross margin within that our subscription gross margin is actually continuing to improve.
Which quarter over quarter.
<unk> of <unk>.
Q2 was 67, 8% and description margins Q1 was 67, 6%.
So slightly up quarter over quarter professional services as I mentioned in my comments.
<unk> total revenue slightly down from first quarter, and we had a surge in our work during the first quarter. So that contributed to the overall gross margin actually declining from Q1 to Q2 the professional services.
Great very helpful I'll get back in queue. Thanks, guys.
Our next question comes from Sterling Auty with Jpmorgan.
Okay.
Sterling Your line is open.
Please check your mute button.
Sterling if you can hear me please get back in the queue.
Our next question is from Mike <unk> with Needham <unk> company.
Hey, Thanks for the time guys I really do appreciate it here just just.
Two quick questions from me.
First I know that you guys had disclosed the resubmission customer average I think they are spending I want to make sure I got that right. It was 156000.
With secure works versus the overall average revenue per customer is a 117000 so that was.
That was the first and then second I guess building on that that $156000 from pages re solution customers.
Has that trended over recent quarters I'm trying to get a sense of what it was last quarter or even a year ago to see how that $156000.
I guess data point has has changed overtime.
Yes, so Titus Azure average revenue per customer.
Q2 was actually a 149000 total total <unk> 56 for resolutions with risk solution.
So resolution portion of that has been trending.
Around the $57.0
Ill kind of up and down a little bit quarter to quarter, we will see that kind of bobble around that number but not much change from that.
Some quarters slightly higher this has been a good good medium number.
Great. Thanks for that and then one more if I could.
If I'm thinking about the services that you guys are intentionally walking away from there just lower margin not considered strategic to you guys.
Much of that is left.
From where we stand today I am just trying to see how much we've already I guess walked away from and then what's what's coming down the pipe.
Sure So our guidance for this year reflects.
The pace at which we'll be exiting those as will our guidance for next year, which we which we haven't given yet.
But we are moving to do that obviously as quickly as possible and will be.
As I said really substantially complete by the end of next year.
Okay is it fair to assume that the vast majority of that.
I guess intentionally turned over revenue.
We will be done this year.
Or is it more more evenly spread between this year and next year.
I would I would say that we will probably be substantially complete with that towards the mid part of next year, but the guidance. This year reflects.
The pace at which we want to push that fairly quickly.
Understood. Okay. Thanks for the time guys I'll get back in the queue. Good luck.
And as a reminder, ladies and gentlemen, if you have a question. Please press.
Star then one to get into queue.
Yeah.
Our next question is from Brian Essex with Goldman Sachs.
Hi, good morning, and thank you for taking the question.
Maybe maybe Paul for you I would.
He'd like to see if you could give us maybe a little bit more clarity around the moving pieces within Tejas I know youre, just kind of starting to disclose some of this stuff, but in terms of the mix of Xdr MBR DDR.
What is the mix maybe the total pages revenue.
Hey.
Apologize, if I missed that and and how you anticipate that to trend.
Over the next year or so.
Yes, So we gave guidance on the total revenue for this year of $90 million to $100 million potatoes.
We continue.
Continues to climb as we have increased conversions over <unk> over <unk>.
So we see that momentum continuing and we're pretty pretty happy with the momentum, we're having and the growth, we're having which was reflected in our total IRR.
Got it.
Okay.
That's helpful. Just trying to get a sense of the Mexico like Xdr, MBR and DDR, what that might be within the with the.
Revenue wherever you are.
Yes, we're reporting as total pages as we continue through this journey of the transformation, we will consider additional disclosures along those lines, but why now reporting it altogether total charges.
Okay fair enough.
And then maybe just a follow up.
Understand the customers that are kind of migrating over to the platform I think you've previously noted that you've also had other service providers that are.
You know kind of leveraging your technology on their platforms any any traction there and any indication of maybe the magnitude of you know.
That channel four four pages.
Sure I can take that one.
We are really pleased with the traction we've had in the MSS P program. So far so we launched that.
Formerly in May and had some some data work with partners towards the end of last year, starting so in terms of.
Partners, who have signed on to deliver services on the platform U S. Europe Middle East pleased with that traction.
Obviously with our launch in May the sales are not going to be material to the total just yet, but we're looking at the early indicators of.
Have their teams completed the certifications that we have available on the pages platform.
<unk>.
The pipeline that they are building and frankly, just the go to market activities that were doing jointly as leading indicators of traction. There. So pleased with where we are and we will take a little time before the the total numbers start to move.
The top line.
Got it that's very helpful. Thank you very much I appreciate it.
And I don't see any additional questions. Thank you.
Okay.
Thanks that wraps up our Q&A in todays call a replay of this webcast will be available on our Investor Relations page of secure works Dot com, along with our Q2 web deck with additional financial tables.
Also a reminder, secure works are scheduled to present at the D. A Davidson virtual Investor Conference on September nine.
Hope you will join US there and thanks again for joining us today.
And ladies and gentlemen that concludes today's call you may now disconnect.
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Yes.
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Good morning, and welcome to secure works second quarter fiscal 2022 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 and anytime during the presentation.
At this time all participants are in a listen only mode. We are webcasting. This call live on the secure works 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 Andrew Storm, Vice President of Investor Relations you may begin.
Thanks to everyone for joining us I'm, Andrew Storm VP of Investor Relations at secure works with me or with each other our CEO as of Tomorrow, and Paul <unk> our CFO.
During this call we will reference non-GAAP financial measures, including non-GAAP revenue gross profit gross margin operating expenses operating income net income earnings per share EBITDA, adjusted EBITDA and cash flow from operations. A reconciliation of these measures to the most directly comparable GAAP measures can be found on our web deck and press release, which are available on our IR website. 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 expectation.
Actual results and events could differ materially from those projected due to a number of risks and uncertainties, which are discussed in our press release web deck and SEC filings, we assume no obligation to update our forward looking statements now I will turn it over to Wendy.
Thank you Andrea and welcome everyone.
First one to say what a privilege it is to serve as the CEO of Secureworks.
This company has a remarkable history and the security industry constantly evolving just care in ever changing technology landscape by outpacing and outmaneuvering the adversary.
Our approach is grounded in solving customer security pain points and.
And the three themes that we always here.
Instead, they are looking to reduce overall risk to the organization.
Optimizing their security investments.
Now the gating the shortage of security talent.
To reduce their risk customers need a grid of security controls to protect their data and applications and they need the technology to enable the prevention detection and protection capabilities to respond to todays security threats efficiently and effectively across their entire technology environment.
Listening to our customers' Redeveloped Tejas and integrated cloud Native security platform that provides customers with both the security controls and the operational enablement they need to achieve superior threat prevention vulnerability reduction rapid detection across the full range of threats and the fastest.
<unk> term aviation solving these pain points for our customers create significant opportunity for us.
And the emergence of xdr extended detection and response and M. D. R. A security categories validates decision.
In our view Xdr will become the primary security offering with the current suite of Standalone security tools and applications, becoming features that we offer enhancing our tam to over $40 billion by 2025 of the endpoint protection Sim vulnerability assessment and other products become features a holistic xdr.
Solutions, while competitors are making claims in the market every day there are three clear reasons CIO and <unk> are choosing us.
First our software was purpose built to be and xdr solution XD.
Xdr at its core is really a big data challenge and opportunity to use data science to solve security problems and what your design software for the architecture, you build to support it matters a lot.
<unk> designed and developed Tejas Xdr from day zero with the Xdr vision in mind.
Our solution takes all the relevant security preliminary from our own proprietary data sources as well as third party sources across our customers' entire ecosystem endpoint network cloud and business systems for comprehensive and timely visibility.
<unk> supports both streaming and batch data ingestion, enabling advanced detectors to identify malicious activity assets received this provides analysts timely detections coupled with one click response actions to drive efficiency and faster time to remediation.
Our second advantage is the powerful combination of our security platform with analytics and Detections fueled by the deep security expertise that comes from staying in the fight with our customers each day.
Security is one of the few arenas, where you regularly face a highly motivated human adversary empowered with technology and collaborating amongst themselves to hone their craft, we do the same with.
We constantly enhance our detection and prevention capabilities by leveraging what we learned about the threat actor behavior their techniques tactics and procedures each day.
We see adversarial behavior from every angle through our daily security investigations incident response engagements and adversarial testing opportunities.
Further our counter threat unit data science teams conduct proactive research on threat actors and their changing targeting tools to ensure we're keeping our customers aware of and prepared for the latest most relevant threats.
All of this knowledge has turned into machine readable software that accelerates the protections for all of our customers.
And the end result is an incredible breadth and depth of automated detectors and threat context to help our global customer outpace and out maneuver the adversary at scale.
And if a customer needs an expert opinion, they can simply use the intuitive built in chat functionality, we provide that makes it easy to collaborate with experts 24 by seven for life personal health.
And lastly, our fundamental understanding of how to manage and efficiently run our security operation at scale is a powerful powerful differentiator.
<unk> is efficiently run first class security operations as an industry recognized leader for over two decades.
With changes, we are putting that expertise in the hands of our customers and partners.
One example, we continue to expand our library of orchestration playbooks and connectors and pages xdr.
These playbooks and connectors enable our customers partners and our own security analysts to work efficiently by integrating with a variety of third party tools and automating what would otherwise be manual tasks piece.
These capabilities enable us to deliver services at higher margins than peers, and we're sharing this knowledge with partners.
Customers are looking to optimize their investment in security with a platform that integrates with their security controls unified visibility across their entire environment and that enables highly efficient and effective security workflows to optimize limited security resources.
And partners see that we can help them build a profitable quality business around security services.
To bring this all to life, let me give an example recent.
Recently, an employee at a large manufacturing customer was prompted to run what turned out to be a fake update to their Google Chrome browser design.
Designed to allow the adversary to collect information about the system and its users to send back to their command and control node.
Hey, just detected this pattern of activity within minutes and central alert showing the expected attack chain.
I quickly isolating the host and resetting the credentials of impacted users we were able to prevent the script from installing cobalt strike a popular tool often used to set up future ransomware deployments.
<unk> enabled the rapid shutdown of the entire attack early in the kill chain here.
Here's another important part it doesn't vary same customer also had endpoint protection from another vendor in place that did not prevent the attack and the customer didn't hear about it from them until about 10 hours later.
While some believe endpoint protection is enough marrying our holistic visibility with our breadth and depth of Detections is table Stakes in today's security environment detecting attacks earlier in the kill chain is the key to preventing costly breaches.
To translate this to success in the market, we're proud to share the pages just two years. After its launch has crossed the $100 million in air our front tripling from a year ago.
I'd like to put that in the context of our total business for you are.
Our total revenue and gross margin reflect one our success in shifting our C. T P MSS customer base to Tejas.
And two the shift away from some non strategic offerings.
First shifting TTP customers to teach us.
We call this re solutions because tejas is fundamentally different.
Our holistic approach to security that extends from detection to automated investigation and response capabilities.
When a secure works customer re solutions take up shift their entire security posture. They expand to full coverage of their estate gain access to the best security run books for detection and response and they can easily collaborate with our security experts.
We make the planning and implementation the overall transition and upgrade experience.
And we typically gain higher average revenue per customer or <unk>.
P C.
Our overall RPC, including the subscription services on our counter threat platform is 117000.
<unk> re solution customers spend 156000 on average with us.
I'll share a recent example every solution.
We've historically secured firewalls for this large well known public company for several years and when the colonial pipeline attack happened. They made the decision to invest in expanding security across their entire environment, particularly for endpoints.
During an evaluation process that engaged and assessed the top end point and security providers. They test drove changes and we're impressed not only with our endpoint security, but also how easy are product, what's to us and our ability to secure their entire environment no. One else can compete on that front.
The result was a multiyear multimillion dollar deal for us.
Plus as part of the engagement, we connected them with one of our service partners to provide them with managed firewall services solution. We no longer offer. The end result is that we have a customer getting a great security outcome and we've improved the quality of our revenue mix. This example, also illustrates the second area of tree.
Formation in our business, we've chosen to move on from certain bespoke and outsourcing type security services.
And we've been reducing our exposure to non integrated third party resales. These revenues are simply not strategic to us long term and have been typically lower margin contracts for us.
We're moving a pace to both transitions TTP customers to pages and exit non strategic service lines.
Our expectation is that pages are our will eclipse C. T. P. A R in mix next year.
And that by the end of next year, we will have transitioned the substantial majority of our current <unk> <unk> off of that platform.
Finally, as the xdr in MTR markets come into their own industry analysts are evaluating competition and tejas is consistently showing up as a market leader.
Boston Sullivan ordered us the 2021 customer value leadership award for the global Xdr market.
With special recognition for a meaningful degree of automation.
We were referenced as number eight in the top 100 software companies of 2021, and the highest rank security software pure play by the software report recently Forrester named US a leader in their first MTR wave assessment as did IDC for their first U S. M D. Our assessment.
These are proof points of the agile and customer driven way secure works is transforming.
As part of that transformation I'd be remiss, if I did not recognize congratulate and thank our incredible employees for their tremendous execution and their unwavering commitment to our mission now I'll turn the call over to Paul Parrish our CFO.
So Linda as noted <unk>, Mark an important milestone for us.
<unk> crossing $100 million and representing.
Adding approximately a quarter of total <unk>.
We added $30.0 million this quarter up from $22.0 million last quarter.
We are raising our full year guidance to at least $155 million changes IRR.
Can you just revenue was $23.0 million up 33% sequentially.
To help understand the relationship of revenue to Titan Sega or re solution customers revenue was classified as changes once the customer converts to the <unk> platform.
This conversion creates a lag between <unk> and revenue.
The average revenue per customer was approximately $149000 versus $102000 for managed security services customers showing our transition continues to result in broader customer relationships.
Changes customers increased from 500 to 700 sequentially offsetting declines in our managed security subscription customer base.
This quarter, we increased our disclosure, providing a breakout of subscription and professional services revenue and cost of sales.
Total revenue was down 3% subscription revenues were down three 6% this.
This is primarily where we're intentionally reducing certain non strategic areas of the business, while we're growing measures.
Professional services revenues were flat.
Revenues were lower sequentially following a surge in short term engagements in Q1.
Gross profit margins were 61, 1% up 140 basis points year over year.
The year over year, a pickup in margin was primarily driven by improved cost and subscription revenues.
Since the start of last fiscal year subscription gross margins have expanded by approximately 400 basis points. While total revenue has been flat evidence that our transformation is working.
Moving to operating expenses, we are investing in key areas of the business to capture the opportunities ahead of us R&D increased to 21, 5% of revenue.
From 16, 6% last year, and we capitalized $5.0 million in incremental R&D spend as we accelerate investments in our security platform sale.
Sales and marketing was 25, 1% of revenue consistent with last year.
We will invest in sales and marketing on the second half to continue.
Accelerating growth in charges.
Adjusted EBITDA margin was two 7%.
Cash flow provided by operations was $20.0 million for the quarter Capex was $2 million for the second quarter, including $5.0 million of capitalized R&D investments and changes.
We ended the quarter with $197 million of cash.
Untapped credit facilities.
Moving to guidance.
There is additional detail in the press release, but the big picture is we're raising today just IRR lowering the total revenue range and tightening the high and low end of adjusted EBITDA guidance.
We are rapidly transforming the business and our guidance is reflective of our successful execution.
Wendy will now join US again as we begin the Q&A.
Operators can you. Please introduce the first question.
Thank you and I will now open the call for questions. If you have a question press Star then one on your telephone keypad as a courtesy to others. Please ask no more than two questions.
We will take our first question from SEC <unk> Kalia with Barclays.
Okay, Great Hey, good morning folks thanks for taking my questions here.
Good morning.
Hey, Good morning, Hey, Wendy maybe just to start with you.
Great to see the improving growth in pages <unk>.
I think you alluded to this a little bit in your prepared remarks, but can you just talk about how much of this is coming from from those those CPP slush MSS customers that are shifting and sort of how you see that path kind of going forward as that shift continues.
Sure. So we do as we have seen both of those contributing to the growth in a balanced way.
The important element, which I mentioned in terms of.
The re solution customers that this is not just dollar for dollar moving over to the pages platform, but.
Creating incremental.
Average revenue per customer as they make that transition where they're getting more value.
And we're getting a greater share of their wallet. So there's benefit from that too. We also see as new customers are on the platform. They too have average higher average revenue per <unk>.
<unk> solution customers simply because of that same state coverage opportunity.
And so we expect as I mentioned to see the substantive majority of CCP transition complete by the end of next year. So that will obviously continue to be an important contribution to the <unk> growth and then of course towards the end of next year and after that it will be primarily new and upsell them.
On existing cases customers that contribute.
Got it that's very helpful.
Paul maybe for my follow up for you.
Can you just can you just touch on gross margins a little bit sequentially. I know there were up very nicely year over year, but I was just wondering if there was just anything to consider from a pro serv or subscription.
Perspective, with gross margins, maybe just down slightly sequentially. How do you sort of think about some of the puts and takes there.
Yes excellent question and that's the reason why we're giving our new disclosures around our margins and so when you drill into the overall gross margin within that our subscription gross margin is actually continuing to improve which.
Which quarter over quarter.
Increased.
Q2 was 67, 8% and description margins Q1 was 67, 6%.
So slightly up quarter over quarter professional services as I mentioned in my comments.
Our total revenue slightly down from first quarter, and we had a surge in our work during the first quarter. So that contributed to the overall gross margin actually declining from Q1 to Q2 the professional services.
Great very helpful I'll get back in queue. Thanks, guys.
Our next question comes from Sterling Auty with Jpmorgan.
Okay.
Sterling Your line is open.
Okay.
Please check your mute button.
Oh Sterling if you can hear me please get back in the queue.
Our next question is from Mike <unk> with Needham <unk> company.
Hey, Thanks for the time guys I really do appreciate it here.
Just two quick questions from me first I know that you guys have disclosed the resubmission customer average I think they are spending I want to make sure I got that right with the 156000.
With secure works versus the overall average revenue per customer is 117000, so that was.
That was the first and then second I guess building on that that $156000 from pages re solution customers.
How has that trended over recent quarters I'm trying to get a sense of what it was last quarter or even a year ago to see how that $156000.
I guess data point has has changed over time.
Yes, so take us Azure average revenue per customer.
Q2 was actually a 149000 total total totaled 56 for re solutions or three solutions.
So resolution portion of that has been trending.
Around the $57.0
Ill kind of up and down a little bit quarter to quarter, we will see that kind of bobble around that number but not much change from that.
Some quarters slightly higher this has been a good good medium number.
Great. Thanks for that and then one more if I could.
If I'm thinking about the services that you guys are intentionally walking away from there just lower margin not considered strategic to you guys.
Much of that is left.
From where we stand today I am just trying to see how much we've already I guess walked away from and then what's what's coming down the pipe.
Sure So our guidance for this year reflects.
The the pace at which we will be exiting those as will our guidance for next year, which we which we haven't given yet.
But we are moving to do that obviously as quickly as possible and will be.
As I said really substantially complete by the end of next year.
Okay is it fair to assume that the vast majority of that.
I guess it intentionally turned over revenue.
We'll be done this year.
Or is it more more evenly spread between this year and next year.
I would I would say that we will probably be substantially complete with that towards the mid part of next year, but the guidance. This year reflects.
The pace at which we want to push that fairly quickly.
Understood. Okay. Thanks for the time guys I'll get back in the queue. Good luck.
And as a reminder, ladies and gentlemen, if you have a question. Please.
Star then one to get in NICU.
Okay.
Our next question is from Brian Essex with Goldman Sachs.
Hi, good morning, and thank you for taking the question.
Maybe maybe Paul for you I.
We'd like to see if you could give us maybe a little bit more clarity around the moving pieces within Tejas I know youre, just kind of starting to disclose some of this stuff, but in terms of the mix of Xdr MBR DDR.
What is the mix maybe the total pages revenue.
Hey.
I apologize, if I missed that and and how you anticipate that to trend.
Over the next year or so.
Yeah. So we gave guidance on the total revenue for this year of $90 million to $100 million potatoes.
The.
Continues to climb as we have increased our conversions over <unk> over <unk>. So we see that momentum continuing and we're pretty pretty happy with the momentum, we're having and the growth, we're having which are reflected in our total IRR.
Got it.
Okay.
That's helpful. Just trying to get a sense of the Mexico like SCRA, MBR and DDR, what that might be within the with the.
Revenue whatever Europe.
Yes, we're reporting as total pages as we continue through this journey of the transformation, we will consider additional disclosures along those lines, but right now we're reporting it altogether total ages.
Okay fair enough.
And then maybe just a follow up.
Understand that the customers that are kind of migrating over to the platform I think you've previously noted that you've also had other service providers that are.
Kind of leveraging your technology on their platforms any any traction there and any indication of maybe the magnitude of.
That channel four four pages.
Sure I can take that one.
We are really pleased with the traction we've had in the MSS P program. So far so we launched that.
Formerly in May had some some data work with partners towards the end of last year, starting so in terms of.
Partners, who have signed on to deliver services on the platform U S. Europe Middle East pleased with that traction.
Obviously without launch in May the sales are not going to be material to the total just yet, but we're looking at the early indicators of.
Have their teams completed the certifications that we have available on the tedious platform.
<unk>.
The pipeline that they are building and frankly, just the go to market activities that were doing jointly as leading indicators of traction. There. So pleased with where we are we will take a little time before the the total numbers start to move.
The top line.
Got it that's very helpful. Thank you very much I appreciate it.
And I don't see any additional questions. Thank you.
Okay.
Thanks that wraps up our Q&A in todays call a replay of this webcast will be available on our Investor Relations page of secure works Dot com along with our Q2 web deck with additional financial tables are.
Also a reminder, secure works are scheduled to present at the da Davidson Virtual Investor Conference on September nine.
Hope you will join US there and thanks again for joining us today.
And ladies and gentlemen that concludes today's call you may now disconnect.