Q3 2023 SecureWorks Corp Earnings Call
Thanks, everyone for joining us with me. This morning are Wendy Thomas our CEO and Paul Parrish our CFO .
During this call unless otherwise indicated we will reference non-GAAP financial measures you will find the reconciliations between these GAAP and non-GAAP measures in the press release and presentation posted on our website earlier today.
Please also note that all growth percentages refer to year over year changes 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 ill turn the call over to secure work CEO Wendy Thomas.
Thank you, Kevin and welcome everyone.
I am pleased to report that <unk> grew more than 80% to a record $222 million in the third quarter.
We doubled our cages customer base over the past 12 months ending the third quarter with a total of 1600 customers.
Our changes to our end customer count growth rates continue to be among the highest in the <unk> space.
And we've only just started to scratch the surface of the emerging market opportunity.
In addition, our business model transition is accelerating.
<unk> represents 65% of our overall subscription are are.
And is now expected to be approximately 80% of <unk> by the end of this fiscal year.
We extended the reach and performance of our platform and third quarter with the launch of a localized version of the <unk> platform in Japan.
A significant step in both the global expansion of cages and the strategic repositioning of our business.
Since our initial market entry into Japan, nearly a decade ago, we've had the privilege of securing some of the most innovative multinational organizations in the world.
The launch of cages marks the next era for secure works and its customers across the Japan market.
<unk> access to unified prevention detection, and response and a single localized and global platform with an added layer of support available to customers and partners via managed xdr.
It was an honor for me to meet so many prospects and customers top companies and their CEO , while in Japan for the launch.
As well as to invest time in forging new partnerships.
In the short period of time since the launch we've seen great traction with a growing pipeline and key new logo wins for example, I spent time with the security leaders of a $9 billion multinational retail company headquartered in Japan.
And they were looking to create global consistency and streamlined management of their security operations teams across regions. They selected pages to consolidate stock management.
170 business application.
And to align global security teams across time zones with the ability to secure regional systems with multiple service providers.
The open and collaborative design of changes towards seamlessly across global teams and disparate technologies.
Could secure their organization at the speed of their digital transformation.
We also recently announced our partner first go to market approach.
Customers want choice and the ability to work seamlessly with trusted partners and advisors.
Since launching our partner program in mid 2020.
We have established strategic relationships within the partner community.
Support customers' preferred buying approach and to widen our access to market opportunities.
Year to date more than half of the new tedious business was sold through partners.
And the scalability of the <unk> platform and operating efficiency enabled us to deliver growth with the sound partner led business model.
So the time was right to take the next step in the evolution of our partner led go to market program to.
To capitalize on the momentum in our partner relationships and sales milestone we've been building towards since we began our journey to a SaaS company.
Prospective customers come to us with a consistent set of security pain points.
We need to consolidate sprawling cyber states moving away from disparate point solutions that are costly don't work together and overwhelm their short staffed teams with noisy alerts.
The first principles behind the design of the <unk> platform address this challenge from the perspective of customers and <unk>.
Four areas.
And open platform approach that meets them, where they are and can evolve seamlessly.
Our technology transformation.
And one that provides superior detection.
And unmatched response.
To prevent damaging security breaches all at an industry leading return on investment.
Our results show that secure works is delivering on these priorities.
Let me share some of the proof points and the voice of our customers.
First <unk> offers superior detection.
Detection is more than finding everything that poses a threat.
Is about finding the right things so that the headline is not buried in the noise.
Can you just now ingest newly 550 billion cyber security events daily.
Including events across hundreds of purpose built integration.
We were able to use these events combined.
Combined with our proprietary threat intelligence.
To better training, our machine learning models to detect known and unknown threats.
A renowned counter threat unit tracks more than a 175 active threat groups and handled over 3000 incident response and adversarial testing engagements annually.
The threat intelligence and hunting and detection techniques distilled from their work.
Fused into the <unk> platform to accelerate detection efficacy and efficiency.
Year to date can you just xdr has filtered nearly 99% of point security product alerts, which would have been noise to our customers.
This difference was clear and a deal we recently signed with a large auto parts manufacturer.
Well it was facing an overwhelming number of alerts from a leading endpoint provider.
This company's security leader have been challenged to improve the level of security visibility and effectiveness.
To be in a better position to support the constant competitive innovation and new technologies. His company was introducing all.
All while showing cost savings.
After a short proof of value deploying cages.
We were able to quickly show the ability of changes to sort the signal from the noise in a way that demonstrated the business case for their teams improved setup scale and effectiveness.
And the ability of changes to work across their Ot and it environments was critical to protecting their revenue and reducing their business risks from ransomware another attack.
And tejas regularly find malicious activity that other products mist with our unique capabilities to detect a threat actor behavior based on our knowledge of threat actors tactics and techniques.
For example, <unk> recently identified a business email compromise and a third party cloud environment and email application.
We're a threat actor was able to steal credentials and create a malicious inbox rule to hide emails from the primary owner.
The security controls in the email application.
Ill provider did not alert around the compromise the user nor around the creation of the malicious rules.
The second way, our xdr platform solves a key customer pain point is through unmatched response.
Our vision remains to automate detection threat hunting security investigation and response actions to the greatest extent possible.
Moving to align forward to free up security talent to focus on the things only humans can falls.
The soar capabilities native to teach us enabled us.
This is not a bolt on that customers have to build in June , but rather are designed and curated by our security experts and software developers.
Automated response matter so much because the pace required of securities has accelerated.
The median dwell time for ransomware attacks is about four days.
Compared to 55 days, just three years ago.
Pages prevents threat actors from lingering and blind spots and by enabling rapid response.
Key to preventing costly breaches.
And third quarter are multibillion dollar holding company with numerous operating units in the sports and entertainment industries.
I supposed to assess all of their disparate systems to determine if a threat with lingering in their environment.
Leveraging the capabilities of cages, we demonstrated the value of the speed the visibility of compromise in their environment.
And if capabilities for automated response actions in real time.
With the additional benefit of the ability to access a security expert in less than one minute via the pages UI chat feature the customer subscribed to tejas xdr to maintain their security posture going forward and added managed xdr to complement our team with additional security expertise.
Three.
We are open without compromise.
Why is this important.
Because the one constant in technology is change and security has to stay ahead of the curve, while being a business enabler.
Transparency and open interoperability has always been first order principles for pages and this is resonating with our customers and our partners.
For example, <unk>.
<unk> technology choice is one of the Differentiators of pages.
Unlike with other xdr providers changes customers can leverage leading third party endpoint solutions or our own endpoint agent included natively with changes.
But edr or Edr centric xdr is insufficient for holistic security visibility and effectiveness.
Year to date less than half of the investigations on pages leveraged any endpoint telemetry.
Point security solutions are no longer the answer to holistic visibility and effective security.
Another important difference and our open without compromise approach.
Is that we design cages to be used collaboratively and transparently.
Across customer teams, our MSP partners and security experts had secure works.
All have the same visibility into the efficacy and actions in the platform.
Section sources threat contract <unk>.
Investigation steps and more working interoperability in real time.
Black box MTR solutions make it difficult organizations to hold their vendor accountable.
Because it's opaque as to how they are making decisions about threats in that environment.
You would never let your investment advisors and you only occasional reports with your returns without access to your underlying investments are trades why would anyone except that from their MTR security provider.
Finally customers choose pages for the measurable and superior return on investment.
We demonstrate return on security investments across three primary areas.
Streamlining of security vendors and spend.
The value of uptime of business operations and revenue streams.
And the ability to optimize investments and internal security teams.
To make this point concrete.
We recently won a global aviation manufacturing customer that was looking to reduce their overall risk with a more effective cyber defense program.
This customer was able to reduce total direct security spend by approximately 500000 annually by.
By leveraging cages to drastically reduce false positives.
And by implementing a roadmap to rationalize other vendors and unify their security operations functions.
It had the added benefit of another $1 8 million and reduced cyber insurance recovery costs.
All while demonstrating for the first time, a security posture protecting all of the 75 product lines driving their revenue.
While it's clear that the market cannot solve security challenges with either people are point solutions alone.
Dr and even MTR markets are still early in the emergent stage.
But awareness and momentum are accelerating.
A recent study by Forrester showed that 47% of buyers, we're actively assessing and planning for and Xdr implementation, while another 25% were interested but needed to further research xdr's capabilities.
Kgs Xdr is the unification and automation answer to today's security challenges.
The majority of the market lacks the security expertise to fully manage xdr independently.
We see customers choosing managed xdr is the better MBR solution, putting them on a path to achieve the benefits of xdr, while addressing their security talent challenges.
With the changes platform.
<unk> and our partners are delivering the most transparent interoperable and open <unk> solution.
Customers will increasingly demand better security at the same or lower total spend levels with.
With fewer vendors to manage and fewer operational burdens on their team.
<unk> is well positioned to accomplish this for customers.
As we keep our customers secure and do this at the highest possible ROI for them, our customers and the broader market will continue to choose secure works.
I want to thank our customers and partners for joining forces with us.
Thank our teammates for their hard work and commitment to realizing the secure commission to secure human progress with that I'll turn the call over to Paul Parrish, our CFO to discuss our third quarter results and the outlook for the fourth quarter and fiscal year 2023.
Thanks Wendy.
<unk> continues to gain traction in the market.
<unk> increased $99 million year over year in Q3 $222 million representing year over year growth of 80%.
We've added 800 customers since Q4 of last year doubling over the prior year to end the quarter at 6800 total customers.
Taser subscription revenue was $47 $9 million for the quarter.
100% year over year.
And average revenue per customer was approximately $139000 up sequentially from $146000 in Q2 and remains a premium to our non <unk> revenue per customer, which averages $77000 per customer.
As we continue to grow our new business every solution other MSS customers on Texas. We ended the third quarter was 65% of total air or on pages and elsewhere, just expanding to nearly 80% of total IRR by the time, we exit this fiscal year as we accelerate the transition from nonstrategic services through our taxes.
<unk> business model.
On an overall basis total revenue was $111 million in Q3, which was in our guidance range. Despite an approximately $1 $5 million FX headwind.
Overall Q3 gross margins at 63, 3%, we're roughly flat from the prior year Q3.
We have been raising our voice and profile of the market. This year with targeted investments in sales and marketing as we reposition the company in the security market.
Sales and marketing costs have increased to 35, 8% of revenue up from 25, 1% in Q3 of FY 'twenty, two and 33, 8% in Q2.
We also continue to differentiate our tightest platform through innovation working closely with our customers to deliver new features aligned to their security needs.
R&D was 29% of revenue up from 22, 8% in the third quarter of last year and 26, 7% of revenue in Q2.
G&A expenses were down in dollar terms compared to Q3 of the prior year as we continued to manage G&A in relation to our revenue.
Adjusted EBITDA loss was $17 2 million.
Compared to a $4 $7 million gain in prior year Q3.
The overall change of $22 million was driven by a combination of reduced other MSS revenue as we actively exit nonstrategic services and make targeted investments in support of our growth strategy.
Cash flow used by operations in <unk> fiscal 2003 was $27 million.
Compared with $11 million provided by operations and prior year Q3, and primarily reflects the impact of lower adjusted EBITDA.
Capex was $1 million for the quarter relatively flat with the prior year.
We finished the quarter with a strong balance sheet.
$39 million of cash no debt and an untapped credit facility.
Turning to our guidance for FY 'twenty three.
Both Wendy and I detailed earlier, we saw healthy growth in our taking solutions, which are helping drive better outcomes for customers on their most urgent security challenges and our business model transformation continues to accelerate.
We experienced incremental FX headwinds of $1 5 million in Q3, which assuming that repeats in Q4 will be a total impact of $3 million to revenue for the second half of FY 'twenty three.
In addition, non strategic revenue for our other MSS and other professional services revenues have transmission slightly faster than previous guidance.
Given these combined impacts we now expect full year revenue to be in the $456 million to $460 million range.
Regarding <unk>, we now expect to end FY 'twenty three at $245 million.
Our higher reflecting the longer sales cycles and scrutiny on spending that has occurred with the macroeconomic uncertainty.
We have updated the other MSS IRR component to now and FY 'twenty three below $65 million.
It will be approximately $65 million of all remaining at year end, we continue to expect <unk> solution to be largely complete in FY 'twenty for enabling us to eliminate duplicative costs to support other MSS platform and services.
We are holding our full year non-GAAP net loss in the $55 million to $59 million range with EPS loss in the 63 to six month range.
Additionally, we have narrowed the following guidance ranges from our previous guidance full.
Full year, adjusted EBITDA, and the negative $64 million to $68 million range, which includes our investments in sales and marketing in R&D, reflecting our continued management of spend to revenue.
We now expect cash flow and operations to be in the 64 and $68 million range.
Guarding Q4, we expect revenue of $108 million to $112 million and an EPS loss in the 24 to 28 six range. Please.
Please recall our fourth quarter of fiscal 2023 contains one extra week this year worth approximately $8 million of revenue.
I expect you have questions around FY 'twenty, four and while we will provide guidance with our fourth quarter results I will highlight some of our current high level thoughts.
We expect ongoing global macroeconomic factors, including slowing economic growth inflation rising interest rates and currency pressure to weigh on our customers and as a result potentially their security spending intentions.
These dynamics are creating a broader range of financial outcomes for our upcoming fiscal year.
With what we know today, we will enter next year with the beginning overall quarterly revenue run rate not too different from our exiting Q4 run rate adjusted for the extra week.
We expect pages and other MSS to continue to diverge from an overall revenue component perspective, as tasers close while we wind down other MSS and non strategic parts of our professional services portfolio.
We are committed to actively managing our cost to proportionate to our top line growth.
We are making changes to our cost structure to align with our go forward lines of business as we reach end of life for the majority of the other MSS business in February 2024.
In closing FY.
FY 'twenty three was a year of significant milestones in the company's expansion of its pages xdr platform and the acceleration of our business model transition.
Our customers are clear that <unk> is providing us or to address today's security challenges with an open platform approach that evolves seamlessly with their technology transformation.
<unk> superior detection and unmatched response to prevent damaging security bridges and does so in the industry leading return on investment.
Wendy will now join us as we begin Q&A.
Operator can you please introduce the first question.
Thank you at.
At this time I would like to remind everyone in order to ask a question. Please press Star then the number one on your telephone keypad will close with just a moment to compile the Q&A roster.
The first question comes from the line of <unk> Kalia from Barclays. Please go ahead. Your line is now open.
Okay, Great Hey, good morning, guys. Thanks for taking my questions here.
Good morning.
Good morning, Wendy maybe maybe just to start with you.
Was wondering if you could just talk about how customers are approaching their MSS engagements in this macro I mean, clearly the re <unk> effort. There is going well we mentioned the February 2023.
And the end of life, but I wonder if the macro backdrop is affecting that decision at all to adopt solutions like like like pages, just given the uncertainty around macro and.
And the ease with solutions like MSS curious if you have any thoughts.
Sure. It's a great question and we definitely see the market shifting.
Sort of view it as a.
As both a challenge that turns into an opportunity for us in particular, given the way Tejas is.
Structured for customers.
So what we see is that there are many more consolidation and conversations that that.
We view as an opportunity for us and Thats in terms of.
Consolidation of vendors, where there are elements of pages that are inherent features and capabilities.
Don't require secondary spend and therefore don't require secondary management.
The other pieces is clearly around.
Operational efficiency and being able to create some optionality around their team as they can see through through.
Proof of values the ability for them to drastically reduce the time wasted on sort of false positives.
Wasted alerts their ability to optimize their investment and talent, whether it's through a partner or on their own team on trade is pretty powerful.
The environment, while it is it is not great in terms of a lot of prospects and customers are seeing budget pressure just across their entire organization all functions. It as an opportunity for us to demonstrate an accelerated roadmap toward towards security savings with higher efficacy that we think tejas plays into nicely.
Got it got it that makes a lot of sense, Paul maybe for you a bit of a minutia question.
Clearly the the shift to SaaS.
Way from away from emphasis.
Peaks for itself, but I wonder from a billings and invoicing perspective.
As the shift to pages continues can you talk about how that profile changes if at all between the two I'm just curious.
If that's different from a billings and invoicing perspective for for Tejas versus versus MSS, as we may be model billings and deferred and cash flow.
Thanks for the question.
As youre, describing what those billing become simpler is.
Is it better under <unk> versus MSS and it is something where our customers excited about how simple simple we present the invoicing now.
Our percent collected upfront, it's better now customers are more willing with a product such as Jay just to pay upfront.
And our overall average customer life.
Remained roughly the same on the customer billing term.
Voice and term.
Between the two and the contract term average contract term for RSA as disclosed in our 10-Q10-K.
He is roughly two years, so that we're seeing that still play out for <unk>.
So from a back office standpoint, we're pretty excited about customers, how they look at our buildings and invoicing.
It's simpler and understandable.
Makes sense I'll get back in queue. Thanks folks.
Thank you.
Thank you.
The next question today comes from the line of Mike Sekos from Needham. Please go ahead. Your line is now open.
Great. Thanks for getting me on guys I wanted to circle up on the <unk> guidance here.
I know that we're taking down the page you say or for the year as well as the other MSA or.
And I know that you guys don't guide to it on a quarterly basis, we have those annualize rate, but can you provide some additional color for us how much of the guidance reduction that we're seeing for both pages and other MSS.
Is coming from <unk> not meeting your internal expectations.
What youre seeing in <unk> versus layering in any additional conservatism. When we think about <unk> can you help us separate those three buckets as we look at the or guidance that we have today.
So as we laid out the original $2 65 for pages.
And we laid that out with our Q2 call.
Sure.
And now as you're positioning at the end of Q3, there is a portion relates to a little bit less performance in Q3.
We saw as we ended the.
Towards the tail end of our end of life for other MSS decisions being made.
Somewhat being delayed by customers.
May end up with some.
Exiting of those customers versus decisions made to re solution.
Move over to the <unk> product. So there is a component of this that is made.
Made up of our existing customers.
Willingness to move given the dynamics of what's going on in the economy.
FX.
<unk> continues to be an issue and that becomes a component of this so.
It's roughly $5 million of this 20 million changes FX.
And then just for.
For new logos that piece of this equation, which were all focused on we're growing that piece of the business. We just see that reluctance given what's going on in the economy customers delaying decisions.
So that's a chunk of those two and that's accelerating as we get further into.
And I'm, telling you this year.
Great.
Appreciate the color on the pages here.
Just wanted to make sure I'm doing the math right and would be would be interested if you have the metrics handy, but for MSS space specifically.
So to exit the year MSA or was call it.
I'm, sorry to exit the quarter MSA or was around $119 million.
So I wanted to sanity check that and then second.
Do you have the MSS customer count handy.
Yeah. So it's roughly the same number of customers at the end of Q3, <unk> hundred or other MSS and 1600 potatoes.
Okay. Okay. The average revenue per customer 7000 average revenue per customer for other MSS is 77 and potatoes to 139000.
Got it thank you.
Thank you.
The next question today comes from the line of Hamzah <unk> from Morgan Stanley . Please go ahead. Your line is now open.
Hey, guys. Good morning, Thank you for taking my question.
<unk>.
Paul maybe to start.
You just as a clarification.
And I'm, sorry, if I missed this earlier, but.
Of the guidance cut could you just clarify how much of that is FX macro or any other factors that I may have missed.
And let's make sure the guidance, you're referring to our board.
Our guidance, if thats, what youre focused on.
Yes that was on our revenue guidance for the narrowing of the band on that so.
Yes, yes, yes.
Yes.
There are $2 45.
And we've previously said 265, we'd exit greater than 265. So we're now at $2 45, or greater so that $20 million reduction.
About half of it relates to the existing migration of customers off of other MSS to the product sort of some delays some hasnt see some some customers deciding not to them from our previous projections than there is FX.
Put that is maybe $5 million ish.
For FX impacts.
We know what's going on in the World FX continues to have some drains.
Certain geographic areas of the world.
And then the last piece of this is our focus on new logos.
And we believe we have momentum, but theres delays caused by what's going on in the economy and that's another $5 million ish of that Delta.
Makes total sense.
No no it makes total sense.
And it's being seen across the board.
Pretty much everywhere so.
On that point, Wendy just on the on the budgetary pressures.
<unk>.
I'm curious as you talk to customers.
And your partners.
What sense you get about security budgets for next year do you see them still growing at a healthy rate.
Is this sort of macro pressure that we're seeing right now just a function of perhaps.
Projects, taking longer or is it outright maybe reduction in security budgets.
Sure. It's a good question and we really don't have a crystal ball and frankly, a lot of these prospects don't either.
To characterize what we're seeing right now which is.
Interestingly kind of the pipeline the front and the pipeline remains healthy in terms of that growth. The the time period of the sales cycle to get to the technical win.
<unk>.
Perspective of security teams that they want to make the transition toward a kind of a centralized xdr approach those pieces haven't.
Haven't moderated as we talked about last time and we saw this increasingly this quarter.
What we see is it's more on the back end of the sales cycle additional layers of scrutiny and I think what we're really seeing.
In the market now is sort of budget, absolutely freezing up kind of right towards the end.
And that reflects.
I'd say more uncertainty as different businesses are sort of trying to sort through what their growth opportunities are and therefore, what they can invest next year and.
So the.
The answer is I couldnt say for certain with a great deal of evidence that that those budgets are disappearing permanently right now it feels more like there are kind of in a holding pattern as they sort out their own.
Their own.
Broader budgets, but that is where as we lean into sort of the economic calculators of cages and help them with roadmaps around.
Vendor consolidation and operational efficiency.
The opportunity for us is to really lean into that aspect to give them that visibility too.
Due to a better answer that that's a better answer for us as well.
Makes sense. Thank you.
Thank you.
As a reminder, if you would like to ask a question. Please press star followed by one on your telephone keypad.
The next question today comes from the line of <unk> from Bank of America. Please go ahead. Your line is now open.
Hey, guys you've model and on the call. This morning, just two quick questions for me. The first one the average age of contract going up sequentially to 139000, just wondering in terms of the pipeline that youre seeing in macro deterioration across the board in security how is that number changing throughout the pipeline.
Then I have one follow up question as well.
Sure.
Number has remained strong and consistent and it is it is higher.
Higher than on average than a lot of our peers in the space.
What we see there is that our approach to.
Total coverage has has helped us start with a higher average revenue per customer and then as we've been increasing the number of modules that they take on the customers take on the platform and we've seen our cross sells actually be a bright spot of customers, who know us and trust us.
See the opportunity and the risk reduction in their business.
Have been increasing their existing spend with us so the.
We don't see that moderating.
Materially in the near term relative to our business model remains the same.
Got it thanks, Lindy and that leads me to my next question as well. So if you just break out the growth in Canada.
If you break it out between new customer versus upsell and also how youre thinking about modeling that out for next year as well.
Yes, so as we've referred to in the past the upsell on existing customers moving over have been in that 20% ish range. So we get 20% more from customers when they move from the other MSS potatoes.
So we're continuing to hold.
And as we continue to work our way through the bottom half our bottom end of this.
A portion of the other.
Other MSS moving of course, that's always the hardest part of the mood battalion, but we don't see a dynamic playing out any different than what we've already talked about so it's playing out the same way.
We haven't put together a full fall channel next year, but we still see it playing out at least for this year.
Into next year pointed out the same way and then as we look at the average.
Between re solution and what's coming from new logo, we've talked about it's slightly heavy to the customers moving from other MSS to take just right now versus new logo, but we're focused on that new logo.
On the go forward in the growth areas of the business.
And as we finish the resell loosening quite done done, but largely complete outside of Japan at the end of this fiscal year.
The account executives, who have been working those customer transitions turned towards the actually they already have new territories to start to build pipeline. There. So that is part of.
That transition is just a focus shift for experienced tejas.
Sellers to move towards <unk>.
Patches as opposed to moving existing customers, so that mix will shift as we head into next year.
Got it I appreciate the color. Thank you both.
Thank you.
Thank you.
Further questions at this time, Mr. <unk> I turn the call back over to you.
Okay. Thank you that wraps the Q&A.
Today's call a replay of this webcast will be available on our Investor Relations page of secure work Dot com, along with our Q2 free web deck and additional financial tables. Thanks again for joining us today.
This concludes today's conference call you may now disconnect your lines.
[music].
Yes.