Q2 2020 Earnings Call
Good morning, and welcome to secure worked second quarter of fiscal 2000, trendy financial results Conference call.
Following prepared remarks, we will come back a question and answer session. If you have a question superstar I did a number on your telephone keypad at any time during the presentation. I. This time all participants are in a listen only mode.
Our web casting this call live on the secure works Investor Relations.
Site after the completion of a call a recording of the call will be made available on the same site now I will turn to go over to Terry Miller, VP and Chief Accounting Officer give me no begin.
Good morning, everyone and thank you for joining us today to review secure works financial results for the second quarter of fiscal 2020. This call is being recorded.
Call is also being broadcast live over the Internet and can be accessed on the Investor Relations section of secure works website at investors Dot secure works Dot com.
The web cast will be archived at the same location for one year.
This morning secure works issued a press release announcing results for it second quarter ended August 2nd 2019.
You can access this press release on the Investor Relations section of the secure works website.
During this call management will make forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
These forward looking statements include but are not limited to guidance with respect to gap and non gap revenue and net loss per share as well as adjusted earnings before interest taxes depreciation and amortization.
Are forward looking statements involve risks and uncertainties that could cause the actual results to differ materially from those anticipated by these statements.
You can find a description of these risks and uncertainties in this morning's earnings press release, and then the company's annual report on form 10, K. for the year ended February 1st 2019.
Which is available on the Investor relations.
Website and on the Securities and exchange Commission's website.
[noise] all forward looking statements made on this call are based on assumptions that we believe to be reasonable as of this date September 5th 2019.
We undertake no obligation to update are forward looking statements. After this call as a result of new information or future event.
Some of the financial measurement measures. We use on this call are expressed on a non gap basin.
These non-GAAP measures exclude stock based compensation the impact of purchase accounting amortization of intangibles and the related tax effect of these items.
We have provided reconciliations <unk> financial measures to the GAAP financial measures in today's earnings press release available on our website.
Noncat measures are not intended to be considered in isolation from a substitute for or superior to our gap result, and we encourage you to consider all measures when analyzing secure works performance.
Also as a reminder, all financial information discussed is non gap and growth rates are compared to the prior year period, unless otherwise stated.
With us on today's call or Michael Cody, President and Chief Executive Officer of secure works and Wayne Jackson, Chief Financial Officer.
Following their prepared remarks, we will take your questions.
We would appreciate you limiting your initial questions to too so that we may allow as many of you to ask questions as possible and are a lot of time.
Any event you have additional questions that are not covered by others. Please feel free to reach you and we will do our best to come back to you.
Thank you for your cooperation on this.
Now I'd like to turn the call over to Mr. Cody.
Thank you very much and thank you everyone for joining us this morning for a second quarter 2020 earnings call.
In the second quarter, we achieved revenue of $137 million exceeding the high end of our guidance.
Gross margin of 56.3% of revenue, which expanded 200 basis points from last year.
And even a a $1 million and a loss per share of one soon.
Both of which also top their expectations for the quarter.
We also improvements in the quarter in several aspects of her go to market activities.
The annual value or sales contracts close during the quarter or a C.V. improved across all markets as compared with key one.
Our revenue retention rate was 99%.
We grew the sales pipeline increased our pipeline conversion rate compared with Q1.
We have a growing pipeline for a new T.D. or software application.
And they'll say scored responds feels rather nicely during the second quarter.
I am pleased with the results for the quarter as they represent a good step in the right direction.
Although our go to market efforts remain an area focus and an opportunity for improved execution.
As we've highlighted on protocols are business is undergoing an exciting strategic transition as we bring our vision of the future of security operations to life.
Through software driven solutions.
Review the Sacirbey future.
As a more agile scaled <unk> and effective model for security operations.
Net addresses the challenges of today's dynamic I.T. landscape and rapidly evolving threats.
This new approach in combating security threats demands a leap forward in capabilities.
Made possible by leveraging the following.
The speed and scale of machine learning deep learning in cloud computing to analyze data.
From the extended I.T. ecosystem for greater visibility.
Real time collaboration with experts and smarter more effective automation.
Crowdsourced threaten televisions and insert response insights to enrich the spectrum of data.
For faster and more reliable advanced threat detection and remediation.
And integrated analytics, empowering security analysts to be more effective and productive.
Unencumbered by disconnected point solutions false positives and did an investigation.
Red <unk> threat detection in response or T.D. or.
Was launched at the end of Q1.
Is our first cloud latest patent pending software built on our security analytics platform.
This was an important milestone in the execution of our strategy and the first key building blocks that enables the soccer the future.
To become a reality.
R.T.D.R. software out is differentiated by an integrated set of detectors.
Enriched by or threaten intelligence and network effect.
Automated response actions and collaborative investigations.
We've TDR <unk>, we're building on our heritage of working in a vendor inclusive manner to ingest all relevant data from a wide range of sources.
Network and point cloud and business systems.
To provide visibility across the entire environment.
We're leveraging the latest machine and deep learning methods informed by our 20 years a threat intelligence.
The large and diverse data sets obtained from our customer community.
And our threat models.
To detect malicious activity not identified by other tools.
And to reduce the noise from false positives.
When customers need help <unk> alert or investigating suspicious activity.
A secure work senior intrusion analyst is only a click away with our collaborative investigation capability built into the product.
We've integrated automated response actions natively in the software, giving our customers the ability to take the right action quickly.
And finally, the T.D. or up is built on a platform that allows for rapid innovation.
We've added data sources, and written new detectors and Dave.
And with the network effect each of our 4100 customers across the globe benefits from the latest intelligence gathered they are a threat research in incident response engagements.
The platform and software applications have been designed with a modular approach, giving customers the flexibility to create a security program the lines with wherever they are in their security maturity journey.
As a follow on for the launch of the T.D.R. <unk> last month at the Black Cat Conference.
We announced our next generation managed detection and response solution.
M.D.R. leverage is the power of R.T.D.R.M., allowing customers to work in partnership with us.
<unk> drive the best possible security outcomes.
Although we're early in the go to market efforts with both P.D.R. and R. new version of M.D.R.
Response from the market has been very positive.
We've closed the handful of deals all of which are multi year.
And are encouraged by a few common themes.
Customers appreciate the increased visibility we provide across their entire ecosystem in our predictable compelling pricing model, which makes full asset visibility affordable and accessible.
And customers are also tangibly, realizing the benefits of the software as our security analytics, driven by telemetry and correlation a diverse data sources.
Are substantially reducing alert noise, while our automated response actions.
Are allowing quick threatened resolution.
In addition to or go to market activities, we're working to upgrade a select group of customers to the new software enabled solutions.
This provides value through broader asset coverage.
Better African C., and speed, ultimately, allowing us to expand and or expand relationships with our clients.
We also consider this an important phase of building Referenceable accounts.
A source of valuable customer feedback and a vehicle to create implementation and operational efficiencies as we scale.
We've upgraded over 65 customers in less than four weeks in the early feedback has been very positive.
As we head into the second half of the year, we remain laser focused on building on this progress.
Driving our business transition and bring me or vision of more effective and efficient security operations to life.
I will now turn it over to Wayne to talk about our second quarter performance in more detail Wayne.
Thanks, Mike and good morning, everyone.
Our second quarter results were positive and we continue to maintain our strong financial position as we invest in our new software driven security solutions and our go to market efforts.
In the second quarter of F.Y. 20 revenue was $136.6 million.
6.1% increase over two two F.Y. 19.
And a 2.8% increase sequentially.
Second quarter revenue exceeded our guidance range.
[noise] Eva dollars $1.3 million ahead of our expectations driven by higher gross margins.
And we generated 16.3 million of cash from operations in the quarter, primarily on improved D.S. So.
Our average annual subscription revenue per customer was $106000 this quarter.
Growing 5.5% over last year.
We close nine deals with total contract value greater than $1 million in the second quarter.
We actually have the quarter with annual recurring revenue a $437.6 million.
Consulting revenue grew 11.5% your every year and comprise 24.8% of total revenue for the quarter.
We anticipate our subscription to consulting revenue mix will continue around the 75% level next quarter.
At the incident response and other consulting services continue to be an important component of a comprehensive security solution for our customers.
Finally revenue outside the U.S., representing 26% of total revenue in the second quarter.
From 22% of total revenue in Q2 last year.
Consistently strong growth in the U.K. middle East in Japan.
Gross margin total $77 million in the second quarter of F.Y. 20, or 56.3% of revenue.
A 200 basis point increase from the prior year.
Second quarter operating expenses total $79.3 million compared with $72.2 million last year.
A 201 basis point increase as a percentage of revenue.
Research and development expenses total 17.5% of revenue in the quarter compared with 16.7% for Q2 F.Y. 19.
And 80 basis point year over year increase.
Driven by incremental investments in our software platform development activities.
Sales and marketing expense.
We're approximately 70, 27.2% of revenue in the second quarter compared with 27% for prior year Q. too.
General and administrative expenses total 13.4% of revenue in the second quarter compared with 12.4% for the same quarter last year.
Current G.N.A. costs include charged for the consolidation of some real estate leases, which is the primary driver for the increase in costs as a percentage of revenue.
Adjusted EBITDA on Q2 was $1.3 million compared with $1 million last year.
Nanya net loss of $700000 compared with a net loss of 900000 in Q2 last year.
And non get lost per share was one cent in both current and prior year.
Regarding casual and balance sheet items.
As I mentioned cash flow provided by operating activities was $16.3 million in the second quarter and $13.2 million a year to date compared with the $10.9 million.
Cash provided by operation operating activities in the first half of last year.
Yes, I was 80 days at the end of Q2 down from 93 days at the end of Q1 and an improvement from 94 days at the end of Q. to last year.
We finished supported with cash of $117.7 million and have an untapped 30 million dollar credit facility.
Kepp access 3.6 million in the second quarter.
Now for guidance.
In the third quarter of F.Y. 20, we expect both gap and non gap revenue to be in the range of $135 million to $137 million.
And we expect nine yeah net loss per share to be between three and four cents.
[noise] for F.Y. 20, we now expect the following.
Gap and non gap revenue to be in the range of $540 million to $545 million.
Adjusted EBITDA ought to be positive for the full.
You're in the range of $2 million to $5 million.
Non yet net loss for share to be eight to 11 cents per share.
Yeah net loss per share to be in the range of 52 to 55 cents.
For modeling purposes, we estimate that the tax benefit rate will be approximately 24% for the remainder of the year.
Cash provided by operations to be between 30 and $35 million.
We expect second half cash flow it'd be weighted more towards queue for given expect a collection of the tax receivable from del in that quarter.
And kept back to be in the range of $14 million to $16 million.
In closing, we have a strong financial foundation generating well over 500 million in revenue producing strong cash flow for the year.
We will continue to invest in the development of additional apps and software offerings to better protect our customers.
As we transform the business for long term success.
I will now return the call to Mike.
Thank you Wayne.
I would like to thank my security teammates for the continuous dedication on behalf of our customers.
We have an exciting opportunity in front of us as we undergo the strategic transition.
We welcome the challenge that change brains, and I'm proud and energized by the commitment and adaptability of our team.
As we focus on delivering innovative.
Solutions to secure our customers.
On behalf of the entire secure works team. We appreciate your continued interest in support.
Operator feel now open the line for questions. Please.
Oh, well that Oh them to call for questions. If you have a question for us for the number one on your telephone keypad.
As a courtesy to others. Please as no more than two questions.
We'll take our first question.
<unk> <unk> <unk> <unk>.
Yeah. Thanks, Hi, guys. So the improvement in terms of the the top line can you give us a sense because you did touch upon it is it just improve close rates or did you actually increase the coverage ratio in the quarter as well so you're seeing some flow through effects of that.
[noise] morning, Sterling. It's my thanks to the question, it's it's actually a little bit of both is higher close race and an expansion of the coverage.
And within the close rates and specifically there's been lots of questions out of a lot of these calls around concerns around the macro you know environment that that's out there how would you see the the business reacting if we saw further kind of economic slowdown do you think because of cost savings on hit town et cetera that the business would actually benefit or does it actually take it take a hit companies what to restrain spending.
So that's a great question Sterling and thank you again, it's Mike a good couple of things I'd add or respond to that question with one is in the quarter, we saw a better clothes roads in coverage in all markets across the world, which was the first time, we've sort of.
Not first time, it's been awhile since we've seen that kind of productivity and increase from a coverage perspective, so definitely moving in the right direction. My my sense, having been around for a long time is that security is not a a luxury and as we go through this process.
The are focused on creating better efficiency and effectiveness in.
Delivering value so that the security operation centers are actually going after and spend their time on things that matter should help us in this process and the software that we're creating a that we've created in taking the market. We believe we're we're optimistic that old what will be will sit in a very good.
To show that increase value is the if any downturn were to occur from an economic perspective.
God. Thank you.
Thank you.
Next question from from five T. mobile I need with U.B.S.
Good morning, Thank you for taking across tens and our apologies for background noise I have a question from my a question for Wayne, but like to start with you excuse me <unk> you're undertaking this transformation strategy as it relates to the product plot for and then essentially coding awful platform to pluck your customers on cue. So my question for you might have a lot of cyber security product then senders adventure into this sort of automation arena. So I wanted to get your perspective on you know how that's impacting your customer discussion buying cycles of buying behavior and I have a follow up for one.
So I I think for 10 I've got your question, but let me try and respond and if I didn't will give me a a a a passive being able to ask a clarifying question for me in case I didn't I didn't hear it correctly.
<unk>.
There as we all know there are thousands of point products in the market today that are not effectively working together I think actually taken the that made the statement that as an industry.
The security industry is is in my opinion getting further behind as we can see by the number of breaches talk about capital on or.
The company here in Atlanta that had as she recently I mean, we're just not it's just not in the industry is not working well.
And we believe that software is the key to make it more agile scale on effective model of security and we also believe that.
The community is going to be needed for us to work better together and as the security community. Overall, so we've taken the approach with the security on a Linux at that we've created that will work in a vendor neutral manner to be able to bring the best efficiency and effectiveness.
So that from a a buyer perspective, a customer perspective, we can help them cut through the noise.
And work with the best of breed products across the market. I also think that that means that as everybody talks about a platform in the platform definitions very som.
These platforms will begin to to work together as well and that may be one of the facilitating ways for people to work together in the security community.
Fair enough, maybe just clarify it and then claim the question you know in a sense products on yours talking about automating <unk> fine.
On the alert management monthly validation sort of the the journey that you're embarking on so I guess, what I'm really trying to happen with product vendors are withheld traditionally you hot and ignostic relationship with with them sort of entering a sort of automation free how does that change the competitive easier.
I'm fine.
It's just it's very frightening clarify.
Okay.
I understand.
I guess the way I'd respond to that is there's two different aspects to this in my my one is the the plumbing the the technology that will allow.
Orchestration to happen, which is the automation of an action if you will versus the intellectual property and it drives that action being the right action to take and I think from a from a focus on the security operations Center I'm not sure. We have well we have 20 years of historical experience and data in doing this.
For customers around the globe.
So if he if ultimately this gets down to a buyer's decision of trying to ensure that they're getting the appropriate.
Intellectual property of what to automate and how to automate versus the <unk>, taking the automation action.
I think we sit in a very good position and I'm excited about this and I again from my perspective, I'd like to do this in a cooperative manner in the community.
I don't think the customer will be.
Will benefit to the extent that the security organizations cannot figure out a way to work together in the customers best manner and in doing so or in the customers best not manner in the customers best interest in doing so I think yeah look I'm, an abundance mentality type person. So I actually think the pie gets bigger and we provide better more effective security in fighting the bad guys.
Fair enough I appreciate that and I'm waiting for you if you sort of talked about and Mike as well around.
<unk>.
Pipeline elegant pipeline grammar with as well as conversion rate.
But you saw sequentially I'm wondering why how you've thought about doctoring got into your full your outlook because it doesn't necessarily seem like you're extrapolating quite a good nested in terms of the trends fine too.
Cigarettes, a year or six months to get your thought process behind your Mac you on the phone God. That's it for me. Thank you so much.
Hi for team assure thanks for the question. So as you as you noted we did bring up the bottom end of the range to reflect the the beat into too.
It's it's it's as simple as we had a really a a much improved cute too from a sales perspective go to market.
And I'm kind of a show me Guy So I want to wait and see how Q3 looks before we get too too far out from our rigid from our revised guidance for the full year in in Q1. So it's it's no more simple that we we had a really we had a good q. too.
We're comfortable right now with the guidance and.
News to follow.
Make sense I appreciate it thanks for him.
Thank you.
Your next question.
From Alex Henderson dumb ankle.
Hi, This is Roger Boyd on for Alex Thanks particular questions.
I think previously mentioned, you're expecting acceleration m. or on the back out for the year.
Is that still the case and maybe what are the what are the put some take some that grows district to benefit from.
P.D.R.M.R.T.D.R. and D.R.
Hi, this is waning so acceleration and the back half is as you as you can infer from the guidance.
You know, we're we're we're still focused and we did have some acceleration in the back half that's baked into the 540 to 545.
For the year, we saw we sell some and as I mentioned earlier, we sell some improvement in you to go to market, we expect to see.
Some improvement for the second half of the year, but it's a great question relative to TDR, because there's going to be some tradeoff right as we roll out TDR. It's it's new in the market. We're doing everything we can to accelerate that Mike talked about some conversions that's going to help that net net we we do expect a the go to market to to continue to improve certainly compared to for Q1, but time will tell.
Okay that makes sense and then maybe strategically.
Does the V.M. where acquisition of carbon black.
Knowing that you guys are vendor agnostic does that affect your relationships with with V.M. where itself and then also what's though.
So so this is not my get all respond to that so for the last 20 years, we've had a history of working with the best of breed partners in the marketplace.
Which allows us is I'd sort of alluded to admire mentioned them earlier comment to provide the most effective security for our customers.
And we intend to continue to do that we've worked with carbon black with crowds strike and with me m. were over years.
That have very strong relationships and partnerships with all three.
And and I would expect us to continue to to build upon that success.
And and continue to focus there.
Makes it stinks takes the questions.
Your next question from that the headboard with I.V.C. capital markets.
Thanks. This is actually my Swanson on for Matt If I guess has kind of a broader question. That's what kind of looking out at this product road map of sock the future.
Did you touch a little bit about how your consulting business and and kind of visibility that gives you into your customers has helped shape your product road map.
Matt My Coney. Thanks for the question the <unk> the consulting business in particular, the incident response engagements we do.
But the consulting business overall gives us visibility to understanding.
Which customers have more effective processes procedures and technologies quite frankly for where they are in the security maturity journey, and whether they're looking to prevent or detect and how they're looking to use the various technologies.
So it plays an important role in helping us understand and form a view both from an a threaten intelligence perspective as well as from a product road map perspective of how we evolved.
And the the thing I'd add that it's been great about the new T.D.R. platform and the customers that we have there and I alluded to this in my prepared remarks is that we've been able to turn around customer feedback within hours to at most two days.
To ensure that were being responsive and continuing to evolve in a manner that helps our customers improve the efficiency and effectiveness of what they do from security operations perspective.
That's how pulling up and then just a quick one on the T.D.R. and you know at the beginning of M.D.R.
Using any change in the terms of new and existing customer mix for these products is it mostly insisting that you're targeting so far.
No no we're targeting for for for both new for both P.D.R. and for M.B.R., we are targeting targeting both existing customers, who we will either migrate over or and or upgrade or you know if if they'd make sense to expand the relationship by cross selling into them.
But we also have dedicated sellers, who are focused on helping <unk> to continue to expand the customer base.
On top of <unk> on top of the expansion, we're doing with our existing sellers, but the dedicated sellers are looking to focus on T.D.R. from a sophomore only application perspective initially.
So a different part of the target market. If you will let me let me just explain a little declare because it may help <unk>, we segregate the market or segment the market based upon security maturity.
And clearly the the the it's a different.
Maturity level of customer who may be looking for the software only app with us providing support through the chat feature versus those that would be looking for more of a man on managed and expanded where we may be doing response for them and and an increased.
Level of service.
That helped Matt.
Yeah. Thanks, that's really helpful.
Mm.
Once again, if you did have a question press star on your telephone keypad, That's star one to ask for a question.
Your next question.
From Gur Talpaz with Stifel.
Hi, This is actually Chris bureaus on for Gore.
You mentioned that the del safeguard pipeline ramped nicely during the quarter.
Can you speak to when we can expect to the pipeline to begin to materially convert and to the degree to which this can drive that new customer growth going forward.
So Chris this is Mike injuring the coil first of all I didn't mean to infer that we didnt have conversions and sales in the quarter.
So we did have a ramp with conversion sales and net new customers from the del safeguard relationship in the quarter.
And and the pipeline continues to build build for us to where we would expect.
I would say later this year early next year us be written we would be ramping at a level that.
That would give us a good business.
Well at a normalized level I would say so we now have sort of greater visibility.
In the Q Q3, Q4, Q1 of next year, where we'll have a pretty consistent level. We would hope of sales in the Dell said garden response, and the ability to open up some of those new customer relationships to cross sell into.
Great. Thanks, Mike.
Yep.
Just to be clear, though when we went from a from a revenue perspective that is a good we don't expect it to become a material part of our business, but it is clearly a nice level of new customer acquisitions and revenue and profitability.
Got it got it thank you guys.
We'll now take our final question from Howard Smith with first analyst.
Yes. Good morning. Thank you for taking my question. So first I just wanted to clarify.
Get a little more detailed on the upgrade of the 65 customers you mentioned.
Is that from managed detection and response, you're not providing TDR to these customers as well.
And and you know how did you go about kind of selecting which customers who are most appropriate for that program.
Morning, Howard Thanks for the thanks for the question.
You knew that so what we basically did was looked at a group of our customers that.
That we were providing services or solutions for around monitoring and management.
And effectively saw that there was an easy upgrade path for us to move them to operating on the TDR software.
Where we are working cooperatively with them. So if for example.
A b C company as a customer of ours, and we were able to effectively wake up with very little effort and energy on their on their or our behalf.
And show them, the capability, where they're seeing what we're doing on the old platform and the new platform and the opportunity to to transparently see how we're operating so they have the same lagon with a new portal and capabilities working cooperatively in a cloud native app to see how we're we're working and.
It was a very quick upgrade path, an ability to train them and show them in the process of doing this we came up with some incremental detections along the way on the first 65 to show the power of the.
The TDR software, we had one customer actually respond telling us that they thought it was like Christmas morning for them.
So if it was a very encouraging and it's been a very uplifting sort of four weeks for us as we've gone down that path.
Great. Thank you for the color there and then in terms of the financial Q2 financials. If I heard right just want to clarify there was approximately a 1.3 $1.4 million onetime expense in DNA for some office consolidation I just want to confirm that's kind of a one time.
Item power this way that's correct that's correct.
Okay. Thank you much.
Thanks very much.
Thank you again for joining us on today's call and for all of your questions. We appreciate your support and look forward to our third quarter call. In early December if we did not get to your questions. During the kidney section. Please don't hesitate to reach out to us for a follow up.
Thank you very much.
Have a great day, thanks, everyone.
Ladies and gentlemen that concludes today's call you may all disconnect at this time.
Good morning, and welcome to the secure work second quarter fiscal 2020 financial results Conference call.
Following prepared remarks, we will conduct a question and answer session.
If you have a question superstars are the number one on your telephone keypad at any time during the presentation. At this time all participants are in a listen only mode. We are webcasting. This call life on the secure work Investor Relations website.
After the completion of a call a recording of the call will be made available on the same site now I will turn to go over to Terry Mueller VP and Chief Accounting Officer, you May now begin.
Good morning, everyone and thank you for joining us today to review secure works financial results for the second quarter of fiscal 2020. This call is being recorded call is also being broadcast live over the internet and can be accessed on the Investor Relations section of secure works website at investors start to cure works Dot com.
The webcast will be archived at the same location for one year.
This morning secure works issued a press release announcing results for its second quarter ended August 2nd 2019.
You can access this press release on the Investor Relations section of the secure works website.
During this call management will make forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
These forward looking statements include but are not limited to guidance with respect to GAAP and non-GAAP revenue and net loss per share as well as adjusted earnings before interest taxes depreciation and amortization.
Our forward looking statements involve risks and uncertainties that could cause actual results to differ materially from those anticipated by these statements.
You can find a description of these risks and uncertainties in this mornings earnings press release and in the company's annual report on Form 10-K for the year ended February Onest 2019, which is available on the Investor Relations.
Web site and on the Securities and exchange Commission's website.
All forward looking statements made on this call are based on assumptions that we believe to be reasonable as of this date September Fiveth 2019, we undertake no obligation to update our forward looking statements. After this call as a result of new information or future events.
Some of the financial measurement measures. We use on this call are expressed on a non-GAAP basis. These non-GAAP measures exclude stock based compensation the impact of purchase accounting.
Amortization of intangibles and the related tax effect of these items.
We have provided reconciliations of the non-GAAP financial measures to the GAAP financial measures in todays earnings press release available on our website.
non-GAAP measures are not intended to be considered in isolation from a substitute for or superior to our GAAP results and we encourage you to consider all measures when analyzing secure works performance.
Also as a reminder, all financial information discussed as non-GAAP and growth rates are compared to the prior year period, unless otherwise stated.
With us on today's call are Michael Coty, President and Chief Executive Officer of secure work and Wayne Jackson, Chief Financial Officer.
Following their prepared remarks, we will take your questions. We would appreciate you limiting your initial questions to two so that we may allow as many of you to ask questions as possible in our allotted time any event you have additional questions that are not covered by others. Please feel free to re queue and we will do our best to come back to you. Thank you for your cooperation on this now I would like to turn the call over to Mr. Cody.
Thank you Terry and thank you everyone for joining us this morning for our second quarter 2020 earnings call.
In the second quarter, we achieved revenue of $137 million exceeding the high end of our guidance.
Gross margin of 56.3% of revenue, which expanded 200 basis points from last year, and EBITDA of $1 million and a loss per share of one cents both of which also topped our expectations for the quarter.
We also saw improvements during the quarter in several aspects of our go to market activities.
The annual value of sales contracts closed during the quarter or HCV implemented across all markets as compared with Q1.
Our revenue retention rate was 99%.
We grew the sales pipeline and increased our pipeline conversion rate compared with Q1.
We have a growing pipeline for our new TDR software application.
And Dell sees quarter response deals ramp nicely during the second quarter.
I am pleased with the results for the quarter as they represent a good step in the right direction.
Although our go to market efforts remain an area of focus and an opportunity for improved execution.
As we've highlighted on prior calls our business is undergoing an exciting strategic transition as we bring our vision of the future security operations to life through software driven solutions.
We view the stock of the future as a more agile scalable and effective model for security operations that addresses the challenges of todays dynamic IP landscape and rapidly evolving threats.
This new approach in combating security threats demands a leap forward and capabilities made possible by leveraging the following.
The speed and scale of machine learning deep learning and cloud computing to analyze data from the extended IP ecosystem for greater visibility real time collaboration with experts and smarter more effective automation.
Crowd source threat intelligence and incident response insights to enrich the spectrum of data for faster and more reliable advanced threat detection and remediation.
And integrated analytics.
Empowering security analysts to be more effective and productive unencumbered by disconnected point solutions false positives and didn't investigations.
Rick CLO threat detection and response or TDR was launched at the end of Q1.
It was our first cloud native patent pending software App built on our security analytics platform.
This was an important milestone in the execution of our strategy and the first key building block that enables the soccer the future to become a reality.
Our TDR software App is differentiated by an integrated set of detectors or enriched by our threat intelligence and network effect automated response actions and collaborative investigations.
With TDR, we're building on our heritage of working in a vendor inclusive manner to ingest all relevant data from a wide range of sources network endpoint.
To detect malicious activity not identify by other tools and to reduce the noise from false positives.
When customers need help treat housing and alert or investigating suspicious activity a secure work senior intrusion analyst is only a click away with our collaborative investigation capability built into the product.
Weve integrated automated response actions negatively in the software, giving our customers the ability to take the right action quickly.
And finally, the TDR App is built on a platform that allows for rapid innovation.
We've added data sources and written new detectors in days.
And with the network effect each of our 4100 customers across the globe benefits from the latest intelligence gathered via our threat research and incident response engagements.
The platform and software applications have been designed with a modular approach, giving customers the flexibility to create a security program that aligns with wherever they are in their security maturity journey.
As a follow on so the launch of the TDR App last month at the Black Hat Conference, We announced our next generation managed detection and response solution.
MDR Leverages the power of our TDR app, allowing customers to work in partnership with us to drop drive the best possible security outcomes.
Although we are early in the go to market efforts with both TDR and our new version of MDR.
Response from the market has been very positive.
We've closed a handful of deals all of which are multi year.
And are encouraged by a few common themes.
Customers appreciate the increased visibility, we provide across their entire ecosystem and our predictable and compelling pricing model, which makes full asset visibility affordable and accessible.
And customers are also tangibly, realizing the benefits of the software as our security analytics, driven by telemetry and correlation of diverse data sources are substantially reducing alert noise. While our automated response actions are allowing quick threat resolution.
In addition to our go to market activities, we are working to upgrade a select group of customers to the new software enabled solutions.
This provides value to broader asset coverage better efficacy and speed.
Ultimately, allowing us to extend and or expand relationships with our clients.
We also consider this an important phase of building Referenceable accounts, a source of valuable customer feedback and a vehicle to create implementation and operational efficiencies as we scale.
We've upgraded over 65 customers in less than four weeks in the early feedback has been very positive.
As we head into the second half of the year, we remain laser focused on building on this progress driving our business transition and bringing our vision of more effective and efficient security operations to life.
I will now turn it over to Wayne to talk about our second quarter performance in more detail Wayne.
Thanks, Mike and good morning, everyone.
Our second quarter results were positive and we continue to maintain our strong financial position as we invest in our new software driven security solutions and our go to market efforts.
In the second quarter of Fr 20 revenue was $136.6 million, a 6.1% increase over Q2, FY 19, and a 2.8% increase sequentially.
Second quarter revenue exceeded our guidance range.
EBITDA was $1.3 million ahead of our expectations driven by higher gross margins and we generated 16.3 million of cash from operations in the quarter, primarily on improved DSO.
Our average annual subscription revenue per customer was $106000 this quarter growing 5.5% over last year.
We closed nine deals with total contract value greater than $1 million in the second quarter.
We exited the quarter with annual recurring revenue of $437.6 million.
Consulting revenue grew 11.5% year over year and comprised 24.8% of total revenue for the quarter.
We anticipate our subscription to consulting revenue mix will continue around the 75% level next quarter as incident response and other consulting services continued to be an important component of a comprehensive security solution for our customers.
Finally revenue outside the U.S. represented 26% of total revenue in the second quarter up from 22% of total revenue in Q2 last year on consistently strong growth in the UK middle East in Japan.
Gross margin totaled $77 million in the second quarter of 520 or 56.3% of revenue.
A 200 basis point increase from the prior year.
Second quarter operating expenses totaled $79.3 million compared with $72.2 million last year.
A 201 basis point increase as a percentage of revenue.
Research and development expenses totaled 17.5% of revenue in the quarter compared with 16.7% for Q2 Fynineteen.
And 80 basis point year over year increase driven by incremental investments in our software App and platform development activities.
Sales and marketing expense.
Were approximately 70, 27.2% of revenue in the second quarter compared with 27% for prior year Q2.
General and administrative expenses totaled 13.4% of revenue in the second quarter compared with 12.4% for the same quarter last year.
Current DNA cost includes charge for the consolidation of some real estate leases, which is the primary driver for the increase in cost as a percentage of revenue.
Adjusted EBITDA in Q2 was $1.3 million compared with $1 million last year.
non-GAAP net loss was $700000 compared with a net loss of 900000 in Q2 last year and non-GAAP loss per share was one cents in both current and prior year.
Regarding cash flow and balance sheet items.
As I mentioned cash flow provided by operating activities was $16.3 million in the second quarter and $13.2 million year to date.
Compared with $10.9 million of cash provided by operations operating activities in the first half of last year.
The DSO was 80 days at the end of Q2 down from 93 days at the end of Q1 and an improvement from 94 days at the end of Q2 last year.
We finished the quarter with cash of $117.7 million and have an untapped $30 million credit facility.
Capex was $3.6 million in the second quarter.
Now for guidance.
In the third quarter of F. Y 20, we expect both GAAP and non-GAAP revenue to be in the range of $135 million to $137 million.
And we expect non-GAAP net loss per share to be between three and four cents.
For Fytwenty, we now expect the following.
GAAP and non-GAAP revenue to be in the range of $540 million to $545 million adjusted EBITDA to be positive for the full year.
Year in the range of $2 million to $5 million.
non-GAAP net loss per share to be eight to 11 cents per share.
GAAP net loss per share to be in the range of 52 to 55 cents.
For modeling purposes, we estimate that the tax benefit rate will be approximately 24% for the remainder of the year.
Cash provided by operations to be between 30 and $35 million.
We expect second half cash flow be weighted more towards Q4, given the expected collection of the tax receivable from Dell in that quarter.
And capex to be in the range of 14% to $16 million.
In closing, we have a strong financial foundation generating well over $500 million in revenue and producing strong cash flow for the year.
We will continue to invest in the development of additional apps and software offerings to better protect our customers as we transformed the business for long term success.
I will now return the call to Mike.
Thank you Wayne.
I would like to thank my security teammates for their continuous dedication on behalf of our customers.
We have an exciting opportunity in front of us as we undergo this strategic transition.
We welcome the challenge that change brings and I'm proud and energized by the commitment and adaptability of our team as we focus on delivering innovative solutions to secure our customers.
On behalf of the entire Secureworks team. We appreciate your continued interest and support.
Operator, we'll now open the line for questions. Please.
I will now open the call for questions.
I have a question first for item number one on your telephone keypad.
Great.
Others. Please ask no more than two questions, we'll take our first question from Charlie.
JP Morgan.
Yes, Thanks, Hi, guys. So the improvement in terms of the top line can you give us a sense because you did touch on it is it just improve close rates or did you actually increase the coverage ratio in the quarter as well so you're seeing some flow through effects of that.
Morning, Sterling its Mike. Thanks for the question, it's actually a little bit of both its higher close rates and an expansion of the coverage.
And within the close rates specifically, there's been lots of questions on a lot of these calls around concerns around the macro.
Environment that that's out there how would you see the business reacting if we saw further kind of economic slowdown do you think because those.
Cost savings on headcount et cetera that the business would actually benefit or does that actually take it.
Take a hit as companies look to restrain spending.
So that's a great question Sterling and thank you again, it's Mike.
Couple of things I would add and respond to that question with one is in the quarter, we saw better close rates in coverage in all markets across the world, which was the first time, we've sort of.
Not first time, it's been a while since we've seen that kind of productivity and increase from a coverage perspective, so definitely moving in the right direction might my sense, having been around for a long time is that security is not a luxury and as we go through this process.
Our focus on creating better efficiency and effectiveness in.
Delivering value so that the security operation centers are actually going after and spending their time on things that matter should help us in this process and the software that we are creating that we've created and taking the market. We believe we're we're optimistic that we'll we'll be we'll sit in a very good.
To show that increase value as the if any downturn where to recur from an economic perspective.
Got it thank you.
Thank you.
Next question from Doug from Fatima Boolani with us.
Good morning, Thank you for taking the questions and apologies for the background noise.
I have a question from Mike.
So with that I'd like to start with you on.
While you're undertaking this transformation strategy as it relates to that product platform and essentially trading.
Warrants to collect your customers on Q2. My question for you is we put a lot of cyber security products that vendors and sensor in Q.
Sort of automation arena, so I wanted to get your perspective on.
How is that impacting your customer discussion buying cycles of buying behavior and I have a follow up drilling.
So I think 15 I got your question, but let me try and respond and if I didn't we will give you a a passive being able to ask a clarifying question for me and case I Didnt I Didnt hear it correctly.
Hi, there as we all know there are thousands of point products in the market today that are not effectively working together I think actually has taken the that made the statement that as an industry. The security industry is is in my opinion getting further behind as we can see by the number of breaches talk about capital one or the company here in Atlanta that had in she recently I'm in it. We're just not it's just not the industry is not working well and we believe that software is the key to make it more agile scalable and effective model of security and we also believe that.
The community is going to be needed for us to work better together and as a security community. Overall, so we've taken the approach with the security analytics App that we've created that will work in a vendor neutral manner to be able to bring the best efficiency and effectiveness.
So that from a buyer perspective, a customer perspective, we can help them cut through the noise and work with the best of breed products across the market. I also think that that means that as everybody talks about a platform and the platform definitions vary some.
These platforms will begin to to work together as well and that may be one of the facilitating ways for people to work together in the security community.
Fair enough, maybe just to clarify.
A question on.
Our chronic talking about automation, each and incident response on the alarm management lunch revalidation of sort of the journey that you're embarking on so I guess, what I'm really trying.
With product vendors with home traditionally you had an agnostic relationship with with them sort of entering this sort of automation free how does that smooths the competitive behaviour.
And bind.
Just.
Clarified.
Okay, I think I understand that.
I guess the way I would respond to that is there is two different.
Aspects to this in my mind, one is the the plumbing the technology that will allow.
Orchestration to happen, which is the automation of an action if you will versus the intellectual property and that drives that action being the right action to take and I think from a from a focus on the security operations Center I'm not sure. We're well we have 20 years of historical experience and data in doing this for customers around the globe.
So if if if if ultimately this gets down to a buyer's decision of trying to ensure that they are getting the appropriate intellectual property of what to automate and how to automate versus the app, taking the automation action.
I think we sit in a very good position and I'm excited about this and I again from my perspective, I would like to do this in a cooperative manner in the community.
I don't think the customer will be.
We'll benefit to the extent that the security organizations cannot figure out a way to work together in the customer's best manner and in doing so we are in the customer's best not manner in the customers' best interest and in doing so I think look I'm, an abundance mentality type person. So I actually think the pie gets bigger and we provide better more effective security and fighting the bad guys.
Fair enough I appreciate that and I'm waiting for you.
As you sort of talked about and Mike as well around the courier pipeline build and pipeline growth as well as conversion rates.
Sequentially I'm wondering.
How you thought about factoring that into your full year outlook.
Because it doesn't necessarily seem like you're extrapolating out of the goodness in terms of the trends you saw in Q.
To the rest of year. So just wanted to get your thought process behind your back to you on the phone.
Got it and that's it for me. Thank you so much.
I have to tame assure thanks for the question. So as you as you noted we did bring up the bottom end of the range to reflect the beat in Q2.
It's it's as simple as we had a really.
Much improved Q2 from a sales perspective go to market and.
I'm kind of a show me Guy so I want to wait and see how Q3 looks before we get too far out from our rigid from our revised guidance for the full year in Q1.
So it's no more simple that we had a really we had a good Q2, we're comfortable right now with the guidance and.
News to follow.
Makes sense I appreciate it thanks.
Thank you.
Your next question from Alex Henderson.
Needham and co.
Hi, This is Roger going on for Alex Thanks for taking my questions.
So I think previously mentioned expecting acceleration them or are in the back half of the year is that still the case and maybe what are the what are the puts and takes in that growth start to benefit from TDR TDR MDR.
Hi, This is Wayne so acceleration in the back half as you as you can infer from the guidance.
We're still focused and we did have some acceleration in the back half that's baked into the 540 to 45 for the year.
We saw we saw some and as I mentioned earlier, we saw some improvement in Q2 go to market, we expect to see.
Some improvement for the second half of the year, but it's a great question relative to TDR, because there's going to be some trade off right as we rollout TDR, it's new in the market. We're doing everything we can to accelerate that Mike talked about some conversions that's going to help that.
Net net we do expect the go to market to to continue to improve certainly compared to for Q1.
Time will tell.
Okay makes sense and then maybe strategically.
Does the Vmware acquisition of carbon black.
Knowing that you guys are vendor agnostic does that affect your relationships with with.
Vmware itself and then also with Doe.
So so this is not Mike and I'll have.
Respond to that so for the last 20 years, we've had a history of working with the best of breed partners in the marketplace.
Which allows us as I sort of alluded to in my or mentioned in my earlier comment to provide the most effective security for our customers.
And we intend to continue to do that we've worked with carbon black with crowd strike and with the M. where over years and have very strong relationships and partnerships with all three and and I would expect us to continue to to build upon that success.
And continue to focus there.
Makes sense thanks for the questions.
Your next question comes from Matt Hedberg with RBC capital markets.
Thanks, This is actually Matt Swanson on for Matt.
If I could just ask kind of a broader question since we're kind of looking out past this product roadmap of Soc for the future could you touch a little bit about how your consulting business and kind of visibility that gives me when do your customers has helped shape for product roadmap.
Matt My Tony Thanks for the question.
The consulting business in particular, the incident response engagements we do.
But the consulting business overall gives us visibility to understanding which customers have more effective processes procedures and technologies quite frankly for where they are in the security maturity journey and whether they are looking to prevent or detect and how they're looking to use the various technologies. So it plays an important role in helping us understand and form a view both from an.
A threat intelligence perspective, as well as from a product roadmap perspective of how we evolve and the thing I'd add thats been great about the new TDR platform and the customers that we have there and I alluded to this in my prepared remarks is that we've been able to turn around customer feedback within hours to at most two days to ensure that we're being responsive and continuing to evolve in a manner that helps our customers improve the efficiency and effectiveness of what they do from security operations perspective.
That's helpful. And then just a quick one on the TDR.
At the beginning of MDR are you seeing any change in the terms of new and existing customer mix for these products is it mostly existing that you're targeting so far.
No no we're targeting FERC for for both new for both TDR and four MDR, we are targeting targeting both existing customers, who we will either migrate over and or upgrade or if it's made make sense to expand the relationship by cross selling into them.
But we also have dedicated sellers, who are focused on helping to continue to expand the customer base.
On top of on top of the expansion, we're doing with our existing sellers, but the dedicated sellers are looking to focus on TDR from a software only application perspective initially.
So a different part of the target market if you will.
Let me, let me just explain a little declare because it may help we segregate.
Managed an expanded where we may be doing response for them and and an increased.
Level of service.
So that helped Matt.
Yes, Thanks, that's really helpful.
Once again, if you do have a question press star on your telephone keypad, That's star one to ask for a question.
Your next question.
From Gur Talpaz with Stifel.
Hi, This is actually Chris bureaus on for Gore.
You mentioned that the del safeguard pipeline ramp nicely during the quarter.
Can you speak to when we can expect to the pipeline to begin to materially convert and to the degree to which this can drive that new customer growth going.
Forward.
So Chris this is Mike.
During the quarter first of all I Didnt mean to infer that we didnt have conversions and sales in the quarter.
So we did have a ramp with conversion sales and net new customers from the del safeguard relationship in the quarter.
And and the pipeline continues to build build for us to where we would expect.
I would say later this year early next year us be written we would be ramping at a level that.
That would give us a.
Well at a normalized level I would say so we now have sort of greater visibility.
Hi into Q2, Q3, Q4 Q1 of next year, where we'll have a pretty consistent level, we would hope of sales in the del safeguard in response and the ability to open up some of those new customer relationships to cross sell into.
Great. Thanks, Mike Yes.
Just to be clear, though from a from a revenue perspective that is a good we don't expect it to become a material part of our business, but it is clearly a nice level of new customer acquisitions and revenue and profitability.
Got it got it thank you guys.
We'll now take our final question from Howard Smith with first analyst.
Yes. Good morning. Thank you for taking my question. So first I just wanted to clarify.
Get a little more detailed on the upgrade of the 65 customers you mentioned.
Is that from managed detection and response, you're not providing TDR to these customers as well and and how did you go about kind of selecting which customers. We are most appropriate for that program.
Good morning, Howard Thanks for the thanks for the question.
Do you do that so what we basically did was looked at a group of our customers that.
That we were providing services or solutions for around monitoring and management.
And effectively saw that there was an easy upgrade path for us to move them to operating on the TDR software.
Where we are working cooperatively with them so if.
For example.
A b C company as a customer of ours, and we were able to effectively wake up with very little effort and energy on their on their or our behalf and show them the capability, where they're seeing what we're doing on the old platform and the new platform and the opportunity to to transparently see how we're operating so they have the same lagon with a new portal and capabilities working cooperatively in a cloud native app to see how we're we're working and.
It was a very quick upgrade path, an ability to train them and show them in the process of doing this we came up with some incremental detections along the way on the first 65 to show the power of the the TDR software, we had one customer actually respond telling us that they thought it was like Christmas morning for them.
So if it was a very encouraging and it's been a very uplifting sort of four weeks for us as we have gone down that path.
Great. Thank you for.
The color there and then in terms of the financial Q2 financials. If I heard right. We just want to clarify there was approximately a 1.3 $1.4 million onetime expense of DNA for some office consolidation I just want to confirm that's kind of a one time.
Item power this way that's correct that's correct.
Okay. Thank you much.
Thanks very much.
Thank you again for joining us on today's call and for all of your questions. We appreciate your support and look forward to our third quarter call. In early December if we did not get to your questions. During the earnings section. Please don't hesitate to reach out to us for a follow up.
Thank you very much.
Have a great day, thanks, everyone.
Ladies and gentlemen that concludes today's call you may all disconnect at this time.