Press release

Secureworks Reports First Quarter Fiscal 2020 Results

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Secureworks (NASDAQ: SCWX), a leading global cybersecurity company that
protects organizations in the digitally connected world, today announced
financial results for its first quarter ended May 3, 2019.

“As a leader in the continuously evolving cybersecurity market, we are
re-imagining how security is done. I am excited about our strategic
transition to delivering software-driven security solutions and the
achievement of another milestone in this journey, the launch of Red
Cloak™ Threat Detection and Response (TDR), the first software
application on our new platform,” said Michael R. Cote, Chief Executive
Officer of Secureworks.

“Our first quarter financial results were positive. However, the value
of new business in the quarter fell below our expectations. In the
near-term, we are focused on business execution as we continue to
transition our product portfolio and business model to software-driven
solutions. I am confident that we have the right strategy and have
identified the right actions to drive growth and long-term value,”
continued Mr. Cote.

Business and operational developments for the first quarter of fiscal
2020 include:

  • The Company recently launched Red Cloak™ Threat Detection and Response
    (TDR), a SaaS-based security analytics application, which enables
    security analysts to detect advanced and unknown threats, streamline
    and collaborate on investigations, and automate the right actions. It
    ingests, enriches, and correlates data from a variety of endpoint,
    network, cloud, and business systems. Red Cloak™ TDR is differentiated
    by our advanced analytics, integrated threat intelligence, decades of
    security operations experience, and the power of our network effect.
  • The Company was recognized for the eleventh consecutive time in the
    Leaders quadrant in Gartner’s May 2019 Magic Quadrant for Managed
    Security Services, Worldwide1.

First Quarter Fiscal 2020 Financial Results Highlights

  • Both GAAP and non-GAAP revenue increased 5.3 percent to $132.8 million
    from $126.2 million in the first quarter of fiscal 2019.
  • GAAP gross margin was 52.7 percent in the first quarter of fiscal
    2020, compared with 52.0 percent in the same period last year.
    Non-GAAP gross margin was 55.5 percent compared with 54.9 percent in
    the first quarter of fiscal 2019.
  • GAAP net loss was $8.3 million, or $0.10 per share, in the first
    quarter of fiscal 2020, compared with $13.8 million, or $0.17 per
    share, in the prior year. Non-GAAP net loss was $1.9 million, or $0.02
    per share, in the first quarter of fiscal 2020, compared with
    $4.5 million, or $0.06 per share, in the same prior year period.
  • Adjusted EBITDA was $0.8 million, compared with an adjusted EBITDA
    loss of $2.6 million in the first quarter of fiscal 2019.
  • Cash used in operating activities for the three months ended May 3,
    2019 was $3.0 million.
  • Secureworks ended the first quarter of fiscal 2020 with $111.2 million
    in cash and cash equivalents.
  • Monthly recurring revenue as of May 3, 2019 was $36.1 million. The
    Company’s monthly recurring revenue metric represents the monthly
    value of its subscription contracts, including operational backlog, as
    of period end.

Second Quarter and Full Fiscal Year 2020 Guidance

For the second quarter of fiscal 2020, the Company expects:

  • Revenue of $132 to $134 million on both a GAAP and non-GAAP basis.
  • GAAP net loss per share of $0.16 to $0.17 and non-GAAP net loss per
    share of $0.04 to $0.05.

Based on first quarter fiscal 2020 performance and current business
trends, the Company has updated its guidance for the full fiscal year
2020. The Company now expects:

  • GAAP and non-GAAP revenue of $535 to $545 million.
  • GAAP net loss of $44 to $47 million and $0.55 to $0.58 on a per share
    basis.
  • Non-GAAP net loss per share of $0.10 to $0.13.
  • Adjusted EBITDA of $2 to $5 million.
  • Cash flow from operations of $25 to $35 million.

Conference Call Information

As previously announced, the Company will hold a conference call to
discuss its first quarter fiscal 2020 results and outlook for its second
quarter and full year fiscal 2020 on June 5, 2019, at 8:00 a.m. ET. A
live audio webcast of the conference call and the supplemental financial
information referred to above will be accessible on the Company’s
website at http://investors.secureworks.com.
The webcast and supplemental information will be archived at the same
location for one year.

Non-GAAP Financial Measures

The press release presents information about the Company’s non-GAAP
revenue, non-GAAP gross margin, non-GAAP research and development
expenses, non-GAAP sales and marketing expenses, non-GAAP general and
administrative expenses, non-GAAP operating loss, non-GAAP net loss,
non-GAAP net loss per share and adjusted EBITDA, which are non-GAAP
financial measures provided as a supplement to the results provided in
accordance with accounting principles generally accepted in the United
States of America (“GAAP”). A reconciliation of each of the foregoing
historical and forward-looking non-GAAP financial measures to the most
directly comparable historical and forward-looking GAAP financial
measure is provided below for each of the fiscal periods indicated.

Special Note Regarding Forward-Looking Statements

This press release contains “forward-looking statements” within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of
the Securities Exchange Act of 1934. In some cases, you can identify
these statements by such forward-looking words as “anticipate,”
“believe,” “confidence,” “could,” “estimate,” “expect,” “guidance,”
“intend,” “may,” “plan,” “potential,” “outlook,” “should,” “will” and
“would,” or similar words or expressions that refer to future events or
outcomes. Such forward-looking statements include, but are not limited
to, the statements in this press release with respect to the Company’s
expectations concerning its GAAP and non-GAAP revenue and GAAP and
non-GAAP net loss per share for the second quarter of fiscal 2020 and
for full year fiscal 2020, net loss and adjusted EBITDA loss for full
year fiscal 2020, and cash flow from operations for full year fiscal
2020, all of which reflect the Company’s current analysis of existing
trends and information. These forward-looking statements represent the
Company’s judgment only as of the date of this press release.

Actual results and events in future periods may differ materially from
those expressed or implied by these forward-looking statements because
of risks, uncertainties and other factors, including those relating to:
the Company’s ability to achieve or maintain profitability; the
Company’s ability to enhance its existing solutions and technologies and
to develop or acquire new solutions and technologies; the rapidly
evolving market in which the Company operates; the Company’s reliance on
personnel with extensive information security expertise; fluctuations in
the Company’s quarterly results and other operating measures; intense
competition in the Company’s markets; the Company’s ability to attract
new clients, retain existing clients and increase its annual contract
values; the Company’s reliance on its largest client and on clients in
the financial services industry; the Company’s ability to manage its
growth effectively; the Company’s ability to maintain high-quality
client service and support functions; the Company’s service level
agreements with clients requiring credits for service failures or
inadequacies; the Company’s ability to continue expansion of its sales
force; the Company’s long and unpredictable sales cycles; risks
associated with the Company’s international sales and operations; the
Company’s ability to expand its key distribution relationships; the
Company’s technology alliance partnerships; real or perceived defects,
errors or vulnerabilities in the Company’s solutions or the failure of
its solutions to prevent a security breach; the ability of the Company’s
solutions to interoperate with its clients’ IT infrastructure; the
Company’s ability to use third-party technologies; the effect of
evolving information security and data privacy laws and regulations on
the Company’s business; the Company’s ability to maintain and enhance
its brand; risks associated with the Company’s acquisition of other
businesses; the Company’s recognition of revenue ratably over the terms
of its managed security and threat intelligence contracts; the effect of
timing differences between the expensing of sales commissions paid to
the Company’s strategic and distribution partners and the recognition of
associated revenues; estimates or judgments relating to the Company’s
critical accounting policies; the Company’s exposure to fluctuations in
currency exchange rates; the effect of governmental export or import
controls on the Company’s business; the Company’s compliance with the
Foreign Corrupt Practices Act and similar laws; the Company’s ability to
maintain effective disclosure controls and procedures; the effect of
natural disasters and other catastrophic events on the Company’s ability
to serve its clients; the Company’s reliance on patents to protect its
intellectual property rights; the Company’s ability to protect, maintain
or enforce its non-patented intellectual property rights and proprietary
information; claims by third parties of infringement of their
proprietary technology by the Company; the Company’s use of open source
technology; and risks related to the Company’s relationship with Dell
Technologies Inc. and Dell Inc. and control of the Company by Dell
Technologies Inc.

This list of risks, uncertainties and other factors is not complete. The
Company discusses these matters more fully, as well as certain risk
factors that could affect the Company’s business, financial condition,
results of operations and prospects, under the caption “Risk Factors” in
the Company’s annual report on Form 10-K for the fiscal year ended
February 1, 2019, as well as in the Company’s other SEC filings. Any or
all forward-looking statements the Company makes may turn out to be
wrong and can be affected by inaccurate assumptions the Company might
make or by known or unknown risks, uncertainties and other factors,
including those identified in this press release. Accordingly, you
should not place undue reliance on the forward-looking statements made
in this press release, which speak only as of its date. The Company does
not undertake to update, and expressly disclaims any obligation to
update, any of its forward-looking statements, whether as a result of
circumstances or events that arise after the date the statements are
made, new information or otherwise.

1   Gartner, “Magic Quadrant for Managed Security Services, Worldwide”,
Toby Bussa, Kelly M. Kavanagh, Sid Deshpande, Pete Shoard, 2 May
2019. The report was formerly titled Magic Quadrant for Global MSSPs
and Magic Quadrant for MSSPs, North America. Positioned as
Secureworks from 2019-2018, SecureWorks in 2017, 2010-2007, and as
Dell SecureWorks from 2015-2011.
 

Gartner Disclaimer

Gartner does not endorse any vendor, product or service depicted in its
research publications, and does not advise technology users to select
only those vendors with the highest ratings or other designation.
Gartner research publications consist of the opinions of Gartner’s
research organization and should not be construed as statements of fact.
Gartner disclaims all warranties, express or implied, with respect to
this research, including any warranties of merchantability or fitness
for a particular purpose.

About Secureworks

Secureworks® (NASDAQ: SCWX) is a technology-driven cybersecurity leader
that protects organizations in the digitally connected world. Built on
proprietary technologies and world-class threat intelligence, our
applications and solutions help prevent, detect, and respond to cyber
threats. Red Cloak™ software brings advanced threat analytics to
thousands of customers, and the Secureworks Counter Threat Platform™
processes over 300 billion threat events per day. We understand complex
security environments and are passionate about simplifying security with
Defense in Concert™ so that security becomes a business enabler. More
than 4,000 customers across over 50 countries are protected by
Secureworks, benefit from our network effect and are Collectively
Smarter. Exponentially Safer.™ www.secureworks.com

(Tables Follow)

 
 
SECUREWORKS CORP.
Condensed Consolidated Statements of Operations and Related
Financial Highlights
(in thousands, except per share data and percentages)
(unaudited)
             
Three Months Ended
May 3, 2019 May 4, 2018
Net revenue $ 132,842 $ 126,161
Cost of revenue 62,841   60,530  
Gross margin 70,001   65,631  
Research and development 22,642 22,354
Sales and marketing 38,193 35,670
General and administrative 23,638   25,197  
Total operating expenses 84,473   83,221  
Operating loss (14,472 ) (17,590 )
Interest and other, net 268   505  
Loss before income taxes (14,204 ) (17,085 )
Income tax benefit (5,934 ) (3,266 )
Net loss $ (8,270 ) $ (13,819 )
 
Loss per common share (basic and diluted) $ (0.10 ) $ (0.17 )
 
Weighted-average common shares outstanding (basic and diluted) 80,467   80,522  
 

Percentage of Total Net Revenue

Gross margin 52.7 % 52.0 %
Research and development 17.0 % 17.7 %
Sales and marketing 28.8 % 28.3 %
General and administrative 17.8 % 20.0 %
Operating expenses 63.6 % 66.0 %
Operating loss (10.9 )% (13.9 )%
Loss before income taxes (10.7 )% (13.5 )%
Net loss (6.2 )% (11.0 )%
Effective tax rate 41.8 % 19.1 %
 
Note: Percentage growth rates are calculated based on underlying
data in thousands
 
 
 
SECUREWORKS CORP.
Condensed Consolidated Statements of Financial Position
(in thousands)
(unaudited)
         

May 3,
2019

February 1,
2019

Assets:

Current assets:
Cash and cash equivalents $ 111,176 $ 129,592
Accounts receivable, net 135,270 141,344
Inventories, net 632 468
Other current assets 24,852   27,604
Total current assets 271,930 299,008
Property and equipment, net 35,612 35,978
Goodwill 416,487 416,487
Purchased intangible assets, net 199,514 206,448
Other non-current assets 88,265   78,238
Total assets $ 1,039,000   $ 1,036,159

Liabilities and Stockholders’ Equity:

Current liabilities:
Accounts payable $ 25,152 $ 16,177
Accrued and other 63,984 86,495
Short-term deferred revenue 161,493   157,865
Total current liabilities 250,629 260,537
Long-term deferred revenue 15,801 16,064
Other non-current liabilities 63,724   66,851
Total liabilities 358,255 343,452
Stockholders’ equity 680,745   692,707
Total liabilities and stockholders’ equity $ 1,039,000   $ 1,036,159
 
 
 
SECUREWORKS CORP.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
       
Three Months Ended
May 3, 2019 May 4, 2018
Cash flows from operating activities:
Net loss $ (8,270 ) $ (13,819 )
Adjustments to reconcile net loss to net cash used in operating
activities
Depreciation and amortization 10,365 10,287
Stock-based compensation expense 4,916 4,730
Effects of exchange rate changes on monetary assets and liabilities
denominated in foreign currencies
70 (377 )
Income tax benefit (5,934 ) (3,266 )
Provision for doubtful accounts 779 1,492
Changes in assets and liabilities:
Accounts receivable 5,221 9,176
Net transactions with parent 5,850 1,103
Inventories (164 ) 360
Other assets 2,747 (2,350 )
Accounts payable 8,965 (3,343 )
Deferred revenue 3,264 8,668
Accrued and other liabilities (30,834 ) (31,065 )
Net cash used in operating activities (3,025 ) (18,404 )
Cash flows from investing activities:
Capital expenditures (7,016 ) (2,216 )
Net cash used in investing activities (7,016 ) (2,216 )
Cash flows from financing activities:
Principal payments on financing arrangement with Dell Financial
Services
(1,104 )
Taxes paid on vested restricted shares (7,465 ) (2,013 )
Purchases of stock for treasury (910 )
Payments on financed capital expenditures   (500 )
Net cash used in financing activities (8,375 ) (3,617 )
Net decrease in cash and cash equivalents (18,416 ) (24,237 )
Cash and cash equivalents at beginning of the period 129,592   101,539  
Cash and cash equivalents at end of the period $ 111,176   $ 77,302  
 

Non-GAAP Financial Measures

This press release presents information about the Company’s non-GAAP
revenue, non-GAAP gross margin, non-GAAP research and development
expenses, non-GAAP sales and marketing expenses, non-GAAP general and
administrative expenses, non-GAAP operating loss, non-GAAP net loss,
non-GAAP net loss per share and adjusted EBITDA, which are non-GAAP
financial measures provided as a supplement to the results provided in
accordance with GAAP. A detailed discussion of the Company’s reasons for
including these non-GAAP financial measures, the limitations associated
with these measures, the items excluded from these measures, and our
reason for excluding those items are presented in “Management’s
Discussion and Analysis of Financial Condition and Results of Operations
– Non-GAAP Financial Measures” in our periodic reports filed with the
SEC. The Company encourages investors to review the non-GAAP discussion
in conjunction with the presentation of non-GAAP financial measures.

(Tables Follow)

 
 
SECUREWORKS CORP.
Reconciliation of GAAP to Non-GAAP Financial Measures
(in thousands, except per share data)
(unaudited)
       
Three Months Ended
May 3, 2019 May 4, 2018
GAAP and non-GAAP revenue $ 132,842 $ 126,161
 
GAAP gross margin $ 70,001 $ 65,631
Amortization of intangibles 3,410 3,410
Stock-based compensation expense 260   269  
Non-GAAP gross margin $ 73,671   $ 69,310  
 
GAAP research and development expenses $ 22,642 $ 22,354
Stock-based compensation expense (1,176 ) (1,031 )
Non-GAAP research and development expenses $ 21,466   $ 21,323  
 
GAAP sales and marketing expenses $ 38,193 $ 35,670
Stock-based compensation expense (781 ) (621 )
Non-GAAP sales and marketing expenses $ 37,412   $ 35,049  
 
GAAP general and administrative expenses $ 23,638 $ 25,197
Amortization of intangibles (3,524 ) (3,524 )
Stock-based compensation expense (2,699 ) (2,809 )
Non-GAAP general and administrative expenses $ 17,415   $ 18,864  
 
GAAP operating income (loss) $ (14,472 ) $ (17,590 )
Amortization of intangibles 6,934 6,934
Stock-based compensation expense 4,916   4,730  
Non-GAAP operating income (loss) $ (2,622 ) $ (5,926 )
 
GAAP net income (loss) $ (8,270 ) $ (13,819 )
Amortization of intangibles 6,934 6,934
Stock-based compensation expense 4,916 4,730
Aggregate adjustment for income taxes (5,467 ) (2,391 )
Non-GAAP net income (loss) $ (1,887 ) $ (4,546 )
 
GAAP earnings (loss) per share $ (0.10 ) $ (0.17 )
Amortization of intangibles 0.09 0.09
Stock-based compensation expense 0.06 0.06
Aggregate adjustment for income taxes (0.07 ) (0.03 )
Non-GAAP earnings (loss) per share * $ (0.02 ) $ (0.06 )
 
* Sum of reconciling items may differ from total due to rounding
of individual components
 
GAAP net income (loss) $ (8,270 ) $ (13,819 )
Interest and other, net (268 ) (505 )
Income tax benefit (5,934 ) (3,266 )
Depreciation and amortization 10,365 10,287
Stock-based compensation expense 4,916   4,730  
Adjusted EBITDA $ 809   $ (2,573 )
 
 
 
SECUREWORKS CORP.
Reconciliation of GAAP to Non-GAAP Financial Measures
(in thousands)
(unaudited)
       
 
Three Months Ended

Percentage of Total Net Revenue

May 3, 2019 May 4, 2018
 
GAAP gross margin 52.7 % 52.0 %
Non-GAAP adjustment 2.8 % 2.9 %
Non-GAAP gross margin 55.5 % 54.9 %
 
GAAP research and development expenses 17.0 % 17.7 %
Non-GAAP adjustment (0.8 )% (0.8 )%
Non-GAAP research and development expenses 16.2 % 16.9 %
 
GAAP sales and marketing expenses 28.8 % 28.3 %
Non-GAAP adjustment (0.6 )% (0.5 )%
Non-GAAP sales and marketing expenses 28.2 % 27.8 %
 
GAAP general and administrative expenses 17.8 % 20.0 %
Non-GAAP adjustment (4.7 )% (5.0 )%
Non-GAAP general and administrative expenses 13.1 % 15.0 %
 
GAAP operating (loss) (10.9 )% (13.9 )%
Non-GAAP adjustment 8.9 % 9.2 %
Non-GAAP operating (loss) (2.0 )% (4.7 )%
 
GAAP net (loss) (6.2 )% (11.0 )%
Non-GAAP adjustment 4.8 % 7.4 %
Non-GAAP net (loss) (1.4 )% (3.6 )%
 
 
SECUREWORKS CORP.
Reconciliation of GAAP to Non-GAAP Financial Measures
(in millions, except per share data)
(unaudited)
                       
Three Months Ending     Fiscal Year Ending
August 2, 2019     January 31, 2020

Low End of
Guidance

   

High End of
Guidance

Low End of
Guidance

   

High End of
Guidance

 
GAAP and non-GAAP revenue $ 132 $ 134 $ 535 $ 545
 
GAAP (loss) per share $ (0.17 ) $ (0.16 ) $ (0.58 ) $ (0.55 )
Amortization of intangibles 0.09 0.09 0.34 0.34
Stock-based compensation expense 0.08 0.08 0.30 0.30
Aggregate adjustment for income taxes (0.04 ) (0.04 ) (0.19 ) (0.19 )
Non-GAAP (loss) per share* $ (0.05 ) $ (0.04 ) $ (0.13 ) $ (0.10 )
 
GAAP net loss $ (47 ) $ (44 )
Income tax benefit (18 ) (17 )
Depreciation and amortization 43 43
Stock-based compensation expense 24   24  
Adjusted EBITDA* $ 2   $ 5  
 
Other Items
Effective tax rate 24 %
Weighted average shares outstanding (in millions) 80.5
Cash flow from operations $25-$35
Capital expenditures $12-$14
 
 

* Sum of reconciling items may differ from total due to
rounding of individual components

Sum of quarterly guidance may differ from full year guidance
due to rounding