SecureWorks Reports Second Quarter Fiscal 2017 Results

SecureWorks Reports Second Quarter Fiscal 2017 Results

• Revenue increased 30 percent year-over-year to $103.7 million; Non-GAAP revenue increased 29 percent year-over-year to $103.9 million.
• Gross margin increased 500 basis points over last year to 49.0 percent; Non-GAAP gross margin expanded by 150 basis points over last year to 52.6 percent.
• Net loss per share improved to $0.15 from $0.30 last year; Non-GAAP net loss per share improved to $0.07 from $0.18 last year.

SecureWorks (NASDAQ: SCWX), a provider of intelligence-driven information security solutions, today announced its financial results for the second quarter ended July 29, 2016. The Company narrowed its operating loss in the second quarter as a result of continued demand for its subscription-based security solutions business and continued scale in operating expenses.

“We are pleased with our quarterly financial performance, highlighted by solid revenue growth and continued momentum towards profitability. SecureWorks is in the best position to help protect organizations from emerging cyber threats as their technology investment strategies continue to evolve,” said Michael R. Cote, Chief Executive Officer of SecureWorks. “I am excited about our new Cloud Security Solutions that give clients the confidence that their data, applications and intellectual-property will receive the required cyber protection in the Cloud.”

A few key business highlights for the quarter include:

• The Company expanded the capabilities of its vendor-agnostic, data analytics engine -- the Counter Threat Platform^TM (CTP) -- to provide security monitoring of client applications and data being hosted on Amazon Web Services (AWS). With this capability, SecureWorks offers a comprehensive solution for security considerations for both on-premises environments and in the cloud, allowing organizations to pursue hybrid environments with confidence.
• As part of its program to orchestrate threat prevention, the Company announced the integration of its high-fidelity proprietary Attacker Database with Palo Alto Networks® Next-Generation Security Platform as part of the SecureWorks-managed Palo Alto Next-Generation Firewall solution. This solution delivers advanced threat intelligence and immediate protections to proactively block cyber threats before they enter client eco-systems.

Second Quarter Financial Results Highlights

• Revenue in the second quarter increased 29.8 percent to $103.7 million from $79.9 million in the second quarter of fiscal 2016. Non-GAAP revenue increased by 29.0 percent to $103.9 million, compared to $80.5 million in the second quarter of fiscal 2016.
• Gross margin was 49.0 percent, up from 44.0 percent in the second quarter of fiscal 2016. Non-GAAP gross margin increased to 52.6 percent from 51.1 percent in the second quarter of fiscal 2016 due to strong revenue growth and scale in our delivery model.
• Operating loss for the quarter was $20.0 million; non-GAAP operating loss was $9.6 million.
• Net loss per share was $0.15 as compared to a net loss per share of $0.30 in the second quarter of fiscal 2016; non-GAAP net loss per share was $0.07 as compared to a non-GAAP net loss per share of $0.18 in the second quarter of fiscal 2016.
• The number of weighted average shares outstanding during the second quarter was approximately 80.0 million.
• Adjusted EBITDA was a loss of $7.0 million, compared to a loss of $16.0 million in the second quarter of fiscal 2016.
• SecureWorks ended the quarter with $113.3 million in cash and cash equivalents.
• Monthly recurring revenue as of July 29, 2016 was $29.8 million, as compared to $26.6 million as of July 31, 2015. The Company’s monthly recurring revenue metric represents the monthly value of its subscription contracts, including operational backlog, as of a particular date.

Third Quarter Fiscal 2017 and Full Fiscal Year Outlook

Based on the second quarter performance and current market conditions, the Company now expects the following results for the third fiscal quarter ending on October 28, 2016, and the full fiscal year ending on February 3, 2017 (“fiscal 2017”):

• For the third fiscal quarter, the Company expects:

• Revenue, on both a GAAP and non-GAAP basis to be between $104 and $105 million.
• Net loss per share to be in the range of $0.15 to $0.17 and non-GAAP net loss per share to be in the range of $0.07 to $0.09.
• The Company expects approximately 80.009 million weighted average shares outstanding during the third quarter of fiscal 2017.

• For fiscal year 2017¹, the Company reiterates prior guidance as follows:

• Revenue to be between $423 and $425 million and non-GAAP revenue to be between $424 and $426 million.
• Net loss per share to be in the range of $0.62 to $0.66 and non-GAAP net loss per share to be in the range of $0.30 to $0.33.
• Adjusted EBITDA loss to be between $28 and $32 million.
• The Company expects approximately 77.635 million weighted average shares outstanding during fiscal 2017.
• Finally, as we continue investing for growth, the Company expects capital expenditures to be approximately $20 to $22 million for the full year.

¹ The fourth quarter of fiscal 2017 will have 14 weeks versus the standard 13 weeks, as SecureWorks operates on a 52-53-week fiscal year. The next year this will occur is calendar year 2022, which for SecureWorks is fiscal year 2023.

Conference Call Information

As previously announced, the Company will hold a conference call to discuss its second quarter performance on September 7, 2016, at 8:00 a.m. EDT. The conference call will be broadcast live over the Internet and can be accessed at http://investors.secureworks.com. For those unable to listen to the live broadcast, an archived version will be available at the same location until 5:00 p.m. EDT on October 7, 2016.

Non-GAAP Financial Measures

The press release presents information about the Company’s non-GAAP revenue, non-GAAP gross margin, non-GAAP operating expenses, 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 generally accepted accounting principles 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 measures 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 fiscal quarter of fiscal 2017 and for full year fiscal 2017, adjusted EBITDA loss for full year fiscal 2017, and capital expenditures for full year fiscal 2017, which reflect the Company’s current analysis of existing trends and information. These 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 cycle; 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 perform as intended; 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; successful implementation of the Company’s strategic acquisitions; 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 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. (formerly known as Denali Holding 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 captions “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s quarterly report on Form 10-Q for the quarter ended April 29, 2016. Additional information also will be set forth in the Company’s quarterly report on Form 10-Q for the quarter ended July 29, 2016 and in its 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.

About SecureWorks

SecureWorks is a leading global provider of intelligence-driven information security solutions exclusively focused on protecting our clients from cyberattacks. Our solutions enable organizations to fortify their cyber defenses to prevent security breaches, detect malicious activity in real time, prioritize and respond rapidly to security incidents and predict emerging threats. As of July 29, 2016, SecureWorks served over 4,300 clients across 59 countries. For more information, visit www.secureworks.com.

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 GAAP. The Company believes these non-GAAP financial measures provide useful information to help evaluate its operating results by facilitating an enhanced understanding of its operating performance and enabling more meaningful period-to-period comparisons. There are limitations to the use of the non-GAAP financial measures presented in the press release. These non-GAAP financial measures may not be comparable to similarly titled measures of other companies. Other companies, including companies in SecureWorks’ industry, may calculate non-GAAP financial measures differently than the Company does, limiting the usefulness of those measures for comparative purposes.

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 measures is provided below for each of the fiscal periods indicated.

The Company excludes the following items from one or more of its non-GAAP financial measures:

Impact of purchase accounting. The impact of purchase accounting consists primarily of purchase accounting adjustments related to a change in the basis of deferred revenue for the going-private transaction of Dell Inc. (“Dell”), an indirect parent of the Company, that was completed on October 29, 2013, as well as Dell’s acquisition of the Company in February 2011. The Company believes it is useful to exclude such purchase accounting adjustments related to the foregoing transactions as this deferred revenue generally results from multi-year service contracts under which deferred revenue is established upon sale and revenue is recognized over the term of the contract. Pursuant to the fair value provisions applicable to the accounting for business combinations, GAAP requires this deferred revenue to be recorded at its fair value, which is typically less than the book value. In presenting non-GAAP earnings, the Company adds back the reduction in revenue that results from this revaluation on the expectation that a significant majority of these service contracts will be renewed in the future and therefore the revaluation is not helpful in predicting its ongoing revenue trends. The Company believes that this non-GAAP financial adjustment is useful to investors because it allows investors to (1) evaluate the effectiveness of the methodology and information used by management in its financial and operational decision-making, and (2) compare past and future reports of SecureWorks’ financial results, as the revenue reduction related to acquired deferred revenue will not recur when related service contracts are renewed in future periods.

Amortization of intangible assets. Amortization of intangible assets consists of amortization of customer relationships and acquired technology. In connection with Dell’s going-private transaction and Dell’s acquisition of the Company in February 2011, all of the Company’s tangible and intangible assets and liabilities were accounted for and recognized at fair value on the transaction date. Accordingly, for periods after October 29, 2013, amortization of intangible assets consists of amortization associated with intangible assets recognized in connection with Dell’s going-private transaction. For periods prior to October 29, 2013, amortization of intangible assets consists of amortization associated with purchased intangible assets recognized in connection with Dell’s acquisition of the Company.

Stock-based compensation. Non-cash stock-based compensation relates to both the Dell Technologies and SecureWorks equity plans. We exclude such expenses when assessing the effectiveness of our operating performance since they do not necessarily correlate with the underlying operating performance of the business.

Other expenses. Other expenses include professional fees incurred by the Company in connection with the Company’s initial public offering and amounts expensed in the settlement of a legal matter. The Company excludes these expenses for the purpose of calculating the non-GAAP financial measures because it believes these items are outside the ordinary course of business and do not contribute to a meaningful evaluation of its current operating performance or comparisons to its past operating performance.

Aggregate adjustment for income taxes. The aggregate adjustment for income taxes is the estimated combined income tax effect for the adjustments mentioned above. The tax effects are determined based on the tax jurisdictions where the above items were incurred.

As the excluded items can have a material impact on earnings, management compensates for this limitation by relying primarily on GAAP results and using non-GAAP financial measures supplementally. The non-GAAP financial measures are not meant to be considered as indicators of performance in isolation from or as a substitute for revenue, gross margin, research and development expenses, sales and marketing expenses, general and administrative expenses, operating loss or net loss prepared in accordance with GAAP, and should be read only in conjunction with financial information presented on a GAAP basis.

SecureWorks
Investor Inquiries:
Rebecca Gardy, 404-417-4803
Investor Relations Officer
rgardy@secureworks.com
or
SecureWorks
Media inquiries:
Elizabeth W. Clarke, 404-486-4492
Director of Media Relations
eclarke@secureworks.com

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