SECUREWORKS CORP. This management's discussion and analysis is based upon the financial statements of Secureworks which have been prepared in accordance with accounting principles generally accepted inthe United States , or GAAP, and should be read in conjunction with our audited financial statements and related notes for the year endedJanuary 29, 2021 included in Part II, Item 8 of our Annual Report on Form 10-K for the fiscal year endedJanuary 29, 2021 filed with theSEC onMarch 25, 2021 , which we refer to as the Annual Report. In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, beliefs, expected future responses to and effects of the COVID-19 pandemic and other characterizations of future events or circumstances. Our actual results could differ materially from those discussed or implied in our forward-looking statements. Factors that could cause or contribute to these differences include those discussed in "Risk Factors" in Part I, Item 1A of our Annual Report. Our fiscal year is the 52- or 53-week period ending on the Friday closest toJanuary 31 . We refer to the fiscal year endingJanuary 28, 2022 and the fiscal year endedJanuary 29, 2021 as fiscal 2022 and fiscal 2021, respectively. Fiscal 2022 and fiscal 2021 each have 52 weeks, and each quarter has 13 weeks. Unless otherwise indicated, all changes identified for the current-period results represent comparisons to results for the prior corresponding fiscal periods. All percentage amounts and ratios presented in this management's discussion and analysis were calculated using the underlying data in thousands. Except where the context otherwise requires or where otherwise indicated, (1) all references to "Secureworks," "we," "us," "our" and "our Company" in this management's discussion and analysis refer toSecureWorks Corp. and our subsidiaries on a consolidated basis, (2) all references to "Dell" refer toDell Inc. and its subsidiaries on a consolidated basis and (3) all references to "Dell Technologies" refer toDell Technologies Inc. , the ultimate parent company ofDell Inc. Overview We are a leading global cybersecurity provider of technology-driven security solutions singularly focused on protecting our customers by outpacing and outmaneuvering threat actors. Our vision is to be the essential cybersecurity company for a digitally connected world by providing the software platform of choice to deliver our holistic approach to security at scale for our customers. We combine considerable experience from securing thousands of customers, deep and machine-learning capabilities in our software platform, and actionable insights from our team of elite researchers, analysts and consultants to create a powerful network effect that provides increasingly strong protection for our customers. Through our vendor-inclusive approach, we create integrated and comprehensive solutions by proactively managing the collection of "point" products deployed by our customers to address specific security issues and provide solutions to close the gaps in their defenses. We seek to provide the right level of security for each customer's unique situation, which evolves as their organization grows and changes over time. By aggregating and analyzing data from sources around the world, we offer solutions that enable organizations to: •prevent security breaches, •detect malicious activity, •respond rapidly when a security breach occurs, and •identify emerging threats. We have pioneered an integrated approach that delivers a broad portfolio of security solutions to organizations of varying size and complexity. Our flexible and scalable solutions support the evolving needs of the largest, most sophisticated enterprises, as well as small and medium-sized businesses andU.S. state and local government agencies with limited in-house capabilities and resources. We offer our customers: •software-as-a-service, or ("SaaS"), solutions, •managed security services, and •professional services, including incident response services and security risk consulting. Our solutions leverage the proprietary technologies, security operations workflows, extensive expertise and knowledge of the tactics, techniques and procedures of the adversary that we have developed over more than 22 years. As key elements of our strategy, we seek to: 17 -------------------------------------------------------------------------------- •be the cloud-native security analytics software platform of choice, •broaden our reach with security service providers to deliver our security analytics software platform globally, and •empower the global security community to beat the adversary at scale. Our technology-driven security solutions offer an innovative approach to prevent, detect, and respond to cybersecurity breaches. The platforms collect, aggregate, correlate and analyze billions of events daily from our extensive customer base utilizing sophisticated algorithms to detect malicious activity and deliver security countermeasures, dynamic intelligence and valuable context regarding the intentions and actions of cyber adversaries. Through our Taegis applications and managed security services, which are sold on a subscription basis, we provide global visibility and insight into malicious activity, enabling our customers to detect, respond to and effectively remediate threats quickly. Our proprietary Taegis software platform, which we launched in fiscal 2020, was purpose-built as a cloud-native software platform that combines the power of machine-learning with security analytics and threat intelligence to unify detection and response across endpoint, network and cloud environments for better security outcomes and simpler security operations. The Taegis software platform is a core element for our SaaS applications, which leverage workflows designed using 22 years of security operations expertise and our integrated orchestration and automation capabilities to increase the speed of response actions. We expanded our Taegis SaaS applications with Vulnerability, Detection and Response, or VDR, during fiscal 2021 with our acquisition ofDelve Laboratories Inc. , as discussed below. In addition to Taegis applications and managed security services, we also offer a variety of professional services, which include incident response and security and risk consulting, to accelerate adoption of our software solutions. We advise customers on a broad range of security and risk-related matters through both project-based and long-term contracts in addition to our Taegis applications and managed security services. COVID-19 InDecember 2019 , a novel strain of the coronavirus, COVID-19, was reported in mainlandChina . TheWorld Health Organization declared the outbreak to constitute a "pandemic" onMarch 11, 2020 . This led to a significant disruption of normal business operations globally, as businesses, including Secureworks, have implemented modifications to protect employees by restricting travel and directing employees to work-from-home, in some instances as required by federal, state and local authorities. While we instituted a global work-from-home policy beginning inMarch 2020 , we did not incur significant disruptions in our business operations or a material impact on our results of operations, financial condition, liquidity or capital resources for the three months endedApril 30, 2021 . We have experienced a limited reduction in customer demand for our solutions that we believe is attributable to COVID-19, which may impact our results in future periods. Although we are unable to predict the extent and severity of all impacts of COVID-19, the pandemic might further curtail customer spending, lead to delayed or deferred purchasing decisions, lengthen sales cycles and result in delays in receiving customer or partner payments. These effects, individually or in the aggregate, could have a material negative impact on our future results of operations and financial condition. In light of these considerations, we continue to actively monitor the impacts and potential impacts of the COVID-19 pandemic in all aspects of our business. The extent of the impact of COVID-19 on our future operational and financial performance will depend on various developments, including the duration and spread of the virus, effectiveness of vaccines deployed to contain the virus, impact on our employees, customers and vendors, impact on our customers' liquidity, and impact on volume of sales, and length of our sales cycles, all of which remain uncertain and cannot be predicted, but which could have a material negative effect on our business, results of operations or financial condition. Due to our subscription-based business model, any such effect of COVID-19 may not be fully reflected in our results of operations until future periods. Key Factors Affecting Our Performance We believe that our future success will depend on many factors, including the adoption of our Taegis solutions by organizations, continued investment in our technology and threat intelligence research, our introduction of new solutions, our ability to increase sales of our solutions to new and existing customers and our ability to attract and retain top talent. Although these areas present significant opportunities, they also present risks that we must manage to ensure our future success. For additional information about these risks, refer to "Risk Factors" in Part I, Item 1A of our Annual Report. We operate in an intensely competitive industry and face, among other competitive challenges, pricing pressures within the information security market as a result of action by our larger competitors to reduce the prices of their security prevention, detection and response solutions, as well as the prices of their managed security services. We must continue to manage our investments in an efficient manner and effectively execute our strategy to succeed. If we are unable to address these challenges, our business could be adversely affected. Adoption of Technology-Driven Solution Strategy. The evolving landscape of applications, modes of communication and IT architectures makes it increasingly challenging for organizations of all sizes to protect their critical business assets, including 18 -------------------------------------------------------------------------------- proprietary information, from cyber threats. New technologies heighten security risks by increasing the number of ways a threat actor can attack a target, by giving users greater access to important business networks and information and by facilitating the transfer of control of underlying applications and infrastructure to third-party vendors. An effective cyber defense strategy requires the coordinated deployment of multiple products and solutions tailored to an organization's specific security needs. Our integrated suite of solutions, including our new Taegis offerings, is designed to facilitate the successful implementation of such a strategy, but continuous investment in, and adaptation of, our technology will be required as the threat landscape continues to evolve rapidly. The degree to which prospective and current customers recognize the mission-critical nature of our technology-driven information security solutions, and subsequently allocate budget dollars to our solutions, will affect our future financial results. Investment in OurTechnology and Threat Intelligence Research . Our software platforms constitute the core of our technology-driven security solutions. They provide our customers with an integrated perspective and intelligence regarding their network environments and security threats. Our software platforms are augmented by our Counter Threat Unit research team, which conducts exclusive research into threat actors, uncovers new attack techniques, analyzes emerging threats and evaluates the risks posed to our customers. Our performance is significantly dependent on the investments we make in our research and development efforts, and on our ability to be at the forefront of threat intelligence research, and to adapt these software platforms to new technologies as well as to changes in existing technologies. This is an area in which we will continue to invest, while leveraging a flexible staffing model to align with solutions development. We believe that investment in our Taegis software platform and solutions will contribute to long-term revenue growth, but it may continue to adversely affect our near-term profitability. Introduction of New Security Solutions. Our performance is significantly dependent on our ability to continue to innovate and introduce new information security solutions, such as our Taegis solutions, that protect our customers from an expanding array of cybersecurity threats. We continue to invest in solutions innovation and leadership, including hiring top technical talent and focusing on core technology innovation. In addition, we will continue to evaluate and utilize third-party proprietary technologies, where appropriate, for the continuous development of complementary offerings. We cannot be certain that we will realize increased revenue from our solutions development initiatives. We believe that our investment in solutions development will contribute to long-term revenue growth, but such investment may continue to adversely affect our near-term profitability. Investments in Expanding Our Customer Base and Deepening Our Customer Relationships. To support future sales, we will need to continue to devote resources to the development of our global sales force. We have made and plan to continue to make significant investments in expanding our go-to-market efforts with direct sales, channel partners and marketing. Any investments we make in our sales and marketing operations will occur before we realize any benefits from such investments. The investments we have made, or intend to make, to strengthen our sales and marketing efforts may not result in an increase in revenue or an improvement in our results of operations. Although we believe our investment in sales and marketing will help us improve our results of operations in the long term, the resulting increase in operating expenses attributable to these sales and marketing functions may continue to affect adversely our profitability in the near term. The continued growth of our business also depends in part on our ability to sell additional solutions to our existing customers. As our customers realize the benefits of the solutions they previously purchased, our portfolio of solutions provides us with a significant opportunity to expand these relationships. Investment in Our People. The difficulty in providing effective information security is exacerbated by the highly competitive environment for identifying, hiring and retaining qualified information security professionals. Our technology leadership, brand, exclusive focus on information security, customer-first culture, and robust training and development program have enabled us to attract and retain highly talented professionals with a passion for building a career in the information security industry. These professionals are led by a highly experienced and tenured management team with extensive IT security expertise and a record of developing successful new technologies and solutions to help protect our customers. We will continue to invest in attracting and retaining top talent to support and enhance our information security offerings. Key Operating Metrics In recent years, we have experienced broad growth across our portfolio of technology-driven information security solutions being provided to all sizes of customers. We have achieved much of this growth by providing solutions to large enterprise customers, which generate substantially more average revenue than our small and medium-sized business, or SMB, customers, and by continually expanding the volume and breadth of the security solutions that we provide to all customers. Execution of this strategy has resulted in steady growth in our average revenue per customer. This growth has required ongoing investment in our business, resulting in net losses. We believe these investments are critical to our success, although they may continue to impact our profitability. We believe the operating metrics described below provide further insight into the long-term value of our subscription agreements and our ability to maintain and grow our customer relationships. Relevant key operating metrics are presented below as of the dates indicated and for the fiscal years then ended. 19 -------------------------------------------------------------------------------- April 30, 2021 May 1, 2020 Managed security subscription customer base 3,100 3,900 Taegis subscription customer base 500 100 Total subscription customer base 3,600 4,000 Total customer base 5,300 5,300 Managed security annual recurring revenue (in millions)$ 349.1 $ 412.8 Taegis annual recurring revenue (in millions)$ 72.4 $ 24.9 Total annual recurring revenue (in millions) $
421.5
Managed security average subscription revenue per customer (in$ 105.4 $ 104.6 thousands ) Taegis average subscription revenue per customer (in thousands)$ 143.3 $ 172.8 Total average subscription revenue per customer (in thousands)$ 116.1 $ 109.4 Net revenue retention rate 98 % 98 % Total Subscription Customer Base. We define our total subscription customer base as the number of customerswho subscribe to our Taegis SaaS applications or managed security services as of a particular date. We believe that growing our existing customer base and our ability to grow our average subscription revenue per customer represent significant future revenue opportunities for us. Total Customer Base. We define total customer base as the number of customers that subscribe to our Taegis SaaS applications and managed security services and customers that buy professional and other services from us, as of a particular date. Total Annual Recurring Revenue. We define total annual recurring revenue as of the measurement date. Changes to recurring revenue may result from the expansion of our offerings and sales of additional solutions to our existing customers, as well as the timing of customer renewals. Total Average Subscription Revenue Per Customer. Total average subscription revenue per customer is primarily related to the persistence of cyber threats and the results of our sales and marketing efforts to increase the awareness of our solutions. Our customer composition of both enterprise and small and medium sized business provides us with an opportunity to expand our professional services revenue. As ofApril 30, 2021 andMay 1, 2020 , approximately 64% and 61%, respectively, of our professional services customers subscribed to our Taegis applications or managed security services. Net Revenue Retention Rate. Net revenue retention rate is an important measure of our success in retaining and growing revenue from our subscription-based customers. To calculate our revenue retention rate for any period, we compare the annual recurring revenue of our subscription-based customers at the beginning of the fiscal year (base recurring revenue) to the same measure from that same cohort of customers at the end of the fiscal year (retained recurring revenue). By dividing the retained recurring revenue by the base recurring revenue, we measure our success in retaining and growing installed revenue from the specific cohort of customers we served at the beginning of the period. Our calculation includes the positive revenue impacts of selling and installing additional solutions to this cohort of customers and the negative revenue impacts of customer or service attrition during the period. The calculation, however, does not include the positive impact on revenue from sales of solutions to any customers acquired during the period. Our net revenue retention rates may increase or decline from period to period as a result of various factors, including the timing of solutions installations and customer renewal rates. 20 -------------------------------------------------------------------------------- Non-GAAP Financial Measures We use supplemental measures of our performance, which are derived from our financial information, but which are not presented in our financial statements prepared in accordance with generally accepted accounting principles inthe United States of America , referred to as GAAP. Non-GAAP financial measures presented in this management's discussion and analysis include 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 income (loss), non-GAAP net income (loss), non-GAAP earnings (loss) per share and adjusted EBITDA. We use non-GAAP financial measures to supplement financial information presented on a GAAP basis. We believe these non-GAAP financial measures provide useful information to help evaluate our operating results by facilitating an enhanced understanding of our operating performance and enabling more meaningful period-to-period comparisons. There are limitations to the use of the non-GAAP financial measures presented in this management's discussion and analysis. Our non-GAAP financial measures may not be comparable to similarly titled measures of other companies. Other companies, including companies in our industry, may calculate non-GAAP financial measures differently than we do, limiting the usefulness of those measures for comparative purposes. The non-GAAP financial measures we present, as defined by us, exclude the items described in the reconciliation below. As the excluded items can have a material impact on earnings, our 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 income (loss), net income (loss), earnings (loss) per share and EBITDA prepared in accordance with GAAP, and should be read only in conjunction with financial information presented on a GAAP basis. Reconciliation of Non-GAAP Financial Measures The table below presents a reconciliation of each non-GAAP financial measure to its most directly comparable GAAP financial measure. We encourage you to review the reconciliations in conjunction with the presentation of the non-GAAP financial measures for each of the periods presented. In future fiscal periods, we may exclude such items and may incur income and expenses similar to these excluded items. Accordingly, the exclusion of these items and other similar items in our non-GAAP presentation should not be interpreted as implying that these items are non-recurring, infrequent or unusual. The following is a summary of the items excluded from the most comparable GAAP financial measures to calculate our non-GAAP financial measures: •Amortization of Intangible Assets. Amortization of intangible assets consists of amortization of customer relationships and acquired technology. In connection with the acquisition ofDell byDell Technologies in fiscal 2014 and our acquisition ofDelve Laboratories, Inc. in fiscal 2021, all of our tangible and intangible assets and liabilities were accounted for and recognized at fair value on the transaction date. Accordingly, amortization of intangible assets consists of amortization associated with intangible assets recognized in connection with each such transaction. •Stock-based Compensation Expense. Non-cash stock-based compensation expense relates to both theDell Technologies and Secureworks equity plans. We exclude such expense when assessing the effectiveness of our operating performance since stock-based compensation does not necessarily correlate with the underlying operating performance of the business. •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. 21 --------------------------------------------------------------------------------
Three Months Ended
April 30, 2021 May 1,
2020
(in thousands)
GAAP revenue(1) $ 139,463 $ 141,181
GAAP gross margin $ 82,256 $ 78,272
Amortization of intangibles 3,819 3,460
Stock-based compensation expense 299 355
Non-GAAP gross margin $ 86,374 $ 82,087
GAAP research and development expenses $ 28,152 $ 24,073
Stock-based compensation expense (1,098) (1,291)
Non-GAAP research and development expenses $
27,054
GAAP sales and marketing expenses$ 36,405 $ 37,452 Stock-based compensation expense (732) (741) Non-GAAP sales and marketing expenses $
35,673
GAAP general and administrative expenses$ 25,555 $ 27,516 Amortization of intangibles (3,524) (3,524) Stock-based compensation expense (3,906) (3,500) Non-GAAP general and administrative expenses $
18,125
GAAP operating loss$ (7,856) $ (10,769) Amortization of intangibles 7,343 6,984 Stock-based compensation expense 6,035 5,887 Non-GAAP operating income $
5,522
GAAP net loss$ (6,390) $ (7,536) Amortization of intangibles 7,343 6,984 Stock-based compensation expense 6,035 5,887 Aggregate adjustment for income taxes (2,997) (2,803) Non-GAAP net income $ 3,991$ 2,532 GAAP loss per share $ (0.08)$ (0.09) Amortization of intangibles 0.09 0.09 Stock-based compensation expense 0.07 0.07 Aggregate adjustment for income taxes (0.04) (0.03) Non-GAAP earnings per share * $ 0.05$ 0.03 * Sum of reconciling items may differ from total due to rounding of individual components GAAP net loss$ (6,390) $ (7,536) Interest and other, net 907 (993) Income tax benefit (2,373) (2,240) Depreciation and amortization 9,918 10,486 Stock-based compensation expense 6,035 5,887 Adjusted EBITDA $ 8,097$ 5,604
(1) Historically the Company has presented non-GAAP revenue as a financial measure. There are no such adjustments that give rise to non-GAAP revenue for either of the periods presented.
22
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Our Relationship with Dell and Dell Technologies
On April 27, 2016 , we completed our IPO. Upon the closing of our IPO, Dell
Technologies owned, indirectly through Dell Inc. and Dell Inc.'s subsidiaries,
all shares of our outstanding Class B common stock, which as of April 30, 2021
represented approximately 83.8% of our total outstanding shares of common stock
and approximately 98.1% of the combined voting power of both classes of our
outstanding common stock.
As a majority-owned subsidiary of Dell , we receive from Dell various corporate
services in the ordinary course of business, including finance, tax, human
resources, legal, insurance, IT, procurement and facilities related services.
The costs of these services have been charged in accordance with a shared
services agreement that went into effect on August 1, 2015 , the effective date
of our carve-out from Dell . For more information regarding the allocated costs
and related party transactions, see "Notes to Condensed Consolidated Financial
Statements-Note 10-Related Party Transactions" in our condensed consolidated
financial statements included in this report.
During the periods presented in the condensed consolidated financial statements
included in this report, Secureworks did not file separate federal tax returns,
as Secureworks was generally included in the tax grouping of other Dell entities
within the respective entity's tax jurisdiction. The income tax benefit has been
calculated using the separate return method, modified to apply the benefits for
loss approach. Under the benefits for loss approach, net operating losses or
other tax attributes are characterized as realized or as realizable by
Secureworks when those attributes are utilized or expected to be utilized by
other members of the Dell consolidated group. For more information, see "Notes
to Condensed Consolidated Financial Statements -Note 9-Income and Other Taxes"
in our condensed consolidated financial statements included in this report.
Additionally, we participate in various commercial arrangements with Dell under
which, for example, we provide information security solutions to third-party
customers with which Dell has contracted to provide our solutions, procure
hardware, software and services from Dell , and sell our solutions through Dell
in the United States and some international jurisdictions. In connection with
our IPO, effective August 1, 2015 we entered into agreements with Dell that
govern these commercial arrangements. These agreements generally were initially
effective for up to one to three years and include extension and cancellation
options. To the extent that we choose to or are required to transition away from
the corporate services currently provided by Dell , we may incur additional
non-recurring transition costs to establish our own stand-alone corporate
functions. For more information regarding the allocated costs and related party
transactions, see "Notes to Condensed Consolidated Financial Statements-Note
10-Related Party Transactions" in our condensed consolidated financial
statements included in this report.
Components of Results of Operations
Revenue
We sell SaaS applications and managed security services on a subscription basis
and various professional services, including incident response solutions and
security risk consulting services. Our Taegis SaaS applications and managed
security contracts typically range from one to three years and, as of April 30,
2021 , averaged approximately two years in duration. The revenue and any related
costs for these deliverables are recognized ratably over the contract term,
beginning on the date on which service is made available to customers.
Professional services customers typically purchase solutions pursuant to
customized contracts that are shorter in duration. In general, these contracts
have terms of less than one year. Professional services consist primarily of
fixed-fee and retainer-based contracts. Revenue from these engagements is
recognized under the proportional performance method of accounting. Revenue from
time and materials-based contracts is recognized as costs are incurred at
amounts represented by the agreed-upon billing rates.
The fees we charge for our solutions vary based on a number of factors,
including the solutions selected, the number of customer devices covered by the
selected solutions, and the level of management we provide for the solutions. In
the first quarter of fiscal 2022, approximately 75% of our revenue was derived
from subscription-based arrangements, attributable to Taegis applications and
managed security services, while approximately 25% was derived from professional
services engagements. As we respond to the evolving needs of our customers, the
relative mix of subscription-based solutions and professional services we
provide our customers may fluctuate. International revenue, which we define as
revenue contracted through non-U.S. entities, represented approximately 32% of
our total net revenue in the first quarter of fiscal 2022 and approximately 29%
of our total net revenue in the first quarter of fiscal 2021. Although our
international customers are located primarily in the United Kingdom , Japan ,
Australia and Canada , we provide our SaaS applications or managed security
services to customers across 75 countries as of April 30, 2021 .
Over all of the periods presented in this report, our pricing strategy for our
various offerings was relatively consistent, and accordingly did not
significantly affect our revenue growth. However, we may adjust our pricing to
remain competitive and support our strategic initiatives.
23
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Gross Margin
We operate in a challenging business environment, where the complexity and
number of cyber-attacks are constantly increasing. Accordingly, initiatives to
drive the efficiency of our Counter Threat Platform and the continued training
and development of our employees are critical to our long-term success. Gross
margin has been and will continue to be affected by these factors as well as
others, including the mix of solutions sold, the mix between large and small
customers, the timing of revenue recognition and the extent to which we expand
our security operations centers.
Cost of revenue consists primarily of personnel expenses, including salaries,
benefits and performance-based compensation for employees who maintain our
Counter Threat Platform and provide support services to our customers, as well
as perform other critical functions. Also included in cost of revenue are
amortization of equipment and costs associated with hardware utilized as part of
providing subscription services, amortization of technology licensing fees,
amortization of intangible assets, fees paid to contractors who supplement or
support our solutions, maintenance fees and overhead allocations. As our
business grows, the cost of revenue associated with our solutions may fluctuate.
We operate in a high-growth industry and have experienced significant revenue
growth since our inception. We continue to invest in initiatives to drive the
efficiency of our business to increase gross margin as a percentage of total
revenue. However, as we balance revenue growth and efficiency initiatives, gross
margin as a percentage of total revenue may fluctuate from period to period.
Operating Costs and Expenses
Our operating costs and expenses consist of research and development expenses,
sales and marketing expenses and general and administrative expenses.
?Research and Development, or R&D, Expenses. Research and development expenses
include compensation and related expenses for the continued development of our
solutions offerings, including a portion of expenses related to our threat
research team, which focuses on the identification of system vulnerabilities,
data forensics and malware analysis. R&D expenses also encompass expenses
related to the development of prototypes of new solutions offerings and
allocated overhead. Our customer solutions have generally been developed
internally. We operate in a competitive and highly technical industry.
Therefore, to maintain and extend our technology leadership, we intend to
continue to invest in our R&D efforts by hiring more personnel to enhance our
existing security solutions and to add complementary solutions.
• Sales and Marketing, or S&M, Expenses. Sales and marketing expenses include
salaries, sales commissions and performance-based compensation benefits and
related expenses for our S&M personnel, travel and entertainment, marketing and
advertising programs (including lead generation), customer advocacy events, and
other brand-building expenses, as well as allocated overhead. As we continue to
grow our business, both domestically and internationally, we will invest in our
sales capability, which will increase our sales and marketing expenses in
absolute dollars.
?General and Administrative, or G&A, Expenses. General and administrative
expenses include primarily the costs of human resources and recruiting, finance
and accounting, legal support, information management and information security
systems, facilities management, corporate development and other administrative
functions, and are partially offset by allocations of information technology and
facilities costs to other functions.
Interest and Other, Net
Interest and other, net consists primarily of the effect of exchange rates on
our foreign currency-denominated asset and liability balances and interest
income earned on our cash and cash equivalents. All foreign currency transaction
adjustments are recorded as foreign currency gains (losses) in the Condensed
Consolidated Statements of Operations. To date, we have had minimal interest
income or expense.
Income Tax Benefit
Our effective tax benefit rate was 27.1% and 22.9% for the three months ended
April 30, 2021 and May 1, 2020 , respectively. The change in effective tax rate
from fiscal 2020 to fiscal 2021 was primarily attributable to the impact of
certain discrete adjustments related to the vesting of stock-based compensation
awards and results of foreign operations.
We calculate a provision for income taxes using the asset and liability method,
under which deferred tax assets and liabilities are recognized by identifying
the temporary differences arising from the different treatment of items for tax
and accounting purposes. We provide valuation allowances for deferred tax
assets, where appropriate. We file U.S. federal returns on a consolidated basis
with Dell and we expect to continue doing so until such time (if any) as we are
deconsolidated for tax purposes with respect to the Dell consolidated group.
According to the terms of the tax matters agreement between Dell Technologies
and Secureworks that went into effect on August 1, 2015 , Dell Technologies will
reimburse us for any amounts by which our tax assets reduce the amount of tax
liability owed by the Dell group on an unconsolidated basis. For a further
24
--------------------------------------------------------------------------------discussion of income tax matters, see "Notes to Condensed Consolidated Financial Statements-Note 9-Income and Other Taxes" in our consolidated financial statements included in this report.
Results of Operations
Three months ended
The following tables summarize our key performance indicators for the three
months ended
Three Months Ended
April 30, 2021 May 1, 2020
% of % % of
$ Revenue Change $ Revenue
(in thousands, except percentages)
Net revenue $ 139,463 100.0 % (1.2) % $ 141,181 100.0 %
Cost of revenue $ 57,207 (41.0) % (9.1) % $ 62,909 (44.6) %
Total gross margin $ 82,256 59.0 % 5.1 % $ 78,272 55.4 %
Operating expenses $ 90,112 64.6 % 1.2 % $ 89,041 63.1 %
Operating loss $ (7,856) (5.6) % (27.0) % $ (10,769) (7.6) %
Net loss $ (6,390) (4.6) % (15.2) % $ (7,536) (5.3) %
Other Financial Information (1)
Non-GAAP net revenue$ 139,463 100.0 % (1.2) %$ 141,181 100.0 % Non-GAAP cost of revenue$ 53,089 38.1 % (10.2) %$ 59,094 41.9 % Non-GAAP gross margin$ 86,374 61.9 % 5.2 %$ 82,087 58.1 % Non-GAAP operating expenses$ 80,852 58.0 %
1.1 %
Non-GAAP operating income (loss)
Non-GAAP net income (loss)$ 3,991 2.9 % 57.6 %$ 2,532 1.8 % Adjusted EBITDA$ 8,097 5.8 % 44.5 %$ 5,604 4.0 % _____________________ (1) See "Non-GAAP Financial Measures" and "Reconciliation of Non-GAAP Financial Measures" for more information about these non-GAAP financial measures, including our reasons for including the measures, material limitations with respect to the usefulness of the measures, and a reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure. Non-GAAP financial measures as a percentage of revenue are calculated based on non-GAAP revenue. Revenue Net revenue, which we refer to as revenue, decreased$1.7 million , or 1.2%, for the three months endedApril 30, 2021 . The decrease resulted primarily from a decline in revenue generated by our subscription-based solutions, which represented approximately 75% of total revenue for the three months endedApril 30, 2021 . The decline reflected our continued focus on reducing non-strategic service offerings and prioritizing the growth of our Taegis subscription solutions, which includes reselling Taegis offerings to our current subscription customer base. Revenue for certain services provided to or on behalf ofDell under our commercial agreements withDell totaled approximately$3.2 million and$6.0 million for the three months endedApril 30, 2021 andMay 1, 2020 , respectively. For more information regarding the commercial agreements, see "Notes to Condensed Consolidated Financial Statements-Note 10-Related Party Transactions" in our condensed consolidated financial statements included in this report. We primarily generate revenue from sales inthe United States . However, for the three months endedApril 30, 2021 , international revenue, which we define as revenue contracted through non-U.S. entities, increased to$44.9 million , or 10.8% of total revenue from the three months endedMay 1, 2020 . Currently, our international customers are primarily located in theUnited Kingdom ,Japan ,Australia andCanada . We are focused on continuing to grow our international customer base in future periods. Gross Margin Our total gross margin increased$4.0 million , or 5.1%, for the three months endedApril 30, 2021 . As a percentage of revenue, our gross margin increased 400 basis points to 59.0% for the three months endedApril 30, 2021 . Gross margin on a GAAP basis includes amortization of intangible assets and stock-based compensation expense. On a non-GAAP basis, excluding these adjustments, gross margin increased$4.3 million , or 5.2%, for the three months endedApril 30, 2021 . As a percentage of 25 -------------------------------------------------------------------------------- revenue, our non-GAAP gross margin increased 400 basis points to 61.9% for three months endedApril 30, 2021 . The increase in gross margin as a percentage of revenue on both a GAAP and non-GAAP basis during the three months endedApril 30, 2021 was primarily attributable to improvement in our subscription-based solutions margins as we continue to focus on delivering comprehensive higher-value security solutions and driving scale and operational efficiencies, as well as to a decrease in travel-related costs attributable to the COVID-19 pandemic. Operating Expenses
The following table presents information regarding our operating expenses during
the three months ended
Three Months Ended
April 30, 2021 May 1, 2020
% of % % of
Dollars Revenue Change Dollars Revenue
(in thousands, except percentages)
Operating expenses:
Research and development $ 28,152 20.2 % 16.9 % $ 24,073 17.1 %
Sales and marketing 36,405 26.1 % (2.8) % 37,452 26.5 %
General and administrative 25,555 18.3 % (7.1) % 27,516 19.5 %
Total operating expenses $ 90,112 64.6 % 1.2 % $ 89,041 63.1 %
Other Financial Information
Non-GAAP research and development $ 27,054 19.4 % 18.8 % $ 22,782 16.1 %
Non-GAAP sales and marketing 35,673 25.6 % (2.8) % 36,711 26.0 %
Non-GAAP general and administrative 18,125 13.0 % (11.6) % 20,492 14.5 %
Non-GAAP operating expenses (1) $ 80,852 58.0 % 1.1 % $ 79,985 56.7 %
(1) See "Non-GAAP Financial Measures" and "Reconciliation of Non-GAAP
Financial Measures" for a reconciliation of each non-GAAP financial measure to
the most directly comparable GAAP financial measure.
Research and Development Expenses. R&D expenses increased $4.1 million , or
16.9%, for the three months ended April 30, 2021 . As a percentage of revenue,
R&D expenses increased 300 basis points to 20.2% for the three months ended
April 30, 2021 . On a non-GAAP basis, R&D expenses as a percentage of revenue
decreased 300 basis points to 19.4% for the three months ended April 30, 2021 .
The increase in R&D expenses was primarily attributable to increased
compensation and benefits resulting from the addition of R&D personnel
associated with the continued development of our Taegis software platform and
SaaS applications.
Sales and Marketing Expenses. S&M expenses decreased $1.0 million , or 2.8%, for
the three months ended April 30, 2021 . As a percentage of revenue, S&M expenses
decreased 40 basis points to 26.1% for the three months ended April 30, 2021 . On
a non-GAAP basis, S&M expenses as a percentage of revenue decreased 40 basis
points to 25.6% for the three months ended April 30, 2021 . The decrease in S&M
expenses was primarily attributable to lower travel-related cost associated with
increased activities on a remote basis as a result of the COVID-19 pandemic.
General and Administrative Expenses. G&A expenses decreased $2.0 million , or
7.1%, for the three months ended April 30, 2021 . As a percentage of revenue, G&A
expenses increased 100 basis points to 18.3% for the three months ended
April 30, 2021 . On a non-GAAP basis, G&A expenses as a percentage of revenue
increased 200 basis points to 13.0% for the three months ended April 30, 2021 .
The decrease in G&A expenses was primarily attributable to lower professional
services and consulting related costs for the current quarter.
Operating Loss
Our operating loss was $7.9 million and $10.8 million for the three months ended
April 30, 2021 and May 1, 2020 , respectively. As a percentage of revenue, our
operating loss was 5.6% and 7.6% for the three months ended April 30, 2021 and
May 1, 2020 , respectively. The decrease in our operating loss was primarily
attributable to our increased gross margin, which was partially offset by higher
operating expenses as we continue to invest in the business to drive growth.
Operating loss on a GAAP basis includes amortization of intangible assets and
stock-based compensation expense. On a non-GAAP basis, excluding these
adjustments, our non-GAAP operating income was $5.5 million for the three months
ended April 30, 2021 compared to an operating loss of $2.1 million for the three
months ended May 1, 2020 .
26
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Interest and Other, Net
Our interest and other, net was $(0.9) million and $1.0 million for the three
months ended April 30, 2021 and May 1, 2020 , respectively. The change primarily
reflected the effects of foreign currency transactions and related exchange rate
fluctuations.
Income Tax Expense (Benefit)
Our income tax benefit was $2.4 million , or 27.1%, and $2.2 million , or 22.9%,
of our pre-tax loss during the three months ended April 30, 2021 and May 1,
2020 , respectively. The change in the effective tax benefit rate was primarily
attributable to the impact of certain discrete adjustments related to the
vesting of stock-based compensation awards in the current quarter.
Net Income (Loss)
Our net loss of $(6.4) million decreased $1.1 million , or 15.2%, for the three
months ended April 30, 2021 . Net income on a non-GAAP basis was $4.0 million
compared to a non-GAAP net loss of $2.5 million the three months ended May 1,
2020 . The changes on both a GAAP and non-GAAP basis were attributable to our
improved operating results, partially offset by the lower income tax benefit
recognized in the current period.
Liquidity and Capital Commitments
Overview
We believe that our cash and cash equivalents together with our accounts
receivable will provide us with sufficient liquidity to fund our business and
meet our obligations for at least 12 months and for the foreseeable future
thereafter. Our future capital requirements will depend on many factors,
including our rate of revenue growth, the rate of expansion of our workforce,
the timing and extent of our expansion into new markets, the timing of
introductions of new functionality and enhancements to our solutions, potential
acquisitions of complementary businesses and technologies, continuing market
acceptance of our solutions, and general economic and market conditions. We may
need to raise additional capital or incur indebtedness to continue to fund our
operations in the future or to fund our needs for less predictable strategic
initiatives, such as acquisitions. In addition to our $30 million revolving
credit facility from Dell , described below, sources of financing may include
arrangements with unaffiliated third parties, depending on the availability of
capital, the cost of funds and lender collateral requirements.
Selected Measures of Liquidity and Capital Resources
As of April 30, 2021 , our principal sources of liquidity consisted of cash and
cash equivalents and accounts receivable. Our cash and cash equivalents balance
as of April 30, 2021 included $45.8 million invested in money market funds
pending their use in our business.
Selected measures of our liquidity and capital resources are as follows:
April 30,
2021 January 29, 2021
(in thousands)
Cash and cash equivalents $ 180,607 $ 220,300
Accounts receivable, net $ 94,901 $ 108,005
We invoice our customers based on a variety of billing schedules. During the
three months ended April 30, 2021 , on average, approximately 57% of our
recurring revenue was billed in advance and approximately 43% was billed on
either a monthly or a quarterly basis. Invoiced accounts receivable are
generally collected over a period of 30 to 120 days. The decrease in accounts
receivable as of April 30, 2021 reflected increased collection activity. We
regularly monitor our accounts receivable for collectability, particularly in
markets where economic conditions remain uncertain, and continue to take actions
to reduce our exposure to credit losses. As of April 30, 2021 and January 29,
2021 , the provision for credit losses was $4.5 million and $4.8 million ,
respectively. Based upon our assessment, we believe we are adequately reserved
for credit risk.
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Revolving Credit FacilitySecureWorks, Inc. , our wholly-owned subsidiary, is party to a revolving credit agreement with a wholly-owned subsidiary ofDell Inc. under which we have obtained a$30 million senior unsecured revolving credit facility. Under the facility, up to$30 million principal amount of borrowings may be outstanding at any time. The maximum amount of borrowings may be increased by up to an additional$30 million by mutual agreement of the lender and borrower. The proceeds from loans made under the facility may be used for general corporate purposes. The facility is not guaranteed by us or our subsidiaries. There was no outstanding balance under the facility as ofApril 30, 2021 orJanuary 29, 2021 . EffectiveMarch 25, 2021 , the facility was amended and restated to extend the maturity date toMarch 25, 2022 and to modify the annual rate at which interest accrues to the applicable LIBOR plus 1.54%. Amounts under the facility may be borrowed, repaid and reborrowed from time to time during the term of the facility. The borrower will be required to repay in full all of the loans outstanding, including all accrued interest, and the facility will terminate upon a change of control of us or following a transaction in whichSecureWorks, Inc. ceases to be a direct or indirect wholly-owned subsidiary of our Company. The credit agreement contains customary representations, warranties, covenants and events of default. The unused portion of the facility is subject to a commitment fee of 0.35%, which is due upon expiration of the facility.
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