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. Effective beginning with the three months endedJuly 30, 2021 , management decided to separately present Net revenue and Costs of revenue recognized from Subscription and Professional Services offerings, respectively, in the Condensed Consolidated Statement of Operations and within management's discussion and analysis. Historically, these amounts were presented within the Net revenue and Cost of revenue line items, respectively. We concluded that the discrete presentation of these revenue streams provides a more meaningful representation of the nature of the revenues generated by our service offerings. Certain prior year amounts have been conformed to the current year presentation 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. 20 -------------------------------------------------------------------------------- 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: •be the cloud-native security software platform of choice, •broaden our reach with security service providers to deliver our security 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 security 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 security 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. 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. Acquisition ofDelve Laboratories We seek to make strategic acquisitions of other companies to supplement our internal growth. OnSeptember 21, 2020 , we acquired all of the outstanding shares ofDelve Laboratories Inc. , or Delve, for$15.1 million , net of cash acquired. Delve provides comprehensive vulnerability assessment solutions through its automated vulnerability platform. Delve's SaaS solution is powered by artificial intelligence and machine learning to provide customers with more accurate and actionable data about the highest risk vulnerabilities across their network, endpoints and cloud. We are integrating the vulnerability discovery and prioritization technology into new offerings within our cloud-based portfolio, including our Red Cloak Platform and TDR application, expanding visibility and insights for users. 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 and nine endedOctober 29, 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. 21 -------------------------------------------------------------------------------- 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 and acceptance of vaccines deployed to contain the virus, impact on our employees, customers and vendors, impact on our customers' liquidity and our 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 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 security platform and solutions will contribute to long-term revenue growth, but it may continue to adversely affect our prospects for 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 prospects for near-term profitability. 22
--------------------------------------------------------------------------------
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.
23
--------------------------------------------------------------------------------
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 prospects for near-term
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 nine months ended
October 29, 2021 and October 30, 2020 :
October 29, 2021 October 30, 2020
Taegis subscription customer base 800 300
Managed security subscription customer base 2,900 3,700
Total subscription customer base 3,500 3,900
Total customer base 5,100 5,200
Taegis annual recurring revenue (in millions) $ 123.1 $ 42.0
Managed security annual recurring revenue (in millions) 282.4 400.7
Total annual recurring revenue (in millions) $ 405.5 $ 442.7
Taegis average subscription revenue per customer (in thousands) 149.1 142.3
Managed security average subscription revenue per customer (in 97.5 106.9
thousands)
Total average subscription revenue per customer (in thousands)
$ 113.2 Net revenue retention rate 91 % 95 % Taegis Subscription Customer Base and Managed Security Subscription Customer Base. We define our Taegis subscription customer base and managed security subscription customer base as the number of customerswho have a subscription agreement for that respective offering as of a particular date. Some customers may have subscription agreements for both security offerings to address their current security needs. Total Subscription Customer Base. We define our total subscription customer base as the number of unique customerswho have a subscription agreement for our Taegis solutions and/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 businesses provides us with an opportunity to expand our professional services revenue. For the nine months endedOctober 29, 2021 andOctober 30, 2020 , approximately 59% and 66%, respectively, of our professional services customers subscribed to our Taegis solutions 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 24 -------------------------------------------------------------------------------- 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. 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 subscription cost of revenue, non-GAAP professional services cost of revenue, non-GAAP gross profit, 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 profit, research and development expenses, sales and marketing expenses, general and administrative expenses, operating income (loss), net income (loss), and earnings (loss) per share 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 technology. In connection with the acquisition ofDell byDell Technologies in fiscal 2014 and our acquisition of Delve 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. 25 --------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
October 29, October 30, October 29, October 30,
2021 2020 2021 2020
(in thousands, except per share data)
GAAP net revenue(1) $ 133,699 $ 141,641 $ 407,334 $ 421,298
GAAP subscription cost of revenue 34,888 40,051 109,423 122,506
Amortization of intangibles (4,109) (3,646) (11,972) (10,754)
Stock-based compensation expense (41) (84) (159) (532)
Non-GAAP subscription cost of revenue $ 30,738 $ 36,321 $ 97,292 $ 111,220
GAAP professional services cost of revenue $ 18,002 $ 19,562 $ 57,157 $ 59,916
Stock-based compensation expense (103) (171) (474) (476)
Non-GAAP professional services cost of revenue $ 17,899 $ 19,391 $ 56,683 $ 59,440
GAAP gross profit $ 80,809 $ 82,028 $ 240,754 $ 238,876
Amortization of intangibles 4,109 3,646 11,972 10,754
Stock-based compensation expense 144 255 633 1,008
Non-GAAP gross profit $ 85,062 $ 85,929 $ 253,359 $ 250,638
GAAP research and development expenses $ 32,767 $ 27,608 $ 91,336 $ 75,790
Stock-based compensation expense (2,268) (793) (4,908) (3,181)
Non-GAAP research and development costs
GAAP Selling and Marketing Expenses
$ 35,008 $ 34,810 $ 106,098 $ 107,886 Stock-based compensation expense (1,493) (1,072) (3,241) (2,695) Non-GAAP sales and marketing expenses$ 33,515 $ 33,738 $ 102,857 $ 105,191 GAAP general and administrative expenses$ 28,404 $ 24,508 $ 80,447 $ 73,824 Amortization of intangibles (3,524) (3,524) (10,571) (10,571) Stock-based compensation expense (6,157) (3,961) (14,895) (10,791) Non-GAAP general and administrative expenses$ 18,723 $ 17,023 $ 54,981 $ 52,462 GAAP operating loss$ (15,370) $ (4,898) $ (37,127) $ (18,624) Amortization of intangibles 7,633 7,170 22,543 21,325 Stock-based compensation expense 10,062 6,081 23,677 17,675 Non-GAAP operating income$ 2,325 $ 8,353 $ 9,093 $ 20,376 GAAP net loss$ (12,863) $ (3,608) $ (31,016) $ (12,371) Amortization of intangibles 7,633 7,170 22,543 21,325 Stock-based compensation expense 10,062 6,081 23,677 17,675 Aggregate adjustment for income taxes (3,613) (2,917) (9,073) (8,998) Non-GAAP net income$ 1,219 $ 6,726 $ 6,131 $ 17,631 GAAP loss per share$ (0.15) $ (0.04) $ (0.37) $ (0.15) Amortization of intangibles 0.09 0.09 0.27 0.26 Stock-based compensation expense 0.12 0.08 0.28 0.22 Aggregate adjustment for income taxes (0.04) (0.04) (0.11) (0.11) Non-GAAP earnings (loss) per share *$ 0.01 $ 0.08 $ 0.07 $ 0.22 * Sum of reconciling items may differ from total due to rounding of individual components GAAP net loss$ (12,863) $ (3,608) $ (31,016) $ (12,371) Interest and other, net 762 79 2,270 (944) Income tax benefit (3,269) (1,369) (8,381) (5,309) Depreciation and amortization 10,051 10,106 29,914 30,978 Stock-based compensation expense 10,062 6,081 23,677 17,675 Adjusted EBITDA$ 4,743 $ 11,289 $ 16,464 $ 30,029 (1) Historically the Company has presented non-GAAP net revenue as a financial measure. There are no such adjustments that give rise to non-GAAP net revenue for any of the periods presented. GAAP net revenue is inclusive of both subscription and professional services revenue. 26 -------------------------------------------------------------------------------- Our Relationship withDell andDell Technologies OnApril 27, 2016 , we completed our IPO. Upon the closing of our IPO,Dell Technologies owned, indirectly throughDell Inc. andDell Inc.'s subsidiaries, all shares of our outstanding Class B common stock, which as ofOctober 29, 2021 represented approximately 83.1% of our total outstanding shares of common stock and approximately 98.0% of the combined voting power of both classes of our outstanding common stock. As a majority-owned subsidiary ofDell , we receive fromDell 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 onAugust 1, 2015 , the effective date of our carve-out fromDell . For more information regarding the allocated costs and related party transactions, see "Notes to Condensed Consolidated Financial Statements-Note 11-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 otherDell 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 theDell consolidated group. For more information, see "Notes to Condensed Consolidated Financial Statements -Note 10-Income and Other Taxes" in our condensed consolidated financial statements included in this report. Additionally, we participate in various commercial arrangements withDell under which, for example, we provide information security solutions to third-party customers with whichDell has contracted to provide our solutions, procure hardware, software and services fromDell , and sell our solutions throughDell inthe United States and some international jurisdictions. In connection with our IPO, effectiveAugust 1, 2015 we entered into agreements withDell 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 byDell , 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 11-Related Party Transactions" in our condensed consolidated financial statements included in this report. Components of Results of Operations Revenue We generate revenue from the sales of our subscriptions and professional services. •Subscription Revenue. Subscription revenue primarily consists of subscription fees derived from our Taegis SaaS security platform solutions and managed security services. Taegis subscription-based revenue currently includes two applications, Extended Detection and Response, or XDR, and Vulnerability Detection and Response, or VDR, along with the add-on managed service to supplement the XDR SaaS application, referred to as Managed Detection and Response, or ManagedXDR. Managed security service subscription-based arrangements typically include a suite of security services, up-front installation fees and maintenance, and also may include the provision of an associated hardware appliance. Our subscription contracts typically range from one to three years and, as ofOctober 29, 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 Revenue. Professional services revenue consists primarily of incident response solutions and security and risk consulting. Professional services engagements are typically purchased as fixed-fee and retainer-based contracts. Professional services customers typically purchase solutions pursuant to customized contracts that are shorter in duration. 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. In general, these contracts have terms of less than one year. 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 third quarter of fiscal 2022, approximately 77.0% of our revenue was derived from subscription-based arrangements, attributable to Taegis solutions and managed security services, while approximately 23.0% 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 27 -------------------------------------------------------------------------------- through non-U.S. entities, represented approximately 33.2% of our total net revenue in the third quarter of fiscal 2022 and 30.5% of our total net revenue in the third quarter of fiscal 2021. Although our international customers are located primarily in theUnited Kingdom ,Japan ,Australia andCanada , we provide our SaaS applications or managed security services to customers across 84 countries as ofOctober 29, 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. Cost of Revenue Our cost of revenue consists of costs incurred to provide subscription and professional services. •Cost of Subscription Revenue. Cost of subscription revenue consists primarily of personnel-related expenses associated with maintaining our platform and delivering managed services to our subscription customers, as well as hosting costs for these platforms. Personnel-related expenses consist primarily of salaries, benefits and performance-based compensation. Also included in cost of subscription 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, maintenance fees and overhead allocations. As our business grows, the cost of subscription revenue associated with our solutions may fluctuate. •Cost of Professional Services. Cost of professional services revenue consists primarily of personnel-related expenses, such as salaries, benefits and performance-based compensation. Also included in cost of professional services revenue are fees paid to contractorswho supplement or support our solutions, maintenance fees and overhead allocations. As our business grows, the cost of professional services revenue associated with our solutions may fluctuate. Gross Profit and Margin Gross Margin, or gross profit as a percentage of revenue, has been and will continue to be affected by a variety of factors, including the mix between our existing solutions, introduction of new solutions, personnel-related cost and cloud hosting cost. We expect our gross margins to fluctuate depending on these factors, but increase over time with expected growth and higher mix of Taegis subscription solutions revenue compared to managed security services and professional services revenue. However, as we balance revenue growth and continue to invest in initiatives to drive the efficiency of our business, 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. 28 -------------------------------------------------------------------------------- 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 20.3% and 21.3% for the three and nine months endedOctober 29, 2021 , respectively, and 27.5% and 30.0% for the three and nine months endedOctober 30, 2020 , respectively. The change in effective tax rate between the periods was primarily attributable to the increase of loss before income taxes, 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 fileU.S. federal returns on a consolidated basis withDell and we expect to continue doing so until such time (if any) as we are deconsolidated for tax purposes with respect to theDell consolidated group. According to the terms of the tax matters agreement betweenDell Technologies and Secureworks that went into effect onAugust 1, 2015 ,Dell Technologies will reimburse us for any amounts by which our tax assets reduce the amount of tax liability owed by theDell group on an unconsolidated basis. For a further discussion of income tax matters, see "Notes to Condensed Consolidated Financial Statements-Note 10-Income and Other Taxes" in our condensed consolidated financial statements included in this report. 29 --------------------------------------------------------------------------------
Results of operations
Three and nine months ended
The following tables summarize our key performance indicators for the three and nine months ended.
Three Months Ended Nine Months Ended
October 29, 2021 October 30, 2020 October 29, 2021 October 30, 2020
% of % of % of % of
$ Revenue $ Revenue $ Revenue $ Revenue
(in thousands, except percentages)
Net revenue:
Subscription $ 102,992 77.0 % $ 108,265 76.4 % $ 309,488 76.0 % $ 320,881 76.2 %
Professional Services 30,707 23.0 % 33,376 23.6 % 97,846 24.0 % 100,417 23.8 %
Total net revenue $ 133,699 100.0 % $ 141,641 100.0 % $ 407,334 100.0 % $ 421,298 100.0 %
Cost of revenue:
Subscription $ 34,888 26.1 % $ 40,051 28.3 % $ 109,423 26.9 % $ 122,506 29.1 %
Professional Services 18,002 13.5 % 19,562 13.8 % 57,157 14.0 % 59,916 14.2 %
Total cost of revenue $ 52,890 39.6 % $ 59,613 42.1 % $ 166,580 40.9 % $ 182,422 43.3 %
Total gross profit $ 80,809 60.4 % $ 82,028 57.9 % $ 240,754 59.1 % $ 238,876 56.7 %
Operating costs :
Research and development$ 32,767 24.5 %$ 27,608 19.5 %$ 91,336 22.4 %$ 75,790 18.0 % Sales and marketing 35,008 26.2 % 34,810 24.6 % 106,098 26.0 % 107,886 25.6 % General and administrative 28,404 21.2 % 24,508 17.3 % 80,447 19.7 % 73,824 17.5 % Total operating expenses$ 96,179 71.9 %$ 86,926 61.4 %$ 277,881 68.2 %$ 257,500 61.1 % Operating loss (15,370) (11.5) % (4,898) (3.5) % (37,127) (9.0) % (18,624) (4.4) % Net loss$ (12,863) (9.6) %$ (3,608) (2.5) %$ (31,016) (7.6) %$ (12,371) (2.9) % Other Financial Information (1) GAAP net revenue: Subscription$ 102,992 77.0 %$ 108,265 76.4 %$ 309,488 76.0 %$ 320,881 76.2 % Professional Services 30,707 23.0 % 33,376 23.6 % 97,846 24.0 % 100,417 23.8 % Total GAAP net revenue$ 133,699 100.0 %$ 141,641 100.0 %$ 407,334 100.0 %$ 421,298 100.0 %
Non-GAAP Cost of Revenue:
Non-GAAP Subscription$ 30,738 23.0 %$ 36,321 25.6 %$ 97,292 23.9 %$ 111,220 26.4 % Non-GAAP Professional Services 17,899 13.4 % 19,391 13.7 % 56,683 13.9 % 59,440 14.1 % Total Non-GAAP cost of revenue (1)$ 48,637 36.4 %$ 55,712 39.3 %$ 153,975 37.8 %$ 170,660 40.5 % Non-GAAP gross profit$ 85,062 63.6 %$ 85,929 60.7 %$ 253,359 62.2 %$ 250,638 59.5 %
Non-GAAP operating expenses:
Non-GAAP research and development$ 30,499 22.8 %$ 26,815 18.9 %$ 86,428 21.2 %$ 72,609 17.2 % Non-GAAP sales and marketing 33,515 25.1 % 33,738 23.8 % 102,857 25.3 % 105,191 25.0 % Non-GAAP general and administrative 18,723 14.0 % 17,023 12.0 % 54,981 13.5 % 52,462 12.5 % Total Non-GAAP operating expenses$ 82,737 61.9 %$ 77,576 54.8 %$ 244,266 60.0 %$ 230,262 54.7 % Non-GAAP operating income 2,325 1.8 % 8,353 5.9 % 9,093 2.2 % 20,376 4.8 % Non-GAAP net income $ 1,219 0.9 % $ 6,726 4.7 % $ 6,131 1.5 %$ 17,631 4.2 % Adjusted EBITDA $ 4,743 3.5 %$ 11,289 8.0 %$ 16,464 4.0 %$ 30,029 7.1 % ____________________ (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 total GAAP net revenue. 30
--------------------------------------------------------------------------------
Returned
The following table presents information regarding our income for the three and nine months ended.
Three Months Ended Change Nine Months Ended Change
October 29, October 30, October 29, October 30,
2021 2020 $ % 2021 2020 $ %
(in thousands, except percentages)
Net revenue:
Taegis Subscription
Solutions $ 23,929 $ 9,177 $ 14,752 160.7 % $ 56,392 $ 20,757 $ 35,635 171.7 %
Managed Security
Services 79,063 99,088 (20,025) (20.2) % 253,096 300,124 (47,028) (15.7) %
Total Subscription
revenue $ 102,992 $ 108,265 $ (5,273) (4.9) % $ 309,488 $ 320,881 $ (11,393) (3.6) %
Professional services 30,707 33,376 (2,669) (8.0) % 97,846 100,417 (2,571) (2.6) %
Total net revenue
(5.6) %$ 407,334 $ 421,298 $ (13,964) (3.3) % Subscription Revenue. For the three and nine months endedOctober 29, 2021 , subscription revenue decreased$(5.3) million , or (4.9)%, and$(11.4) million , or (3.6)%, respectively. The revenue decrease reflects 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 managed security services customer base. Professional Services Revenue. For the three and nine months endedOctober 29, 2021 , professional services revenue decreased$(2.7) million , or (8.0)%, and$(2.6) million , or (2.6)%, respectively. The revenue decrease reflects our focus on reducing non-strategic professional service offerings. Revenue for certain services provided to or on behalf ofDell under our commercial agreements withDell totaled approximately$2.7 million and$8.9 million for the three and nine months endedOctober 29, 2021 , respectively, and$4.3 million and$14.9 million for the three and nine months endedOctober 30, 2020 , respectively. Approximately 68% and 60% and of these net revenue amounts were derived from professional services for the three and nine months endedOctober 29, 2021 , respectively, and approximately 44% and 50% were derived from professional services for the three and nine months endedOctober 30, 2020 , respectively. Approximately 32% and 40% were derived from subscription services for the three and nine months endedOctober 29, 2021 , respectively, and approximately 56% and 50% were derived from subscription services for the three and nine months endedOctober 30, 2020 , respectively. For more information regarding these commercial agreements, see "Notes to Condensed Consolidated Financial Statements-Note 11-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 endedOctober 29, 2021 , international revenue, which we define as revenue contracted through non-U.S. entities, increased to$44.3 million , or 2.5%, and$133.7 million , or 7.7%, of our total revenue from the three and nine months endedOctober 30, 2020 , respectively. Currently, our international customers are primarily located in theAustralia ,United Kingdom ,Japan andCanada . We are focused on continuing to grow our international customer base in future periods. 31 -------------------------------------------------------------------------------- Cost of Revenue The following table presents information regarding our cost of revenue for the three and nine months endedOctober 29, 2021 andOctober 30, 2020 . Three Months Ended Change Nine Months Ended Change October 29, October 30, October 29, October 30, 2021 2020 $ % 2021 2020 $ % (in thousands, except percentages)
Cost of income:
Subscription$ 34,888 $ 40,051 $ (5,163) (12.9) %$ 109,423 $ 122,506 $ (13,083) (10.7) % Professional services 18,002 19,562 (1,560) (8.0) % 57,157 59,916 (2,759) (4.6) %
Total cost of income
(11.3) %$ 166,580 $ 182,422 $ (15,842) (8.7) %
Other financial information
Non-GAAP underwriting
(15.4) %$ 97,292 $ 111,220 $ (13,928) (12.5) % Non-GAAP Professional Services 17,899 19,391 (1,492) (7.7) % 56,683 59,440 (2,757) (4.6) % Total Non-GAAP cost of revenue(1)$ 48,637 $ 55,712 $ (7,075) (12.7) %$ 153,975 $ 170,660 $ (16,685) (9.8) %
(1) See “Non-GAAP financial measures” and “Reconciliation of non-GAAP financial measures” for a reconciliation of each non-GAAP financial measure with the most directly comparable GAAP financial measure.
Subscription Cost of Revenue. For the three months endedOctober 29, 2021 , subscription cost of revenue decreased$(5.2) million , or (12.9)%. As a percentage of revenue, subscription cost of revenue decreased 220 basis points to 26.1%. On a non-GAAP basis, subscription cost of revenue as a percentage of revenue decreased 260 basis points to 23.0%. The decrease in subscription cost of revenue was primarily attributable to lower employee-related expenses. For the nine months endedOctober 29, 2021 , subscription cost of revenue decreased$(13.1) million , or (10.7)%. As a percentage of revenue, subscription cost of revenue decreased 220 basis points to 26.9%. On a non-GAAP basis, subscription cost of revenue as a percentage of revenue decreased 250 basis points to 23.9%. The decrease in subscription cost of revenue was primarily attributable to lower employee-related expenses. Professional Services Cost of Revenue. For the three months endedOctober 29, 2021 , professional services cost of revenue decreased$(1.6) million , or (8.0)%. As a percentage of revenue, professional services cost of revenue decreased 30 basis points to 13.5%. On a non-GAAP basis, professional services cost of revenue as a percentage of revenue decreased 30 basis points to 13.4%. The decrease in professional services cost of revenue was primarily attributable to reduced cost associated with the utilization of third-party consultants and lower employee-related expenses associated with the reduction of non-strategic professional services offerings. For the nine months endedOctober 29, 2021 , professional services cost of revenue decreased$(2.8) million , or (4.6)%. As a percentage of revenue, professional services cost of revenue decreased 20 basis points to 14.0%. On a non-GAAP basis, professional services cost of revenue as a percentage of revenue decreased 20 basis points to 13.9%. The decrease in professional services cost of revenue was primarily attributable to reduced cost associated with the utilization of third-party consultants and lower employee-related expenses associated with the reduction of non-strategic professional services offerings. 32 -------------------------------------------------------------------------------- Gross Profit and Gross Margin The following table presents information regarding our gross profit and gross margin for the three and nine months endedOctober 29, 2021 andOctober 30, 2020 . Three Months Ended Change Nine Months Ended Change October 29, October 30, October 29, October 30, 2021 2020 $ % 2021 2020 $ % (in thousands, except percentages)
Gross Profit: Subscription$ 68,104 $ 68,214 $ (110) (0.2) %$ 200,065 $ 198,375 $ 1,690 0.9 % Professional Services 12,705 13,814$ (1,109) (8.0) % 40,689 40,501 188 0.5 % Total Gross Profit$ 80,809 $ 82,028 $ (1,219) (1.5) %$ 240,754 $ 238,876 $ 1,878 0.8 % Three Months Ended Change Nine Months Ended Change October 29, October 30, October 29, October 30, 2021 2020 % 2021 2020 % Gross Margin: Subscription 66.1 % 63.0 % 3.1 % 64.6 % 61.8 % 2.8 % Professional Services 41.4 % 41.4 % - % 41.6 % 40.3 % 1.3 % Total Gross Margin 60.4 % 57.9 % 2.5 % 59.1 % 56.7 % 2.4 % Subscription Gross Margin. For the three and nine months endedOctober 29, 2021 , subscription gross margin increased primarily due to our continued focus on delivering comprehensive higher-value security solutions and driving scale and operational efficiencies associated with reducing non-strategic service offerings and prioritizing the growth of our Taegis subscription solutions. Subscription 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 3.7% and 3.3% for the three and nine months endedOctober 29, 2021 , respectively. Professional Services Gross Margin. Professional services gross margin remained flat for the three months endedOctober 29, 2021 and slightly increased for the nine months endedOctober 29, 2021 primarily due to reduced cost associated with the utilization of third-party consultants and lower employee-related expenses associated with the reduction of non-strategic professional services offerings. Professional services gross margin on a GAAP basis includes stock-based compensation expense. On a non-GAAP basis, excluding that adjustment, gross margin decreased (0.2)% and increased 1.3% for the three and nine months endedOctober 29, 2021 , respectively. 33 -------------------------------------------------------------------------------- Operating Expenses The following table presents information regarding our operating expenses during the three and nine months endedOctober 29, 2021 andOctober 30, 2020 . Three Months Ended Change Nine Months Ended Change October 29, October 30, October 29, October 30, 2021 2020 $ % 2021 2020 $ % (in thousands, except percentages) Operating expenses: Research and development$ 32,767 $ 27,608 $ 5,159 18.7 %$ 91,336 $ 75,790 $ 15,546 20.5 % Sales and marketing 35,008 34,810 198 0.6 % 106,098 107,886 (1,788) (1.7) % General and administrative 28,404 24,508 3,896 15.9 % 80,447 73,824 6,623 9.0 % Total operating expenses$ 96,179 $ 86,926 $ 9,253 10.6 %$ 277,881 $ 257,500 $ 20,381 7.9 % Other Financial Information Non-GAAP research and development$ 30,499 $ 26,815 $ 3,684 13.7 %$ 86,428 $ 72,609 $ 13,819 19.0 % Non-GAAP sales and marketing 33,515 33,738 (223) (0.7) % 102,857 105,191 (2,334) (2.2) % Non-GAAP general and administrative 18,723 17,023 1,700 10.0 % 54,981 52,462 2,519 4.8 %
Non-GAAP operating expenses (1)
$ 5,161 6.7 %$ 244,266 $ 230,262 $ 14,004 6.1 %
(1) See “Non-GAAP financial measures” and “Reconciliation of non-GAAP financial measures” for a reconciliation of each non-GAAP financial measure with the most directly comparable GAAP financial measure.
Research and Development Expenses. For the three months endedOctober 29, 2021 , R&D expenses increased$5.2 million , or 18.7%. As a percentage of revenue, R&D expenses increased 500 basis points to 24.5%. On a non-GAAP basis, R&D expenses as a percentage of revenue increased 390 basis points to 22.8%. 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 security platform and SaaS applications. For the nine months endedOctober 29, 2021 , R&D expenses increased$15.5 million , or 20.5%. As a percentage of revenue, R&D expenses increased 440 basis points to 22.4%. On a non-GAAP basis, R&D expenses as a percentage of revenue increased 400 basis points to 21.2%. The increase in R&D expenses was primarily attributable to increased compensation and benefits associated with the addition of R&D personnel resulting from the continued development of our Taegis security platform and SaaS applications. Sales and Marketing Expenses. For the three months endedOctober 29, 2021 , S&M expenses increased$0.2 million , or 0.6%. As a percentage of revenue, S&M expenses increased 160 basis points to 26.2%. On a non-GAAP basis, S&M expenses as a percentage of revenue decreased 100 basis points to 25.1%. The slight increase in S&M expenses was primarily attributable to increased marketing program expense of$2.0 million related to our Taegis offerings and$0.9 million of higher employee-related cost, partially offset by$2.7 million of lower commission expense. For the nine months endedOctober 29, 2021 , S&M expenses decreased$(1.8) million , or (1.7)%. As a percentage of revenue, S&M expenses decreased 40 basis points to 26.0%. On a non-GAAP basis, S&M expenses as a percentage of revenue decreased 30 basis points to 25.3%. The decrease in S&M expenses was primarily attributable to$7.4 million of lower commission expense, partially offset by an increase in marketing program expense of$4.7 million related to our Taegis offerings and$1.4 million of higher employee-related cost. General and Administrative Expenses. For the three months endedOctober 29, 2021 , G&A expenses increased$3.9 million , or 15.9%. As a percentage of revenue, G&A expenses increased 400 basis points to 21.2% . On a non-GAAP basis, G&A expenses as a percentage of revenue increased 200 basis points to 14.0%. The increase in G&A expenses was primarily attributable to higher employee-related costs. For the nine months endedOctober 29, 2021 , G&A expenses increased$6.6 million , or 9.0%. As a percentage of revenue, G&A expenses increased 220 basis points to 19.7%. On a non-GAAP basis, G&A expenses as a percentage of revenue increased 100 basis points to 13.5%. The increase in G&A expenses was primarily attributable to higher employee-related costs, which were partially offset by lower professional services and consulting related costs. 34 -------------------------------------------------------------------------------- Operating Loss Our operating loss for the three months endedOctober 29, 2021 andOctober 30, 2020 was$(15.4) million and$(4.9) million , respectively. As a percentage of revenue, our operating loss was (11.5)% and (3.5)% for the three months endedOctober 29, 2021 andOctober 30, 2020 , respectively. The increase in our operating loss was primarily due to higher operating expenses, as previously described. Our operating loss for the nine months endedOctober 29, 2021 andOctober 30, 2020 was$(37.1) million and$(18.6) million , respectively. As a percentage of revenue, our operating loss was (9.0)% and (4.4)% for the nine months endedOctober 29, 2021 andOctober 30, 2020 , respectively. The increase in our operating loss was primarily due to higher operating expenses, as previously described. Operating income 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$2.3 million and$9.1 million for the three and nine months endedOctober 29, 2021 , respectively, compared to non-GAAP operating income of$8.4 million and$20.4 million for the three and nine months endedOctober 30, 2020 , respectively. Interest and Other, Net Our interest and other, net was$(0.8) million and$(2.3) million for the three and nine months endedOctober 29, 2021 , respectively, compared with$(0.1) million and$0.9 million for the three and nine months endedOctober 30, 2020 , respectively. The changes primarily reflected the effects of foreign currency transactions and related exchange rate fluctuations. Income Tax Benefit Our income tax benefit was$3.3 million , or 20.3%, and$8.4 million , or 21.3%, of our pre-tax loss during the three and nine months endedOctober 29, 2021 , respectively, and$1.4 million , or 27.5%, and$5.3 million , or 30.0%, of our pre-tax loss during the three and nine months endedOctober 30, 2020 , respectively. The changes in the effective tax benefit rate were primarily attributable to both the increase in loss before income taxes and the impact of certain discrete adjustments related to stock-based compensation awards. Net Loss Our net loss of$(12.9) million increased$9.3 million for the three months endedOctober 29, 2021 compared with the three months endedOctober 30, 2020 . For the nine months endedOctober 29, 2021 , our net loss of$(31.0) million increased$18.6 million compared with the nine months endedOctober 30, 2020 . Net income on a non-GAAP basis for the three months endedOctober 29, 2021 was$1.2 million compared to non-GAAP net income of$6.7 million for the three months endedOctober 30, 2020 , and$6.1 million for the nine months endedOctober 29, 2021 compared to a non-GAAP income of$17.6 million for the nine months endedOctober 30, 2020 . The changes on both a GAAP and non-GAAP basis were attributable to increased operating expenses, the effect of which was offset in part by the higher income tax benefit recognized in the current periods. 35 -------------------------------------------------------------------------------- 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 from the filing date of this report 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$30 million revolving credit facility fromDell , described below, sources of financing may include arrangements with unaffiliated third parties, depending on the availability of capital, the cost of funds and lender collateral requirements. Selected Measures of Liquidity and Capital Resources As ofOctober 29, 2021 , our principal sources of liquidity consisted of cash and cash equivalents and accounts receivable. Selected measures of our liquidity and capital resources are as follows: October 29, January 29, 2021 2021 (in thousands) Cash and cash equivalents$ 205,129 $ 220,300 Accounts receivable, net$ 95,108 $ 108,005 We invoice our customers based on a variety of billing schedules. During the nine months endedOctober 29, 2021 , on average, approximately 59% of our recurring revenue was billed in advance annually or for the entirety of the contract amount, and approximately and approximately 41% was billed in advance 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 ofOctober 29, 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 ofOctober 29, 2021 andJanuary 29, 2021 , the provision for credit losses was$4.0 million and$4.8 million , respectively. Based upon our assessment, we believe we are adequately reserved for credit risk. 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$30 million by mutual agreement of the lender and borrower. The proceeds from loans made under the facility may be used for general corporate purposes. The facility is not guaranteed by us or our subsidiaries. There was no outstanding balance under the facility as ofOctober 29, 2021 orJanuary 29, 2021 and we did not borrow any amounts under the facility during any period covered by this report. EffectiveMarch 25, 2021 , the facility was amended and restated to extend the maturity date toMarch 25, 2022 and to modify the annual rate at which interest accrues to the applicable LIBOR plus 1.54%. Amounts under the facility may be borrowed, repaid and reborrowed from time to time during the term of the facility. The borrower will be required to repay in full all of the loans outstanding, including all accrued interest, and the facility will terminate upon a change of control of us or following a transaction in whichSecureWorks, Inc. ceases to be a direct or indirect wholly-owned subsidiary of our Company. The credit agreement contains customary representations, warranties, covenants and events of default. The unused portion of the facility is subject to a commitment fee of 0.35%, which is due upon expiration of the facility. 36 -------------------------------------------------------------------------------- Cash Flows The following table presents information concerning our cash flows for the nine months endedOctober 29, 2021 andOctober 30, 2020 . Nine Months Ended October 29, October 30, 2021 2020 (in thousands) Net change in cash from: Operating activities$ (1,773) $
28,433
Investing activities (5,822)
(17,262)
Financing activities (7,576)
(4,962)
Change in cash and cash equivalents$ (15,171) $ 6,209 Operating Activities - Cash (used)/provided by operating activities totaled$(1.8) million and$28.4 million for the nine months endedOctober 29, 2021 andOctober 30, 2020 , respectively. The increased use of our operating cash was primarily driven by the decrease in our net transactions withDell and accounts payables. We expect that our future transactions withDell will continue to be a source of cash over time as we anticipate that our charges toDell will continue to exceedDell's charges to us, although the timing of charges and settlements may vary from period to period. Investing Activities - Cash used in investing activities totaled$5.8 million and$17.3 million for the nine months endedOctober 29, 2021 andOctober 30, 2020 , respectively. For the periods presented, investing activities consisted primarily of capitalized expenses related to the development of our Taegis security platform and SaaS applications, capital expenditures to support our facilities infrastructure, and cash used for our acquisition of Delve inSeptember 2020 . Financing Activities - Cash used in financing activities totaled$7.6 million and$5.0 million for the nine months endedOctober 29, 2021 andOctober 30, 2020 , respectively. The use of cash flows for the nine months endedOctober 29, 2021 reflected employee tax withholding payments paid by us of$11.7 million on restricted stock-based awards, which were partially offset by$4.1 million of proceeds from stock option exercises. Off-Balance Sheet Arrangements As ofOctober 29, 2021 , we were not subject to any obligations pursuant to any off-balance sheet arrangements that have or are reasonably likely to have a material effect on our financial condition, results of operations or liquidity. Critical Accounting Policies The unaudited condensed consolidated financial statements included elsewhere in this report have been prepared in accordance with GAAP for interim financial information and the requirements of theSEC . Accordingly, they do not include all of the information and disclosures required by GAAP for a complete financial statement presentation. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. In the opinion of management, all adjustments consisting of normal recurring accruals and disclosures considered necessary for a fair interim presentation have been included. All inter-company accounts and transactions have been eliminated in consolidation. As described in "Notes to Condensed Consolidated Financial Statements-Note 1-Description of the Business and Basis of Presentation," management assessed the critical accounting policies as disclosed in our Annual Report and determined that there were no changes to our critical accounting policies or our estimates associated with those policies during the three and nine months endedOctober 29, 2021 . Recently Issued Accounting Pronouncements See "Notes to Condensed Consolidated Financial Statements-Note 1-Description of the Business and Basis of Presentation" in our condensed consolidated financial statements included in this report for a description of recently issued accounting pronouncements and our expectation of their impact, if any, on our financial statements. 37
————————————————– ——————————
© Edgar online, source
