SecureWorks Corp.

Good morning, and welcome to the SecureWorks fourth quarter and four-year fiscal 2021 financial results conference call. Following prepared remarks, we will conduct the question and answer session. If you have a question, simply press star, then one on your telephone keypad at any time during the presentation. At this time, all participants are in a listen-only mode. We are webcasting this call live on the SecureWorks investor relations website. After the completion of the call, a recording of the call will be made available on the same site. Now I will turn the call over to Paul Parrish, Chief Financial Officer. You may begin.

Thanks, everyone, for joining us. With me today is Mike Cody, our CEO, and Wendy Thomas, our President of Customer Success, who will join us for questions at the end of our prepared remarks. During this call, we will reference non-GAAP financial measures, including non-GAAP revenue, gross margin, operating expenses, operating income, net income, earnings per share, EBITDA, adjusted EBITDA, and cash flow from operations. A reconciliation of these measures to their most directly comparable GAAP measures can be found in our web deck and press release, which are available on our IRR websites. Please also note that all growth percentages refer to year-over-year change unless otherwise specified. Finally, I'd like to remind you that all statements made during this call that relate to future results and events are forward-looking statements based on current expectations. Actual results and events could differ materially from those projected due to a number of risks and uncertainties, which are discussed in our press release, web deck, and STC filings. We assume no obligation to update our forward-looking statements. Now I'll turn it over to Mike.

Thanks, Paul. Our fourth quarter marked a solid end to an unprecedented year. Despite the macro uncertainty, our path remained clear. We leaned into our strategy of becoming the cloud-native security analytics platform of choice and broadened our reach with the partner community to deliver our holistic approach to security at scale. Our security analytics platform, what we are now calling TAGIS, is differentiated by intellectual property developed over more than 20 years. As the managed security services leader, we have deep experience across tens of thousands of environments, allowing us to create detectors and security analytics that work in an integrated way. We also see how threat actors' tactics, techniques, and procedures avoid point product security controls on a daily basis and embed this understanding of the threat landscape and behaviors into our platform. Furthermore, our approach to security is vendor inclusive. We use telemetry from both our sources and third parties to create the most comprehensive, effective security analytics platform. Customers are consistently telling us about the value they are realizing with Tagus, and initial results are promising. Tagus ARR has grown to $55 million, up from approximately $15 million at the beginning of the year, and now accounts for 13% of total ARR. Additionally, we drove robust Tejas customer growth up 390% and increased the average revenue per customer to approximately $140,000. This lifted the total average revenue per customer to the highest in our company history. I thank my teammates who were undeterred by the challenges presented this past year, and I continue to be incredibly proud of the resiliency and adaptability they've shown in protecting our customers every day. They've done a terrific job, but we know in the security business our work is never done. We must continue to defend our customers and get better each day to outpace and outmaneuver an ever-evolving adversary. Cyber threats continue to rise, and cyber crime continues to accelerate, with the explosion of data and devices expanding the vulnerable attack surface from the core to the edge. Recent well-publicized breaches have once again demonstrated the capability of nation states to coordinate and execute a sophisticated attack. In response to this, we've leveraged the visibility of our global threat intelligence to keep all customers informed and apprised of their vulnerability status. Events like these also underscore the importance of our strategic focus. We believe that the ability to outpace the adversary at scale requires an integrated, inclusive analytics platform, one that works with point products from across the industry, allowing the community to come together and defend against the threat. Historically, we delivered our security platform and software applications as an integrated part of our managed security services. With the decoupling of our software, we can now meet the needs of more customers regardless of their security strategy. Our security analytics platform positions us to compete in a total addressable market of $37 billion, growing in the mid-teens, and we are well positioned to capture this market span. I'll take a few minutes now to discuss the three key focus areas outlining why we win, starting with our portfolio. Tagus was built from the ground up by our world-class team of engineers and product developers, using our decades of experience as the foundation. We have imbued the software with best practice investigation and remediation workflows, leaning on our leadership and security operations to understand how to best defend and support our customers. The Tagus brand signals our evolution, offering best-in-class cloud-native software and higher value to our customers. It extends beyond detection to automated investigation response taken in context with each customer's risks and vulnerabilities. And with cloud-native software, we rapidly build, scale, and deploy the additional capabilities our customers seek to secure their organizations in an industry that requires constant innovation. Here are two examples. In early December, we announced improvements in our extended detection and response application, directly addressing customers' needs for a compelling SIEM alternative. With the addition of log retention, reporting, and search capabilities, security operations teams can now detect, investigate, and respond to security incidents with greater visibility. They can also proactively hunt and gain actionable insights on both known and unknown threats. Customers have told us with these additions They have a view to displacing some, if not all, of their legacy SIM spend, and you will see us extend this approach to additional use cases in the future. We also expanded the TAGIS platform with the vulnerability detection and response application, demonstrating our intent to use both organic and inorganic strategies to layer on the additional capabilities our customers need. Additionally, our managed security services, incident response engagements, and proactive research enhance our software capabilities with the latest threat intelligence and workflow improvements. Our counter-threat unit tracks global threat groups, creating an extensive list of countermeasures, rules, and analytics to provide broad visibility and coverage. This allows us to improve our workflow design and automation as the combination of delivering both security services and building software in-house creates a cycle of rapid, continuous improvements. This unique combination of strengths, our deep experience as the global MSSP leader, paired with our software-enabled threat intelligence that is constantly evolving, distinguishes us in the marketplace. Turning to customer success, we are actively working with existing customers to migrate their solutions to TAGIS, while also expanding our customer base with new logos. We ended the year with nearly 400 customers on the platform and are seeing continued success with both new and existing customers realizing the value of our security analytics. Customers see a significant benefit when deploying Tagus XDR. The potential ROI over a three-year period in terms of total economic impact is north of 400% based on a study conducted by Forrester Consulting. Let me give you two examples. A large European steel manufacturer selected Tagus Managed XDR to help streamline the identification and investigation of threats in their environment. By leveraging Tagus, this new customer gained full visibility across their environment with high-fidelity alerts that are automatically enriched with threat intelligence from our CTU research team. And this is a repeatable use case. Our platform allows us to extend our security intelligence and operations expertise to customers of all sizes, no matter the scale of their environment they need to protect. Additionally, an existing regional bank customer was looking for a solution to integrate the visibility and coordination of their disparate security point products. They too turned to Tagis as their central security hub. Given the platform's inclusive approach to data sources and integrated workflows, the customer now has comprehensive visibility and security management through a single pane of glass. Stories like these emphasize the value proposition of our expanded software platform to both customers and our business. Finally, our go-to-market acceleration and expansion. We are investing in our channel strategy and building momentum in the SecureWorks partner community, most recently launching an MSSP track for our partner program. This push into the channel provides two key benefits. First, a robust partner program will help us accelerate Tagus sales. We are growing a broad community of service providers that mutually benefit from the expanded use of our platform at the heart of their security operations. MSSPs get to add our leading software capabilities to their portfolio, while managed service providers who aspire to extend into security services can accelerate their journey by leveraging the Tagus platform and applications our best practices and our training programs. In addition, our MSSP program addresses one of the fundamental challenges in our industry, a lack of security talent. Extending our security expertise to partners creates a larger force of well-trained security experts that benefit from our know-how in defending and securing customers around the globe. Our platform is designed to connect the security community, creating a force for good. By leveraging SecureWorks IP, we transform the way security is done for the benefit of both our and our partners' customers. In closing, I'm pleased with the progress we are making as we strengthen the security community to beat the adversary at scale. There is power in democratizing our security expertise and services leadership. We are using our deep security operations experience, understanding of threat intelligence, and advancements in technology to reimagine how security should be done. As a broader set of customers embrace Tejas, there is a network effect through this connected community. More customers means more visibility, increasing our ability to outmaneuver threat actors through collaboration to better protect all customers. We are making great progress and remain laser focused on three goals. First, innovating and expanding the Tejas platform. Second, ensuring the protection and success of our customers, and finally, accelerating our go-to-market. We recognize this year will be an important one and are committed to providing incremental disclosures on Tagus as the year progresses. I am confident we have the right strategy to help our customers, partners, and teammates while creating long-term value for our investors. I'll now turn it back to Paul.

Thanks, Mike. We've made meaningful progress on our Tagus platform, which had a strong first year of growth. Tejas ARR ended the year at $55 million, and Tejas revenue grew to approximately $30 million for the year. Our margins remained healthy while we balanced the right investments for our future and strengthened our overall financial position. We generated more than $60 million in cash flow from operations for the year and ended with a record cash balance of $220 million. And for our total results, fiscal 21 revenue grew 1% to $561 million. Gross margin was up 6% to $335 million, or approximately 60% of revenue. And EPS of $0.22 was up from $0.01 in the prior year, reflecting our team's solid execution as we positioned the company for future growth. Moving to our Q4 performance, we're excited about the momentum on our Tejas platform. Tagus revenue was $11.2 million and demonstrated consistent quarter-over-quarter growth throughout the year. Tagus now represents 400 customers with 35% sequential growth and 55 million of ARR with 31% sequential growth. These results reinforce our conviction that we can accelerate Tagus growth and scale the platform in the coming year. Total Q4 revenue of $139.7 million was down 2%, primarily driven by reduction in non-strategic areas of the business as we pivot toward contagious growth opportunities. Gross profit was $84.2 million, translating to 60.2% gross margin. For Q4 and the full year, our gross margin percentage is up nearly 300 basis points from fiscal 20, reflecting pandemic-related cost benefits. The flexibility required to navigate the past year's environment also created new learnings, and we expect some of these efficiencies will continue to benefit us in the long term. Operating expense was $84.3 million, up 2%, primarily driven by strategic investments in R&D. Research and development expenses increased to 20% of revenue, up from 15.7% in Q4 fiscal 20, as we accelerate our security analytics platform development. Sales and marketing expenses were 25.8% of revenue, down 340 basis points, primarily due to a severance-related cost impact included in the prior year period and lower travel costs. General administrative expenses totaled 14.5% of revenue, modestly above the prior year period. Operating loss was $100,000, up 1%, and EPS was breakeven. Adjusted EBITDA was $3.2 million, up from $2.3 million on gross margin gains. Fiscal 21 adjusted EBITDA was $33.2 million. Turning to cash performance and the strength of our balance sheet, cash flow from operations was $32.2 million, down from last year's Q4 performance of $43 million, with the decrease reflecting our investments in the Tejas platform, along with channel and marketing. We ended the year in a strong liquidity position, with record cash of $220 million, up from $182 million, despite navigating through these uncertain times. Additionally, we have an untapped $30 million credit facility with an expansion provision of up to $60 million. Now for our outlook, starting with Tejas. As Mike mentioned, we are focused on increasing the level of disclosure for this business. For the current year, we expect Tejas ARR of at least $150 million, up from a base of $55 million at the end of fiscal 21. This translates to revenue of $90 to $100 million, up from approximately $30 million this past year. We plan to drive new customer acquisitions by ramping our sales and marketing investments. And we anticipate an accelerated portion of existing customers will transition in fiscal 22 as they look to benefit from the additional capabilities offered by the platform. Looking at the overall business in Q1, we expect GAAP revenue of $134 to $136 million and a net loss per share of 16 to 17 cents. We expect our non-GAAP revenue to be in line with the GAAP range and a non-GAAP loss per share of 2 to 4 cents. For the full fiscal year, we expect GAAP revenue of $535 to $545 million, a net loss of $63 to $71 million, and a loss per share of 76 to 86 cents. We expect our fiscal 22 non-GAAP revenue to be consistent with the GAAP range. Our revenue outlook reflects our shift toward partner-delivered services as we scale our MSSP program. Our non-GAAP net loss range is 18 to 26 million dollars, with a non-GAAP loss per share of 22 to 31 cents, reflecting several factors. First, an incremental $25 million in R&D to extend the Tejas platform. Second, an additional $15 million in sales and marketing related to the expansion of our partner program and promotion of Tejas. And finally, a portion of the pandemic-related cost savings coming back into the P&L. Adjusted EBITDA is expected to be negative for the full year in the range of $13 to $23 million. We expect cash flow from operations to range from breakeven to This includes a use in Q1 driven by our annual performance payouts, offset by cash generation in the later quarters. CapEx for the full year is expected to be in the range of $3 to $4 million. Finally, we will compete effectively in a security software market that is growing double digits, leveraging our differentiated expertise and approach, including our leading position as the trusted MSSP vendor of choice, our understanding of the constantly evolving threat landscape, and our vendor-inclusive approach to telemetry. This will be a pivotal transition period, but we've already laid the foundation for a compelling long-term model, which we outlined at our December Investor Day. A replay of the event is available on our investor relations page, and we've also added an abbreviated presentation along with our quarterly web deck that highlights the key tenets of our vision and multi-year strategy. As a reminder, in the next three to five years, we expect to generate 100% of ARR and 90% of revenue on the Tejas platform, unlock partner growth, scaling our channel business to 50% of our mix, and migrate gross margins to the mid-70s as a result of increased software sales. Our journey to an integrated SaaS platform with rapidly expanding go-to-market capabilities will provide compelling future economics, including a highly reoccurring revenue model, significant margin expansion, and strong cash flow, ultimately creating sustainable long-term value for our shareholders. I invite Mike and Wendy to join me now for Q&A. Operator, can you please introduce the first question?

Thank you. I will now open the call for your questions. If you have a question, please press star then one on your telephone keypad. As a courtesy to others, please ask no more than two questions. We'll take our first question from Sakeet Kalia with Barclays. Your line is now open.

Hey, good morning, folks. It's Sakeet. Thanks for taking my questions here. Morning, Sakeet. Hey, good morning. Hey, Mike, maybe first for you, can we just talk about the traditional MSS business to start? You know, I believe Tagus products like MDR, for example, could supplement or even convert customers from kind of the traditional MSS business that we know to something more automated and higher value, to your point. Can you just talk about how that's going and what customers, what MSS customers are saying about that shift to Tejas?

Sokka, thanks for the question. Happy to do that. I'm going to tee this up and then I'm going to let Wendy jump in since she's been integral in kind of moving forward with that effort. So we started the process to migrate or show our customers the capabilities on the TAGIS platform in fiscal 21, and we were selectively putting customers in cohorts with regard to the capabilities that we had and the incremental value we showed them as we expanded the process. The receptivity and the incremental value they're seeing has been very strong. It fits perfectly. tremendously well with the majority of our customers, and we accelerated that process into Q4 and expect that acceleration to continue through fiscal 22 and, quite frankly, into fiscal 23. I do want to touch on one thing, and then I'll bounce it over to Wendy. From the perspective of there is, however, a portion of our customer base that we're doing much more customized solutions really relating to other platforms. And some of that business, quite frankly, won't fit in what we're doing from a TAGIS perspective. But having the capability on the underlying TAGIS platform with regard to the XDR capabilities, the VDR capabilities, the log retention capabilities we talked about, some targeted threat hunting capabilities, and incremental features and functions we're going to add over time through this fiscal year, we're excited about the progress and the and the evolution and the progress we've had to date. So, Wendy, now if you want to go into a little more depth and maybe touch on, to Socket's question, a little bit of the things we're doing from a customer's perspective.

Sure, absolutely. Good morning. So it's absolutely a great opportunity to take customers, particularly current MSS customers, to really, as Mike said, extend from primarily detection into more automated investigations and response support. And that's really the incremental value that our MSS customers see in moving to the new platform. As part of what we call a re-solutioning process, when we engage those customers, we absolutely want existing customers, because we know them, to feel that as an upgrade experience. And it's been a great opportunity to just make sure that they've got full coverage and great security hygiene in place. And so their reaction and really the time to visibility and value to them is is incredibly fast, and that's kind of in the reaction. The ability to see things and move them through an investigation quickly is tremendous, and that the time saved by my team has been also tremendous. In fact, we get a lot of anecdotal customer comments around the hours that we've saved, but we did do a study with Forrester, I think that Mike mentioned, around it not only reduced SOC work by about 85%, for our average customer, they'll see productivity gains of about 500K over three years from just the automation of the work in the space. So that's the real value for customers is speed to value and efficiency.

Touch on two other things, if you would, though, Wendy. Touch on the technology, the cloud-native system, and the capability it leads to training. Oh, sure. Yeah. training the customer, because we've gotten a lot of feedback on that, as well as the network effect, kind of the incremental aspect of the network effect.

One of the key features of the new platform also is integrated chat, but in a way that lets customers' teams really work seamlessly with our security experts through an investigation. They can see the same thing. They can actively chat. They can confirm, you know, threat actor activity was this a targeted attack, commodity attack in real time so that it really extends or supplements the expertise on their teams as well and kind of has their back. And again, just makes that process faster and higher fidelity. And of course, in terms of the ability to quickly benefit all customers with a cloud native approach to security, the speed of our ability to improve the platform seamlessly for the customers, to constantly add detections that we learn from our incident response engagements and investigations with current customers. Our ability to deploy protections for them is so rapid that they can feel the improvements each week. And we help our sales team kind of position that with customers as well.

Yeah, I guess the only other thing I'd add, and then Sokka will let you move to... is the user group capability, right, which is different because of the way that it's architected, right? We set up a user group where people are able to, customers and our, you know, super users, our employees are all able to work together in the environment to kind of drive the platform forward.

That's great, guys. That's super helpful. Paul, maybe for my follow-up for you, first of all, appreciate the additional transparency and disclosure on TAGIS. Maybe just kind of thinking top down, as you look at that 2022 revenue guide, can you just talk broad brush? I mean, I guess we've got a TAGIS guide as part of that in terms of 90 to 100 million in revenue. But as you look at, you know, how much of that revenue guide is going to be coming from TAGIS versus traditional MSS versus SRC?

Yeah, thanks for the question, Sarah. And I'm glad you appreciate the additional disclosures. We're excited about what we're doing around our new product, our new Tagus product, and we're going to be providing more and more disclosures through the year, as evidenced by our revenue guidance that we gave around Tagus. So if you take that revenue guidance of $90 to $100 million for Tagus, which is basically 3X the revenue that we had this year, SRC is going to be somewhat flattish, even though the mix within SRC will be leaning more toward IR. As we go through the year, we see the benefits of our IR services, and our customers are seeing that, and we see that as continuing to grow in that mix within SRC. And then the remaining number will shake out to be the old MSS platform. So if you just follow through that logic there, you can get to the mix there.

That's super helpful. Thanks very much. Thanks.

Thank you. Our next question comes from the line of Hamza Fadawalla with secure works. Your line is not open.

Well, with secure works. Um, thank you guys. Yeah. Um, yeah, I guess I'm, I guess I'm changing jobs, but thank you guys for taking my question. And, uh, Likewise, really appreciate the incremental disclosure there. You know, maybe just the first question from a macro standpoint for you, Michael. You know, obviously we've had some pretty significant breaches recently, you know, given secure work sort of focused on, you know, threat hunting and response. I'm curious, you know, whether that, you know, drove any incremental pipeline or, you know, if that's raising any customer awareness towards your platform. I know you've had some events around the incidents and, you know, helping customers sort of respond to this. So I'm just curious if there's anything that, you know, you saw in the most recent quarter.

Yes.

First of all, thank you for the question. I think, unfortunately, any time there are incidents, particularly when we've seen kind of the announcements that have happened back to back to back over the last couple of months, it increases and validates the risk that exists out there. And I think it's created a heightened desire from the board level down because we are having a lot of conversations with boards to figure out and ensure that processes and controls they can put in place and that they can work with their management teams to ensure that they're getting the appropriate prevention, detection, response, and prediction, if you will, of where the hackers are going. So we did see an uptick. and did do some incremental IR engagements, which are continuing, quite frankly, at this point. And it did create opportunities for us to open the door and have some increased conversations and show people what we're doing from a TAGIS perspective on our platform and where we're trying to go and driving things. I guess the other thing I'd sort of touch on from that perspective is, is that I think it's highlighted in what we've seen is an interest from our customers' perspective in a lot of conversations and not just trusting a single-point product. And there's been an uplift in looking at how do they have checks and balances throughout their whole system. Some are even looking at putting in multiple layers of defense, either at the network or the endpoint layer, or ensuring that they've got the full environment covered but in a duplicative manner or controls and controls checking manner.

And just a quick follow up, you know, for Paul, just around the, you know, I think there's, correct me if I'm wrong, but some initial headwinds just around the transition as you shift some of the revenue, you know, to your partners, any sense you could give us for sort of, you know, normalized revenue growth in Q4 looking ahead? You know, given that dynamic as you try to, you know, become more of an ARR-focused company.

Yeah, and are you looking at Q4 of FY22s when you say that? Is that to reference?

I'm sorry, no, just this most recent quarter from a revenue standpoint and then, you know, in FY22 from a revenue standpoint, any color on sort of, you know, a transition impact or headwind that we should think about when we think about normalization?

Right, right. So, we took that into consideration when we set the guidance for FY22. And so, that guidance is reflecting some headwinds from the switch over to partners taking some of the services as we continue to sell the software and then they take on the services. impact will start to shift more as we travel through FY22. So look at that growing mainly Q3, Q4, that type of growth in the shift over to the MSSPs.

Can I add to what you said, Paul, just to make sure? So in instances where we are moving customers, existing customers over, there has typically been an uplift in the ARR that they pay us, roughly 20% sort of uplift. And it's the key component of what has caused our overall increase in our ARR on our overall customer base to $138,000 internally. And then I think just to make sure where we are partnering with an MSSP or an MSP and they pick up the services component, we in those instances are getting just the software revenue, and they are doing the services component of the work. And we expect that is a component of that, but a very small component at this point. We expect that to increase, and that's what's in the guidance that I think, as Paul referred to it. Sorry, I stopped as Paul was shaking his head. Yes. Does that help?

Yes, that's helpful. Thank you guys so much.

Thank you. Our next question comes from the line of Sterling Audie with JP Morgan. Your line is now open.

Yeah, thanks. I'd like to start by asking what kind of compensation is Hamza getting now that he's switched over? So just to kick off. Yeah, exactly, exactly. Mike, there's a lot of different types of MSSPs that are out there. So when you talk about kind of the the partner model. I'm kind of curious, Bertie, just what is the type of partner that you see this resonating most with? So, Sterling, first of all, thank you.

Great question. We are actually, we started our pilot program last month on the MSSP partner program. We have signed up both current MSSPs and we have signed up managed service providers who would like to become MSSPs and are working with both regional players in those two categories and global players in those two categories and have sort of are going through the learning process of which ones are taking a little bit longer to really get to where they want to move along and become a part of the program. And they're both going through to understand the value proposition. So, it's really a process around when the acceptance will happen with regard to their internal capabilities today. For example, an MSP has very little capabilities. They're really excited to move forward. In our process, we've created a training program and a training certification program for one to become. You can't just sign up and put your hand in the air. So we can see through that program and who has passed the certifications, who's really interested in making the investment to do this. In many cases, MSPs, particularly those that are focused on our target market, which tend to be what we would say midsize, if you will, market, tend to move quicker because they see the value, the increased revenue stream, the opportunity, and are excited about it. Then we've been going through the program with the larger companies who understand it, but it's a little bit heavy of a lift for them to move their incremental existing infrastructure. And the training is not just training on our platform, but it is actually training certified to show them our experiences, the workflows, the processes, and all the things we've learned over the last 10 years we've put into a training system.

Does that help, Sterling? Yes. It does. And on my follow-up, I'm really curious, what is the gross margin for Tejas, you know, through that type of opportunity look like today? And what do you think as you scale that business, what the gross margins will look like for it?

So let me start and then I'll jump it over to Paul. In our partner program, and then I'll get to your specific question, there's three types of partners we have signed up. There are referral partners, that would fit into the normal margins that we would provide, but they would be referring to us software sales where it's the XDR or the VDR software application alone, so it's typical software margins you would expect, or the management of it. And we could do that management, or as we continue to expand the MSSP program, the objective would be to move the management to our partners in many cases where it makes sense. There's resale solutions where the end customer versus referrals, so it will be on the partner paper. And then there's the example of the MSSP program we just talked about. And in the MSSP program, in those cases, the MSSP partner would be doing the services component. So to us, we would expect to see software margins.

Yeah. And I discussed this during the analyst day. And in the long term, as we get more and more of the mix of software, you'll see that flow through our overall margins. And as we continue to grow the TAGIS platform, we're exploring when is the time for the appropriate disclosures on segments, and you'll start seeing that when we start disclosing segments as size and scale of that product continues to mature. Understood. Thank you.

Thanks, darling. Thank you. Once again, if you do have a question, press star 1 on your telephone keypad. That's star one to ask a question. Our next question comes from the line of Alex Henderson with Needham. Your line is now open.

Thank you very much. It's good to talk to you guys again. I was hoping you could talk a little bit about the mechanics around what you're spending on sales and marketing and to what extent you're adding additional reps, whether you're putting additional capabilities to support them and Can you flesh out that sales and marketing spend, where it's going, how it's being orchestrated, please?

Thanks. Sure, Alex. This is Mike. Thanks for the question. I think I have it, but let me try and address it, and then if I don't, just let me know. So we are basically investing in various reps around the markets, around the globes and the different geographies. So, we are continuing to expand. We're investing heavily in the go-to-market side of the, I mean, in the channel side of the house in our efforts as we're expanding the channel through the MSSP program that we just talked about a few moments ago. We are also spending heavily from or increasing the amount from a marketing perspective. And I guess a really good example, a really good example of one of the collaborative efforts we're doing is the self-service demo and trial, which is on our website, which we released about a month ago and are seeing very strong acceptance of it and people that are in the process of actually in a 30-day trial, free trial, of looking at what TAGIS does and how it operates. So it's probably, I would say, a level amount of increased sales, a level amount of spend over the prior year in our direct sales organization, an increased amount in the channel organization, and an increased amount in the marketing organization year over year.

I see. And just going back to the, you know, frictionless version, I'm a little confused at why that requires an additional spend if it's already been launched. You can address, you know, how you're expanding that or what needs to be addressed. in order to improve it.

Male Speaker 1 It's cost around the self-service demos and trials.

Male Speaker 2 Oh, that was just an example. So, the self-service demo and trial, the frictionless version, if you will, that you referred to, there's no incremental cost. It's just purely an example of the types of things that we are doing to kind of drive forward from a demand gen perspective as a software company to give people the opportunity. I was trying to give an example of the types of things that we're doing.

It's exactly right. I get it.

Okay.

One more question, if I could, um, can you talk a little bit about, uh, you know, what's going on with Dell, uh, what's going on with the, you know, their integration of carbon black, whether that impacts you guys at all and, uh, you know, how all of that, that those relationships are developing.

Sure. This is Mike again. So I guess the first thing I'd say is, as I've talked about before, we're really proud and it works great being a part of the Dell Technologies family. SecureWorks is a part of the Dell Safeguard and Response, as well as we're integrated into the Dell SafeBIOS, Prevention, Detection, and Remediation of Passive Threats at the OS level. We... are continuing to explore expansion of our relationship across the Dell organization in relation to some of the discussions that I was talking about earlier in our partner program and how we can accelerate the opportunities for us to work together between SecureWorks and Dell. Within the VMware side of the house, as you touched on Carbon Black, I would say that A couple things. One is our SecureWorks XDR ingests the Carbon Black cloud platform data, so we work closely with the Carbon Black organization as we do the other market-leading endpoints in the marketplace that our customers may choose, since we're vendor-inclusive. And we incorporate the endpoint controllability from Carbon Black into our XDR system. You know, and as we sort of have said over time, our experience shows that, you know, point product security alone is not necessarily sufficient. So we are looking and we've seen how the adversaries avoided those point products or evaded those point products. And we're looking to bring in the carbon black aspect of things as well as the other leading products at the cloud network. endpoint and business systems into the CAGIS XDR platform.

Great. Thank you very much. I appreciate the detail. Yep. Thanks, Ash.

Thank you. We'll now take our final question from the line of Brian Essex with Goldman Sachs. Your line is now open.

Hi, Grace. Thank you. Good morning, and thank you for taking the question. Yeah, I was wondering maybe if I could dig in a little bit on the – on the Tagus customers. I guess as of last quarter, you had over 5,000 total customers. And I just wanted to understand, you know, what percentage of those, I guess it's nearly 400 customers on the Tagus platform, were migration of existing customers? How many net new? And what that addressable install base for incremental conversion might look like over time?

Yeah, about half of the customers customers on pages will represent existing customers. And so of that 400 roughly 200 ish, uh, are existing customers that moved over. And, uh, We see over time that net new logos is very important, and that's why we've got so much emphasis on marketing spin and channel as we continue to go after net new logos, and we see that growing in importance as we continue to develop the Tagus product.

The other part of the question maybe, Wendy, you could address, which was effectively how many of our existing base of managed security service customers, as well as the 5,000 includes consulting customers, are either an opportunity to migrate over or move to the new platform, or if they're not in that relationship, do we, for example, the consulting-only customers, do we have the ability to cross-sell or up-sell them into what we're doing from a TAGIS perspective and show them the incremental value?

Sure. From the consulting perspective, of course, we view that as continuing to be an important part of both lead generation opportunities for the platform, especially on the incident response side and even on our adversarial testing side of the house. And the second is, frankly, the benefit of the learnings that we get from those engagements and making the overall Pages platform and XDR and VDR products smarter. So that will continue going forward. In terms of the existing MSS base, as Mike mentioned, while there is a portion of that base that is, I'd say, more bespoke and not necessarily strategic to the go-forward approach, The majority of the MSS customers, as we were talking about earlier, are a great MDR transition play in the future. And as Mike said, we really started that transition program in earnest back in third quarter and are seeing that accelerate as we build the muscle memory. We've enabled the sales team with a lot of tools and support for that process. And so we'll see that continue going forward.

I actually think it's a little more granular than that to some extent, Wendy, in that some of those customers, there's a service that we're performing for them that doesn't necessarily fit where we're going longer term that a partner or somebody may pick up. But the customer may stay with us for the core of what we're looking to do.

Absolutely. And some partners are very interested in that.

Got it. That's helpful. And maybe to follow up on that, Within your sales and marketing organization, I get that you're kind of in the process of building a channel strategy, but, you know, direct reps, how different are those customers and, you know, what percentage of your sales force is kind of up to speed on cages at this point?

So, great question. The customers are the same. The buyer is the same. The sales process is slightly different, which is why we've gone through a lot of training and enablement. In our sales organization, and we basically have the sales team divided between sales consultants who really are, if you will, hunters. And almost all of our sales consultants have closed a deal or more of Tagus. In the account executives side of the house, Again, the vast majority of those individuals have been involved in moving customers or resolutioning customers to the new platform. And on the channel side of the house, our channel account managers are working closely with our account reps and our sales consultants in the process and are actively engaged in pages. Excellent.

Excellent. Thank you. That's great color. I appreciate it. Thank you very much.

Thank you. I will now turn the call back to Mr. Parrish for closing remarks.

That wraps the Q&A, and I want to thank everyone for listening to us this morning and asking the questions. We value the relationships that we have with our investors. A replay of this webcast will be available on our investor relations page at secureworks.com, along with our Q4 and full year fiscal 21 web deck with additional financial tables. Thanks again for joining us today.

ladies and gentlemen this concludes today's conference call thank you for your participation you may now disconnect