SecureWorks Corp.

Thank you, operator. Good morning and welcome to SecureWorks' second quarter fiscal 2025 earnings call. Joining me today are Wendy Thomas, our Chief Executive Officer, and Alpana Wegner, our Chief Financial Officer. During this call, unless otherwise indicated, we will reference non-GAAP financial measures. You will find the reconciliations between these GAAP and non-GAAP measures in the press release and presentation posted on our website earlier today. 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 SEC filings, which you can also find on the investor relations website at investors.secureworks.com. We assume no obligation to update our forward-looking statements. With that, I'll turn the call over to SecureWorks CEO, Wendy Thomas.

Thank you, Kevin, and welcome, everyone. Our business continued its strong momentum in the second quarter. Cages revenue grew 7% year-over-year to $71 million, and we delivered on our Q2 total revenue commitment. Annual recurring revenue, or ARR, now stands at $290 million, driven by the strength in new customer acquisition and expansion. And our TAGIS average revenue per customer, or ARPC, expanded to $150,000 per customer. Our non-GAAP TAGIS gross margin of 74% remained strong, growing 360 basis points year over year. And we delivered positive adjusted EBITDA once again this quarter. We are demonstrating that the security outcomes delivered by our TAGIS platform, the success of our partner ecosystem, and our advanced automation and AI capabilities are propelling the growth of our business profitably. And they give us ample runway to further benefit from the scale that our business model offers. Antagious is increasingly receiving accolades from industry experts. SecureWorks was recently recognized as the gold winner in the Golden Bridge Awards in the category of AI and cybersecurity innovation. the only company out of more than 1,000 nominated to win this award. A testament to our commitment to excellence and innovation, helping organizations reduce cyber risk and prevent cyber attacks by harnessing the power of AI in managed detection and response. In the second quarter, we progressed our growth strategy in several key areas. Specifically, we launched Cages IDR, our new identity threat detection and response solution. solving a threat vector that has plagued companies for years and furthering the protection of our customers. We gain traction across our global partner ecosystem, adding new key partners, increasing momentum and sales productivity and partner win rates. And we continue to increase the extensibility of our platform to enable customization of playbooks, integrations, and advanced detectors to drive scale in the platform and increasing margins for partners and for us. I'll turn to product innovation in the second quarter, starting with a significant product advancement in identity security. First, for background, as traditional cyber defenses have hardened, attackers are taking advantage of vulnerable user identity, with nearly 80% of breaches involving some form of identity compromise in the mix. And given that identity misconfigurations impact 95% of organizations, the risk here remains high. To put that risk into context, the average cost of a data breach reported last year was $4.5 million. In speaking with CISOs, this is often the number one fear that keeps them up at night, one that isn't covered by traditional controls such as endpoint. This is why we built and launched Cages IDR, our identity threat detection and response solution, to help security leaders detect, prioritize, and respond to identity-based threats across their organization's environment and on the dark web. Conventional identity and access management controls, like multi-factor authentication, are helpful but insufficient. Tejas IDR provides comprehensive attack surface coverage of credential access techniques, providing visibility into identities, monitoring for gaps in the environment, flagging risky user behaviors, Alerting when credentials have been exposed on the dark web and detecting and accelerating response to identity based threats in lockstep with Tejas XDR. Like all threats, speed is of the essence and these capabilities and a time to detect that's counted in seconds are superior to what we see in the market today. And these will make a meaningful difference in protecting our customers environments from one of the most prevalent and lucrative attack vectors deployed by threat actors. I'm pleased with the feedback from our early adopters on Tejas IDR and the results they are experiencing. Customers appreciate Tejas IDR's ability to rapidly detect gaps and other misconfigurations in their environment, particularly in areas of misconfiguration and vulnerable exposures across the Azure and Microsoft ecosystems. Tejas IDR ensures customers can close those gaps while preventing threat actors from accessing and then moving laterally within their network. This quarter, we also launched a more personalized MDR offering with guidance on proactive security posture management and defense called Tagus Managed XDR+. Many organizations struggle to find tailored cybersecurity solutions that fit their unique needs at an affordable price. They often have to settle for one size fits all approaches that don't offer the proactive defenses they need for resilience. The TAGES Plus offering addresses this gap by providing a more targeted threat hunting experience, personalized security health guidance, and customized reporting to support compliance with a growing set of regulatory requirements. With this offering, we are making good on our commitment to help our customers mature their security posture over time with a clear return on their investment. This too grows our share of wallet, further propelling our industry-leading ARPC. Shortly after we launched our plus offering last quarter, we won a multi-year contract with a leading real estate development company in the Middle East. This company had a local MSSP relationship that was not providing the capabilities that they needed to address. Gaps and threat detection were falling on their lean team, which meant they had little to no time to proactively manage the security posture of their organization in the face of rising cyber attacks on their business. This customer chose Managed XDR Plus for the personalized, proactive approach to getting ahead of the risk, improving their security posture, addressing their regulatory compliance requirements, while scaling their security team, all at a meaningful return on investment. Arteja's platform is also supporting our go-to-market momentum. that the industry is experiencing an inflection point in the approach to security resilience. We see this in the displacement not only of legacy security technologies, but also in the consolidation of spend on and the number of technology partners. Via our Tagus XDR platform, we are expanding to address a growing set of security use cases, such as identity and exposure management. Our open and integrated approach de-risks the consolidation of technologies with full visibility into the efficacy of CAGIS and point controls, ensuring CAGIS is well positioned as organizations reevaluate their security investments and resilience strategies. Our supportive choice means that customers can work within their own time constraints around their technology evolution with optionality to evolve their security controls to save vendor spend and management costs at a compelling per endpoint pricing model that has no surprise variable data charges. Last quarter, we won a consolidation opportunity with a leading multinational electronics company, where the team had invested in multiple security products in recent years, but were not seeing the results they had hoped for. Their team was even more overwhelmed with alerts from a variety of costly and unconnected security controls. while facing rising cyber risks to their business. This customer was seeking valid detections and the automation required to scale their existing SecOps team. By consolidating on Tagis, they immediately benefited from fewer higher fidelity detections with full threat context and automated response capabilities. The ability to seamlessly manage security operations 24 seven with a predictable and compelling total cost of ownership led them to make SecureWorks their global security partner. We also saw great momentum across our global partner ecosystem this quarter with the addition of new key partners and acceleration in our deals one together. This quarter, we expanded the number of partners we have with global reach while offering all of our partners strong operating margins, customized sales and technical enablement, and marketing collaboration. The broader channel increasingly appreciates the competitive advantages that Tagus and the SecureWorks suite of solutions offer, demonstrably reducing risk and supporting resilience, increasing the market's recognition that XDR represents the next era in security. Supported by the growing success in our partner-first go-to-market, we saw increasing momentum in sales productivity with our Better Together go-to-market motion in 2Q, and our partner win rate improved to the highest level since we launched our partner-first go-to-market motion. In Q2, approximately 80% of global Tagus new logo sales closed were partner deals, reflecting the security value Tagus-based solutions bring to their customers. In second quarter, we also continued to add to the more than 50 managed security services partners in our program. I'll highlight one MSSP partnership signed this quarter with a premier provider of IT and technology solutions. This partner is delivering managed detection and response services powered by the Tagus XDR platform to protect its elite clients across the financial services, life sciences, and professional services sectors. This partner made a seven-figure ARR commitment up front, beginning with the transition of customers from its legacy SIM technology onto the Tejas platform to drive higher retention and margin expansion for their business. Partnerships like this provide further validation of Tejas' ability to drive scale for large managed security services providers, empowering them to provide organizations of all sizes with access to enterprise-level security within an attractive business model. In conclusion, Tejas is defining the future of threat detection and response, driving superior sustainable growth and value creation. Our agile expansion of features and capabilities to protect against threat actor access vectors, delivering organizations improved security risk postures and the best security outcomes, and our open without compromise approach. These, combined with our growing successful partnership ecosystem, put us at an advantage. In an environment where vendor consolidation and scaling spend on both security technology and talent are top priorities, demand for our Cages security offerings remains strong. Cages is the platform of choice for organizations to bolster their security posture at a proven return on investment, driving our growth now and into the future. I want to thank you for investing in our mission to secure human progress, and thank you to our customers and partners for joining forces with us. With that, I'd like to hand the call over to Alpana to cover our financial results and guidance. Thanks, Wendy.

Good morning, everyone. I will review our Q2 results before I provide expectations for Q3 in fiscal year 25. We once again hit our financial commitments in Q2. We delivered total revenue exceeding $82 million, which was at the high end of our expectations, primarily on the strength of subscription deals closing earlier in the quarter. Year over year, total revenue growth was impacted by a $13 million decline in revenue from the wind down of our non-strategic legacy business. Patient subscription revenue was $71 million, up 7% year over year. Total ARR increased 5% year-over-year to $290 million, in line with our expectations. Our ARPC was $150,000, up 14% year-over-year, and remains a premium to the industry average, underscoring the value that Tejas provides our customers. The growth in our ARPC was driven by strength in new logo and existing customer expansion. We ended the quarter with 1,900 Tejas customers. We saw new customers added in the quarter at a higher ARPC than the customers that churned. As our Cages pricing is largely on a per endpoint basis, growth in endpoints is another indicator of platform expansion. Our endpoint count grew more than 9% year over year in the second quarter. Our Q2 operating results are strong, reflecting our continued focus on operational efficiency, productivity improvements, and cost discipline. The Q2 non-GAAP TAGIS subscription gross margin of 74.3%, an improvement of 360 basis points versus second quarter a year ago, driven by automation, continued cloud architecture scaling, and by leveraging our AI and machine learning capabilities across the business. Total non-GAAP gross margin expanded by 680 basis points to approximately 69% in the quarter. Amy Nunez, Total non gap gross margin expanded by 680 basis points to approximately 69% in the quarter total gross margins reflect the end of life of our other MSS business in Q1 resulting in revenue being nearly zero in Q2. Amy Nunez, Adjusted EBITDA was 1 million in line with our guidance of one to 3 million and an improvement from a loss of 10 million in Q2 of the prior year. EBITDA was impacted with more than 1.3 million of redundant or transitional costs associated with the end of life of our other MSS business. GAAP net loss was 15 million for the second quarter, or 17 cents per share, compared with GAAP net loss of 32 million, or 38 cents per share, in the same period last year. Non-GAAP net income was breakeven, or zero cents per share, compared with non-GAAP net loss of $9 million or $0.10 per share in the same period last year. Turning to the balance sheet and capital allocation, we ended Q2 with a strong balance sheet with $48 million in cash, no debt, and an undrawn $50 million credit facility. Our cash flow from operations was $4 million in the quarter, compared with $27 million used in the prior year period. The decreased use of our operating cash is driven by our focus on cost discipline, reduction in duplicative costs, and increase in operational efficiencies. As a reminder, our cash flow can fluctuate from quarter to quarter, with the first half seasonally being a use of cash primarily due to the timing of annual incentive payouts, and the second half typically generating cash from operations. Now turning to third quarter and full year fiscal 25 guidance. For Q3 fiscal year 25, we expect total revenue of 80 to 82 million, adjusted EBITDA to be between break even and 2 million, and we expect a range of non-GAAP net loss per share of one cent to non-GAAP net income per share of one cent. For the full year fiscal 25, we now expect Total ARR to be $300 million or greater. Total revenue of $328 to $335 million. Total non-GAAP gross margins to be 68%, inclusive of TAGES gross margins to be 74%. Adjusted EBITDA to be between $6 and $12 million. Non-GAAP net income per share to be between $0.03 and $0.09. Cash flow from operations to be between cash used of $2 million and cash generated of $8 million. And we expect CapEx to be in line with fiscal year 24. In closing, our Q2 results give us confidence in our ability to meet our 2025 outlook. We are executing on our growth strategy and will continue to deliver additional value to our customers and partners by opportunistically investing in sales and marketing to accelerate our partner momentum, and in product development on new and innovative capabilities both across add-on and native security products. We remain committed to EBITDA profitability as we continue to drive scale in our business. Thank you for joining us on the call today. Wendy will now rejoin us as we begin Q&A. Operator, can you please introduce the first question?