Seeking Alpha • Sep 13
SecureWorks Sees Taegis XDR Platform Growth But Forex Headwinds Remain
Summary
SecureWorks recently reported its FQ2 2023 financial results.
The firm provides organizations with cybersecurity threat detection and response software and services.
SCWX has produced growth for its Taegis platform but overall results have disappointed.
I'm on Hold for SCWX in the near term.
A Quick Take On SecureWorks
SecureWorks (NASDAQ:SCWX) reported its FQ2 2023 financial results on September 1, 2022, meeting expected revenue but missing EPS estimates.
The company provides organizations with cybersecurity software and services to manage their IT threat environment.
While the firm is making progress away from its legacy business, given a slowing macroeconomic environment, strong dollar and increasing operating losses, I’m on Hold for SCWX in the near term.
SecureWorks Overview
Atlanta, Georgia based SecureWorks was founded in 1999 to provide a variety of endpoint protection and vulnerability management and response software to organizations of all sizes.
The firm is headed by Chief Executive Officer Wendy Thomas, who was previously Chief Financial Officer at Bridgevine and VP Finance at First Data Corporation.
The company’s primary offerings include:
Taegis extended detection & response [XDR]
Managed detection & response
Vulnerability management
Managed services
Security assessments & training
The firm acquires customers through its direct sales and marketing efforts as well as through partner referrals and technology alliances.
SCWX now counts a total of 1,500 customers for its flagship Taegis XDR platform.
SecureWorks' Market & Competition
According to a 2019 market research report by Global Market Insights, the global endpoint security market is projected to reach $7.5 billion by 2024, growing at a CAGR of 7% between 2017 and 2024.
Endpoints are considered to be the weakest links in network security; hence, securing them plays a critical role in effectively strengthening the overall network.
Additionally, growing in number and increasingly complex malware attacks force antivirus/antimalware solutions providers to constantly update their detection tools with the latest security patches.
Major vendors that provide or are developing endpoint security solutions include:
McAfee
Symantec Corporation
Cylance
Palo Alto Networks (PANW)
FireEye
F-Secure
Webroot
Okta (OKTA)
Per a market research report by Grand View Research on the Extended Detection and Response market, the firm estimated the value of the XDR market to have been $628 million in 2021 and forecasts its growth to reach $3.4 billion by 2030.
If achieved, this would represent CAGR of 20.7% from 2022 to 2030.
The U.S. XDR market history and forecast is shown in the chart below:
U.S. XDR Market (Grand View Research)
SecureWorks’ Recent Financial Performance
Total revenue by quarter has trended lower in recent quarters:
9 Quarter Total Revenue (Seeking Alpha)
Gross profit by quarter has also been lower more recently, as the chart shows below:
9 Quarter Gross Profit (Seeking Alpha)
Selling, G&A expenses as a percentage of total revenue by quarter have risen in recent quarters, a negative signal:
9 Quarter Selling, G&A % Of Revenue (Seeking Alpha)
Operating losses by quarter have worsened as shown below:
9 Quarter Operating Income (Seeking Alpha)
Earnings per share (Diluted) have also grown increasingly negative:
9 Quarter Earnings Per Share (Seeking Alpha)
(All data in above charts is GAAP)
In the past 12 months, SCWX's stock price has fallen 51.3% vs. the U.S. S&P 500 index's drop of around 8.5%, as the chart below indicates:
52 Week Stock Price (Seeking Alpha)
Valuation And Other Metrics For SecureWorks
Below is a table of relevant capitalization and valuation figures for the company:
Measure [TTM]
Amount
Enterprise Value / Sales
1.50
Revenue Growth Rate
-10.1%
Net Income Margin
-13.6%
GAAP EBITDA %
-10.0%
Market Capitalization
$900,690,000
Enterprise Value
$747,550,000
Operating Cash Flow
-$11,400,000
Earnings Per Share (Fully Diluted)
-$0.81
(Source - Seeking Alpha)
The Rule of 40 is a software industry rule of thumb that says that as long as the combined revenue growth rate and EBITDA percentage rate equal or exceed 40%, the firm is on an acceptable growth/EBITDA trajectory.
SCWX’s most recent GAAP Rule of 40 calculation was negative (20.2%) as of FQ2 2023, so the firm needs substantial improvement in this regard, per the table below:
Rule of 40 - GAAP
Calculation
Recent Rev. Growth %
-10.1%
GAAP EBITDA %
-10.0%
Total
-20.2%
(Source - Seeking Alpha)
Commentary On SecureWorks
In its last earnings call (Source - Seeking Alpha), covering FQ2 2023’s results, management highlighted the growth in adoption for its Taegis XDR platform, which crossed the $200 million ARR (Annual Recurring Revenue) mark 14 quarters after launch.