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Get to know SecureWorks quickly
Safety Engineering Company (NASDAQ: SCWX) announced second-quarter 2024 financial results on September 7, 2023, with revenue missing expectations but exceeding consensus earnings estimates.
The company provides security software and services to companies to manage their IT Cyber threat environment.
I wrote an article about SecureWorks before and had reservations about SecureWorks.
While leadership is cutting costs and reducing headcount, and demand for its Taegis platform continues to increase, overall revenue continues to decline.
My view on SCWX is SELL.
SecureWorks Overview and Market
Founded in 1999, Atlanta-based SecureWorks specializes in providing a range of endpoint security and vulnerability management solutions to organizations of all sizes.
The company is led by CEO Wendy Thomas, formerly chief financial officer of Bridgevine and vice president of finance at First Data Corporation.
SecureWorks’ key products and services include:
– Taegis extended detection and response [XDR]
– Managed detection and response
– Vulnerability management
– Management services
– Security assessment and training.
SecureWorks acquires customers through direct sales and marketing strategies, partner referrals and technology collaborations. The company currently serves more than 2,000 customers using its flagship Taegis XDR platform.
Verified Market Research’s 2021 market research estimates that the global endpoint security market size was approximately US$13.4 billion in 2020 and is expected to increase to US$24.7 billion by 2028, with a compound annual growth rate of 7.9% from 2021 to 2028.
This growth forecast stems from the expected increased adoption of artificial intelligence/machine learning technologies and IoT applications, spurring demand for innovative endpoint security solutions.
Additionally, the increasing number of sophisticated malware attacks requires antivirus/anti-malware solution providers to continually update their detection tools with the latest security patches.
Major vendors that provide or are developing endpoint security solutions include:
-
McAfee (Intel)
-
Symantec
-
Essett
-
AVG Technologies
-
Selance
-
Palo Alto Networks
-
Eye of fire
-
F-Safety
-
network root directory
-
Octa
-
Sophos.
Recent Financial Trends for SecureWorks
-
Total revenue continues to decline on a quarterly basis; operating income on a quarterly basis remains significantly negative.
Total revenue and operating income (Seeking Alpha)
-
Gross margin has trended downward in recent quarters; selling and general administrative expenses as a percentage of total revenue have risen significantly recently.
Gross profit margin and selling, management and administrative expenses as a percentage of revenue (Seeking Alpha)
-
Earnings per share (diluted) trended further into negative territory, which is a concerning trajectory.
earnings per share (Seeking Alpha)
(All data in the charts above are GAAP.)
Shares of SCWX have fallen 33.97% over the past 12 months, while shares of the iShares Expanded Tech-Software Sector ETF (IGV) have gained 27.74%:
52-week stock price comparison (Seeking Alpha)
In terms of balance sheet results, the company ended the quarter with $64.9 million in cash and equivalents and no debt.
A significant amount of free cash was used in the last 12 months ($92.8m), of which capital expenditure was $1.7m. The company paid $33.8 million in stock-based compensation over the past four quarters.
SecureWorks’ Valuation and Other Metrics
The following table is the company’s relevant capital and valuation data:
|
measure [TTM] |
quantity |
|
Enterprise value/sales |
1.2 |
|
Enterprise Value/EBITDA |
nanometer |
|
price/sales |
1.3 |
|
revenue growth rate |
-17.1% |
|
Net profit rate |
-31.8% |
|
Earnings before interest, taxes, depreciation and amortization % |
-28.2% |
|
Market value |
US$532,070,000 |
|
Corporation value |
$477,040,000 |
|
operating cash flow |
-$91,150,000 |
|
Earnings per share (fully diluted) |
-$1.54 |
(Source – Seeking Alpha.)
SCWX’s most recent unadjusted Rule 40 calculation was negative (45.3%) as of Q2 2024 results, so the company is underperforming in this regard, as shown in the chart below:
|
40 Performance Rules (Untuned) |
Q4 2023 |
Q2 2024 |
|
Revenue growth % |
-13.4% |
-17.1% |
|
Earnings before interest, taxes, depreciation and amortization % |
-24.0% |
-28.2% |
|
all |
-37.4% |
-45.3% |
(Source – Seeking Alpha.)
sentiment analysis
I’ve prepared a chart showing how often various terms have been mentioned (or not mentioned) in management’s most recent earnings calls:
Revenue Record Key Term Frequency (Seeking Alpha)
The chart shows that, with the exception of two instances of “challenge” and one instance of “headwind,” relatively few negative words were mentioned.
Analysts questioned management about its sales efforts to drive customers to the company’s Taegis platform and the dynamics of its sales cycle.
Leadership responded that the company is expanding into Europe and the Middle East through partners in Europe and the Middle East and that the company’s sales cycles are lengthening as the company is now more financially conservative.
SEMRush’s website traffic monitoring shows a significant decline in website visits over the past two years, as shown below:
organic traffic history (SEM Rush)
SecureWorks Reviews
In the last earnings call covering Q2 2024 results (Source – Seeking Alpha), management highlighted the ARR growth of the Taegis XDR platform.
Leadership pointed to its partner go-to-market model led by MSSPs, solution providers, cyber risk partners and technology alliance partners.
After the quarter ended, the company announced 15% of its layoffs and plans to cut real estate spending.
Management did not disclose any company or revenue retention metrics.
In the second quarter of 2023, total revenue fell by 20% year-on-year, and gross profit margin fell by 0.4%.
Selling and general administrative expenses as a percentage of revenue fell 0.6% year over year in the quarter, and operating losses decreased 16.5% to $26.9 million.
The company’s financials are in poor shape, with $65 million in cash over the past four quarters, but it used $93 million in free cash.
The company’s Rule of 40 performance has been poor and getting worse.
Looking forward, revenue in fiscal 2024 is expected to shrink by 21.9% year-over-year, which is worse than the 13.43% decline in fiscal 2023 from fiscal 2022.
Over the past 12 months, the company’s EV/sales valuation multiple has declined net by around 11%, as shown in Seeking Alpha’s chart below:
EV/sales multiple history records (Seeking Alpha)
Potential upside catalysts for the stock could include an improving sales cycle and growing demand for its flagship Taegis platform.
However, given the cautious business environment and the continued impact of rising interest rates, I am not optimistic.
While management is taking steps to reduce operating losses, overall revenue growth through partners has not yet been reflected in its financial results.
Therefore, my view on SecureWorks Corp. is SELL.
