Discussion and Analysis by the Management of SECUREWORKS CORP of the Financial Position and Results of Operations (Form 10-Q)

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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 in the United States, or GAAP, and should be read in
conjunction with our audited financial statements and related notes for the year
ended January 29, 2021 included in Part II, Item 8 of our Annual Report on Form
10-K for the fiscal year ended January 29, 2021 filed with the SEC on March 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 to
January 31. We refer to the fiscal year ending January 28, 2022 and the fiscal
year ended January 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 ended July 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 to SecureWorks Corp. and our
subsidiaries on a consolidated basis, (2) all references to "Dell" refer to Dell
Inc. and its subsidiaries on a consolidated basis and (3) all references to
"Dell Technologies" refer to Dell Technologies Inc., the ultimate parent company
of Dell 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 and U.S.
state and local government agencies with limited in-house capabilities and
resources.


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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 of Delve
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 of Delve Laboratories
We seek to make strategic acquisitions of other companies to supplement our
internal growth. On September 21, 2020, we acquired all of the outstanding
shares of Delve 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
In December 2019, a novel strain of the coronavirus, COVID-19, was reported in
mainland China. The World Health Organization declared the outbreak to
constitute a "pandemic" on March 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 in March 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 ended
October 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.
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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 Our Technology 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.





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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.

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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) $ 115.3

           $        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 customers who 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 customers who 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 ended October 29, 2021 and
October 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
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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 in the
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 of Dell by Dell 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 the Dell 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.
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                                                           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 $ 30,499 $ 26,815 $ 86,428 $ 72,609
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.



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Our Relationship with Dell and Dell Technologies
On April 27, 2016, we completed our IPO. Upon the closing of our IPO, Dell
Technologies owned, indirectly through Dell Inc. and Dell Inc.'s subsidiaries,
all shares of our outstanding Class B common stock, which as of October 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 of Dell, we receive from Dell 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 on August 1, 2015, the effective date
of our carve-out from Dell. 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 other Dell 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 the Dell 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 with Dell under
which, for example, we provide information security solutions to third-party
customers with which Dell has contracted to provide our solutions, procure
hardware, software and services from Dell, and sell our solutions through Dell
in the United States and some international jurisdictions. In connection with
our IPO, effective August 1, 2015 we entered into agreements with Dell 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 by Dell, 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 of October 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
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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 the United Kingdom, Japan, Australia and Canada, we provide
our SaaS applications or managed security services to customers across 84
countries as of October 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 contractors who 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.
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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
ended October 29, 2021, respectively, and 27.5% and 30.0% for the three and nine
months ended October 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 file U.S. federal returns on a consolidated basis
with Dell and we expect to continue doing so until such time (if any) as we are
deconsolidated for tax purposes with respect to the Dell consolidated group.
According to the terms of the tax matters agreement between Dell Technologies
and Secureworks that went into effect on August 1, 2015, Dell Technologies will
reimburse us for any amounts by which our tax assets reduce the amount of tax
liability owed by the Dell 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.


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Results of operations

Three and nine months ended October 29, 2021 compared to the three and nine months ended October 30, 2020

The following tables summarize our key performance indicators for the three and nine months ended. October 29, 2021 and October 30, 2020.

                                                                   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.


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Returned

The following table presents information regarding our income for the three and nine months ended. October 29, 2021 and October 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)
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 $ 133,699 $ 141,641 $ (7,942)

             (5.6) %       $    407,334          $    421,298          $ (13,964)             (3.3) %


Subscription Revenue. For the three and nine months ended October 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 ended October 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 of Dell under our
commercial agreements with Dell totaled approximately $2.7 million and $8.9
million for the three and nine months ended October 29, 2021, respectively, and
$4.3 million and $14.9 million for the three and nine months ended October 30,
2020, respectively. Approximately 68% and 60% and of these net revenue amounts
were derived from professional services for the three and nine months ended
October 29, 2021, respectively, and approximately 44% and 50% were derived from
professional services for the three and nine months ended October 30, 2020,
respectively. Approximately 32% and 40% were derived from subscription services
for the three and nine months ended October 29, 2021, respectively, and
approximately 56% and 50% were derived from subscription services for the three
and nine months ended October 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 in the United States. However, for the
three months ended October 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 ended October 30, 2020, respectively. Currently, our international
customers are primarily located in the Australia, United Kingdom, Japan and
Canada. We are focused on continuing to grow our international customer base in
future periods.

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Cost of Revenue
The following table presents information regarding our cost of revenue for the
three and nine months ended October 29, 2021 and October 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 $ 52,890 $ 59,613 $ (6,723)

           (11.3) %       $    166,580          $    182,422          $ (15,842)            (8.7) %

Other financial information

Non-GAAP underwriting $ 30,738 $ 36,321 $ (5,583)

           (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 ended October 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 ended October 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 ended October 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 ended October 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.

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Gross Profit and Gross Margin
The following table presents information regarding our gross profit and gross
margin for the three and nine months ended October 29, 2021 and October 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 ended October 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 ended October 29, 2021, respectively.
Professional Services Gross Margin. Professional services gross margin remained
flat for the three months ended October 29, 2021 and slightly increased for the
nine months ended October 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 ended
October 29, 2021, respectively.


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Operating Expenses
The following table presents information regarding our operating expenses during
the three and nine months ended October 29, 2021 and October 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) $ 82,737 $ 77,576

   $ 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 ended October 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 ended October 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 ended October 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 ended October 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 ended October 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 ended October 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.
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Operating Loss
Our operating loss for the three months ended October 29, 2021 and October 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 ended
October 29, 2021 and October 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 ended October 29, 2021 and October 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 ended
October 29, 2021 and October 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 ended October 29, 2021, respectively, compared to
non-GAAP operating income of $8.4 million and $20.4 million for the three and
nine months ended October 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 ended October 29, 2021, respectively, compared with $(0.1)
million and $0.9 million for the three and nine months ended October 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 ended October 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 ended October 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
ended October 29, 2021 compared with the three months ended October 30, 2020.
For the nine months ended October 29, 2021, our net loss of $(31.0) million
increased $18.6 million compared with the nine months ended October 30, 2020.
Net income on a non-GAAP basis for the three months ended October 29, 2021 was
$1.2 million compared to non-GAAP net income of $6.7 million for the three
months ended October 30, 2020, and $6.1 million for the nine months ended
October 29, 2021 compared to a non-GAAP income of $17.6 million for the nine
months ended October 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.

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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 from Dell, 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 of October 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 ended October 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 of October 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 of October 29, 2021 and January 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 Facility
SecureWorks, Inc., our wholly-owned subsidiary, is party to a revolving credit
agreement with a wholly-owned subsidiary of Dell 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 of October 29, 2021 or January 29,
2021 and we did not borrow any amounts under the facility during any period
covered by this report. Effective March 25, 2021, the facility was amended and
restated to extend the maturity date to March 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 which SecureWorks, 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.
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Cash Flows
The following table presents information concerning our cash flows for the nine
months ended October 29, 2021 and October 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 ended October 29, 2021 and
October 30, 2020, respectively. The increased use of our operating cash was
primarily driven by the decrease in our net transactions with Dell and accounts
payables. We expect that our future transactions with Dell will continue to be a
source of cash over time as we anticipate that our charges to Dell will continue
to exceed Dell'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 ended October 29, 2021 and October 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 in
September 2020.
Financing Activities - Cash used in financing activities totaled $7.6 million
and $5.0 million for the nine months ended October 29, 2021 and October 30,
2020, respectively. The use of cash flows for the nine months ended October 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 of October 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 the SEC. 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 ended
October 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.



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