SecureWorks(SCWX) - 2025 Q3 - Quarterly Report

Part I. FINANCIAL INFORMATION This section provides the company's unaudited financial statements, management's discussion, market risk disclosures, and controls Item 1. Financial Statements (unaudited) This section presents the unaudited consolidated financial statements, including balance sheets, income statements, and cash flows, detailing financial position, performance, and liquidity Condensed Consolidated Statements of Financial Position This statement provides a snapshot of the company's assets, liabilities, and equity at specific points in time Financial Metric Comparison | Financial Metric | Nov 1, 2024 (in thousands) | Feb 2, 2024 (in thousands) | | :--- | :--- | :--- | | Total Assets | $664,976 | $724,779 | | Total Liabilities | $220,623 | $223,454 | | Total Stockholders' Equity | $444,353 | $501,325 | - Total assets decreased primarily due to a reduction in cash and cash equivalents, intangible assets, and other non-current assets[10] - The decrease in stockholders' equity was mainly driven by an increase in the accumulated deficit from $(470.2) million to $(548.5) million[10] Condensed Consolidated Statements of Operations This statement details the company's revenues, expenses, and net loss over specific reporting periods Three Months Ended November 1, 2024 vs. November 3, 2023 | Metric (in thousands, except EPS) | Three Months Ended Nov 1, 2024 | Three Months Ended Nov 3, 2023 | | :--- | :--- | :--- | | Total Net Revenue | $82,733 | $89,364 | | Gross Profit | $56,066 | $54,749 | | Operating Loss | $(22,158) | $(19,253) | | Net Loss | $(27,501) | $(14,421) | | Loss Per Share (basic and diluted) | $(0.31) | $(0.17) | Nine Months Ended November 1, 2024 vs. November 3, 2023 | Metric (in thousands, except EPS) | Nine Months Ended Nov 1, 2024 | Nine Months Ended Nov 3, 2023 | | :--- | :--- | :--- | | Total Net Revenue | $250,567 | $276,725 | | Gross Profit | $168,579 | $159,267 | | Operating Loss | $(45,956) | $(96,767) | | Net Loss | $(78,306) | $(77,750) | | Loss Per Share (basic and diluted) | $(0.89) | $(0.90) | Condensed Consolidated Statements of Cash Flows This statement summarizes the cash inflows and outflows from operating, investing, and financing activities Cash Flow Activities | Cash Flow Activity (in thousands) | Nine Months Ended Nov 1, 2024 | Nine Months Ended Nov 3, 2023 | | :--- | :--- | :--- | | Net cash used in operating activities | $(453) | $(69,907) | | Net cash used in investing activities | $(6,451) | $(4,981) | | Net cash used in financing activities | $(7,305) | $(5,947) | | Net decrease in cash | $(15,567) | $(85,412) | | Cash at end of period | $53,088 | $58,105 | - Net cash used in operating activities improved significantly for the nine-month period, decreasing from a use of $69.9 million to a use of $0.5 million year-over-year[22] Notes to Condensed Consolidated Financial Statements These notes provide crucial context for the financial statements, detailing significant events like the pending merger, revenue recognition, and asset valuations - On October 21, 2024, the Company entered into a merger agreement with Sophos Inc. to be acquired for $8.50 per share in cash, with the merger expected to close in early 2025, subject to regulatory approvals[32][35] Revenue by Service | Revenue by Service (in thousands) | Q3 FY25 | Q3 FY24 | | :--- | :--- | :--- | | Taegis Subscription Solutions | $71,407 | $67,346 | | Managed Security Services | $0 | $7,866 | | Total Subscription Revenue | $71,407 | $75,212 | - In March 2024, Dell's economic ownership dropped below 80%, leading to Secureworks' deconsolidation from Dell's U.S. federal tax return and an initial valuation allowance of $26.2 million against its deferred tax assets[73] - The company incurred reorganization charges of $1.5 million during the nine months ended November 1, 2024, primarily for severance and termination benefits, aligning investments with strategic priorities[85] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial results and condition, highlighting the strategic shift to Taegis, impact of service exits, and cost optimization efforts Key Operating Metrics This section presents key performance indicators reflecting the company's operational focus and strategic shifts Operating Metrics | Metric | As of Nov 1, 2024 | As of Nov 3, 2023 | | :--- | :--- | :--- | | Taegis annual recurring revenue | $288.8 million | $278.7 million | | Total annual recurring revenue | $288.8 million | $304.0 million | | Total customer base | 3,000 | 4,300 | - The decrease in total customer base and total annual recurring revenue reflects the company's completed exit from non-strategic managed security services to focus on its Taegis platform[101][103] Results of Operations This section analyzes revenue, costs, and operating expenses, detailing the impact of strategic shifts, including Taegis growth, improved gross margins, and merger-related costs - Q3 FY25 total net revenue decreased 7.4% year-over-year to $82.7 million, driven by a $7.9 million (100%) decline in Managed Security Services revenue, partially offset by a $4.1 million (6.0%) increase in Taegis Subscription Solutions revenue[132] - Total gross margin for Q3 FY25 improved to 67.8% from 61.3% year-over-year, driven by the strategic shift to higher-margin Taegis solutions and lower vendor costs[138] - Q3 FY25 General & Administrative expenses increased 35.1% year-over-year, primarily due to $6.5 million in merger-related costs associated with the pending acquisition by Sophos Inc[141][142] - For the nine months ended November 1, 2024, operating loss narrowed significantly to $(46.0) million from $(96.8) million year-over-year, due to lower operating expenses and improved gross margins[145] Liquidity and Capital Resources This section assesses the company's cash position, credit facilities, and ability to meet its financial obligations - As of November 1, 2024, the company had $53.1 million in cash and cash equivalents and access to an undrawn $50 million revolving credit facility with a Dell subsidiary[150][153] - Net cash used in operating activities for the nine-month period improved dramatically to $(0.5) million from $(69.9) million in the prior year, aligning with the decreased operating loss[155] Quantitative and Qualitative Disclosures About Market Risk The company's results of operations and cash flows are subject to fluctuations from changes in global inflation and foreign currency exchange rates - The company is exposed to market risk from foreign currency exchange rate fluctuations, particularly in countries where it has significant international operations[160] Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of November 1, 2024 - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of November 1, 2024[162] - There were no changes in internal control over financial reporting during the quarter that have materially affected, or are reasonably likely to materially affect, these controls[163] Part II. OTHER INFORMATION This section provides additional information, including updated risk factors and a list of exhibits filed with the report Risk Factors This section highlights new and updated risks, primarily concerning the proposed merger, including completion uncertainty, associated costs, and potential litigation - The completion of the merger is not guaranteed as it is subject to regulatory approvals and other conditions, and failure to complete could adversely affect the company's business, stock price, and financial condition[167] - The company has incurred and will continue to incur significant merger-related costs, and if terminated under certain circumstances, may be required to pay a termination fee of $26 million[167] - The company faces the risk of shareholder litigation related to the merger, which could prevent or delay the closing and result in significant costs and diversion of management's attention[169] Exhibits This section lists the exhibits filed with the Form 10-Q, including the merger agreement, CEO/CFO certifications, and XBRL data files - Key exhibits filed include the Merger Agreement with Sophos Inc., CEO/CFO certifications under Sarbanes-Oxley Sections 302 and 906, and interactive data files (XBRL)[171]