How a Software-Driven Security Model is Transforming the Economics of Our BusinessOur strategic investments are keeping customers and partners safer, while adding value for shareholders By: Paul Parrish - Secureworks Chief Financial Officer
Threat actors are constantly exploiting an ever-increasing number of vulnerabilities. According to the 2020 World Economic Forum Global Risks Report, cyberattacks and data fraud rank among the top 10 greatest risks to society over the next 10 years. Imagine how much this risk has accelerated with a significant increase in remote workers and online shopping due to the coronavirus pandemic. And Secureworks’ recent Incident Response Report validates this and goes even deeper. With so much at risk, organizations are required to constantly look beyond the horizon and stay one step ahead of the ever-changing threat landscape. Our partners and our customers expect this from us, and we deliver.
Four years ago, Secureworks began a transformation journey that would fundamentally shift how we secure customers, add new solutions and offerings and double down on our channel partners. Since then, we’ve been purposefully shifting our business:
- To a holistic detection and response provider
- To partner-enabled service delivery where we enable partners to differentiate based on our software and our service expertise
- To a new cloud-native security analytics platform combined with the power of the community
Key to achieving these objectives is transforming the economics of our business. We’ve already seen success as reported in our most recent earnings release.
Holistic detection and response provider
As a result of our strategic transformation, we are well-positioned to seize the opportunities of a significantly larger and faster growing cybersecurity market.
Customers today want solutions that extend far beyond detection. They want full investigation and response with automation – and all in the context of their organization’s specific risks and vulnerabilities. We expanded our cloud-native threat detection and response software analytics platform to meet these needs.
Because customers are looking for more holistic solutions, many features and capabilities from these disparate market segments are converging. Our assessment suggests that we now operate in a $37 billion market growing at 1.5 to 2 times the rate of the managed security services provider (MSSP) market. This creates good opportunity for us moving forward.
The platform accounts for approximately 10 percent of our total Annual Recurring Revenue (ARR), representing 25 percent sequential quarter growth, and approximately half of that came from new customers. Additionally, over the next few years, we will help existing customers understand the value of and move to our new platform. We expect additional growth as we deliver more capabilities, features and additional applications on our platform.
Partner-enabled service delivery
Redefining our Go-to-Market motion is also a critical part of our strategic transformation. When we began investing in our channel strategy a year ago, we wanted to enable partners to resell Secureworks software and services, as well as provide services on top of our platform.
The new channel model is designed to accelerate sales velocity. And we expect the channel to account for roughly half of our revenue over the long-term compared to direct sales accounting for 90 percent of revenue as of the end of Q3 FY21. The fundamental shift will change the paradigm, enabling MSSPs to leverage our industry-leading software to deliver managed security services. It also will propel our growth through the scale and reach of a global partner network.
Cloud-native security analytics platform
Analytics and intelligence are a key differentiator of our platform. Outpacing the adversary at scale requires an integrated detection and response platform powered by a deep understanding of the threat and accelerated through deep learning, machine learning and workflow automation. Importantly, we believe that a security platform is most effective when it enables contributions and sharing from across the security community to advance our collective strength.
We have achieved early success with net new and existing customers realizing the value of our software platform. To date, we’ve gained 300 new customers on our new cloud-native security analytics platform. We will continue to add value to our platform, with additional applications and capabilities to meet customer needs and creating additional revenue streams.
As our mix shifts increasingly toward software, we will continue to drive improved economic returns and increased software mix will drive improvement in gross margin. As of the end of Q3 FY21, pipeline on our cloud-native platform represents more than 40 percent of our total pipeline and we have seen nine consecutive quarters of year-over-year GAAP gross margin expansion.
Our transformation is starting to take hold, but we’ve really only just started. We have a strong balance sheet with $188 million of cash as of the end of Q3 FY21 so we can continue investing in key growth areas and Innovation.
I look forward to reporting on our transformation progress in future blogs.
Special Note on Forward Looking Statements
This presentation contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. In some cases, you can identify these statements by such forward-looking words as “anticipate,” “believe,” “confidence,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “outlook,” “should,” “will” and “would,” or similar words or expressions that refer to future events or outcomes. Such forward-looking statements reflect the Company’s current analysis of existing trends and information. These forward-looking statements represent the Company’s judgment only as of the date of this presentation. In some cases, you can identify these statements by such forward-looking words as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “confidence,” “may,” “plan,” “potential,” “should,” “will” and “would,” or similar expressions. Actual results and events in future periods may differ materially from those expressed or implied by these forward-looking statements because of a number of risks, uncertainties and other factors, including those discussed in SecureWorks Corp.’s periodic reports filed with the Securities and Exchange Commission. These forward-looking statements speak only as of the date of this presentation. SecureWorks Corp. assumes no obligation to update its forward-looking statements.
The Company defines annual recurring revenue (ARR) as the value of its subscription contracts as of a particular date. Because the Company uses recurring revenue as a leading indicator of future annual revenue, it includes operational backlog. Operational backlog is defined as the recurring revenue associated with pending contracts, which are contracts that have been sold but for which the service period has not yet commenced.