Secureworks Reports 149% Taegis™ ARR Growth in Connection with First Quarter Fiscal 2023 Results

ATLANTA,June 2,2022 -- Secureworks (NASDAQ: SCWX),a global leader in cybersecurity,today announced financial results for its first quarter,which ended on April 29,2022.

Key Highlights

Secureworks Taegis grew to $180million in annual recurring revenue (ARR),an increase of 149% on a year-over-year basis.

Added 900 Taegis Customers year-over-year,a 180% increase,to finish the first quarter of fiscal 2023 with 1,400 customers on the Taegis cloud-native security platform.

Taegis revenue grew 167% from the first quarter of fiscal 2022 to $37.2million.

"Our customers recognize that Secureworks Taegis future proofs their security program," said Wendy Thomas,President & CEO,Secureworks. "Our customers are investing in Secureworks Taegis as a long-term security solution that can easily evolve with their technology environments and ever-changing adversarial attack tactics and techniques. Taegis' Open XDR architecture was purpose-built to be flexible and enable seamless innovation to ensure our customers achieve their best security outcomes,now and in the future."

"We're pleased with the continued expansion of our Taegis customer base,resulting in Taegis ARR growth of 149% year over year," said Paul Parrish,Chief Financial Officer,Secureworks. "Taegis now comprises nearly 50 percent of Secureworks overall ARR,an important milestone and key inflection point for our business."

First Quarter Fiscal 2023 Financial Highlights

Overall revenue was $121.0million,compared to $139.5million in the first quarter of fiscal 2022,as we actively exit non-strategic,lower-margin services.

GAAP gross profit was $71.6million,compared with $82.3million in the first quarter of fiscal 2022. Non-GAAP gross profit was $76.4 million,compared with $86.4 million in the same period last year.

GAAP gross margin was 59.1%,compared with 59.0% in the same period last year. Non-GAAP gross margin was 63.1% compared with 61.9% in the first quarter of fiscal 2022.

GAAP net loss was $21.6million,or $0.26 per share,compared with $6.4million,or $0.08 per share,in the prior year. Non-GAAP net loss was $7.6million,or $0.09 per share,compared with $4.0million net income,or $0.05 earnings per share,in the same period last year.

Adjusted EBITDA loss for the quarter was $7.8million,compared with income of $8.1million in the first quarter of fiscal 2022.

Ended the first quarter with $186million in cash and cash equivalents.

Business and Operational Highlights

During the first quarter,Secureworks unveiled several new feature enhancements to Taegis,including:

New Alerts Experience and Custom Dashboards for Taegis XDR. A combination of new and enhanced features enables Security Operation (SecOp) teams to prioritize the most relevant alerts and quickly comprehend threat data through custom dashboards. Security teams can identify threat activity faster and improve incident response capabilities.

Taegis XDR Detections. Taegis also offers broad and deep threat detection that is powered by the optimum mix of machine learning and deep security expertise,including a new Tactic Graph Engine announced in Q1. This new,patent-pending detection engine allows the Secureworks Counter Threat Unit to codify threat actor behavior patterns more rapidly based on findings from over 1,400 IR engagements performed every year,together with Threat Research activities,and insights gleaned from adversarial testing engagements. Taegis' ability to correlate observations from multiple telemetry sources and security controls at scale,including petabytes of data,allows Tactic Graphs to detect threat actor activity with high precision. Over time,the ability to create new Tactic Graphs will be opened to partners and customers.

Secureworks published Incident Response 2021: Year in Review,which brings together notable trends in cyber threats and threat actor behavior based on a year of incident response engagements.

Secureworks continues to be recognized in the industry for its world-class solutions and services built around the Taegis security platform. Recognition and awards in the first quarter of 2022 include:

Named a Strong Performer in New Forrester Wave™ on Cybersecurity Incident Response & Readiness,Q1 2022.

Recognized a Gold Winner for Managed Detection and Response in North America for Cyber Security Excellence Awards for Taegis ManagedXDR.

Honored as one of the 30 Most Innovative Brands of the Year by Silicon Review.

Financial Outlook

For the second quarter of fiscal 2023,the Company expects:

Revenue of $115 million to $117 million.

GAAP net loss per share of $0.30 to $0.32 and non-GAAP net loss per share of $0.15 to $0.17.

Secureworks is providing the following guidance for full fiscal year 2023. The Company expects:

Fiscal Year 2023 Guidance

Taegis ARR

At least $265M

Other MSS ARR

Below $80M

Total revenue

$475M to $490M

GAAP net loss

($107M) to ($114M)

($1.26) to ($1.35) per share

Non-GAAP net loss

($52M) to ($59M)

($.61) to ($.70) per share

Adjusted EBITDA

($58M) to ($68M)

Cash from operations

($55M) to ($65M)

Conference Call Information

As previously announced,the Company will hold a conference call to discuss its first quarter fiscal 2023 results and financial guidance on June 2,2022,at 8:00 a.m. U.S. ET. A live audio webcast of the conference call and the related supplemental financial information will be accessible on the Company's website at http://investors.secureworks.com. The webcast and supplemental information will be archived at the same location.

Operating Metrics

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.

Non-GAAP Financial Measures

This press release presents information about the Company's non-GAAP gross margin,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,which are non-GAAP financial measures provided as a supplement to the results provided in accordance with accounting principles generally accepted in the United States of America ("GAAP"). A reconciliation of the foregoing historical and forward-looking non-GAAP financial measures to the most directly comparable historical and forward-looking GAAP financial measure is provided below for each of the fiscal periods indicated.

Special Note Regarding Forward-Looking Statements

This press release 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," "guidance," "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 include,but are not limited to,the statements in this press release with respect to the Company's expectations regarding revenue,GAAP net loss per share,and non-GAAP net loss per share for the second quarter of fiscal 2023,and revenue,GAAP net loss,non-GAAP net loss,non-GAAP net loss per share,adjusted EBITDA,cash from operations,annual recurring revenue and revenue for its Taegis platform,and other MSS ARR for full year fiscal 2023,all of which 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 press release.

Actual results and events in future periods may differ materially from those expressed or implied by these forward-looking statements because of risks,uncertainties and other factors that include,the following: the Company's ability to achieve or maintain profitability; the Company's ability to enhance its existing solutions and technologies and to develop or acquire new solutions and technologies; the Company's reliance on personnel with extensive information security expertise; intense competition in the Company's markets; the Company's ability to attract new customers,retain existing customers and increase its annual contract values; the Company's reliance on customers in the financial services industry; the Company's ability to manage its growth effectively; the Company's ability to maintain high-quality client service and support functions; terms of the Company's service level agreements with customers that require credits for service failures or inadequacies; the Company's recognition of revenue ratably over the terms of its Taegis SaaS applications and managed security services contracts; the Company's long and unpredictable sales cycles; risks associated with the Company's international sales and operations; the effect of Brexit on the Company's operations; the Company's exposure to fluctuations in currency exchange rates or global inflationary environment; the effect of governmental export or import controls on the Company's business or any international sanctions compliance program applicable to the Company; the Company's ability to expand its key distribution relationships; the Company's technology alliance partnerships; real or perceived defects,errors or vulnerabilities in the Company's solutions or the failure of its solutions to prevent a security breach; the risks associated with cyber attacks or other data security incidents; the ability of the Company's solutions to interoperate with its customers' IT infrastructure; the Company's ability to use third-party technologies; the effect of evolving information security and data privacy laws and regulations on the Company's business; the Company's ability to maintain and enhance its brand; risks associated with the Company's acquisition of other businesses; estimates or judgments relating to the Company's critical accounting policies; the effect of natural disasters,public health issues,geopolitical conflict and other catastrophic events on the Company's ability to serve its customers,including the Ukrainian/Russian conflict,and the coronavirus (COVID-19) pandemic; the Company's reliance on patents to protect its intellectual property rights; the Company's ability to protect,maintain or enforce its non-patented intellectual property rights and proprietary information; claims by third parties of infringement of their proprietary technology by the Company; the Company's use of open source technology; and risks related to the Company's relationship with Dell Technologies Inc. and Dell Inc. and control of the Company by Dell Technologies Inc.

This list of risks,uncertainties and other factors is not complete. The Company discusses these matters more fully,as well as certain risk factors that could affect the Company's business,financial condition,results of operations and prospects,under the caption "Risk Factors" in the Company's annual report on Form 10-K,as well as in the Company's other SEC filings.

Any or all forward-looking statements the Company makes may turn out to be wrong and can be affected by inaccurate assumptions the Company might make or by known or unknown risks,uncertainties and other factors,including those identified in this press release. Accordingly,you should not place undue reliance on the forward-looking statements made in this press release,which speak only as of its date. The Company does not undertake to update,and expressly disclaims any obligation to update,any of its forward-looking statements,whether as a result of circumstances or events that arise after the date the statements are made,new information or otherwise.

About Secureworks

Secureworks (NASDAQ: SCWX) is a global cybersecurity leader that protects customer progress with Secureworks® Taegis™,a cloud-native security analytics platform built on 20+ years of real-world threat intelligence and research,improving customers' ability to detect advanced threats,streamline and collaborate on investigations,and automate the right actions.

www.secureworks.com

(Tables Follow)

SECUREWORKS CORP.

Condensed Consolidated Statements of Operations and Related Financial Highlights

(in thousands,except per share data and percentages)

(unaudited)

Three Months Ended

April 29,

2022

Apr 30,

2021

Net revenue:

Subscription

$ 94,413

$ 104,070

Professional services

26,602

35,393

Total net revenue

121,015

139,463

Cost of revenue:

Subscription

32,826

37,425

Professional services

16,609

19,782

Total cost of revenue

49,435

57,207

Gross profit

71,580

82,256

Operating expenses:

Research and development

33,331

28,152

Sales and marketing

39,245

36,405

General and administrative

25,360

25,555

Total operating expenses

97,936

90,112

Operating loss

(26,356)

(7,856)

Interest and other,net

(697)

(907)

Loss before income taxes

(27,053)

(8,763)

Income tax benefit

(5,455)

(2,373)

Net loss

$ (21,598)

$ (6,390)

Loss per common share (basic and diluted)

$ (0.26)

$ (0.08)

Weighted-average common shares outstanding (basic and diluted)

83,763

81,985

Percentage of Total Net Revenue

Subscription gross margin

65.2 %

64.0 %

Professional services gross margin

37.6 %

44.1 %

Total gross margin

59.1 %

59.0 %

Research and development expenses

27.5 %

20.2 %

Sales and marketing expenses

32.4 %

26.1 %

General and administrative expenses

21.0 %

18.3 %

Operating expenses

80.9 %

64.6 %

Operating loss

(21.8) %

(5.6) %

Loss before income taxes

(22.4) %

(6.3) %

Net loss

(17.8) %

(4.6) %

Effective tax rate

20.2 %

27.1 %

Note: Percentage growth rates are calculated based on underlying data in thousands

SECUREWORKS CORP.

Condensed Consolidated Statements of Financial Position

(in thousands)

(unaudited)

April 29,

2022

January 28,

2022

Assets:

Current assets:

Cash and cash equivalents

$ 186,220

$ 220,655

Accounts receivable,net

74,899

86,231

Inventories,net

373

505

Other current assets

27,075

26,040

Total current assets

288,567

333,431

Property and equipment,net

7,241

8,426

Operating lease right-of-use assets,net

16,208

17,441

Goodwill

425,877

425,926

Intangible assets,net

127,643

133,732

Other non-current assets

69,350

68,346

Total assets

$ 934,886

$ 987,302

Liabilities and Stockholders' Equity:

Current liabilities:

Accounts payable

$ 22,859

$ 15,062

Accrued and other current liabilities

55,064

88,122

Short-term deferred revenue

163,055

163,304

Total current liabilities

240,978

266,488

Long-term deferred revenue

10,412

12,764

Operating lease liabilities,non-current

15,547

16,869

Other non-current liabilities

42,646

43,124

Total liabilities

309,583

339,245

Total stockholders' equity

625,303

648,057

Total liabilities and stockholders' equity

$ 934,302

SECUREWORKS CORP.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

Three Months Ended

April 29,2022

April 30,2021

Cash flows from operating activities:

Net loss

$ (21,390)

Adjustments to reconcile net loss to net cash used in operating activities:

Depreciation and amortization

9,383

9,918

Amortization of right of use asset

964

1,055

Amortization of costs capitalized to obtain revenue contracts

4,514

5,053

Amortization of costs capitalized to fulfill revenue contracts

1,395

1,415

Stock-based compensation expense

9,126

6,035

Effects of exchange rate changes on monetary assets and liabilities

denominated in foreign currencies

565

798

Income tax benefit

(5,373)

Provision for credit losses

53

434

Changes in assets and liabilities:

Accounts receivable

10,728

12,573

Net transactions with Dell

(847)

(9,859)

Inventories

132

(127)

Other assets

(3,102)

(4,250)

Accounts payable

7,674

526

Deferred revenue

(3,421)

(3,773)

Operating leases,net

(1,483)

(1,552)

Accrued and other liabilities

(33,507)

(40,041)

Net cash used in operating activities

(24,879)

(30,558)

Cash flows from investing activities:

Capital expenditures

(413)

(524)

Software development costs

(1,701)

(1,770)

Net cash used in investing activities

(2,114)

(2,294)

Cash flows from financing activities:

Taxes paid on vested restricted shares

(7,442)

(6,841)

Net cash used in financing activities

(7,841)

Net decrease in cash and cash equivalents

(34,435)

(39,693)

Cash and cash equivalents at beginning of the period

220,655

220,300

Cash and cash equivalents at end of the period

$ 186,220

$ 180,607

Non-GAAP Financial Measures

This press release presents information about the Company's non-GAAP gross margin,non-GAAP net income,non-GAAP earnings per share and adjusted EBITDA,which are non-GAAP financial measures provided as a supplement to the results provided in accordance with GAAP. A detailed discussion of the Company's reasons for including these non-GAAP financial measures,the limitations associated with these measures,the items excluded from these measures,and our reason for excluding those items are presented below. The Company encourages investors to review its GAAP results and supplement their review of the Company's GAAP results with the corresponding non-GAAP financial measures.

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 associated with external software development costs capitalized and customer relationships and technology acquired. In connection with the acquisition of Dell by Dell Technologies in fiscal 2014 and our acquisition of Delve in fiscal 2021,our tangible and intangible assets and liabilities associated with customer relationships and technology were accounted for and recognized at fair value on the related transaction date.

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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SECUREWORKS CORP.

Reconciliation of GAAP to Non-GAAP Financial Measures

(in thousands,except per share data)

(unaudited)

Three Months Ended

April 29,2021

GAAP net revenue

$ 121,015

$ 139,463

GAAP subscription cost of revenue

$ 32,826

$ 37,425

Amortization of intangibles

(4,265)

(3,819)

Stock-based compensation expense

(123)

(103)

Non-GAAP subscription cost of revenue

$ 28,438

$ 33,503

GAAP professional services cost of revenue

$ 16,609

$ 19,782

Stock-based compensation expense

(387)

(196)

Non-GAAP professional services cost of revenue

$ 16,222

$ 19,586

GAAP gross profit

$ 71,580

$ 82,256

Amortization of intangibles

4,265

3,819

Stock-based compensation expense

510

299

Non-GAAP gross profit

$ 76,355

$ 86,374

GAAP research and development expenses

$ 33,331

$ 28,152

Stock-based compensation expense

(2,743)

(1,098)

Non-GAAP research and development expenses

$ 30,588

$ 27,054

GAAP sales and marketing expenses

$ 39,245

$ 36,405

Stock-based compensation expense

(1,638)

(732)

Non-GAAP sales and marketing expenses

$ 37,607

$ 35,673

GAAP general and administrative expenses

$ 25,360

$ 25,555

Amortization of intangibles

(3,524)

(3,524)

Stock-based compensation expense

(4,235)

(3,906)

Non-GAAP general and administrative expenses

$ 17,601

$ 18,125

GAAP operating loss

$ (26,356)

$ (7,856)

Amortization of intangibles

7,789

7,343

Stock-based compensation expense

9,035

Non-GAAP operating (loss) income

$ (9,441)

$ 5,522

GAAP net loss

$ (21,390)

Amortization of intangibles

7,035

Aggregate adjustment for income taxes

(2,920)

(2,997)

Non-GAAP net (loss) income

$ (7,603)

$ 3,991

GAAP loss per share

$ (0.26)

$ (0.08)

Amortization of intangibles

0.09

0.09

Stock-based compensation expense

0.11

0.07

Aggregate adjustment for income taxes

(0.03)

(0.04)

Non-GAAP (loss) earning per share *

$ (0.09)

$ 0.05

* Sum of reconciling items may differ from total due to rounding of individual components

GAAP net loss

$ (21,390)

Interest and other,net

697

907

Income tax benefit

(5,373)

Depreciation and amortization

9,918

Stock-based compensation expense

9,035

Adjusted EBITDA

$ (7,847)

$ 8,097

SECUREWORKS CORP.

Reconciliation of GAAP to Non-GAAP Financial Measures

(in thousands)

(unaudited)

Three Months Ended

Percentage of Total Net Revenue

April 29,2021

GAAP gross margin

59.1 %

59.0 %

Non-GAAP adjustment

4.0 %

2.9 %

Non-GAAP gross margin

63.1 %

61.9 %

GAAP research and development expenses

27.5 %

20.2 %

Non-GAAP adjustment

(2.2) %

(0.8) %

Non-GAAP research and development expenses

25.3 %

19.4 %

GAAP sales and marketing expenses

32.4 %

26.1 %

Non-GAAP adjustment

(1.3) %

(0.5) %

Non-GAAP sales and marketing expenses

31.1 %

25.6 %

GAAP general and administrative expenses

21.0 %

18.3 %

Non-GAAP adjustment

(6.5) %

(5.3) %

Non-GAAP general and administrative expenses

14.5 %

13.0 %

GAAP operating loss

(21.8) %

(5.6) %

Non-GAAP adjustment

14.0 %

9.6 %

Non-GAAP operating (loss) income

(7.8) %

4.0 %

GAAP net loss

(17.8) %

(4.6) %

Non-GAAP adjustment

11.5 %

7.5 %

Non-GAAP net (loss) income

(6.3) %

2.9 %

SECUREWORKS CORP.

Reconciliation of GAAP to Non-GAAP Financial Measures

(in millions,except per share data)

(unaudited)

Three Months Ending

Fiscal Year Ending

July 29,2022

February 3,2023

Low End of

Guidance

High End of

Guidance

Low End of

Guidance

High End of

Guidance

GAAP net revenue

$ 115

$ 117

$ 475

$ 490

GAAP net loss

$ (27)

$ (26)

$ (114)

$ (107)

Amortization of intangibles

7

7

29

29

Stock-based compensation expense

10

10

42

42

Aggregate adjustment for income taxes

(4)

(4)

(16)

(16)

Non-GAAP net loss*

$ (14)

$ (13)

$ (59)

$ (52)

GAAP net loss per share

$ (0.32)

$ (0.30)

$ (1.35)

$ (1.26)

Amortization of intangibles

0.09

0.09

0.35

0.35

Stock-based compensation expense

0.12

0.12

0.49

0.50

Aggregate adjustment for income taxes

(0.05)

(0.05)

(0.19)

(0.19)

Non-GAAP net loss per share*

$ (0.17)

$ (0.15)

$ (0.70)

$ (0.61)

GAAP net loss

$ (114)

$ (107)

Interest and other,net

1

1

Income tax benefit

(32)

(30)

Depreciation and amortization

35

35

Stock-based compensation expense

42

42

Adjusted EBITDA*

$ (68)

$ (58)

Other Items

Effective tax rate

22 %

Weighted average shares outstanding (in millions)

84.5

Cash flow from operations

$(65) to $(55)

Capital expenditures

$7 to $9

*

Sum of reconciling items may differ from total due to rounding of individual components

Sum of quarterly guidance may differ from full year guidance due to rounding