SecureWorks Corp (SCWX) 2018 Q1 法說會逐字稿

Good morning and welcome to the SecureWorks first-quarter fiscal 2018 financial results conference call.

(Operator Instructions).

Now I will turn the call over to Rebecca Gardy, Head of Investor Relations.

Ms. Gardy, you may begin.

Thank you, Regina, and good morning, everyone, and thank you for joining us today to review SecureWorks' financial results for the first quarter of fiscal 2018.

This call is being recorded and this call is also being broadcast live over the Internet and can be accessed on the Investor Relations section of SecureWorks' website at investors.secureworks.com.

The webcast will be archived at the same location for one year.

This morning, SecureWorks issued a press release announcing results for its fiscal quarter ended May 5, 2017.

You can access this press release on the Investor Relations section of the SecureWorks website.

During this call, our management will make forward-looking statements relating to our expected financial results and other future events.

Please refer to our Form 10-K and other SEC filings for a discussion of risks and uncertainties that could cause our actual results and events to differ materially from those presented or implied in these forward-looking statements.

We assume no obligation to update our forward-looking statements.

Some of the financial measures we use on this call are expressed on a non-GAAP basis.

These non-GAAP measures exclude stock-based compensation, the impact of purchase accounting, amortization of intangibles and the related tax effects of these items.

We have provided reconciliations of the non-GAAP financial measures to the comparable GAAP financial measures in today's earnings press release available on our website.

With us on today's call are Michael Cote, President and Chief Executive Officer of SecureWorks, and Wayne Jackson, Chief Financial Officer.

Following their prepared remarks we will take your questions.

We would appreciate your limiting your initial questions to two so that we may allow as many of you to ask questions as possible in our allotted time.

In the event you have additional questions that are not covered by others, please feel free to re-queue and we will do our best to come back to you.

Thank you for your cooperation on this.

Finally, I would like to remind you that SecureWorks will be presenting at the Citi 2017 Small and Mid-cap Conference on Thursday, June 8 in New York and the William Blair 37th Annual Growth Stock Conference on Tuesday, June 13 in Chicago.

Additional information on all these events can be found on the Investor Relations section of the SecureWorks website.

And with that I will now turn it over to Mr. Cote.

Thank you, Rebecca, and good morning, everyone.

Thank you for joining the call today.

Demand for cyber security remains strong as threat actors continue to elude security ecosystems of organizations around the globe.

Threats are increasing in complexity and magnitude.

You don't have to search far for evidence.

A glance at the recent headlines about the global WannaCry attack are enough to drive that home.

And those are just the attacks that you hear about.

Over the last few months I've met with many of our largest clients, all global enterprises based in North America representing a substantial amount of our total monthly recurring revenue or MRR.

My interaction with every one of the CIOs and CISOs I met with confirm the industry continues to mature.

Let me give you two examples.

The CIO of a multinational engineering and aerospace company is evolving their security strategy and seeking our counsel as they refresh their point products across their entire organization.

In the past, their approach was adding layers upon layers of security products.

They are now focused on buying the point products that meet their specific requirements in each area, network, endpoint, cloud, and deriving greater value across their ecosystem.

They value the power of the Counter Threat Platform, or CTP, our vendor agnostic approach and visibility to see the strengths and weaknesses of each point product.

They know that we provide solutions that work across their environment in a coordinated, integrated and orchestrated manner on-prem and in the cloud.

I also met with the CIO of one of the largest public universities in the country.

We are working together to seamlessly extend their internal security solutions to their affiliated community colleges.

Rather than just be informed of suspicious cyber threat activity, the community colleges are benefiting from the powerful network effect and the predictive early warning system we deliver to the University and all of our clients.

The key take away from our prospects and clients is that while almost all companies in our space address cyber threats as a technology problem, ours is a highly differentiated approach.

We offer a powerful combination of artificial and human intelligence driven solutions.

We have 17 years of visibility into the threat activity affecting over 4,400 clients in 61 countries.

We combine the artificial intelligence and automation of our industry-leading CTP with actionable insights from our team of elite researchers and analysts to provide a powerful network effect.

The more clients and endpoints we add to CTP, the more visibility we have across all of our clients to detect and eliminate threats.

Clients value our technology leadership and singular focus in the vast and growing cyber security market.

According to Frost & Sullivan, the global managed security services market is expected to grow at an average annual rate of 16% over the next three years, reaching approximately $20 billion by 2020.

In the first quarter, SecureWorks' revenue increased to nearly $114 million, representing almost 14% growth.

Gains in gross profit outpaced revenue growth with margins improving year-over-year by 220 basis points.

I will share more on ways we are scaling in a moment.

Net loss this quarter was primarily impacted by higher sales investments to address the substantial market opportunity.

Proprietary technology -- makes up the CTP, drove powerful scale on the gross margin line.

For example, Foresee, our machine learning technology, auto resolves correlated security events that would have otherwise required analyst review.

We saw double-digit improvement in the portion of the events on which Foresee took action, allowing our security teams to focus on the new threats in our clients' environments.

We are seeing the benefit of this technology in our operational metrics.

This quarter, we processed up to 220 billion events per day, a 33% increase over the prior year.

Over the same period, we saw an approximate 25% efficiency gain in events processed per security analyst, a clear illustration of the powerful scale we can achieve.

Another example is the scale we have achieved in Japan.

Three years ago, we invested in this important region ahead of the revenue curve, making a commitment to one of the largest cyber security markets in the world and one that we believe is critical to global success.

Although still a relatively modest contributor to overall MRR, our Japan investment is ramping nicely.

Year-over-year subscription-based contracts sold in Japan have increased more than fourfold and we have continued to expand margins in the region as we scale.

With these, and many other operational efficiencies in place, we have created a strong, scalable foundation that will serve us well as we accelerate sales.

Let me turn to what we are doing to grow our top line.

In January, Jason Capitel, our Chief Revenue Officer, joined our leadership team and took action to retool our sales process.

Within the last few months we identified areas that needed improvement in order to seize the significant opportunity we have in the enterprise market, particularly in North America.

And today I am pleased to share some updates.

First, all of Jason's direct reports are now in place including a new head of sales engineering and a new head of our indirect sales effort.

Second, we have focused on adding experienced enterprise sellers.

We ended the first quarter with approximately 175 quota carriers or 15% more than last year.

While we experienced slightly higher attrition during this transition period, the percentage of quota carriers with a tenure of two or more years has remained constant.

Third, by the end of the quarter we redistributed our resources in our North American enterprise team in order to provide better density of coverage.

Our sales teams are now closer to their respective clients and prospects within contiguous markets.

They are engaging more efficiently and building deeper relationships to nurture cross sales opportunities.

By hiring additional quota carriers and reducing the size of territories our sales makers will have additional bandwidth to pursue and grow new logos, consistent with our land and expand strategy.

Fourth, we fine-tuned our sales approach to the enterprise market.

We made investment in our sales and engineering team, increasing headcount by nearly 15% over the first quarter of fiscal 2017.

Our sales engineers are important to ensure an optimal solution for enterprise prospects.

We have also streamlined decision-making and created more clarity of roles and responsibilities.

We expect the impact of these changes will properly set client expectation, reduce sales cycles and accelerate installation timelines.

While we are in the early innings, we expect these changes to be evident in MRR acceleration in the back half of fiscal 2018.

Let me share a few examples of seven-figure wins with North American companies this quarter.

We signed a three-year contract with the US-based subsidiary of a global industrial chemical firm that included AETD Red Cloak; a three-year monitoring contract with a large car retailer; and a three-year advanced remediation management contract with the technology arm of a large private equity firm.

In terms of geography, while North America is our largest market and a key focus, demand for our subscription solutions in EMEA and APJ is growing with a healthy pipeline.

This quarter revenue in EMEA grew by about 40% year-over-year while revenue in Japan increased 100%.

Relative to industry diversity, we built this Company catering to the needs of the financial services industry, but over time we have diversified.

Though financial services clients represent 30% of revenue, and that sector continues to grow, we see strong demand across industry verticals particularly healthcare, state and local government and insurance.

In fact, of our top 10 largest deals this quarter -- represented six distinct verticals.

Nurturing relationships with clients across geographies and industries is paramount for us.

In the first quarter, we held our annual Enterprise Security Summit or ESS.

The event provided senior level security professionals an exclusive forum to openly discuss security challenges and concerns.

It was the largest ESS since inception attended by decision-makers at clients from 35 states, four countries and 12 industries.

Now let me highlight just a few of our technology innovations this quarter.

Making continuous investments, especially in the CTP, is critical for us as we maintain a leadership position in the cyber security industry.

Our client portal serves as the window into the power of this technology.

In Q1 we saw rapid adoption of our new mobile application.

This app provides our clients with new key detection and remediation features of our client portal on a mobile device, facilitating on-the-go threat management including searching, filtering and drill down capabilities.

Nearly all of the clients that have subscribed to the app have integrated push notifications into their security workflow.

We also built upon our traditional monitoring capabilities with Microsoft Exchange, SharePoint and Active Directory and launched security monitoring of Microsoft Office 365.

Together with our offerings in our Cloud Guardian portfolio, this solution is one more way that we help our clients secure workloads in their data centers and in the cloud.

We are pleased with the response from clients and prospects.

We are also seeing strong demand for our new subscription-based advanced remediation management solution.

Most enterprise organizations have a security model that includes a first layer of security event management responsible for notification, correlation and filtering.

However, the number of events escalated through to the next level still continues -- still requires overwhelming resources and delays a client from focusing on real threats.

Developing the staff and skills required to provide advanced threat telemetry and business context is a challenge for many organizations.

To address this client need, we now offer our clients the next layer of security event management including incident escalation, correlation across the client's various systems and orchestration of their remediation activities.

This leverage solution delivers deeper event analysis, utilizing CTP alongside existing client tools and systems.

Our clients appreciate the approach and clear business value we provide which enables the best and most effective security decisions possible.

Finally, I would like to share a quick update on Red Cloak, our proprietary technology we use for advanced endpoint threat detection.

While most other vendors focus mostly on detecting malware in endpoints, AETD Red Cloak uses our threat intelligence to detect compromise even in the absence of malware.

Over the last year the subscription contribution of Red Cloak has more than tripled to become a meaningful contributor to MRR.

In Q1 Red Cloak based MRR was up 20% sequentially.

So as I wrap up my comments on the quarter I want to reiterate that across every dimension of SecureWorks we are dedicated to putting our clients first.

Even as we process an ever-growing number of events and incidents we continue to scale, the CTP's effectiveness, and we are achieving increased efficiencies in our delivery model.

This foundation will serve us well as we ignite momentum through our investment in sales.

We are confident that MRR will accelerate in the second half of fiscal 2018 and we will sustain that momentum in the years to come driving profitable growth.

Now let me turn it over to Wayne for a deeper dive into our first-quarter results and to present near-term guidance.

Thank you, Mike.

Good morning, everyone.

Please note that all financial information is non-GAAP and growth rates are compared to the first quarter of fiscal 2017 unless stated otherwise.

For the first quarter of fiscal 2018, we delivered top-line growth and solid gross margin expansion while making continued investments to accelerate our sales momentum.

For the first quarter of fiscal 2018 following are several key metrics.

As Mike mentioned, we ended the first quarter with approximately 4,400 subsection clients in 61 countries.

Our average annual revenue per client was $87,000 this quarter, an 8% increase.

Next, MRR increased by 10.4% to $31.9 million.

We are optimistic about a more robust MRR growth in the second half of fiscal 2018 as we expect to see the benefit of our investments in our sales organizations.

We believe MRR is an indicator of annualized subscription revenue.

Lastly, we ended the first quarter with a 99% revenue retention rate.

Turning to the P&L, first-quarter revenue increased 13.7% to $113.7 million.

The percentage mix of revenue from our subscription solutions and security risk consulting services shifted slightly this quarter, though it remains approximately 80/20.

Revenue in the US increased approximately 11% and we continue to see strong growth in our international markets.

This quarter approximately 14% of revenue was international, up from 12% in the first quarter of fiscal 2017.

Let's take a look at the rest of the P&L items.

Gross margin was 55.8% of revenue during the quarter, a 220 basis point increase.

I am pleased with the impact our investments and our global expansion, our technology and our service delivery model and making on profitability.

Operating expenses were 64.1% of revenue, up 40 basis points.

Research and development expenses were 16.4% of revenue, a 110 basis point reduction.

In absolute dollars, R&D spending increased $1.2 million over the first quarter of last year as we expanded our software engineering team.

As an industry leader, we continue to invest in our CTP and to develop new solutions that protect our clients in an evolving threat landscape.

We expect R&D expense to maintain the current rate as a percent of revenue throughout fiscal 2018.

Sales and marketing expenses increased to 32.5% revenue, a 230 basis point increase.

Our go-to-market investments resulted in a $6.7 million increase in sales and marketing expense primarily driven by a 17% growth in sales headcount and expenses related to sales training.

For the remainder of this fiscal year, we expect to maintain sales and marketing expense as a percent of revenue at roughly the current level while we work to accelerate MRR momentum.

General and administrative expenses in the first quarter were 15.2% of revenue, a 70 basis point improvement.

We expect G&A expense to be in the mid-teens for the remainder of fiscal 2018.

Net interest and other was a charge of approximately $650,000 compared to income of $365,000 the prior year.

The primary driver was the impact of fluctuation in foreign exchange rates.

Our first-quarter non-GAAP net loss expanded by $400,000 to $6.5 million or $0.08 per share.

The difference to our prior guidance is due primarily to additional investments in sales and marketing and FX impact, partially offset by gross margin improvement.

Weighted average shares outstanding, both basic and fully diluted, were 80.056 million for the first quarter.

The Company's adjusted EBITDA loss improved by $1.3 million to $6.4 million.

Given the sales investments we are making this year, we expect a delay in reaching positive adjusted EBITDA until fiscal 2019.

Cash flow used by operations was $19.7 million in the first quarter, primarily due to annual bonus payouts of $22 million.

The timing of this payment in the first quarter is consistent with prior years.

Regarding cash flow from operations, we continue to expect the receipt of approximately $25 million in the fourth quarter from Dell Technologies' utilization of our tax attributes.

The receipt of the $25 million will be included as cash flow from operations.

For the first quarter we invested $3.4 million in capital expenditures to support our growth.

We have a strong cash position of $91.6 million, an untapped $30 million credit facility and continue to have no indebtedness.

Now let's turn to our guidance for the second quarter and full fiscal year 2018.

Based on the Company's performance at the end of the first quarter, the items we have highlighted on this call and current market conditions we expect the following.

For the second quarter revenue on both a GAAP and non-GAAP basis to be in the range of $113 million to $114 million.

Net loss per share to be in the range of $0.17 to $0.18 and non-GAAP net loss per share to be in the range of $0.08 to $0.09.

We expect approximately 80.353 million weighted average shares outstanding during the second quarter of fiscal 2018.

For full-year fiscal 2018 we are updating our prior guidance as follows.

We expect GAAP revenue to be in the range of $459 million to $464 million and in the range of $460 million to $465 million on a non-GAAP basis.

GAAP net loss to be in the range of $53 million to $55 million and adjusted EBITDA loss to be in the range of $24 million to $28 million.

GAAP net loss per share to be in the range of $0.66 to $0.69 and non-GAAP net loss per share in the range of $0.30 to $0.33.

We continue to expect capital expenditures will be approximately $18 million to $20 million for fiscal 2018.

We expect weighted average shares outstanding in fiscal 2018 to be 80.286 million.

And finally, we continue to expect MRR to be in the range of $34.4 million to $36.4 million at the end of the fourth quarter of fiscal 2018.

In summary, while we build momentum on the top line through investments, we continue to deliver operating leverage and manage our operating expenses.

Our cash position remains strong and we believe that we will continue to win in the market as we use our unique mixture of human and machine intelligence to help our clients secure themselves against cyber threat activity.

Operator, will you please open the call for questions at this time?

(Operator Instructions).

Walter Pritchard, Citi.

Hi, thanks.

Just a question around the sales and marketing expense.

It seems like you had a plan last quarter and you hit it on the top line.

And just wondering what was it specifically about the way you changed the sales organization?

Were some of those one-time expenses?

It sounds like they persist through the end of the year, but just trying to understand three months ago versus today and the spend.

Walter, this is Mike Cote thanks for the call.

If I could just divert for a minute; I understand that in the prepared remarks I said 220 billion events when I was talking about the volume.

It's actually 240 billion events so the record can be clear.

To answer your question, Jason has been with us five months now.

And as he came in and traveled around the globe to meet with clients, prospects and our team, we got really excited about the opportunity and the prospects in front of us and took a three stepped approach or a three phased -- three attack vectors.

One is talent.

So as I mentioned, he has all of his direct reports in place including new leaders in the Middle East and Australia, new sales engineering leads and indirect sales leader.

We had slightly higher attrition during this transition period, but the sellers with tenure remained constant.

He aggressively hired seniored -- so faster than we anticipated seniored sales executives and sales engineers and supporting individuals.

From a coverage perspective, so the first was talent, the second area was coverage, we increased quotas -- or quota carriers by 15%, again hiring more seasoned individuals.

Redistributed resources in North America to be closer to our clients.

The sellers are better engaged in deeper relationships in those regions and allowing us to focus really on the land and expand that I mentioned in the prepared remarks.

The third point would be quality of sale, which is increasing the sales engineers by 15%.

And again, those were more sales engineers and more seasoned sales engineers that we had looked at earlier -- or planned on, I should say, earlier.

And we really did some adjustments to and improvements in the tools and systems that we are reporting.

In the first quarter from an expense perspective there were some one-time costs that we would not have recur through the year such as training and our annual sales meeting.

But we expect for the most part those costs will be offset as we continue to do and fill out the headcount that we are looking for.

And then, Mike, just to follow up on that -- maybe for Wayne.

I know you are not giving 2019 guidance, but as we think about getting to EBITDA positive in 2019, is there any -- should we think about like a change in the trajectory of revenue or a change in the trajectory of expenses to get there?

Or is it just a draw these lines that we have coming out of 2018 into 2019?

Hi, Walter, good morning.

So, relative to 2019, you are right, too early to give guidance on that right now.

But relative to 2019 in the growth rate of revenue, we forecasted the $34.4 million to $36.4 million of MRR growth, which gives you some indication of the revenue growth we are expecting in 2019.

And as revenue ramps from an OpEx -- well, first of all from a gross margin perspective, you think about the P&L, revenue is going to ramp, our gross margins we continue to expect -- for the investments we are making to help in our gross margin line.

Then R&D scales, G&A scales.

Sales and marketing, too early innings to know exactly what the investments next year will need to be, but we are optimistic that we will get to EBITDA positive sometime in fiscal 2019.

I hope that answers your question a bit.

Yes, it does.

Thank you.

This is Mike.

Let me just tie on a couple of points with what Wayne said, if I could.

So one would be I think it's important to note that in Q4 of last year we were adjusted EBITDA positive.

The second thing is we will be cash flow positive from operations this fiscal year.

So, the decision to spend this incremental money was really a conscious decision based upon Jason's analysis of the market and what he saw in the field and the opportunity for us to really take a much larger leadership position in the market.

Matt Hedberg, RBC Capital Markets.

Great, thanks for taking my questions.

Mike, the threat landscape is obviously robust.

I'm wondering are you seeing customers using your SecureWorks platform really as a way for them to consolidate or rationalize some of their security spending.

So Matt, that's a great question and thank you.

As I mentioned in the prepared remarks, we are seeing some of our clients approach us to ensure that they have the right point products for them across their ecosystem so they may --.

In your specific question in this case that I gave the example of, they actually had multi-layers of defense and now they are looking to rationalize that cost and put it in a more focused and effective manner based upon the security controls they are looking across their ecosystem.

That's helpful.

And then, with the investments to accelerate MRR in the second half here, can you remind us what percentage of your revenue or MRR comes from the channel?

And how does Jason think about deploying additional resources on the channel side of your business?

So from an indirect perspective -- and remember the channel is not sales as a VAR because of what we do, if you will.

Our ratio of revenue coming in or sales coming in from the channel is roughly the same, which is in the 6% range of revenue.

We've, in the last 90 days I believe, hired the new indirect channel leader.

And we are looking at, and these deals take longer because of the types of relationships they are.

But outside of North America in particular we have some very promising opportunities in Europe and in APJ in particular where we are looking to partner with some complementary companies from a go-to-market and delivery perspective that I am hoping I can announce some more on this later in the year.

That's helpful.

Thanks a lot, guys.

Rob Owens, Pacific Crest Securities.

Great, thanks and good morning.

I'm curious around your comments around how the industry continues to mature.

Relative to discussions with customers in sales cycles, which I know has been longer than you had wanted; A, given the threat landscape that things you are talking about; B, given some refinement in terms of go-to-market, what are you seeing now in terms of those sales cycles?

And maybe you can address it as well as you are entering new verticals you are having more success in new verticals.

Thanks.

So great question, Rob, and thank you.

On the sales cycles themselves, I would say that we are beginning to see them shorten and that people are becoming more decisive.

And again, this is not a dramatic change but it sure feels anecdotally, from the visits that I've made and the conversations that I've had, that clients are becoming more decisive in understanding what they wanted and the pause that seemed to exist, if you will, over the nine-month period of time over six to 12 months is going away some.

From a vertical perspective, our partnership with the Dell organization is helping dramatically particularly, for example, in state and local government where in many instances those sales cycles are being shortened as we leverage our relationships as an overall organization there.

Great, thank you.

Fatima Boolani, UBS.

Hi, good morning.

I apologize for that.

Maybe a question for Wayne.

Wayne, around the time of the IPO you had discussed some metrics around lifetime customer value and some of the repeat purchasing patterns that you've seen within your base that have been pretty loyal.

Can you just give us an update on how maybe your top 25 and top 50 customers are spending and what multiple they are now spending at?

And maybe how that diverges as you move out of the enterprise realm and into the SMB customer cohort you have?

Hi, Fatima, good morning.

So relative to our top 25 to 50 clients, and that's a pretty broad range for us, we see fairly consistent spending patterns certainly over the last two years since becoming a public Company.

The mix of our top 25 have changed as we brought in some larger client; some of the mid-teens to low 20s clients have fallen out of the top 25.

So as we focus on the enterprise space we are signing up some clients that have fairly large contracts for us.

But the demand for the solutions that we're -- if this is what you are asking -- the demand for the solutions that we have are pretty consistent in our client base.

And a quick follow-up if I may.

I understand Jason is still getting his sea legs and fine-tuning the organization for the rest of the year, but I'm curious if you can comment on any quantifiable impact you've seen as a result of onboarding some of the team's sales capacity.

And maybe in the form of what your lead generation volumes look like, what your pipeline conversions look like or any kind of broad color around those metrics to better understand how the changes are manifesting so far.

That's it for me.

Thank you.

This is Mike, Fatima.

Great question.

From a quality of sales perspective, sort of the third leg that I mentioned earlier, in the improved tools and reporting we're looking at the quality and the consistency of the sales pipeline and actually drilling down on a per seller perspective in the movement through that pipeline.

And then as the movement moves through -- as prospects move through particularly to closure we can see the shorter sales cycle.

So Jason and I have had regular conversations to watch how that is moving.

And in particular in the last I'll say 30 days we are beginning to feel much better about looking at it from a pipeline perspective and quality of sale.

Melissa Gorham, Morgan Stanley.

Thanks for taking my question.

So just based on the commentary of increasing sales investment, it sounds like you feel as though you are capacity constrained.

Is that a fair characterization and you feel like MRR growth would actually be higher if you had more feet on the street?

And then given that, what are you seeing in terms of the productivity levels of your existing sales force?

Are they at full productivity today or is there still room to go to improve the guys that you have today?

So Melissa, the last part of your question was productivity.

The first part again was -- capacity?

If you feel as though you are capacity constrained today significantly and that's the biggest inhibitor to growth.

This is Mike.

Thank you for the question.

On the capacity side of things, what Jason has really done is look to bring in more experienced individuals, more seasoned individuals to complement the ones that we have on staff, those that we are looking to be with us longer-term; to bring in more enterprise sales engineers to join the -- to address the North American enterprise selling opportunity.

We have the right number of people on today to reach the guidance that we've given from an MRR perspective.

But believe that with the new folks in place and continuing to ramp for fiscal 2019 and beyond, the decision was really done based upon our evaluation of the market opportunity and Jason being in the field.

He traveled all around the globe in the last 150 or 120 days and is excited about the opportunity.

And there is no one Company in the space that has 5% market share and we are clearly the one that's grown the fastest.

And our hope is to reignite that into prior-year levels and Jason I think is confident that he can do that as quickly as possible.

From a productivity perspective, we clearly believe that our sales productivity per seller closed per seller can improve and will improve over time.

Okay, thank you.

And just one follow-up related to that.

In terms of thinking about the investments and where they are going to go domestically versus international, it sounds like you are having some momentum internationally and the US is obviously a more mature market for you.

So, as we are thinking about the increased investments in the second half of the year, can you help us understand how you are prioritizing moving more internationally versus investing more here in the US?

From a dollar perspective the US will be the bigger part of the investment just because our presence in APJ and EMEA is smaller.

However, because of the growth opportunities we have and the success that we have had in both markets, we are really -- both markets being EMEA and APJ -- we will continue to invest in those markets, both from an indirect perspective as well as a direct perspective in going to market.

I described earlier the successes we were having in both of those markets and we are really excited about the leadership team that we have in EMEA and the leadership team we have in APJ and the successes that we have had there.

So we will proportionally continue to invest.

Okay, thank you.

Sterling Auty, JPMorgan.

Yes, thanks.

Hi, guys.

So, on the sales and marketing being held as a percentage of revenue, how does that translate into further headcount increases versus non-headcount spend?

Sterling, this is Mike Cote.

In Q1 we had some one-time non-headcount items.

I mentioned the sales training and annual sales meeting in particular.

And then we had some transition of individuals on the sales team.

You should expect us to continue to hire some incremental headcount through the rest of this year as we would ramp up actual dollar amounts in Q2, 3 and 4 to be in the approximate guidance that Wayne has given.

But just to follow on that, can you give a sense, is there a target by the end of the year that you would expect either quota carrying headcount to be up a certain percentage as well as you gave some commentary around the sales engineer headcount as well.

So where are those trending?

You should expect to see quota carrying headcount go up to somewhere in the neighborhood of 195 and sales engineering headcount will go up ratably and we will actually have a higher ratio of sales engineers to sellers than we have historically had in the past, but we've brought on a lot of sales engineers quickly.

Okay, and one quick follow-up.

What was linearity like in the quarter and how did that impact cash flow?

I'm sorry, Sterling, can you repeat that?

Yes, so what was linearity like in the quarter and how did that impact cash flow?

Sterling, this is Rebecca.

So when you say linearity, can you --?

So relative to what I was thinking cash from operations would look like, it looked like accounts receivable actually ended up higher than what I was anticipating.

That typically means a more back-end loaded quarter for maybe some of the new deals that you sign.

I didn't know if that is the case or if there was something else in collections in the quarter that stood out to you.

So let me spend maybe one moment on explaining both AR and deferred revenue and the extra week we had -- and this really relates, Sterling, to Q4.

In Q4, as everyone may recall, we had an extra week, the 53rd week.

For us we bill once a month, and so whether we have an extra week or not we bill once a month, but we had an extra month of cash collections so that reduced AR for the fourth quarter.

Compared to the fourth quarter it looks like AR increased more significantly than it has historically, but in reality it was because of that extra week of collections.

And the same with deferred revenue, we had an extra week of recognizing revenue which reduced DR at the end of the year.

So on a linear basis it looked -- it does look a little unusual, but it was more the impact of the extra week than anything unusual in our billing or cash collection patterns.

Got it.

Thank you.

Jonathan Ho, William Blair & Company.

Hey guys, can you give us a little bit of additional color in terms of what you are seeing on the Red Cloak side?

And maybe the percentage of customers you think can maybe upsell to that product over time?

Good morning, Jonathan, and thank you, this is Mike.

So from a Red Cloak perspective we are very excited about both our progress in the last couple of quarters as well as the sales pipeline, which today is five to six times the revenue that we've closed -- the revenue that we have.

And it works again both in situations where we can apply Red Cloak where clients don't have an endpoint solution or, quite frankly, where they do have an endpoint solution and we use it to help bring in incremental telemetry.

And the real key is it helps detect threats where there is an absence of malware.

So we are excited about where it fits in the market, we are excited about the incremental opportunity and we have got a big pipeline and expect to see continued momentum.

Got it, got it.

And then just in terms of the sales side, can you maybe give us a little bit more color in terms of the lead gen side of things and whether you're seeing enough pipeline of opportunity?

Because I guess from my perspective if you are adding additional quota carriers, it seems like you are not saying that there is a demand issue, but at the same time we are not seeing the MRR potentially increase by the end of the year.

So if you can may be rectify that I would appreciate the additional color.

So, there is a couple of questions in there.

Let me try and answer and -- this is Mike -- and if I have not, come back to me.

On the demand gen side of it, I think what I mentioned was Jason went in and met with our sellers and traveled around meeting with clients and prospects and combing through the sales pipeline.

He was more excited about the opportunities in the market in front of us, which caused us to look to hire incremental more seasoned sales executives particularly here in North America and to see the success that was happening.

So from a market opportunity lead gen/demand gen we are bullish on the opportunities in front of us.

From an execution perspective, Jason has been here, this is his first full quarter, and I think he has been here about five months.

So we are not looking to get too far ahead of our skis on -- and would like to come from Missouri and the show me state to see some things happen as we make incremental quarters go through the year from a success perspective.

But we are clearly monitoring and looking at the consistency and quality of the sales pipeline, the movement through that pipeline.

And there is incremental inspection that's occurring on that as we go through this transition period.

Thank you.

Gur Talpaz, Stifel.

Hi, this is actually [Chris Spiros] on for Gur.

In March you announced a series of enhancements to your Cloud Guardian portfolio.

Can you talk about those enhancements and what demand has been like for that portfolio?

Sure.

So I mentioned a little bit on the -- this is Mike, Chris.

Thank you for the question.

From a cloud perspective I mentioned a little bit in the prepared remarks.

We are basically -- in the Cloud Guardian portfolio we have a solution that effectively puts us in a position where we can ensure that CIOs and CISOs have their security policies in place and in force throughout their organization for anybody that may be using.

In this case AWS was the first release, and we are moving to release that to Azure as well.

And it allows us to do management and monitoring of their cloud security devices.

And we have added to that the recent announcement, which we just came out with as I disclosed in the prepared remarks.

And from a sales pipeline perspective we are excited about the opportunities coming in from both Office 365 and from the other parts of the Cloud Guardian portfolio, in particular the ones around allowing there to become some sort of control.

In many of the instances what ends up happening is the businesses are the ones that adopt cloud and basically through a credit card will get out into the cloud.

And this is allowing the Chief Operating Officer -- Chief Information Security Officer, the Chief Information Officer to gain some sort of control or understanding around what security is there.

It's important I think to understand that SecureWorks has addressed things like this over the last 17 years as we have seen adjustments in the industry and where they are going.

And we feel really excited about our opportunity to provide solutions both for clients that have needs on-prem in a hybrid cloud or if they have moved into the public cloud.

So we see the movement to the cloud to be both a risk and an opportunity, but we are excited about our role and where we play in that.

Great.

One more if I may.

Can you talk about the buying behavior from a vertical standpoint and has GDPR emerged as a demand driver?

This is Mike again.

Chris, thank you.

So from a buying behavior perspective I would say that we are seeing increased demand in incremental verticals, whether it be healthcare, retail, state and local government, manufacturing, the ones I mentioned earlier which were behind clearly over the year's financial services.

So, we are seeing increased opportunities and increase demand across a whole host of verticals.

And I think GDPR playing into that, particularly outside of North America, is clearly a concern coming up in all of our contracts and all of our negotiations and discussions.

We have a very focused effort to ensure that we implement all of the requirements and are compliant in the next 12 months.

And we have got activities within the Company underway across each of the different work streams to make this a success.

By the way, I think it's an increased opportunity for us as we are addressing the market.

Great, thank you.

Gabriela Borges, Goldman Sachs.

Great, good morning.

Thanks for taking the questions.

I was hoping you could contextualize for us a little bit better the 15% increase in quota carrying reps that you saw in 1Q.

Maybe you could just help us understand, how does that compare to the previous fiscal year or fiscal year 2016?

Just trying to get a sense of the magnitude of acceleration.

Thank you.

So Gabriela, this is Mike Cote, we can get back to you with the actual numbers.

So this is rough percentages or rough estimates because I don't have them in front of me.

But I would tell you that that is the largest increase we've had in a while through most of -- if I looked at that compared to 2016 or 2015 our increases would have probably been probably single-digits, maybe even in some cases flat.

That's very helpful.

And as a follow-up if I could, great to see the maintaining of the MRR guidance exiting the year.

Maybe, Mike, you could just talk a little bit about whether your assumptions that go into that number -- whether if at all they have changed.

You mentioned a little bit on the shorter sales cycles created some changes in 1Q as well with the sales force structure.

How are you getting to that MRR number and has the visibility or confidence in achieving that changed at all?

I would say that -- and thanks again for the question.

The confidence or visibility to that number, since we are one quarter through the year, is clearly better than it was because of the passage of time and the results and Jason getting his feet on the ground and the increased number of quota carriers and the increased number of sales engineers.

I think there are opportunities for us as the sales organization continues to mature and we'd like to -- we are in the early innings of this process.

I went through the talent coverage and quality of sale focus.

All of those are really items that have taken action and moved steps in the last 90, if you will, to maybe 120 or 110 days.

So, as that continues to mature and accelerate quickly we will feel better about -- hope to feel better about where we are heading and where we are going.

But we are confident in our ability for the reiteration that Wayne gave on the MRR guidance at the end of the year.

Great, thank you very much.

Gabriela, this is Wayne.

Maybe to add some qualitative to Mike's comments.

If you think about what drives new sales and therefore MRR, it's the number of quota carriers.

We've talked about that.

It's the tenure of those quota carriers; new ones obviously take time to ramp.

We've got some seasoned quota carriers.

It's the productivity; they are at levels now that we believe will get us the MRR and then the objective is to increase productivity over time.

It's the close cycles and it's the pipeline.

So we take all those factors into consideration and that's when we reaffirm the guidance.

We feel good about the guidance.

And Wayne, if you could just remind us the typical time that you would expect from when a sales rep joins to when they get up to full productivity?

It varies between SMB and enterprise, but generally six to nine months on the enterprise side to full quota.

That's helpful.

Thank you very much.

Saket Kalia, Barclays.

Hi, guys, thanks for taking my questions here.

One question is on the sales and marketing but want to shift gears just a little bit and talk a little bit about competition.

Mike, can you talk to us a little bit about whether competitive rates have changed at all?

And specifically, can you just talk about how that maybe compares versus maybe some of your carrier-based competitors versus other security companies that are maybe getting a little bit more serious about the MSSP market?

So, let me just make sure I understand your question.

You are talking about our compensation to our individuals?

No, no, no, sorry.

Competition.

Competition.

That's right.

So competition versus the Verizon's and AT&T's of the world versus competition of the FireEye's of the world, to get specific, that are maybe getting more serious about this market.

Okay, great.

Thanks for the clarification.

So I think as the markets continue to mature what's clearly happening from what we've seen is that, for the carriers in particular, the types of services that they are providing, which is basically in most cases management of devices -- I think the value around that is going down and I think there's price pressure in that area as clients are not necessarily seeing it as what's the most valuable to them.

So, I think we are probably seeing decreased competition or not that there was a lot in that area unless you went back a few years from Verizon, if you will.

So we just don't see them in a lot of competitive bids.

Now my sense is in their ITO contracts they are probably throwing security in there, although more and more we are seeing clients pull security out to look for that from a different perspective because they understand it is not the same as what falls in the general ITO contract.

We've not seen FireEye competitively in any of the deals that we've gone after, at least none that I am aware of.

From the security -- specific competitors in this space, I would tell you that we are probably seeing at the enterprise space IBM more than anyone in particular with some buzz about the Watson commercials that they have been doing.

And in small- to medium-size business place it's typically local people that have got local small organizations that have relationships.

Understood.

And then for my follow-up, maybe just talk about competition in a different light.

What do you hear from clients about their willingness to do security in house versus outsourcing it to an MSS like yourself?

So that's a great question and I think there is an increased discussion from clients of a desire to potentially look to do things in-house or to understand what part of the security spectrum they should take responsibility of.

I think for a long period of time -- as this industry has matured, for a long period of time people lived in the fear, uncertainty and doubt world and just tried to throw money at it.

And I think now there's become more of an instance of -- now large enterprises and particularly in the financial services space have been here for years.

But I think the rest of the verticals and the rest of the clients or prospects from an SMB to enterprise space are beginning to look and say we need to own part of this responsibility in some way, shape or form and are gaining in their knowledge and understanding of it.

So there becomes a bigger question around that.

Clearly our value proposition around the visibility that we have with 4,400 clients in 61 countries allows us see things quicker than anybody else can.

And our ability to work across verticals in a vendor agnostic manner from the SMB to large enterprises and show the value that we have in the power of the CTP is what we need to be selling.

Understood.

Thanks very much, guys.

I think that was the final question.

We want to say thank you to everyone for listening on today's call.

And if you have any further questions please reach out to me; this is Rebecca Gardy.

Thanks, everyone.

Thank you.

Have a great day.

This concludes today's conference call.

You may disconnect at this time.