Form 10-Q - Quarterly report [Sections 13 or 15(d)]

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


(Mark One)
☑						QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended November 3, 2023


or
☐						TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

Commission File Number: 001-37748

SecureWorks Corp.

(Exact name of registrant as specified in its charter)

Delaware

27-0463349

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer Identification No.)

One Concourse Parkway NE

Suite 500

Atlanta,

Georgia

30328

(Address of principal executive offices)

(Zip Code)

(Registrant’s telephone number, including area code): (404) 327-6339

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Class A Common Stock,	SCWX	The Nasdaq Stock Market LLC
par value $0.01 per share		(Nasdaq Global Select Market)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☐

Accelerated filer

☑

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

As of December 5, 2023, there were 86,329,480 shares of the registrant's common stock outstanding, consisting of 16,329,480 outstanding shares of Class A common stock and 70,000,000 outstanding shares of Class B common stock.

TABLE OF CONTENTS

ITEM

PAGE

Part I.

FINANCIAL INFORMATION

Item 1.

Financial Statements (unaudited)

Condensed Consolidated Statements of Financial Position as of November 3 , 2023 and February 3, 2023 (unaudited)

Condensed Consolidated Statements of Operations for the three and nine months ended November 3 , 2023 and October 28 , 2022 (unaudited)

Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended November 3 , 2023 and October 28 , 2022 (unaudited)

Condensed Consolidated Statements of Cash Flows for the nine months ended November 3 , 2023 and October 28 , 2022 (unaudited)

Condensed Consolidated Statement of Stockholders' Equity for the three and nine months ended November 3 , 2023 and October 28 , 2022 (unaudited)

Notes to Condensed Consolidated Financial Statements (unaudited)

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Item 4.

Controls and Procedures

Except where the content otherwise requires or where otherwise indicated, all references in this report to "Secureworks," "we," "us," "our" and "our Company" to refer to SecureWorks Corp. and our subsidiaries on a consolidated basis.

Part I. Financial Information

Item 1. Financial Statements

SECUREWORKS CORP.

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (Unaudited)

(in thousands, except for per share data)


	November 3, 2023		February 3, 2023

ASSETS
Current assets:
Cash and cash equivalents	$	58,105	$	143,517
Accounts receivable, net of allowances of $2,017 and $2,402, respectively	55,914		72,627
Inventories, net	759		620
Other current assets	12,865		17,526
Total current assets	127,643		234,290
Property and equipment, net	2,626		4,632
Operating lease right-of-use assets, net	5,262		9,256
Goodwill	425,241		425,519
Intangible assets, net	86,942		106,208
Other non-current assets	72,236		60,965
Total assets	$	719,950	$	840,870

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	11,675	$	18,847
Accrued and other current liabilities	60,890		81,566
Short-term deferred revenue	126,198		145,170

Total current liabilities	198,763		245,583
Long-term deferred revenue	6,988		11,162
Operating lease liabilities, non-current	8,800		12,141
Other non-current liabilities	7,662		14,023
Total liabilities	222,213		282,909
Commitments and contingencies (Note 6)
Stockholders' equity:
Preferred stock - $0.01 par value: 200,000 shares authorized; — shares issued	—		—
Common stock - Class A of $0.01 par value: 2,500,000 shares authorized; 16,329 and 14,749 shares issued and outstanding, at November 3, 2023 and February 3, 2023, respectively.	163		147
Common stock - Class B of $0.01 par value: 500,000 shares authorized; 70,000 shares issued and outstanding	700		700
Additional paid in capital	986,257		967,367
Accumulated deficit	(461,871)		(384,121)
Accumulated other comprehensive loss	(7,616)		(6,237)
Treasury stock, at cost - 1,257 shares	(19,896)		(19,896)
Total stockholders' equity	497,737		557,961
Total liabilities and stockholders' equity	$	719,950	$	840,870

The accompanying notes are an integral part of these condensed consolidated financial statements.

SECUREWORKS CORP.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(in thousands, except per share data)


	Three Months Ended				Nine Months Ended
	November 3, 2023		October 28, 2022		November 3, 2023		October 28, 2022

Net revenue:
Subscription	$	75,212	$	87,191	$	229,296	$	271,926
Professional services	14,152		23,751		47,429		76,213
Total net revenue	89,364		110,942		276,725		348,139
Cost of revenue:
Subscription	25,986		32,136		87,089		99,022
Professional services	8,629		13,444		30,369		45,572
Total cost of revenue	34,615		45,580		117,458		144,594
Gross profit	54,749		65,362		159,267		203,545
Operating expenses:
Research and development	26,358		35,263		85,766		102,232
Sales and marketing	27,079		41,380		92,842		121,565
General and administrative	20,565		24,725		63,194		74,359
Reorganization and other related charges	—		—		14,232		—
Total operating expenses	74,002		101,368		256,034		298,156
Operating loss	(19,253)		(36,006)		(96,767)		(94,611)
Interest and other (expense) income, net	684		(661)		(1,698)		(1,227)
Loss before income taxes	(18,569)		(36,667)		(98,465)		(95,838)
Income tax benefit	(4,148)		(8,521)		(20,715)		(21,375)
Net loss	$	(14,421)	$	(28,146)	$	(77,750)	$	(74,463)

Loss per common share (basic and diluted)	$	(0.17)	$	(0.33)	$	(0.90)	$	(0.88)
Weighted-average common shares outstanding (basic and diluted)	86,278		84,584		85,943		84,277

The accompanying notes are an integral part of these condensed consolidated financial statements.

SECUREWORKS CORP.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (Unaudited)

(in thousands)


	Three Months Ended				Nine Months Ended
	November 3, 2023		October 28, 2022		November 3, 2023		October 28, 2022
Net loss	$	(14,421)	$	(28,146)	$	(77,750)	$	(74,463)
Foreign currency translation adjustments, net of tax	(2,038)		(2,717)		(1,379)		(6,715)
Comprehensive loss	$	(16,459)	$	(30,863)	$	(79,129)	$	(81,178)

The accompanying notes are an integral part of these condensed consolidated financial statements.

SECUREWORKS CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(in thousands)


	Nine Months Ended
	November 3, 2023		October 28, 2022
Cash flows from operating activities:
Net loss	$	(77,750)	$	(74,463)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	26,028		27,728
Amortization of right of use asset	1,686		2,853
Reorganization and other related charges	3,272		—
Amortization of costs capitalized to obtain revenue contracts	12,964		13,319
Amortization of costs capitalized to fulfill revenue contracts	2,562		3,635

Stock-based compensation expense	24,852		27,504
Effects of exchange rate changes on monetary assets and liabilities denominated in foreign currencies	1,575		1,386
Income tax benefit	(20,715)		(21,375)

Provision for credit losses	232		(552)
Changes in assets and liabilities:
Accounts receivable	15,951		21,584
Net transactions with Dell	2,028		(3,741)
Inventories	(139)		(178)
Other assets	(1,237)		(9,709)
Accounts payable	(7,462)		4,550
Deferred revenue	(24,011)		(33,171)
Operating leases, net	(4,031)		(4,086)
Accrued and other liabilities	(30,299)		(23,462)
Net cash used in operating activities	(74,494)		(68,178)
Cash flows from investing activities:
Capital expenditures	(865)		(1,609)
Software development costs	(4,106)		(3,352)

Net cash used in investing activities	(4,971)		(4,961)
Cash flows from financing activities:

Taxes paid on vested restricted shares	(5,947)		(8,484)



Net cash used in financing activities	(5,947)		(8,484)
Net decrease in cash and cash equivalents	(85,412)		(81,623)
Cash and cash equivalents at beginning of the period	143,517		220,655
Cash and cash equivalents at end of the period	$	58,105	$	139,032

The accompanying notes are an integral part of these condensed consolidated financial statements.

SECUREWORKS CORP.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited)

(in thousands, except per share data)


Three Months Ended November 3, 2023	Common Stock - Class A			Common Stock - Class B
	Outstanding Shares	Amount		Outstanding Shares	Amount		Additional Paid in Capital		Accumulated Deficit		Accumulated Other Comprehensive (Loss) Income		Treasury Stock		Total Stockholders' Equity
Balances, August 4, 2023	16,235	$	162	70,000	$	700	$	976,532	$	(447,450)	$	(5,578)	$	(19,896)	$	504,470
Net loss	—	—		—	—		—		(14,421)		—		—		(14,421)
Other comprehensive loss	—	—		—	—		—		—		(2,038)		—		(2,038)
Vesting of restricted stock units	142	1		—	—		(1)		—		—		—		—

Common stock withheld as payment for withholding taxes upon the vesting of restricted shares	(48)	—		—	—		(236)		—		—		—		(236)
Stock-based compensation	—	—		—	—		9,962		—		—		—		9,962

Balances, November 3, 2023	16,329	$	163	70,000	$	700	$	986,257	$	(461,871)	$	(7,616)	$	(19,896)	$	497,737


Nine Months Ended November 3, 2023	Common Stock - Class A			Common Stock - Class B
	Outstanding Shares	Amount		Outstanding Shares	Amount		Additional Paid in Capital		Accumulated Deficit		Accumulated Other Comprehensive (Loss) Income		Treasury Stock		Total Stockholders' Equity
Balances, February 3, 2023	14,749	$	147	70,000	$	700	$	967,367	$	(384,121)	$	(6,237)	$	(19,896)	$	557,961
Net loss	—	—		—	—		—		(77,750)		—		—		(77,750)
Other comprehensive loss	—	—		—	—		—		—		(1,379)		—		(1,379)
Vesting of restricted stock units	2,355	24		—	—		(24)		—		—		—		—

Common stock withheld as payment for withholding taxes upon the vesting of restricted shares	(775)	(8)		—	—		(5,938)		—		—		—		(5,947)
Stock-based compensation	—	—		—	—		24,852		—		—		—		24,852

Balances, November 3, 2023	16,329	$	163	70,000	$	700	$	986,257	$	(461,871)	$	(7,616)	$	(19,896)	$	497,737

The accompanying notes are an integral part of these condensed consolidated financial statements.

SECUREWORKS CORP.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited)

(in thousands, except per share data)


Three Months Ended October 28, 2022	Common Stock - Class A			Common Stock - Class B
	Outstanding Shares	Amount		Outstanding Shares	Amount		Additional Paid in Capital		Accumulated Deficit		Accumulated Other Comprehensive (Loss) Income		Treasury Stock		Total Stockholders' Equity
Balances, July 29, 2022	14,970	$	150	70,000	$	700	$	949,248	$	(315,939)	$	(6,670)	$	(19,896)	$	607,593
Net loss	—	—		—	—		—		(28,146)		—		—		(28,146)
Other comprehensive loss	—	—		—	—		—		—		(2,717)		—		(2,717)
Vesting of restricted stock units	168	2		—	—		(2)		—		—		—		—

Grant and forfeitures of restricted stock awards	(423)	(4)		—	—		4		—		—		—		—
Common stock withheld as payment for withholding taxes upon the vesting of restricted shares	(65)	(1)		—	—		(396)		—		—		—		(397)
Stock-based compensation	—	—		—	—		9,566		—		—		—		9,566

Balances, October 28, 2022	14,650	$	147	70,000	$	700	$	958,420	$	(344,085)	$	(9,387)	$	(19,896)	$	585,899


Nine Months Ended October 28, 2022	Common Stock - Class A			Common Stock - Class B
	Outstanding Shares	Amount		Outstanding Shares	Amount		Additional Paid in Capital		Accumulated Deficit		Accumulated Other Comprehensive (Loss) Income		Treasury Stock		Total Stockholders' Equity
Balances, January 28, 2022	14,282	$	143	70,000	$	700	$	939,404	$	(269,622)	$	(2,672)	$	(19,896)	$	648,057
Net loss	—	—		—	—		—		(74,463)		—		—		(74,463)
Other comprehensive loss	—	—		—	—		—		—		(6,715)		—		(6,715)
Vesting of restricted stock units	1,549	15		—	—		(15)		—		—		—		—

Grant and forfeitures of restricted stock awards	(423)	(4)		—	—		4		—		—		—		—
Common stock withheld as payment for withholding taxes upon the vesting of restricted shares	(758)	(7)		—	—		(8,477)		—		—		—		(8,484)
Stock-based compensation	—	—		—	—		27,504		—		—		—		27,504

Balances, October 28, 2022	14,650	$	147	70,000	$	700	$	958,420	$	(344,085)	$	(9,387)	$	(19,896)	$	585,899

The accompanying notes are an integral part of these condensed consolidated financial statements.

SECUREWORKS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1 — DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION

Description of the Business

SecureWorks Corp. is a leading global cybersecurity provider of technology-driven solutions singularly focused on protecting the Company’s customers. Except where the context otherwise requires or where otherwise indicated, all references in this report to “Secureworks,” “we,” “us,” “our” and “Company” refer to SecureWorks Corp. and our subsidiaries on a consolidated basis. References to “Dell” refer to Dell Inc. and its subsidiaries on a consolidated basis.

The Company has one primary business activity, which is to provide customers with technology-driven cybersecurity solutions. The Company’s chief operating decision-maker, who is the Chief Executive Officer, makes operating decisions, assesses performance and allocates resources on a consolidated basis. There are no segment managers who are held accountable for operations and operating results below the consolidated unit level. Accordingly, Secureworks operates its business as a single reportable segment.

On April 27, 2016, the Company completed its initial public offering, or IPO. Upon the closing of the IPO, Dell Technologies Inc., or Dell Technologies, owned, indirectly through Dell and its subsidiaries, all shares of the Company’s outstanding Class B common stock, which as of November 3, 2023, represented approximately 81.1% of the Company's total outstanding shares of common stock and approximately 97.7% of the combined voting power of both classes of the Company's outstanding common stock.

Basis of Presentation and Consolidation

The Company’s condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. The preparation of financial statements in accordance with GAAP requires management to make assumptions and estimations that affect the amounts reported in the Company’s financial statements and notes. The inputs into certain of the Company’s assumptions and estimations considered the economic implications of the Ukraine/Russia conflict and inflation concerns on the Company’s critical and significant accounting estimates. The condensed consolidated financial statements include assets, liabilities, revenue and expenses of all majority-owned subsidiaries. Intercompany transactions and balances are eliminated in consolidation.

For the periods presented, Dell has provided various corporate services to the Company in the ordinary course of business, including finance, tax, human resources, legal, insurance, IT, procurement and facilities-related services. The cost of these services is charged in accordance with a shared services agreement that went into effect on August 1, 2015. For more information regarding related party transactions, see “Note 10—Related Party Transactions.”

During the periods presented in the financial statements, Secureworks did not file separate federal tax returns, as the Company is 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 this 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. See “Note 9—Income and Other Taxes” for more information.

Fiscal Year

The Company’s fiscal year is the 52- or 53-week period ending on the Friday closest to January 31. The Company refers to the fiscal year ending February 2, 2024 and the fiscal year ended February 3, 2023 as fiscal 2024 and fiscal 2023, respectively. Fiscal 2024 consists of 52 weeks and fiscal 2023 consisted of 53 weeks. In fiscal 2024, each quarter has 13 weeks. In fiscal 2023, each quarter consisted of 13 weeks except for the fourth quarter, which consisted of 14 weeks. Unless otherwise indicated, all changes identified for the current-period results represent comparisons to results for the prior corresponding fiscal periods.

SECUREWORKS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Estimates are revised as additional information becomes available. In the Condensed Consolidated Statements of Operations, estimates are used when accounting for revenue arrangements, determining the cost of revenue, allocating cost, estimating the impact of contingencies, and evaluating long-lived asset impairment. In the Condensed Consolidated Statements of Financial Position, estimates are used in determining the valuation and recoverability of assets, such as accounts receivables, inventories, fixed assets, capitalized software, goodwill and other identifiable intangible assets. Estimates are also used in determining the reported amounts of liabilities, such as taxes payable and the impact of contingencies. All estimates also impact the Condensed Consolidated Statements of Operations. Actual results could differ from these estimates due to risks and uncertainties, including uncertainty in the current economic environment due to the Ukraine/Russia conflict and impacts of inflation. The Company considered the potential impact of the current economic and geopolitical uncertainty on its estimates and assumptions and determined there was not a material impact to the Company’s condensed consolidated financial statements as of and for the three and nine months ended November 3, 2023. As the current economic environment continues to develop, many of the Company’s estimates could require increased judgment and be subject to a higher degree of variability and volatility. As a result, the Company’s estimates may change materially in future periods.

Liquidity

In recent periods, the Company has incurred losses from operations and operating cash outflows and, as of the Balance Sheet date, the Company has reported a deficit in working capital.

During the second quarter of fiscal 2024, the Company completed reorganization actions which are expected to result in significant cost savings as the Company completes a transition to higher value, higher margin Taegis solutions. These efforts are expected to optimize the organizational structure and increase scalability to better position the Company for continued growth with improving operating margins over time. In the event that the Company’s financial results are below our expectations as a result of these or other factors, the Company may need to take additional actions to preserve existing cash reserves.

As of November 3, 2023, the Company held $58.1 million of cash and cash equivalents. There were no amounts drawn on the $50 million Revolving Credit Facility with Dell as of November 3, 2023. We believe that our cash and cash equivalents and access to the Revolving Credit Facility will provide us with sufficient liquidity to meet our material cash requirements, including to fund our business and meet our obligations for at least 12 months from the filing date of this report.

Recently Adopted Accounting Pronouncements

None.

Summary of Significant Accounting Policies

There have been no significant changes to the Company’s significant accounting policies as of and for the three and nine months ended November 3, 2023, as compared to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the fiscal year ended February 3, 2023.

SECUREWORKS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 2 — LOSS PER SHARE

Loss per share is calculated by dividing net loss for the periods presented by the respective weighted-average number of common shares outstanding, and excludes any dilutive effects of share-based awards that may be anti-dilutive. Diluted net loss per common share is computed by giving effect to all potentially dilutive common shares, including common stock issuable upon the exercise of stock options and restricted stock units. The Company applies the two-class method to calculate earnings per share. Because the Class A common stock and the Class B common stock share the same rights in dividends and earnings, earnings per share (basic and diluted) are the same for both classes of common stock. Since losses were incurred in all periods presented, all potential common shares were determined to be anti-dilutive.

The following table sets forth the computation of loss per common share (in thousands, except per share amounts):


	Three Months Ended				Nine Months Ended
	November 3, 2023		October 28, 2022		November 3, 2023		October 28, 2022
Numerator:
Net loss	$	(14,421)	$	(28,146)	$	(77,750)	$	(74,463)
Denominator:
Weighted-average number of shares outstanding:
Basic and Diluted	86,278		84,584		85,943		84,277

Loss per common share:
Basic and Diluted	$	(0.17)	$	(0.33)	$	(0.90)	$	(0.88)

Weighted-average anti-dilutive share-based awards	8,845		6,099		7,693		6,020

SECUREWORKS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 3 — CONTRACT BALANCES AND CONTRACT COSTS

The Company derives revenue primarily from subscriptions and professional services. Subscription revenue is derived from (i) Taegis software-as-a-service, or SaaS, security platform and supplemental Managed Detection and Response, or MDR, services, and (ii) Managed Security Services. Taegis’ core offerings are the security platform, Taegis Extended Detection and Response, or XDR, and the MDR service, ManagedXDR. Managed Security Services are subscription-based arrangements that typically include a suite of security services utilizing the legacy platform. Professional services typically include incident response, adversarial testing services and other security consulting arrangements.

The following table presents revenue by service type (in thousands):


	Three Months Ended				Nine Months Ended
	November 3, 2023		October 28, 2022		November 3, 2023		October 28, 2022
Net revenue:
Taegis Subscription Solutions	$	67,346	$	47,888	$	196,368	$	127,913
Managed Security Services	7,866		39,303		32,928		144,013
Total Subscription revenue	$	75,212	$	87,191	$	229,296	$	271,926
Professional Services	14,152		23,751		47,429		76,213
Total net revenue	$	89,364	$	110,942	$	276,725	$	348,139

Promises to provide the Company’s subscription-based SaaS solutions are accounted for as separate performance obligations and managed security services are accounted for as a single performance obligation. Our subscription-based solutions have an average contract term of approximately two years as of November 3, 2023. Performance obligations related to the Company’s professional services contracts are separate obligations associated with each service. Although the Company has multi-year customer relationships for various professional service solutions, the arrangement is typically structured as a separate performance obligation over the contract period and recognized over a duration of less than one year.

The deferred revenue balance does not represent the total contract value of annual or multi-year, non-cancelable subscription agreements. The Company invoices its customers based on a variety of billing schedules. During the nine months ended November 3, 2023, on average, approximately 65% of the Company’s recurring revenue was billed annually in advance and approximately 35% was billed on either a monthly or quarterly basis in advance. In addition, many of the Company’s professional services engagements are billed in advance of service commencement. The deferred revenue balance is influenced by several factors, including seasonality, the compounding effects of renewals, billing frequency and invoice timing.

Changes to the Company’s deferred revenue during the nine months ended November 3, 2023 and October 28, 2022 are as follows (in thousands):


	As of February 3, 2023		Upfront payments received and billings during the nine months ended November 3, 2023		Revenue recognized during the nine months ended November 3, 2023		As of November 3, 2023
Deferred revenue	$	156,332	$	150,135	$	(173,281)	$	133,186


	As of January 28, 2022		Upfront payments received and billings during the nine months ended October 28, 2022		Revenue recognized during the nine months ended October 28, 2022		As of October 28, 2022
Deferred revenue	$	176,068	$	175,301	$	(206,853)	$	144,516

SECUREWORKS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Remaining Performance Obligation

The remaining performance obligation represents the transaction price allocated to contracted revenue that has not yet been recognized, which includes deferred revenue and non-cancellable contracts that are expected to be invoiced and recognized as revenue in future periods. The remaining performance obligation consists of two elements: (i) the value of remaining services to be provided through the contract term for customers whose services have been activated, or active; and (ii) the value of subscription-based solutions contracted with customers that have not yet been installed, or backlog. Backlog is not recorded in revenue, deferred revenue or elsewhere in the consolidated financial statements until the Company establishes a contractual right to invoice, at which point backlog is recorded as revenue or deferred revenue, as appropriate. The Company applies the practical expedient in Accounting Standards Codification paragraph 606-10-50-14(a) and does not disclose information about remaining performance obligations that are part of a contract that has an original expected duration of one year or less.

The Company expects that the amount of backlog relative to the total value of its contracts will change from year to year due to several factors, including the amount invoiced at the beginning of the contract term, the timing and duration of the Company’s customer agreements, varying invoicing cycles of agreements and changes in customer financial circumstances. Accordingly, fluctuations in backlog are not always a reliable indicator of future revenues.

As of November 3, 2023, the Company expects to recognize remaining performance obligations as follows (in thousands):


	Total		Expected to be recognized in the next 12 months		Expected to be recognized in 12-24 months		Expected to be recognized in 24-36 months		Expected to be recognized thereafter
Performance obligation - active	$	210,557	$	129,595	$	66,976	$	13,837	$	149
Performance obligation - backlog	2,901		1,003		1,002		896		—
Total	$	213,458	$	130,598	$	67,978	$	14,733	$	149

Deferred Commissions and Fulfillment Costs

The Company capitalizes a significant portion of its commission expense and related fringe benefits earned by its sales personnel. Additionally, the Company capitalizes certain costs to install and activate hardware and software used in its managed security services, primarily related to a portion of the compensation for the personnel who perform the installation activities. These deferred costs are amortized on a systematic basis that is consistent with the transfer to the customer of the goods or services to which the assets relate.

Changes in the balance of total deferred commission and total deferred fulfillment costs during the nine months ended November 3, 2023 and October 28, 2022 are as follows (in thousands):


	As of February 3, 2023		Amount capitalized		Amount recognized		As of November 3, 2023
Deferred commissions	$	49,565	$	6,155	$	(12,964)	$	42,756
Deferred fulfillment costs	3,232		—		(2,562)		670


	As of January 28, 2022		Amount capitalized		Amount recognized		As of October 28, 2022
Deferred commissions	$	53,978	$	8,319	$	(13,319)	$	48,978
Deferred fulfillment costs	7,597		241		(3,635)		4,203

During the fourth quarter of fiscal 2022, Secureworks announced the end-of-sale for a number of managed security service offerings effective the first day of fiscal 2023. Accordingly, the Company no longer has new deferred fulfillment costs that meet the criteria for capitalization in accordance with ASC 340. The Company evaluated these deferred costs as part of a broader asset group for impairment and potential changes to their estimated lives. The Company did not record any impairment losses on the deferred commissions or deferred fulfillment costs and did not identify any material changes to the expense recognition pattern during the nine months ended November 3, 2023 or October 28, 2022.

SECUREWORKS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 4 — GOODWILL AND INTANGIBLE ASSETS

Goodwill relates to the acquisition of Dell by Dell Technologies and represents the excess of the purchase price attributable to Secureworks over the fair value of the assets acquired and liabilities assumed, as well as subsequent business combinations completed by the Company. Goodwill decreased $0.3 million due to foreign currency translation for the nine months ended November 3, 2023, compared to February 3, 2023. Goodwill totaled $425.2 million and $425.5 million as of November 3, 2023 and February 3, 2023, respectively.

Goodwill and indefinite-lived intangible assets are tested for impairment on an annual basis during the third fiscal quarter of each fiscal year, or earlier if an indicator of impairment occurs. The Company completed the most recent annual impairment test in the third quarter of fiscal 2024 by performing a "Step 0" qualitative assessment of goodwill at the reporting unit level, as well as the Company's indefinite-lived trade name asset at the individual asset level. The Company has one reporting unit. The qualitative assessment includes the Company's consideration of the relevant events and circumstances that would affect the Company's single reporting unit, including macroeconomic, industry and market conditions, the Company's overall financial performance including changes to its cost structure during calendar 2023 and trends in the market price of the Company's Class A common stock. After assessing the totality of these events and circumstances, the Company determined it was not more-likely-than not that the fair value of the reporting unit and indefinite-lived intangible asset is less than their respective carrying values. No triggering events have transpired since the performance of the qualitative assessment that would indicate a potential impairment occurred during the period through November 3, 2023.

The Company did not recognize any impairment charges on goodwill or trade name asset during the period through November 3, 2023.

Intangible Assets

The Company’s intangible assets as of November 3, 2023 and February 3, 2023 were as follows:


	November 3, 2023						February 3, 2023
	Gross		Accumulated Amortization		Net		Gross		Accumulated Amortization		Net

	(in thousands)
Customer relationships	$	189,518	$	(144,101)	$	45,417	$	189,518	$	(133,530)	$	55,988
Acquired Technology	141,784		(138,783)		3,001		141,784		(128,612)		13,172
Developed Technology	15,933		(7,527)		8,406		11,827		(4,897)		6,930
Finite-lived intangible assets	347,235		(290,411)		56,824		343,129		(267,039)		76,090
Trade name	30,118		—		30,118		30,118		—		30,118
Total intangible assets	$	377,353	$	(290,411)	$	86,942	$	373,247	$	(267,039)	$	106,208

Amortization expense related to finite-lived intangible assets was approximately $7.3 million and $23.4 million for the three and nine months ended November 3, 2023, respectively, and $7.9 million and $23.3 million for the three and nine months ended October 28, 2022, respectively. Amortization expense is included within cost of revenue and general and administrative expense in the Condensed Consolidated Statements of Operations. There were no impairment charges related to intangible assets during the three and nine months ended November 3, 2023 or October 28, 2022.

SECUREWORKS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 5 — DEBT

Revolving Credit Facility

SecureWorks, Inc., a wholly-owned subsidiary of SecureWorks Corp., is a party to a revolving credit agreement with a wholly-owned subsidiary of Dell under which the Company obtained a $50 million senior, unsecured revolving credit facility. Effective September 6, 2023, the Company executed an amendment to the revolving credit agreement that was effectuated on March 23, 2023. This amended agreement: (1) increased the maximum principal amount of borrowings outstanding under the revolving credit facility to $50 million, (2) removed the one-time increase of up to an additional $30 million in borrowings upon mutual agreement by lender and borrower, (3) extended the commitment and required repayment date under the revolving credit agreement to March 23, 2026, and (4) modified the rate at which interest accrues on funds drawn against the revolving credit agreement to SOFR plus 2.00%.

Amounts under the facility may be borrowed, repaid and reborrowed from time to time during the term of the facility. The proceeds from loans made under the facility may be used for general corporate purposes. 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. There was no outstanding balance under the credit facility, and the Company was in compliance with all covenants as of November 3, 2023 or February 3, 2023. Additionally, there were no amounts borrowed under the credit facility during the three and nine months ended November 3, 2023.

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 SecureWorks Corp. or following a transaction in which SecureWorks, Inc. ceases to be a direct or indirect wholly-owned subsidiary of SecureWorks Corp. The facility is not guaranteed by SecureWorks Corp. or its subsidiaries.

SECUREWORKS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 6 — COMMITMENTS AND CONTINGENCIES

Legal Contingencies— From time to time, the Company is involved in claims and legal proceedings that arise in the ordinary course of business. The Company accrues a liability when it believes that it is both probable that a liability has been incurred and that it can reasonably estimate the amount of the loss. The Company reviews the status of such matters at least quarterly and adjusts its liabilities as necessary to reflect ongoing negotiations, settlements, rulings, advice of legal counsel and other relevant information. Whether the outcome of any claim, suit, assessment, investigation or legal proceeding, individually or collectively, could have a material adverse effect on the Company’s business, financial condition, results of operations or cash flows will depend on a number of factors, including the nature, timing and amount of any associated expenses, amounts paid in settlement, damages or other remedies or consequences. To the extent new information is obtained and the Company’s views on the probable outcomes of claims, suits, assessments, investigations or legal proceedings change, changes in accrued liabilities would be recorded in the period in which such a determination is made. As of November 3, 2023, the Company does not believe that there were any such matters that, individually or in the aggregate, would have a material adverse effect on its business, financial condition, results of operations or cash flows.

Customer-based Taxation Contingencies—Various government entities, or taxing authorities, require the Company to bill its customers for the taxes they owe based on the services they purchase from the Company. The application of the rules of each taxing authority concerning which services are subject to each tax and how those services should be taxed involves the application of judgment. Taxing authorities periodically perform audits to verify compliance and include all periods that remain open under applicable statutes, which generally range from three to four years. These audits could result in significant assessments of past taxes, fines and interest if the Company were found to be non-compliant. During the course of an audit, a taxing authority may question the Company’s application of its rules in a manner that, if the Company were not successful in substantiating its position, could result in a significant financial impact to the Company. In the course of preparing its financial statements and disclosures, the Company considers whether information exists that would warrant disclosure or an accrual with respect to such a contingency.

As of November 3, 2023, the Company is under audit with various state taxing authorities in which rulings related to the taxability of certain of its services are pending; the Company has recorded an estimated liability of $8.9 million related to such matters. The Company expects to continue to appeal certain of these rulings, but should the Company not prevail, it could be subject to obligations to pay additional taxes together with associated penalties and interest for the audited tax period, as well as additional taxes for periods subsequent to the tax audit period, including penalties and interest. While Dell does provide an indemnification for certain state tax issues for tax periods prior to August 1, 2015, such indemnification would not cover a material portion of the current estimated liability.

Indemnifications—In the ordinary course of business, the Company enters into contractual arrangements under which it agrees to indemnify its customers from certain losses incurred by the customer as to third-party claims relating to the services performed on behalf of the Company or for certain losses incurred by the customer as to third-party claims arising from certain events as defined within the particular contract. Such indemnification obligations may not be subject to maximum loss clauses. Historically, payments related to these indemnifications have been immaterial.

Concentrations—The Company sells solutions to customers of all sizes through a combination of partners and its sales organization. During the three and nine months ended November 3, 2023 and October 28, 2022, the Company had no customer that represented 10% or more of its net revenue.

SECUREWORKS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 7 — LEASES

The Company’s leases primarily relate to office facilities that have remaining lease terms of 0.8 years to 3.2 years, inclusive of renewal or termination options that the Company is reasonably certain to exercise.

The components of lease expense were as follows:


	Three Months Ended				Nine Months Ended
	November 3, 2023		October 28, 2022		November 3, 2023		October 28, 2022
	(in thousands)
Operating lease cost	$	1,079	$	1,161	$	3,243	$	3,543
Variable lease costs	98		121		249		326
Short term lease costs	—		40		—		87
Total lease costs	$	1,177	$	1,322	$	3,492	$	3,956
Supplemental cash flow information:
Cash paid for amounts included in the measurement of operating lease liabilities	$	1,352	$	1,419	$	4,013	$	4,575

Weighted-average information associated with the measurement of remaining operating lease obligations is as follows:


	November 3, 2023
Weighted-average remaining lease term	3.0 years
Weighted-average discount rate	5.4	%

The following table summarizes the maturity of the Company’s operating lease liabilities as of November 3, 2023 (in thousands):


Fiscal Years Ending	November 3, 2023
2024	$	1,350
2025	5,095
2026	4,526
2027	4,088
2028	—
Thereafter	—
Total operating lease payments	$	15,059
Less imputed interest	1,072
Total operating lease liabilities	$	13,987

During the second quarter of fiscal 2024, as part of its actions to rebalance investments cross-functionally in alignment with its current strategy and growth opportunities, the Company ceased use of certain corporate office space as a part of its real estate-related cost optimization actions. In consideration of updated facts and circumstances relating to the Company's right-of-use asset that was partially impaired in the fourth quarter of fiscal 2023, the Company reassessed the discounted cash flow methodology used to derive fair value of this asset group. The Company determined the asset values were not recoverable and recorded an impairment loss of $2.9 million to its operating lease right-of-use assets during the second quarter of fiscal 2024.

SECUREWORKS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 8 — STOCK-BASED COMPENSATION AND OTHER LONG-TERM PERFORMANCE INCENTIVES

The SecureWorks Corp. 2016 Long-Term Incentive Plan, or the 2016 Plan, provides for the grant of options, stock appreciation rights, restricted stock, restricted stock units, whether time-based, performance-based or time- and performance-based, deferred stock units, unrestricted stock, dividend equivalent rights, other equity-based awards, and cash bonus awards. Awards may be granted under the 2016 Plan to individuals who are employees, officers, or non-employee directors of the Company or any of its affiliates, consultants and advisors who perform services for the Company or any of its affiliates, and any other individual whose participation in the 2016 Plan is determined to be in the best interests of the Company by the compensation committee of the board of directors.

Under the 2016 Plan, the Company granted 222,185 and 8,276,147 restricted stock units during the three and nine months ended November 3, 2023, respectively, and 200,736 and 4,183,636 restricted stock units during the three and nine months ended October 28, 2022, respectively. The majority of the restricted stock units granted during these periods vest over a three-year period. Approximately 17% of such awards granted during each of the nine months ended November 3, 2023 and October 28, 2022 are subject to performance conditions. The majority of the 7,142,257 restricted stock unit awards made during the three months ended May 5, 2023 were subject to stockholder approval of an amendment to the 2016 Plan to increase the number of shares of Class A common stock issuable under the plan by 7,500,000 shares at the Company’s 2023 annual meeting on June 27, 2023. Such stockholder approval was obtained at the annual meeting, and those awards were deemed granted and outstanding for accounting purposes as of the approval date.

The Company grants long-term cash awards to certain employees under the 2016 Plan. The Company granted zero and $0.1 million of cash awards during the three and nine months ended November 3, 2023, respectively, compared to $0.1 million cash awards granted during the three and nine months ended October 28, 2022. The Company recognized $0.4 million and $1.5 million of related compensation expense for the three and nine months ended November 3, 2023, respectively, and $1.0 million and $3.5 million of related compensation expense for the three and nine months ended October 28, 2022, respectively.

SECUREWORKS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 9 — INCOME AND OTHER TAXES

The Company’s loss before income taxes and income tax benefit (in thousands) and effective income tax rate for the three and nine months ended November 3, 2023 and October 28, 2022 was as follows (in thousands, except percentages):


	Three Months Ended						Nine Months Ended
	November 3, 2023			October 28, 2022			November 3, 2023			October 28, 2022

Loss before income taxes	$	(18,569)		$	(36,667)		$	(98,465)		$	(95,838)
Income tax benefit	$	(4,148)		$	(8,521)		$	(20,715)		$	(21,375)
Effective tax rate	22.3		%	23.2		%	21.0		%	22.3		%

During the periods presented in the accompanying Condensed Consolidated Statements of Financial Position, the Company did not file separate federal tax returns as the Company generally was 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 by the Company when those attributes are utilized by other members of the Dell consolidated group.

Effective for tax years beginning on or after January 1, 2022, the Tax Cuts and Jobs Act of 2017 eliminated the option to deduct research and development, or R&D, expenses in the year incurred and instead requires taxpayers to capitalize R&D expenses, including software development cost, and subsequently amortize such expenses over five years for R&D activities conducted in the United States and over fifteen years for R&D activities conducted outside of the United States.

The Company’s effective tax benefit rate was 22.3% and 21.0% for the three and nine months ended November 3, 2023, respectively, and 23.2% and 22.3% for the three and nine months ended October 28, 2022, respectively. The changes in the Company’s effective income tax rate between the periods was primarily attributable to the impact of certain discrete adjustments related to stock-based compensation expense of approximately $0.2 million and $1.8 million for the three and nine months ended November 3, 2023, respectively, and $0.1 million and $0.7 million for the three and nine months ended October 28, 2022, respectively. The changes related specifically to the impact of the vesting of certain equity awards for which the fair value on the vesting date was lower than the fair value for both the three and nine month periods ended November 3, 2023 and higher than the fair value for both the three and nine month periods ended October 28, 2022 in comparison to the fair value on the dates the equity awards were originally granted. The changes in fair value, which is measured by the price of the Class A common stock as reported on the Nasdaq Global Select Market, resulted in a lower actual tax deduction than the amounts deducted for financial reporting purposes for both the three and nine month periods ended November 3, 2023 and October 28, 2022.

As of each of November 3, 2023 and February 3, 2023, respectively, the Company had $5.8 million of deferred tax assets related to net operating loss carryforwards for state tax returns that are not included with those of other Dell entities. These net operating loss carryforwards began expiring in the fiscal year ended February 3, 2023. Due to the uncertainty surrounding the realization of these net operating loss carryforwards, the Company has provided valuation allowances for the full amount as of November 3, 2023 and February 3, 2023, respectively.

Because the Company is included in the tax filings of other Dell entities, management has determined that it will be able to realize its deferred tax assets. If Dell's ownership percentage were to fall below 80%, the Company would become ineligible for inclusion in the Dell Technologies consolidated tax group. The Company's ability to benefit from its losses and other tax attributes may be impaired resulting from the need to file its own Federal and State tax returns without the ability to offset its losses against the profits from the parent. The Company may be required to record a valuation allowance against its deferred tax assets that are currently recorded based on the tax sharing agreement with Dell. Currently, net deferred tax assets are approximately $21.3 million. If the Company’s tax provision had been prepared using the separate return method, the unaudited pro forma pre-tax loss, tax expense and net loss for the nine months ended November 3, 2023 would have been $(98.5) million, $1.2 million and $(99.7) million, respectively, as a result of the recognition of a valuation allowance that would have been recorded on a significant amount of deferred tax assets as well as certain attributes from the Tax Cuts and Jobs Act of 2017 that would be lost if not utilized by the Dell consolidated group.

Net deferred tax balances are included in other non-current assets and other non-current liabilities in the Condensed Consolidated Statements of Financial Position.

As of November 3, 2023 and February 3, 2023, the Company had a net operating loss receivable from Dell of $7.6 million and $3.5 million, respectively. The Company had $4.7 million and $4.5 million of unrecognized tax benefits as of November 3, 2023 and February 3, 2023, respectively.

SECUREWORKS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 10 — RELATED PARTY TRANSACTIONS

Allocated Expenses

For the periods presented, Dell has provided various corporate services to Secureworks in the ordinary course of business. The costs of services provided to Secureworks by Dell are governed by a shared services agreement between Secureworks and Dell Inc. The total amounts of the charges under the shared services agreement with Dell were $0.7 million and $2.3 million for the three and nine months ended November 3, 2023, respectively, and $0.9 million and $2.8 million for the three and nine months ended October 28, 2022, respectively. Management believes that the basis on which the expenses have been allocated is a reasonable reflection of the utilization of services provided to or the benefit received by the Company during the periods presented.

Related Party Arrangements

For the periods presented, related party transactions and activities involving Dell Inc. and its wholly-owned subsidiaries were not always consummated on terms equivalent to those that would prevail in an arm’s-length transaction where conditions of competitive, free-market dealing may exist.

The Company purchases computer equipment for internal use from Dell Inc. and its subsidiaries that is capitalized within property and equipment in the Condensed Consolidated Statements of Financial Position. Purchases of computer equipment from Dell and EMC Corporation, or EMC, an indirect, wholly-owned subsidiary of Dell that provides enterprise software and storage, totaled $7 thousand and $0.4 million for the three and nine months ended November 3, 2023, respectively, and $0.2 million and $0.6 million for the three and nine months ended October 28, 2022, respectively.

EMC previously maintained a majority ownership interest in VMware, Inc., or VMware, a company that provides cloud and virtualization software and services. The Company’s purchases of annual maintenance services, software licenses and hardware systems for internal use from Dell, EMC and VMware totaled $23 thousand and $0.7 million for the three and nine months ended November 3, 2023, respectively and $0.5 million and $1.0 million for the three and nine months ended October 28, 2022, respectively. On November 1, 2021, Dell Technologies completed its spin-off of all shares of common stock of VMware that were beneficially owned by Dell Technologies and its subsidiaries, including EMC, to Dell Technologies’ stockholders. As a result of the spin-off transaction, the businesses of VMware were separated from the remaining businesses of Dell Technologies, although, as of November 3, 2023, Michael S. Dell, the Chairman, Chief Executive Officer and majority stockholder of Dell Technologies, continued to serve as Chairman of the Board of VMware.

The Company recognized revenue related to solutions provided to VMware that totaled $0.2 million and $0.4 million for the three and nine months ended November 3, 2023, respectively, and $0.1 million and $0.4 million for the three and nine months ended October 28, 2022, respectively. In October 2019, VMware acquired Carbon Black Inc., a security business with which the Company had an existing commercial relationship. Purchases by the Company of solutions from Carbon Black totaled $0.3 million and $1.9 million for the three and nine months ended November 3, 2023, respectively, and $0.8 million and $2.5 million for the three and nine months ended October 28, 2022, respectively.

The Company also recognized revenue related to solutions provided to significant beneficial owners of Secureworks common stock, which include Mr. Dell and affiliates of Mr. Dell. The revenues recognized by the Company from solutions provided to Mr. Dell, MSD Capital, L.P. (a firm founded for the purposes of managing investments of Mr. Dell and his family), DFI Resources LLC, an entity affiliated with Mr. Dell, and the Michael and Susan Dell Foundation totaled $34 thousand and $0.2 million for the three and nine months ended November 3, 2023, respectively, and $35 thousand and $0.2 million for the three and nine months ended October 28, 2022, respectively.

The Company provides solutions to certain customers whose contractual relationships have historically been with Dell rather than Secureworks, although the Company has the primary responsibility to provide the services. Effective August 1, 2015, in connection with the IPO, many of such customer contracts were transferred from Dell to the Company, forming a direct contractual relationship between the Company and the end customer. For customers whose contracts have not yet been transferred or whose contracts were subsequently originated through Dell under a reseller agreement, the Company recognized revenues of approximately $13.6 million and $42.9 million for the three and nine months ended November 3, 2023, respectively, and $14.0 million and $44.6 million for the three and nine months ended October 28, 2022, respectively. In addition, as of November 3, 2023, the Company had approximately $2.9 million of contingent obligations to Dell related to outstanding performance bonds for certain customer contracts which Dell issued on behalf of the Company. These contingent obligations are not recognized as liabilities on the Company’s financial statements.

As the Company’s customer and on behalf of certain of its own customers, Dell also purchases solutions from the Company. The Company recognized revenues from such purchases of approximately $0.2 million and $0.6 million for the three and nine months ended November 3, 2023, respectively, and $1.2 million and $4.0 million for the three and nine months ended October 28, 2022, respectively.

SECUREWORKS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

As a result of the foregoing related party arrangements, the Company has recorded the following related party balances in the Condensed Consolidated Statements of Financial Position as of November 3, 2023 and February 3, 2023 (in thousands).


	November 3, 2023		February 3, 2023
Related party payable (in accrued and other current liabilities)	$	3,530	$	1,141

Accounts receivable from customers under reseller agreements with Dell (in accounts receivable, net)	$	4,521	$	5,584

Net operating loss tax sharing receivable under agreement with Dell	$	7,641	$	3,472

NOTE 11 — FAIR VALUE MEASUREMENTS

The Company measures fair value within the guidance of the three-level valuation hierarchy. This hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The categorization of a measurement within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels are defined as follows:

•Level 1 - Quoted market prices in active markets for identical assets or liabilities

•Level 2 - Other observable market-based inputs or unobservable inputs that are corroborated by market data

•Level 3 - Significant unobservable inputs

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The assets and liabilities of the Company that are measured at fair value on a recurring basis using the respective input levels as of November 3, 2023 and February 3, 2023 were as follows (in thousands):


	November 3, 2023		February 3, 2023
	Level 1		Level 1
Cash equivalents - Money Market Funds	$	1,669	$	16,451

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

The carrying amounts of the Company’s accounts receivable, accounts payable and accrued expenses approximate their respective fair value due to their short-term nature.

SECUREWORKS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 12 — REORGANIZATION AND OTHER RELATED COSTS

During the fiscal year ended February 3, 2023, the Company committed to a plan to align its investments more closely with its strategic priorities to meet the expected future needs of the business by reducing the Company’s workforce and implementing certain real estate‑related and other cost optimization actions. Under this plan, the Company began rebalancing investments cross-functionally in alignment with the Company’s current strategy and growth opportunities, such as focusing on the higher value, higher margin Taegis solutions, optimizing the Company’s organizational structure to increase its scalability, and other priorities, to better position the Company for continued growth with improving operating margins over time. The Company incurred expenses associated with the plan of approximately $15.5 million and $14.2 million for the fiscal year ended February 3, 2023, and the nine months ended November 3, 2023, respectively. These expenses consisted primarily of severance and other termination benefits, real estate-related expenses, and various other cost saving measures.

The following table summarizes the liability associated with these charges that is included in accrued and other current liabilities on the accompanying Condensed Consolidated Statement of Financial Position (in thousands):


	Workforce		Real estate-related		Other		Total
Balance as of January 28, 2022	$	—	$	—	$	—	$	—
Reorganization charge	7,550		4,570		3,351		15,471
Charges settled in cash	—		(90)		(325)		(415)
Charges settled in non-cash	—		(4,480)		(1,632)		(6,112)
Balance as of February 3, 2023	$	7,550	$	—	$	1,394	$	8,944
Reorganization charge	10,960		3,272		—		14,232
Charges settled in cash	(14,735)		—		(1,394)		(16,129)
Charges settled in non-cash	—		(3,272)		—		(3,272)
Balance as of November 3, 2023	$	3,775	$	—	$	—	$	3,775

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q 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. The words “believe,” “may,” “would,” “could,” “potentially,” “anticipate,” “estimate,” “expect,” “intend,” “plan,” “aim,” “seek” and similar expressions that convey uncertainty regarding future events or outcomes as they relate to us or our management are intended to identify forward-looking statements. Our results could be materially different from our expectations because of various risks, including risks related to: our history of losses; the need to continually enhance existing solutions and technologies and develop or acquire new ones; the possibility that our plans to strategically realign and optimize our investments with our priorities may not be successful; competition; our reliance on the financial services industry; real or perceived defects, errors or vulnerabilities in our, or failures of, our solutions; cyber-attacks and other data security incidents; the Ukraine/Russia conflict; inflation and other economic concerns; and other risks discussed in "Risk Factors" in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended February 3, 2023 that was filed with the SEC on March 23, 2023 and in our other periodic and current reports filed with the Securities and Exchange Commission. Moreover, we operate in a very competitive and rapidly changing environment, and new risks emerge from time to time. All statements by us regarding our expected financial position, revenues, cash flows and other operating results for future periods, business strategy, the outcome of legal proceedings and similar matters are forward-looking statements. Our expectations expressed or implied in these forward-looking statements may not turn out to be correct. Any forward-looking statement speaks only as of the date as of which such statement is made, and, except as required by law, we undertake no obligation to revise or update any forward-looking statement after the date as of which such statement was made, whether to reflect changes in circumstances or our expectations, the occurrence of unanticipated events, or otherwise.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

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 February 3, 2023 included in Part II, Item 8 of our Annual Report on Form 10-K for the fiscal year ended February 3, 2023 that was filed with the SEC on March 23, 2023, 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 and future expectations. 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 “Cautionary Note Regarding Forward-Looking Statements” above and in "Risk Factors" in Part I, Item 1A of our Annual Report, as may be updated in subsequent quarterly reports.

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 February 2, 2024 and the fiscal year ended February 3, 2023 as fiscal 2024 and fiscal 2023, respectively. Fiscal 2024 has 52 weeks and fiscal 2023 had 53 weeks. In fiscal 2023, each quarter had 13 weeks, except for the fourth quarter, which had 14 weeks. Unless otherwise indicated, all changes identified for the current-period results represent comparisons to results for the prior corresponding fiscal periods.

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 solutions singularly focused on protecting our customers.

Our vision is to be the essential cybersecurity company for a digitally connected world. We believe we are the security platform of choice to deliver a holistic approach to security at scale for our customers to achieve their best security outcomes. We combine considerable experience from securing thousands of customers, processing billions of customer events leveraging artificial intelligence and machine-learning in our security 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.

Our proprietary Taegis security platform leverages an open architecture that is designed to process a wide variety of telemetry to see security threats quickly and to leverage our customers’ existing investments. Our solutions collect and process vast amounts of data across the IT ecosystem by integrating a wide array of proprietary and third-party security products. This open-platform approach allows us to aggregate events from a wide range of endpoint, network, cloud and business systems to increase the effectiveness of our solutions.

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 believe a platform that supports innovation and collaboration enables the power of the security community to outmaneuver the adversary. Leveraging our extensive security expertise and threat intelligence, we utilize our unique insights to extend our Taegis XDR platform to defend against cyber attacks.

The integrated approach we have pioneered enables us to deliver a broad portfolio of security solutions to organizations of varying size and complexity. We seek to provide the right level of security for each customer’s particular situation, which evolves with our customers as their organizations grow and change over time. Our flexible and scalable solutions secure the evolving needs of large enterprises as well as small and medium-sized businesses and U.S. state and local government agencies with limited in-house capabilities and resources.

We offer our customers:

•software-as-a-service, or SaaS, solutions,

•managed solutions, and

•professional services, including incident response and adversarial testing services.

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 two decades. As key elements of our strategy, we seek to:

•be the SaaS security platform of choice,

•broaden our reach with security service providers to deliver our security platform globally, and

•empower the global security community to beat the adversary at scale.

Taegis was purpose-built as a SaaS platform that combines the power of machine-learning with security analytics and threat intelligence to unify detection and response across endpoint, network, cloud, email and other systems for better security outcomes and simpler security operations. The Taegis software platform is a core element of our SaaS solutions, which leverage workflows designed from our extensive security operations expertise and our integrated orchestration and automation capabilities to increase the speed of response actions.

We offer an integrated suite of technology-driven security solutions enabled by our Taegis software platform and team of highly skilled security experts. Our technology-driven security solutions offer an innovative approach to prevent, detect and respond to cybersecurity breaches. The platform collects, aggregates, correlates and analyzes 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 solutions, 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.

In addition to our Taegis solutions, we offer a variety of professional services to advise customers on a broad range of security and risk-related matters, which include incident response, adversarial testing services and Taegis professional services, to accelerate adoption of our software solutions.

Key Factors Affecting Our Performance

We believe that our sustained 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 we remain successful. We operate in an intensely competitive industry and face, among other competitive challenges, pricing pressures within the information security market resulting from actions taken 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. If we are unable to continue to manage our investments in an efficient manner or to effectively execute our strategies aimed to foster sustained success, our business could be adversely affected.

The key factors affecting our performance include the following:

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 strategy requires the coordinated deployment of a solution across the entire network infrastructure. Our Taegis offerings are 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 will continue making into our research and development efforts and on our ability to remain at the forefront of threat intelligence research and 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 continued investment in our Taegis software platform and solutions will contribute to long-term revenue growth, but the costs of our investment 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 intend to continue to invest in solutions innovation and leadership, including by 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 believe that our investment in solutions development will contribute to long-term revenue growth, but this investment may continue to adversely affect our prospects for near-term profitability.

Investments in Expanding Our Customer Base.

Embracing Our Partner Ecosystem. To support future sales, we must continue to devote resources to the development of strategic partnerships with our channel partners, technology alliance partners, and system integrators. We have made and plan to continue to make investments in both marketing and go-to-market efforts with our partners. These investments may not result in an increase in revenue or an improvement in our results of operations in the near term, although we do believe both will improve in the long term from these investments.

Deepening Our Customer Relationships. 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.

Key Operating Metrics

Commencing in fiscal 2021, we began transitioning our subscription customers to our Taegis solutions from our non-strategic, lower margin other managed security subscription services. Although it has resulted in a decline in both our total customer base and total annual recurring revenue, we believe the transition of our subscription business to our Taegis solutions is resulting in a higher value and higher margin business. As part of our ongoing transition, we informed our customers early in the fourth quarter of fiscal 2022 that many of our other managed security subscription services would no longer be available for purchase effective as of the beginning of fiscal 2023, as many of those services offer a natural transition to our Taegis platform. Renewals associated with many of our existing other managed security subscription services were not extended beyond the end of fiscal 2023, as indicated in the operating metric table below.

The transition has resulted in the growth of our Taegis portfolio of technology-driven information security solutions offered to customers of all sizes and across all industries. We have achieved this organic growth by re-solutioning existing customers to our Taegis offerings, which generate more average revenue per customer, and through continued expansion in volume and breadth of the Taegis solutions we deploy. The transformation of our Taegis subscription-based model has required ongoing investment in our business, which has contributed to higher net losses. We believe these investments are critical to our long-term success, although they may continue to impact our prospects for near-term profitability.

Relevant key operating metrics are presented below as of the dates indicated and for the fiscal periods then ended.


	November 3, 2023			October 28, 2022
Taegis subscription customer base	2,000			1,600
Managed security subscription customer base	400			1,600
Total subscription customer base	2,300			2,900

Total customer base	4,300			4,800





Taegis annual recurring revenue (in millions)	$	278.7		$	222.2
Managed security annual recurring revenue (in millions)	25.3			119.9
Total annual recurring revenue (in millions)	$	304.0		$	342.1

Taegis average subscription revenue per customer (in thousands)	$	139.1		$	139.2
Managed security average subscription revenue per customer (in thousands)	$	69.2		$	77.0
Total average subscription revenue per customer (in thousands)	$	134.9		$	116.1

Net revenue retention rate	92		%	83		%

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 solutions 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. We defined total average subscription revenue per customer as the average annual revenue per customer that subscribes to either our Taegis or other managed security subscription solutions, or both, as of the measurement date. Total average subscription revenue per customer is primarily driven by 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. As of November 3, 2023 and October 28, 2022, approximately 46% and 51%, 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, or base recurring revenue, to the same measure from that same cohort of customers at the end of the period, which we refer to as retained recurring revenue. By dividing the end-of-period retained recurring revenue by the base recurring revenue from the beginning of the period, 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 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, customer renewal rates and changes to solution offerings.

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 cost of revenue, non-GAAP Taegis Subscription Solutions cost of revenue, non-GAAP Managed Security Services cost of revenue, non-GAAP subscription cost of revenue, non-GAAP professional services cost of revenue, non-GAAP gross profit, non-GAAP Taegis Subscription Solutions gross profit, non-GAAP Managed Security Services gross profit, non-GAAP subscription gross profit, non-GAAP professional services gross profit, non-GAAP gross margin, non-GAAP Taegis Subscription Solutions gross margin, non-GAAP Managed Security Services gross margin, non-GAAP subscription gross margin, non-GAAP professional services gross margin, non-GAAP operating expenses, 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 earnings before interest, taxes, depreciation and amortization, stock-based compensation and reorganization and other related charges, or 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, subscription revenue, professional services revenue, Taegis Subscription Solutions revenue, Managed Security Services revenue, gross profit, subscription gross profit, professional services gross profit, Taegis Subscription Solutions gross profit, Managed Security Services gross profit, cost of revenue, subscription cost of revenue, professional services cost of revenue, Taegis Subscription Solutions cost of revenue, Managed Security Services cost of revenue, operating expense, research and development expenses, sales and marketing expenses, general and administrative expenses, gross margin, subscription gross margin, professional services gross margin, Taegis Subscription Solutions gross margin, Managed Security Services gross margin, operating income (loss), net income (loss), or earnings (loss) per share in accordance with GAAP, and the non-GAAP financial measures 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 associated with external software development costs capitalized and acquired customer relationships and technology. In connection with the acquisition of Dell by Dell Technologies in fiscal 2014 and our acquisition of Delve Laboratories Inc. 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 Secureworks’ equity plan. 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.

•Reorganization and other related charges. The aggregate adjustment for expenses associated with the Company’s alignment of its investments more closely with its strategic priorities, as described in the “Notes to Condensed Consolidated Financial Statements—Note 12—Reorganization and Other Related Costs.”


	Three Months Ended				Nine Months Ended
	November 3, 2023		October 28, 2022		November 3, 2023		October 28, 2022

	(in thousands, except per share data)
GAAP net revenue:
Taegis Subscription Solutions	$	67,346	$	47,888	$	196,368	$	127,913
Managed Security Services	7,866		39,303		32,928		144,013
Total Subscription revenue	$	75,212	$	87,191	$	229,296	$	271,926
Professional services	14,152		23,751		47,429		76,213
GAAP net revenue(1)	$	89,364	$	110,942	$	276,725	$	348,139



GAAP Taegis Subscription Solutions cost of revenue	$	19,927	$	16,558	$	60,575	$	44,550
Amortization of intangibles	(1,208)		(960)		(3,404)		(2,519)
Stock-based compensation expense	(313)		(80)		(561)		(188)
Non-GAAP Taegis Subscription Solutions cost of revenue	$	18,406	$	15,518	$	56,610	$	41,843

GAAP Managed Security Services cost of revenue	$	6,059	$	15,578	$	26,514	$	54,472
Amortization of intangibles	(2,576)		(3,411)		(9,397)		(10,232)
Stock-based compensation expense	(53)		(87)		(160)		(269)
Non-GAAP Managed Security Services cost of revenue	$	3,430	$	12,080	$	16,957	$	43,971

GAAP subscription cost of revenue	$	25,986	$	32,136	$	87,089	$	99,022
Amortization of intangibles	(3,784)		(4,371)		(12,801)		(12,751)
Stock-based compensation expense	(366)		(167)		(721)		(457)
Non-GAAP subscription cost of revenue	$	21,836	$	27,598	$	73,567	$	85,814

GAAP professional services cost of revenue	$	8,629	$	13,444	$	30,369	$	45,572
Stock-based compensation expense	(344)		(323)		(991)		(1,055)
Non-GAAP professional services cost of revenue	$	8,285	$	13,121	$	29,378	$	44,517

GAAP gross profit	$	54,749	$	65,362	$	159,267	$	203,545
Amortization of intangibles	3,784		4,371		12,801		12,751
Stock-based compensation expense	711		491		1,713		1,512
Non-GAAP gross profit	$	59,244	$	70,224	$	173,781	$	217,808

GAAP research and development expenses	$	26,358	$	35,263	$	85,766	$	102,232
Stock-based compensation expense	(3,794)		(3,077)		(9,077)		(8,460)
Non-GAAP research and development expenses	$	22,564	$	32,186	$	76,689	$	93,772

GAAP sales and marketing expenses	$	27,079	$	41,380	$	92,842	$	121,565
Stock-based compensation expense	(836)		(1,631)		(2,774)		(4,896)
Non-GAAP sales and marketing expenses	$	26,243	$	39,749	$	90,068	$	116,669

GAAP general and administrative expenses	$	20,565	$	24,725	$	63,194	$	74,359
Amortization of intangibles	(3,524)		(3,524)		(10,571)		(10,571)
Stock-based compensation expense	(4,621)		(4,367)		(11,288)		(12,636)
Non-GAAP general and administrative expenses	$	12,420	$	16,834	$	41,335	$	51,152


	Three Months Ended				Nine Months Ended
	November 3, 2023		October 28, 2022		November 3, 2023		October 28, 2022

	(in thousands, except per share data)

GAAP operating loss	$	(19,253)	$	(36,006)	$	(96,767)	$	(94,611)
Amortization of intangibles	7,308		7,895		23,372		23,322
Stock-based compensation expense	9,962		9,566		24,852		27,504
Reorganization and other related charges	—		—		14,232		—
Non-GAAP operating (loss) income	$	(1,983)	$	(18,545)	$	(34,311)	$	(43,785)

GAAP net loss	$	(14,421)	$	(28,146)	$	(77,750)	$	(74,463)
Amortization of intangibles	7,308		7,895		23,372		23,322
Stock-based compensation expense	9,962		9,566		24,852		27,504
Reorganization and other related charges	—		—		14,232		—
Aggregate adjustment for income taxes	(2,856)		(3,030)		(10,469)		(8,974)
Non-GAAP net (loss) income	$	(7)	$	(13,715)	$	(25,763)	$	(32,611)

GAAP loss per share	$	(0.17)	$	(0.33)	$	(0.90)	$	(0.88)
Amortization of intangibles	0.08		0.10		0.27		0.28
Stock-based compensation expense	0.12		0.12		0.29		0.33
Reorganization and other related charges	—		—		0.17		—
Aggregate adjustment for income taxes	(0.03)		(0.04)		(0.12)		(0.11)
Non-GAAP (loss) earnings per share *	$	—	$	(0.16)	$	(0.30)	$	(0.39)
* Sum of reconciling items may differ from total due to rounding of individual components

GAAP net loss	$	(14,421)	$	(28,146)	$	(77,750)	$	(74,463)
Interest and other, net	(684)		661		1,698		1,227
Income tax benefit	(4,148)		(8,521)		(20,715)		(21,375)
Depreciation and amortization	8,067		9,213		26,028		27,728
Stock-based compensation expense	9,962		9,566		24,852		27,504
Reorganization and other related charges	—		—		14,232		—
Adjusted EBITDA	$	(1,224)	$	(17,227)	$	(31,655)	$	(39,379)

(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.

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 November 3, 2023 represented approximately 81.1% of our total outstanding shares of common stock and approximately 97.7% 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, which has been amended or amended and restated, in part, from time to time, 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 10—Related Party Transactions” in our condensed consolidated financial statements included in this report.

During the periods presented in the 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 9—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 10—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 Subscription Solutions and Managed Security Services. Taegis’ core offerings are the security platform, Taegis XDR, and our supplemental MDR service, ManagedXDR. Managed Security Services are subscription-based arrangements that typically include a suite of security services utilizing our legacy platform. Our subscription contracts typically range from one to three years and, as of November 3, 2023, averaged approximately two years in duration. The revenue and any related costs for these deliverables are recognized ratably over the contractual term, beginning on the date on which the tenant is made available to customers.

•Professional Services Revenue. Professional services revenue consists primarily of incident response solutions and adversarial testing services. 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 2024, approximately 84% of our revenue was derived from subscription-based arrangements, attributable to Taegis solutions and managed security services, while approximately 16% 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 through non-U.S. entities, represented approximately 37% and 34% of our total net revenue in the third quarter fiscal 2024 and the third quarter fiscal 2023, respectively. Although our international customers are located primarily in the United Kingdom, Japan, Australia and Canada, we provided our Taegis solutions or managed security services to customers across 73 countries as of November 3, 2023.

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 platforms 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, amortization of external software development costs capitalized, 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 costs and cloud hosting costs. We expect our gross margins to fluctuate depending on these factors, but we believe they will increase over time with expected growth and higher mix of Taegis Subscription Solutions revenue compared to Managed Security Services and professional services revenue.

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.

•General and Administrative, or G&A, Expenses. General and administrative expenses primarily include 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.

•Reorganization and other related charges. Reorganization and other related charges consist primarily of severance and other termination benefits and real estate-related expenses, as described in the “Notes to Condensed Consolidated Financial Statements—Note 12—Reorganization and Other Related Costs.”

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.

Income Tax Benefit

Our effective tax benefit rate was 22.3% and 21.0% for the three and nine months ended November 3, 2023, respectively, and 23.2% and 22.3% for the three and nine months ended October 28, 2022, respectively. The change in effective tax rate between the periods was primarily attributable to the impact of certain adjustments related to the vesting of stock-based compensation awards and the recognition of additional benefits relating to research and development credits.

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) that 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 9—Income and Other Taxes” in our condensed consolidated financial statements included in this report.

Results of Operations

Three and nine months ended November 3, 2023 compared to the three and nine months ended October 28, 2022

The following tables summarize our key performance indicators for the three and nine months ended November 3, 2023 and October 28, 2022.


	Three Months Ended						Nine Months Ended
	November 3, 2023				October 28, 2022				November 3, 2023				October 28, 2022
	$		% of Revenue		$		% of Revenue		$		% of Revenue		$		% of Revenue

	(in thousands, except percentages)
Net revenue:
Subscription	$	75,212	84.2	%	$	87,191	78.6	%	$	229,296	82.9	%	$	271,926	78.1	%
Professional Services	14,152		15.8	%	23,751		21.4	%	47,429		17.1	%	76,213		21.9	%
Total net revenue	$	89,364	100.0	%	$	110,942	100.0	%	$	276,725	100.0	%	$	348,139	100.0	%
Cost of revenue:
Subscription	$	25,986	34.6	%	$	32,136	36.9	%	$	87,089	38.0	%	$	99,022	36.4	%
Professional Services	8,629		61.0	%	13,444		56.6	%	30,369		64.0	%	45,572		59.8	%
Total cost of revenue	$	34,615	38.7	%	$	45,580	41.1	%	$	117,458	42.4	%	$	144,594	41.5	%
Total gross profit	$	54,749	61.3	%	$	65,362	58.9	%	$	159,267	57.6	%	$	203,545	58.5	%
Operating expenses:
Research and development	$	26,358	29.5	%	$	35,263	31.8	%	$	85,766	31.0	%	$	102,232	29.4	%
Sales and marketing	27,079		30.3	%	41,380		37.3	%	92,842		33.6	%	121,565		34.9	%
General and administrative	20,565		23.0	%	24,725		22.3	%	63,194		22.8	%	74,359		21.4	%
Reorganization and other related charges	—		—	%	—		—	%	14,232		5.1	%	—		—	%
Total operating expenses	$	74,002	82.8	%	$	101,368	91.4	%	$	256,034	92.5	%	$	298,156	85.6	%
Operating loss	$	(19,253)	(21.5)	%	$	(36,006)	(32.5)	%	$	(96,767)	(35.0)	%	$	(94,611)	(27.2)	%
Net loss	$	(14,421)	(16.1)	%	$	(28,146)	(25.4)	%	$	(77,750)	(28.1)	%	$	(74,463)	(21.4)	%

Other Financial Information (1)




Non-GAAP cost of revenue:
Non-GAAP Subscription	$	21,836	29.0	%	$	27,598	31.7	%	$	73,567	32.1	%	$	85,814	31.6	%
Non-GAAP Professional Services	8,285		58.5	%	13,121		55.2	%	29,378		61.9	%	44,517		58.4	%
Total Non-GAAP cost of revenue	$	30,120	33.7	%	$	40,718	36.7	%	$	102,944	37.2	%	$	130,331	37.4	%
Non-GAAP gross profit	$	59,244	66.3	%	$	70,224	63.3	%	$	173,781	62.8	%	$	217,808	62.6	%
Non-GAAP operating expenses:
Non-GAAP research and development	$	22,564	25.2	%	$	32,186	29.0	%	$	76,689	27.7	%	$	93,772	26.9	%
Non-GAAP sales and marketing	26,243		29.4	%	39,749		35.8	%	90,068		32.5	%	116,669		33.5	%
Non-GAAP general and administrative	12,420		13.9	%	16,834		15.2	%	41,335		14.9	%	51,152		14.7	%
Non-GAAP operating expenses	$	61,227	68.5	%	$	88,769	80.0	%	$	208,092	75.2	%	$	261,593	75.1	%
Non-GAAP operating (loss) income	$	(1,983)	(2.2)	%	$	(18,545)	(16.7)	%	$	(34,311)	(12.4)	%	$	(43,785)	(12.6)	%
Non-GAAP net (loss) income	$	(7)	—	%	$	(13,715)	(12.4)	%	$	(25,763)	(9.3)	%	$	(32,611)	(9.4)	%
Adjusted EBITDA	$	(1,224)	(1.4)	%	$	(17,227)	(15.5)	%	$	(31,655)	(11.4)	%	$	(39,379)	(11.3)	%

(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, except for non-GAAP subscription cost of revenue and non-GAAP professional services cost of revenue measures, which are calculated based on GAAP subscription net revenue and GAAP professional services net revenue, respectively.

Revenue

The following table presents information regarding our net revenue for the three and nine months ended November 3, 2023 and October 28, 2022.


	Three Months Ended				Change			Nine Months Ended				Change
	November 3 2023		October 28 2022			$		%		November 3 2023		October 28 2022		$		%


	(in thousands, except percentages)
Net revenue:
Taegis Subscription Solutions	$	67,346	$	47,888		$	19,458	40.6	%	$	196,368	$	127,913	$	68,455	53.5	%
Managed Security Services	7,866		39,303			(31,437)		(80.0)	%	32,928		144,013		(111,085)		(77.1)	%
Total Subscription revenue	$	75,212	$	87,191		$	(11,979)	(13.7)	%	$	229,296	$	271,926	$	(42,630)	(15.7)	%
Professional services	14,152		23,751			(9,599)		(40.4)	%	47,429		76,213		(28,784)		(37.8)	%
Total net revenue	$	89,364	$	110,942		$	(21,578)	(19.4)	%	$	276,725	$	348,139	$	(71,414)	(20.5)	%

Subscription Revenue. For the three and nine months ended November 3, 2023, subscription revenue decreased $12.0 million, or 13.7%, and $42.6 million, or 15.7%, respectively. The revenue decrease reflects our continued focus on reducing non-strategic service offerings and prioritizing the growth of our Taegis Subscription Solutions, which has included reselling Taegis offerings to our current Managed Security Services customer base.

Professional Services Revenue. For the three and nine months ended November 3, 2023, professional services revenue decreased $9.6 million, or 40.4%, and $28.8 million or 37.8%, respectively. The revenue decrease reflects both our focus on reducing non-strategic professional service offerings and an overall decrease of billable hours when compared with fiscal 2023 periods.

Revenue for certain services provided to or on behalf of Dell under our commercial agreements with Dell totaled approximately $0.2 million and $0.6 million for the three and nine months ended November 3, 2023, respectively, and $1.2 million and $4.0 million for the three and nine months ended October 28, 2022, respectively. Of the revenue derived from Dell, subscription revenue represented approximately 14% and 18% for the three and nine months ended November 3, 2023, and 18% and 24% for the three and nine months ended October 28, 2022. For more information regarding the commercial agreements, see “Notes to Condensed Consolidated Financial Statements—Note 10—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 and nine months ended November 3, 2023, international revenue, which we define as revenue contracted through non-U.S. entities, totaled $33.2 million and $102.0 million, respectively, and represented 37% for both the three and nine months ended November 3, 2023. For the three and nine months ended October 28, 2022, international revenue totaled $37.3 million and $116.6 million, respectively, and represented 34% of total revenue in both periods. Currently, our international customers are primarily located in Australia, United Kingdom, Japan and Canada. We are focused on continuing to grow our international customer base in future periods.

Cost of Revenue

The following table presents information regarding our cost of revenue for the three and nine months ended November 3, 2023 and October 28, 2022.


	Three Months Ended					Change			Nine Months Ended				Change
	November 3 2023		October 28 2022			$	%		November 3 2023		October 28 2022		$		%


	(in thousands, except percentages)
Cost of revenue:
Taegis Subscription Solutions	$	19,927		$	16,558		$	3,369	20.3	%	$	60,575	$	44,550	$	16,025	36.0	%
Managed Security Services	6,059			15,578			(9,519)		(61.1)	%	26,514		54,472		(27,958)		(51.3)	%
Total subscription cost of revenue	25,986			32,136			(6,150)		(19.1)	%	87,089		99,022		(11,933)		(12.1)	%
Professional Services cost of revenue	8,629			13,444			(4,815)		(35.8)	%	30,369		45,572		(15,203)		(33.4)	%
Total cost of revenue	$	34,615		$	45,580		$	(10,965)	(24.1)	%	$	117,458	$	144,594	$	(27,136)	(18.8)	%
Other Financial Information (1)
Non-GAAP cost of revenue:
Taegis Subscription Solutions	$	18,406		$	15,518		$	2,888	18.6	%	$	56,610	$	41,843	$	14,767	35.3	%
Managed Security Services	3,430			12,080			(8,650)		(71.6)	%	16,957		43,971		(27,014)		(61.4)	%
Total non-GAAP subscription	21,836			27,598			(5,762)		(20.9)	%	73,567		85,814		(12,247)		(14.3)	%
Non-GAAP Professional Services	8,285			13,121			(4,836)		(36.9)	%	29,378		44,517		(15,139)		(34.0)	%
Total Non-GAAP cost of revenue	$	30,120		$	40,718		$	(10,598)	(26.0)	%	$	102,944	$	130,331	$	(27,387)	(21.0)	%

(1) See “Non-GAAP Financial Measures” and “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure.

Subscription Cost of Revenue. For the three months ended November 3, 2023, subscription cost of revenue decreased $6.2 million, or 19.1%. As a percentage of revenue, subscription cost of revenue decreased 230 basis points to 34.6%. On a non-GAAP basis, subscription cost of revenue as a percentage of revenue decreased 270 basis points to 29.0%. The decrease in subscription cost of revenue was primarily attributable to lower employee-related expenses to support our subscription offerings. Those costs were lower as a percentage of revenue for the three months ended November 3, 2023 because our higher margin Taegis subscription solutions represented a larger share of subscription revenue.

For the nine months ended November 3, 2023, subscription cost of revenue decreased $11.9 million, or 12.1%. As a percentage of revenue, subscription cost of revenue increased 160 basis points to 38.0%. On a non-GAAP basis, subscription cost of revenue as a percentage of revenue increased 50 basis points to 32.1%. The decrease in subscription cost of revenue was primarily attributable to lower employee-related expenses to support our subscription offerings. Those costs were higher as a percentage of revenue for the three months ended November 3, 2023 due to the cost required to continue providing our lower margin, non-strategic managed security service offerings.

Professional Services Cost of Revenue. For the three months ended November 3, 2023, professional services cost of revenue decreased $4.8 million, or 35.8%. As a percentage of revenue, professional services cost of revenue increased 440 basis points to 61.0%. On a non-GAAP basis, professional services cost of revenue as a percentage of revenue increased 330 basis points to 58.5%. The decrease in professional services cost of revenue was primarily attributable to lower employee-related expenses associated with the reduction of non-strategic professional services offerings. As a percentage of revenue, we expect professional services cost of revenue to fluctuate due to the timing of the revenue and related expense reductions associated with the reduction of our non-strategic professional services offerings.

For the nine months ended November 3, 2023, professional services cost of revenue decreased $15.2 million, or 33.4%. As a percentage of revenue, professional services cost of revenue increased 420 basis points to 64.0%. On a non-GAAP basis, professional services cost of revenue as a percentage of revenue increased 350 basis points to 61.9%. The decrease in professional services cost of revenue was primarily attributable to lower employee-related expenses associated with the reduction of non-strategic professional service offerings. As a percentage of revenue, we expect professional services cost of revenue to fluctuate due to the timing of the revenue and related expense reductions associated with the reduction of our non-strategic professional services offerings.

Gross Profit and Gross Margin

The following table presents information regarding our gross profit and gross margin for the three and nine months ended November 3, 2023 and October 28, 2022.


	Three Months Ended						Change					Nine Months Ended						Change
	November 3 2023			October 28 2022			$			%		November 3 2023			October 28 2022			$			%

	(in thousands, except percentages)
Gross Profit:
Taegis Subscription Solutions	$	47,419		$	31,330		$	16,089		51.4	%	$	135,793		$	83,363		$	52,430		62.9	%
Managed Security Services	1,807			23,725			(21,918)			(92.4)	%	6,414			89,541			(83,127)			(92.8)	%
Total Subscription	$	49,226		$	55,055		$	(5,829)		(10.6)	%	$	142,207		$	172,904		$	(30,697)		(17.8)	%
Professional Services	5,523			10,307			(4,784)			(46.4)	%	17,060			30,641			(13,581)			(44.3)	%
Total Gross Profit	$	54,749		$	65,362		$	(10,613)		(16.2)	%	$	159,267		$	203,545		$	(44,278)		(21.8)	%

Gross Margin:
Taegis Subscription Solutions	70.4		%	65.4		%	5.0		%			69.2		%	65.2		%	4.0		%
Managed Security Services	23.0		%	60.4		%	(37.4)		%			19.5		%	62.2		%	(42.7)		%
Total Subscription	65.4		%	63.1		%	2.3		%			62.0		%	63.6		%	(1.6)		%
Professional Services	39.0		%	43.4		%	(4.4)		%			36.0		%	40.2		%	(4.2)		%
Total Gross Margin	61.3		%	58.9		%	2.4		%			57.6		%	58.5		%	(0.9)		%

Other Financial Information (1)
Non-GAAP Gross Profit:
Taegis Subscription Solutions	$	48,940		$	32,370		$	16,570		51.2	%	$	139,758		$	86,070		$	53,688		62.4	%
Managed Security Services	4,436			27,223			(22,787)			(83.7)	%	15,971			100,042			(84,071)			(84.0)	%
Total Non-GAAP Subscription	$	53,376		$	59,593		$	(6,217)		(10.4)	%	$	155,729		$	186,112		$	(30,383)		(16.3)	%
Non-GAAP Professional Services	5,867			10,630			(4,763)			(44.8)	%	18,051			31,696			(13,645)			(43.0)	%
Total Non-GAAP Gross Profit	$	59,244		$	70,224		$	(10,980)		(15.6)	%	$	173,781		$	217,808		$	(44,027)		(20.2)	%

Non-GAAP Gross Margin:
Taegis Subscription Solutions	72.7		%	67.6		%	5.1		%			71.2		%	67.3		%	3.9		%
Managed Security Services	56.4		%	69.3		%	(12.9)		%			48.5		%	69.5		%	(21.0)		%
Total Non-GAAP Subscription	71.0		%	68.3		%	2.7		%			67.9		%	68.4		%	(0.5)		%
Non-GAAP Professional Services	41.5		%	44.8		%	(3.3)		%			38.1		%	41.6		%	(3.5)		%
Total Non-GAAP Gross Margin	66.3		%	63.3		%	3.0		%			62.8		%	62.6		%	0.2		%

Subscription Gross Margin. Subscription gross margin increased 2.3% for the three months ended November 3, 2023 and decreased 1.6% for the nine months ended November 3, 2023. Overall, gross margin for Taegis Subscription Solutions has improved as we scale our comprehensive, higher-value offerings. The subscription gross margin continues to trail the increasing Taegis subscription solutions gross margin due to the higher costs as a percentage of revenue required to maintain and support our non-strategic Managed Security Service offerings as we complete their end-of-life transition.

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 2.7% for the three months ended November 3, 2023. On a non-GAAP basis for the nine months ended November 3, 2023, gross margin decreased 0.5%.

Professional Services Gross Margin. Professional services gross margin decreased 4.4% for the three months ended November 3, 2023. For the nine months ended November 3, 2023, gross margin decreased 4.2%. We expect professional services gross margin to fluctuate due to the timing of the revenue and related expense reductions associated with the reduction of our non-strategic professional services offerings.

Professional services gross margin on a GAAP basis includes stock-based compensation expense. On a non-GAAP basis, excluding this adjustment, gross margin decreased 3.3% for the three months ended November 3, 2023. For the nine months ended November 3, 2023, non-GAAP professional services gross margin decreased 3.5%.

Operating Expenses

The following table presents information regarding our operating expenses during the three and nine months ended November 3, 2023 and October 28, 2022.


	Three Months Ended					Change			Nine Months Ended				Change
	November 3 2023		October 28 2022			$	%		November 3 2023		October 28 2022		$		%
	(in thousands, except percentages)
Operating expenses:
Research and development	$	26,358		$	35,263		$	(8,905)	(25.3)	%	$	85,766	$	102,232	$	(16,466)	(16.1)	%
Sales and marketing	27,079			41,380			(14,301)		(34.6)	%	92,842		121,565		(28,723)		(23.6)	%
General and administrative	20,565			24,725			(4,160)		(16.8)	%	63,194		74,359		(11,165)		(15.0)	%
Reorganization and other related charges	—			—			—		100.0	%	14,232		—		14,232		100.0	%
Total operating expenses	$	74,002		$	101,368		$	(27,366)	(27.0)	%	$	256,034	$	298,156	$	(42,122)	(14.1)	%

Other Financial Information (1)
Non-GAAP research and development	$	22,564		$	32,186		$	(9,622)	(29.9)	%	$	76,689	$	93,772	$	(17,083)	(18.2)	%
Non-GAAP sales and marketing	26,243			39,749			(13,506)		(34.0)	%	90,068		116,669		(26,601)		(22.8)	%
Non-GAAP general and administrative	12,420			16,834			(4,414)		(26.2)	%	41,335		51,152		(9,817)		(19.2)	%
Non-GAAP operating expenses	$	61,227		$	88,769		$	(27,542)	(31.0)	%	$	208,092	$	261,593	$	(53,501)	(20.5)	%

Research and Development Expenses. For the three months ended November 3, 2023, R&D expenses decreased $8.9 million, or 25.3%. As a percentage of revenue, R&D expenses decreased 230 basis points to 29.5%, and on a non-GAAP basis, R&D expenses as a percentage of revenue decreased 380 basis points to 25.2%. The decrease in R&D expenses was primarily attributable to lower employee-related expenses, professional services and consulting-related costs.

For the nine months ended November 3, 2023, R&D expenses decreased $16.5 million, or 16.1%. As a percentage of revenue, R&D expenses increased 160 basis points to 31.0% and on a non-GAAP basis, R&D expenses as a percentage of revenue increased 80 basis points to 27.7%. The decrease in R&D expenses was primarily attributable to lower employee-related expenses, professional services and consulting-related costs.

Sales and Marketing Expenses. For the three months ended November 3, 2023, S&M expenses decreased $14.3 million, or 34.6%. As a percentage of revenue, S&M expenses decreased 700 basis points to 30.3%, and on a non-GAAP basis, S&M expenses as a percentage of revenue decreased 640 basis points to 29.4%. The decrease in S&M expenses was primarily attributable to a decrease in marketing and advertising vendor costs as well as lower employee-related expenses.

For the nine months ended November 3, 2023, S&M expenses decreased $28.7 million, or 23.6%. As a percentage of revenue, S&M expenses decreased 130 basis points to 33.6%, and on a non-GAAP basis, S&M expenses as a percentage of revenue decreased 100 basis points to 32.5%. The decrease in S&M expenses was primarily attributable to a decrease in marketing and advertising vendor costs as well as lower employee-related expenses.

General and Administrative Expenses. For the three months ended November 3, 2023, G&A expenses decreased $4.2 million, or 16.8%. As a percentage of revenue, G&A expenses increased 70 basis points to 23.0%, and on a non-GAAP basis, G&A expenses as a percentage of revenue decreased 130 basis points to 13.9%. The decrease in G&A expenses was primarily attributable to lower employee-related expenses, professional services and consulting-related costs.

For the nine months ended November 3, 2023, G&A expenses decreased $11.2 million, or 15.0%. As a percentage of revenue, G&A expenses increased 140 basis points to 22.8%. On a non-GAAP basis, G&A expenses as a percentage of revenue increased 20 basis points to 14.9%. The decrease in G&A expenses was primarily attributable to lower employee-related expenses, professional services and consulting-related costs.

Reorganization and other related charges. During the second quarter of fiscal 2024, the Company incurred expenses of $14.2 million associated with its reorganization plan consisting primarily of severance and other termination benefits and real estate-related impairment.

Operating Loss

Our operating loss for the three months ended November 3, 2023 and October 28, 2022 was $19.3 million and $36.0 million, respectively. As a percentage of revenue, our operating loss was 21.5% and 32.5% for the three months ended November 3, 2023 and October 28, 2022, respectively. The decrease in our operating loss was primarily attributable to a decrease in operating expenses as a percentage of revenue and supplemented by increased gross margins as we complete our transition to higher value, higher margin Taegis solutions.

Our operating loss for the nine months ended November 3, 2023 and October 28, 2022 was $96.8 million and $94.6 million, respectively. As a percentage of revenue, our operating loss was 35.0% and 27.2% for the nine months ended November 3, 2023 and October 28, 2022, respectively. The increase in our operating loss was primarily attributable to decreased gross profit partially offset by decreased operating expenses.

Operating loss on a GAAP basis includes amortization of intangible assets, stock-based compensation expense, and reorganization related costs. On a non-GAAP basis, excluding these adjustments, our non-GAAP operating loss was $2.0 million and $34.3 million for the three and nine months ended November 3, 2023, respectively, compared to operating loss of $18.5 million and $43.8 million for the three and nine months ended October 28, 2022, respectively.

Interest and Other, Net

Interest and other, net represented income of $0.7 million for the three months ended November 3, 2023 and expense of $1.7 million for the nine months ended November 3, 2023, compared with net expense of $0.7 million and $1.2 million for the three and nine months ended October 28, 2022. The change primarily reflects the effects of foreign currency transactions and related exchange rate fluctuations.

Income Tax Expense (Benefit)

Our income tax benefit was $4.1 million, or 22.3%, and $20.7 million, or 21.0%, of our pre-tax loss during the three and nine months ended November 3, 2023, respectively, and $8.5 million, or 23.2%, and $21.4 million, or 22.3%, of our pre-tax loss during the three and nine months ended October 28, 2022, respectively. The change in the effective tax benefit rate was primarily attributable to the impact of certain discrete adjustments related to the vesting of stock-based compensation awards in the current quarter and the recognition of additional benefits related to research and development credits.

Net Income (Loss)

Our net loss of $14.4 million decreased $13.7 million, or 48.8%, for the three months ended November 3, 2023 compared to the three months ended October 28, 2022. Our net loss of $77.8 million increased $3.3 million, or 4.4%, for the nine months ended November 3, 2023 compared to the nine months ended October 28, 2022. Net loss on a non-GAAP basis for the three months ended November 3, 2023 was $0.0 million compared to non-GAAP net loss of $13.7 million for the three months ended October 28, 2022. For the nine months ended November 3, 2023, Non-GAAP net loss was $25.8 million compared to non-GAAP net loss of $32.6 million for the nine months ended October 28, 2022.

For the three months ended November 3, 2023, on a GAAP and non-GAAP basis, net loss decreased $13.7 million, primarily due to the Company's second quarter reorganization actions that resulted in lower operating expenses. Overall gross margin also increased when compared to the three months ended October 28, 2022.

For the nine months ended November 3, 2023, on a GAAP basis, net loss increased $3.3 million as a result of decreased revenue and gross profit, as well as increased operating expenses as a percentage of revenue, the effect of which was offset in part by the higher income tax benefit recognized in the current quarter. On a non-GAAP basis, for the nine months ended November 3, 2023, net loss decreased $6.8 million as the Company's recent reorganization actions have resulted in cost savings, and gross margin has increased as we complete our transition to higher value, higher margin Taegis solutions.

Liquidity and Capital Commitments

Overview

As of November 3, 2023, we have $58.1 million of cash and cash equivalents. We believe that our cash and cash equivalents and access to the revolving credit facility will provide us with sufficient liquidity to meet our material cash requirements, including 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. As of the balance sheet date, we have reported a deficit in working capital. This deficit in working capital represents an excess of our current liabilities over our current assets and is primarily the result of the significant balance of deferred revenue, reported as a current liability, as of the balance sheet date. We have in recent periods incurred losses from operations and operating cash outflows. Our future capital requirements will depend on many factors, including our rate of revenue growth, 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 expect our recent reorganization actions to result in significant cost savings as we complete our transition to higher value, higher margin Taegis solutions. We believe these efforts will optimize our organizational structure and increase scalability to better position us for continued growth with improving operating margins over time.

In the event that our financial results are below our expectations as a result of the factors mentioned above or other factors, we may need to take additional actions to preserve existing cash reserves. To the extent we undertake future material acquisitions, investments or unanticipated capital or operating expenditures, we may require additional capital or incur indebtedness. In this context, we regularly evaluate opportunities to enhance our capital structure. In addition to our $50 million revolving credit facility from Dell, described below, sources of financing may include arrangements with unaffiliated third parties. The timing, term, size and pricing of any such financing will depend on investor interest and market conditions, and there can be no assurance that we will be able to obtain any such financing on favorable terms or at all.

Selected Measures of Liquidity and Capital Resources

Our principal sources of liquidity, consisting of cash and cash equivalents, are set forth below as of the dates indicated.


	November 3, 2023		February 3, 2023

	(in thousands)

Cash and cash equivalents	$	58,105	$	143,517

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 obtained a $50 million senior unsecured revolving credit facility. Effective September 6, 2023, the revolving credit agreement was amended and restated to: (1) increase the maximum principal amount of borrowings outstanding under the revolving credit facility to $50 million, (2) remove the one-time increase of up to an additional $30 million in borrowings upon mutual agreement by the lender and borrower, (3) extend the commitment and required repayment date under the revolving credit agreement to March 23, 2026, and (4) modify the rate at which interest accrues on funds drawn against the revolving credit agreement to SOFR plus 2.00%.

Amounts under the facility may be borrowed, repaid and reborrowed from time to time during the term of the facility. The proceeds from loans made under the facility may be used for general corporate purposes. 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. There was no outstanding balance under the facility as of November 3, 2023 or February 3, 2023, and we did not borrow any amounts under the facility during any period covered by this report.

For more information regarding the facility, see “Notes to Condensed Consolidated Financial Statements—Note 5—Debt” in our condensed consolidated financial statements included in this report.

Cash Flows


	Nine Months Ended
	November 3, 2023		October 28, 2022

	(in thousands)
Net change in cash from:
Operating activities	$	(74,494)	$	(68,178)
Investing activities	(4,971)		(4,961)
Financing activities	(5,947)		(8,484)
Change in cash and cash equivalents	$	(85,412)	$	(81,623)

Operating Activities — Cash used in operating activities totaled $74.5 million and $68.2 million for the nine months ended November 3, 2023 and October 28, 2022, respectively. The increased use of our operating cash was primarily driven by a larger net loss and higher employee-related payments associated with reducing the Company’s workforce when compared to the same period in fiscal 2023.

Investing Activities — Cash used in investing activities totaled $5.0 million for both the nine months ended November 3, 2023 and October 28, 2022. Investing activities consisted primarily of capitalized expenses related to the development of our Taegis software platform and SaaS applications, which increased $0.8 million for the nine months ended November 3, 2023, offset by a decrease in other capital expenditures compared to the same period in fiscal 2023.

Financing Activities — Cash used in financing activities totaled $5.9 million and $8.5 million for the nine months ended November 3, 2023 and October 28, 2022, respectively. The use of cash flows for the nine months ended November 3, 2023 reflected employee tax withholding payments on restricted stock awards paid by us of $5.9 million and $8.5 million for the nine months ended November 3, 2023 and October 28, 2022, respectively.

Off-Balance Sheet Arrangements

As of November 3, 2023, 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” in our consolidated financial statements included in this report, 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 November 3, 2023.

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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our results of operations and cash flows have been and will continue to be subject to fluctuations because of changes in global inflation and foreign currency exchange rates, particularly changes in exchange rates between the U.S. dollar and the Euro, the British Pound, the Romanian Leu, the Japanese Yen, the Australian Dollar and the Canadian Dollar, the currencies of countries where we currently have our most significant international operations. Our expenses in international locations are generally denominated in the currencies of the countries in which our operations are located.

As our international operations grow, we may begin to use foreign exchange forward contracts to partially mitigate the impact of fluctuations in net monetary assets denominated in foreign currencies.

Item 4. Controls and Procedures

Limitations on Effectiveness of Disclosure Controls and Procedures

In designing and evaluating our disclosure controls and procedures, as defined below under SEC rules, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their cost.

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures (as defined in Rules 13a‑15(e) and 15d‑15(e) under the Securities Exchange of 1934, or Exchange Act) are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to management, including the chief executive officer and the chief financial officer, to allow timely decisions regarding required disclosures.

In connection with the preparation of this report, our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of November 3, 2023. Based on that evaluation, our management has concluded that our disclosure controls and procedures were effective as of November 3, 2023.

Changes in Internal Control over Financial Reporting

Internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures which (a) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets, (b) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, (c) provide reasonable assurance that receipts and expenditures are being made only in accordance with appropriate authorization of management and the board of directors, and (d) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the financial statements.

There were no changes in our internal control over financial reporting that occurred during the quarter ended November 3, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II. Other Information

Item 1A. Risk Factors

We have discussed risks affecting us under “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended February 3, 2023 filed with the SEC on March 23, 2023, Part II, Item 1A of our Quarterly Report on Form 10-Q for the fiscal quarter ended May 5, 2023, and in Part II, Item 1A of our Quarterly Report on Form 10-Q for the fiscal quarter ended August 4, 2023. The risks described in our Annual Report and previously Quarterly Report are not the only risks facing us. There are additional risks and uncertainties not currently known to us or that we currently deem to be immaterial that may also materially adversely affect our business, financial condition or operating results.

Item 5. Other Information

(a) Appointment of Principal Accounting Officer

On December 7, 2023, the Board of Directors of the Company designated and appointed Ms. Alpana Wegner, the Company’s Senior Vice President and Chief Financial Officer, as the Company’s principal accounting officer, effective December 9, 2023. The role was held by Mr. Christian Grant, the Company’s Vice President and Chief Accounting Officer until the effective date of Ms. Wegner's appointment.

The information about Ms. Wegner required by Item 5.02(c)(2) of Form 8-K is hereby incorporated by reference from the information set forth under the caption “Appointment of Chief Financial Officer” in Item 5.02 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 27, 2023.

Item 6. Exhibits

Secureworks hereby files or furnishes the following exhibits:


Exhibit No.						Description
10.1						First Amendment to Sixth Amended and Restated Revolving Credit Agreement, dated as of September 6, 2023, between SecureWorks, Inc. and Dell USA L.P. (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended August 4, 2023 (Commission File No. 001-37748)
31.1						Certification of Chief Executive Officer of the Company pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.
31.2						Certification of Chief Financial Officer of the Company pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.
32.1*						Certifications of Chief Executive Officer and Chief Financial Officer of the Company pursuant to Rule 13a-14(b) or Rule 15d-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Furnished herewith.
101.INS						Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH†						Inline XBRL Taxonomy Extension Schema Document.
101.CAL†						Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF†						Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB†						Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE†						Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104						Cover Page Interactive Data File (the cover page XBRL tags are embedded within the Inline XBRL document, which is contained in Exhibit 101).


________

† Filed with this report.

* The certification attached as Exhibit 32.1 accompanying this quarterly report on Form 10-Q pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, shall not be deemed “filed” by the Registrant for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


			SecureWorks Corp.

			By:			/s/ Alpana Wegner
						Alpana Wegner
						Chief Financial Officer
						(Duly Authorized Officer)

Date: December 8, 2023

EXHIBIT 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

OF THE COMPANY PURSUANT TO RULE 13a-14(a)

OR RULE 15d-14(a) UNDER THE SECURITIES EXCHANGE

ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302

OF THE SARBANES-OXLEY ACT OF 2002

I, Wendy K. Thomas, certify that:

1.I have reviewed this quarterly report on Form 10-Q of SecureWorks Corp.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


December 8, 2023						/s/ Wendy K. Thomas
						Wendy K. Thomas
						Chief Executive Officer

EXHIBIT 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

OF THE COMPANY PURSUANT TO RULE 13a-14(a)

OR RULE 15d-14(a) UNDER THE SECURITIES EXCHANGE

ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302

OF THE SARBANES-OXLEY ACT OF 2002

I, Alpana Wenger, certify that:

1.I have reviewed this quarterly report on Form 10-Q of SecureWorks Corp.;

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


December 8, 2023						/s/ Alpana Wegner
						Alpana Wegner
						Chief Financial Officer

EXHIBIT 32.1

CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER

AND CHIEF FINANCIAL OFFICER OF THE COMPANY

PURSUANT TO RULE 13a-14(b) OR RULE 15d-14(b)

UNDER THE SECURITIES EXCHANGE ACT OF 1934

AND 18 U.S.C. SECTION 1350, AS ADOPTED

PURSUANT TO SECTION 906 OF

THE SARBANES-OXLEY ACT OF 2002

Each of the undersigned hereby certifies, in the undersigned's capacity as an officer of SecureWorks Corp. (the “Company”), for purposes of 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of the undersigned's knowledge:

1.The quarterly report on Form 10-Q of the Company for the quarter ended November 3, 2023 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2.The information contained in such quarterly report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.


Date:	December 8, 2023	/s/ Wendy K. Thomas
		Wendy K. Thomas
		Chief Executive Officer


Date:	December 8, 2023	/s/ Alpana Wegner
		Alpana Wegner
		Chief Financial Officer

Cover - shares	9 Months Ended
Cover - shares	Nov. 03, 2023	Dec. 05, 2023
Entity Information [Line Items]
Document Type	10-Q
Document Quarterly Report	true
Document Period End Date	Nov. 03, 2023
Document Transition Report	false
Entity File Number	001-37748
Entity Registrant Name	SecureWorks Corp
Entity Incorporation, State or Country Code	DE
Entity Tax Identification Number	27-0463349
Entity Address, Address Line One	One Concourse Parkway NE
Entity Address, Address Line Two	Suite 500
Entity Address, City or Town	Atlanta,
Entity Address, State or Province	GA
Entity Address, Postal Zip Code	30328
City Area Code	404
Local Phone Number	327-6339
Title of 12(b) Security	Class A Common Stock,
Trading Symbol	SCWX
Security Exchange Name	NASDAQ
Entity Current Reporting Status	Yes
Entity Interactive Data Current	Yes
Entity Filer Category	Accelerated Filer
Entity Small Business	false
Entity Emerging Growth Company	false
Entity Shell Company	false
Entity Central Index Key	0001468666
Current Fiscal Year End Date	--02-03
Document Fiscal Year Focus	2024
Document Fiscal Period Focus	Q3
Amendment Flag	false
Common Stock - Class A
Entity Information [Line Items]
Entity Common Stock, Shares Outstanding		16,329,480
Common Stock - Class B
Entity Information [Line Items]
Entity Common Stock, Shares Outstanding		70,000,000

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (Unaudited) - USD ($) $ in Thousands	Nov. 03, 2023	Feb. 03, 2023
Current assets:
Cash and cash equivalents	$ 58,105	$ 143,517
Accounts receivable, net of allowances of $2,017 and $2,402, respectively	55,914	72,627
Inventories, net	759	620
Other current assets	12,865	17,526
Total current assets	127,643	234,290
Property and equipment, net	2,626	4,632
Operating lease right-of-use assets, net	5,262	9,256
Goodwill	425,241	425,519
Intangible assets, net	86,942	106,208
Other non-current assets	72,236	60,965
Total assets	719,950	840,870
Current liabilities:
Accounts payable	11,675	18,847
Accrued and other current liabilities	60,890	81,566
Short-term deferred revenue	126,198	145,170
Total current liabilities	198,763	245,583
Long-term deferred revenue	6,988	11,162
Operating lease liabilities, non-current	8,800	12,141
Other non-current liabilities	7,662	14,023
Total liabilities	222,213	282,909
Commitments and contingencies (Note 6)
Stockholders' equity:
Preferred stock - $0.01 par value: 200,000 shares authorized; — shares issued	0	0
Additional paid in capital	986,257	967,367
Accumulated deficit	(461,871)	(384,121)
Accumulated other comprehensive loss	(7,616)	(6,237)
Treasury stock, at cost - 1,257 shares	(19,896)	(19,896)
Total stockholders' equity	497,737	557,961
Total liabilities and stockholders' equity	719,950	840,870
Common Stock - Class A
Stockholders' equity:
Common stock	163	147
Common Stock - Class B
Stockholders' equity:
Common stock	$ 700	$ 700

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (Unaudited) (Parenthetical) - USD ($) shares in Thousands, $ in Thousands	Nov. 03, 2023	Feb. 03, 2023
Accounts receivable, allowance for doubtful accounts	$ 2,017	$ 2,402
Preferred stock, par value (usd per share)	$ 0.01	$ 0.01
Preferred stock, shares authorized (in shares)	200,000	200,000
Preferred Stock, shares issued (in shares)	0	0
Treasury stock, shares (in shares)	1,257	1,257
Common Stock - Class A
Common stock, par value (usd per share)	$ 0.01	$ 0.01
Common stock, shares authorized (in shares)	2,500,000	2,500,000
Common stock, shares issued (in shares)	16,329	14,749
Common stock, shares outstanding (in shares)	16,329	14,749
Common Stock - Class B
Common stock, par value (usd per share)	$ 0.01	$ 0.01
Common stock, shares authorized (in shares)	500,000	500,000
Common stock, shares issued (in shares)	70,000	70,000
Common stock, shares outstanding (in shares)	70,000	70,000

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) - USD ($) shares in Thousands, $ in Thousands	3 Months Ended		9 Months Ended
	Nov. 03, 2023	Oct. 28, 2022	Nov. 03, 2023	Oct. 28, 2022
Total net revenue	$ 89,364	$ 110,942	$ 276,725	$ 348,139
Total cost of revenue	34,615	45,580	117,458	144,594
Gross profit	54,749	65,362	159,267	203,545
Operating expenses:
Research and development	26,358	35,263	85,766	102,232
Sales and marketing	27,079	41,380	92,842	121,565
General and administrative	20,565	24,725	63,194	74,359
Reorganization and other related charges	0	0	14,232	0
Total operating expenses	74,002	101,368	256,034	298,156
Operating loss	(19,253)	(36,006)	(96,767)	(94,611)
Interest and other (expense) income, net	684	(661)	(1,698)	(1,227)
Loss before income taxes	(18,569)	(36,667)	(98,465)	(95,838)
Income tax benefit	(4,148)	(8,521)	(20,715)	(21,375)
Net loss	$ (14,421)	$ (28,146)	$ (77,750)	$ (74,463)
Loss per common share (basic in usd per share)	$ (0.17)	$ (0.33)	$ (0.90)	$ (0.88)
Loss per common share (diluted in usd per share)	$ (0.17)	$ (0.33)	$ (0.90)	$ (0.88)
Weighted-average common shares outstanding (basic in shares)	86,278	84,584	85,943	84,277
Weighted-average common shares outstanding (diluted in shares)	86,278	84,584	85,943	84,277
Subscription
Total net revenue	$ 75,212	$ 87,191	$ 229,296	$ 271,926
Total cost of revenue	25,986	32,136	87,089	99,022
Professional services
Total net revenue	14,152	23,751	47,429	76,213
Total cost of revenue	$ 8,629	$ 13,444	$ 30,369	$ 45,572

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (Unaudited) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Nov. 03, 2023	Oct. 28, 2022	Nov. 03, 2023	Oct. 28, 2022
Statement of Comprehensive Income [Abstract]
Net loss	$ (14,421)	$ (28,146)	$ (77,750)	$ (74,463)
Foreign currency translation adjustments, net of tax	(2,038)	(2,717)	(1,379)	(6,715)
Comprehensive loss	$ (16,459)	$ (30,863)	$ (79,129)	$ (81,178)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) - USD ($) $ in Thousands	9 Months Ended
	Nov. 03, 2023	Oct. 28, 2022
Cash flows from operating activities:
Net loss	$ (77,750)	$ (74,463)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	26,028	27,728
Amortization of right of use asset	1,686	2,853
Reorganization and other related charges	3,272	0
Amortization of costs capitalized to obtain revenue contracts	12,964	13,319
Amortization of costs capitalized to fulfill revenue contracts	2,562	3,635
Stock-based compensation expense	24,852	27,504
Effects of exchange rate changes on monetary assets and liabilities denominated in foreign currencies	1,575	1,386
Income tax benefit	(20,715)	(21,375)
Provision for credit losses	232	(552)
Changes in assets and liabilities:
Accounts receivable	15,951	21,584
Net transactions with Dell	2,028	(3,741)
Inventories	(139)	(178)
Other assets	(1,237)	(9,709)
Accounts payable	(7,462)	4,550
Deferred revenue	(24,011)	(33,171)
Operating leases, net	(4,031)	(4,086)
Accrued and other liabilities	(30,299)	(23,462)
Net cash used in operating activities	(74,494)	(68,178)
Cash flows from investing activities:
Capital expenditures	(865)	(1,609)
Software development costs	(4,106)	(3,352)
Net cash used in investing activities	(4,971)	(4,961)
Cash flows from financing activities:
Taxes paid on vested restricted shares	(5,947)	(8,484)
Net cash used in financing activities	(5,947)	(8,484)
Net decrease in cash and cash equivalents	(85,412)	(81,623)
Cash and cash equivalents at beginning of the period	143,517	220,655
Cash and cash equivalents at end of the period	$ 58,105	$ 139,032

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited) - USD ($) shares in Thousands, $ in Thousands	Total	Common Stock - Class A	Common Stock - Class B	Common Stock Common Stock - Class A	Common Stock Common Stock - Class B	Additional Paid in Capital	Accumulated Deficit	Accumulated Other Comprehensive (Loss) Income	Treasury Stock
Beginning balance (in shares) at Jan. 28, 2022				14,282	70,000
Beginning balance at Jan. 28, 2022	$ 648,057			$ 143	$ 700	$ 939,404	$ (269,622)	$ (2,672)	$ (19,896)
Statement of Shareholders' Equity
Net loss	(74,463)						(74,463)
Other comprehensive loss	(6,715)							(6,715)
Vesting of restricted stock units (in shares)				1,549
Vesting of restricted stock units	0			$ 15		(15)
Grant and forfeitures of restricted stock awards (in shares)				(423)
Grant and forfeitures of restricted stock awards	0			$ (4)		4
Common stock withheld as payment for withholding taxes upon the vesting of restricted shares (in shares)				(758)
Common stock withheld as payment for withholding taxes upon the vesting of restricted shares	(8,484)			$ (7)		(8,477)
Stock-based compensation	27,504					27,504
Ending balance (in shares) at Oct. 28, 2022				14,650	70,000
Ending balance at Oct. 28, 2022	585,899			$ 147	$ 700	958,420	(344,085)	(9,387)	(19,896)
Beginning balance (in shares) at Jul. 29, 2022				14,970	70,000
Beginning balance at Jul. 29, 2022	607,593			$ 150	$ 700	949,248	(315,939)	(6,670)	(19,896)
Statement of Shareholders' Equity
Net loss	(28,146)						(28,146)
Other comprehensive loss	(2,717)							(2,717)
Vesting of restricted stock units (in shares)				168
Vesting of restricted stock units	0			$ 2		(2)
Grant and forfeitures of restricted stock awards (in shares)				(423)
Grant and forfeitures of restricted stock awards	0			$ (4)		4
Common stock withheld as payment for withholding taxes upon the vesting of restricted shares (in shares)				(65)
Common stock withheld as payment for withholding taxes upon the vesting of restricted shares	(397)			$ (1)		(396)
Stock-based compensation	9,566					9,566
Ending balance (in shares) at Oct. 28, 2022				14,650	70,000
Ending balance at Oct. 28, 2022	585,899			$ 147	$ 700	958,420	(344,085)	(9,387)	(19,896)
Beginning balance (in shares) at Feb. 03, 2023		14,749	70,000	14,749	70,000
Beginning balance at Feb. 03, 2023	557,961			$ 147	$ 700	967,367	(384,121)	(6,237)	(19,896)
Statement of Shareholders' Equity
Net loss	(77,750)						(77,750)
Other comprehensive loss	(1,379)							(1,379)
Vesting of restricted stock units (in shares)				2,355
Vesting of restricted stock units	0			$ 24		(24)
Common stock withheld as payment for withholding taxes upon the vesting of restricted shares (in shares)				(775)
Common stock withheld as payment for withholding taxes upon the vesting of restricted shares	(5,947)			$ (8)		(5,938)
Stock-based compensation	24,852					24,852
Ending balance (in shares) at Nov. 03, 2023		16,329	70,000	16,329	70,000
Ending balance at Nov. 03, 2023	497,737			$ 163	$ 700	986,257	(461,871)	(7,616)	(19,896)
Beginning balance (in shares) at Aug. 04, 2023				16,235	70,000
Beginning balance at Aug. 04, 2023	504,470			$ 162	$ 700	976,532	(447,450)	(5,578)	(19,896)
Statement of Shareholders' Equity
Net loss	(14,421)						(14,421)
Other comprehensive loss	(2,038)							(2,038)
Vesting of restricted stock units (in shares)				142
Vesting of restricted stock units	0			$ 1		(1)
Common stock withheld as payment for withholding taxes upon the vesting of restricted shares (in shares)				(48)
Common stock withheld as payment for withholding taxes upon the vesting of restricted shares	(236)					(236)
Stock-based compensation	9,962					9,962
Ending balance (in shares) at Nov. 03, 2023		16,329	70,000	16,329	70,000
Ending balance at Nov. 03, 2023	$ 497,737			$ 163	$ 700	$ 986,257	$ (461,871)	$ (7,616)	$ (19,896)

DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION	9 Months Ended
DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION	Nov. 03, 2023
Organization, Consolidation and Presentation of Financial Statements [Abstract]
DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION	DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION Description of the Business SecureWorks Corp. is a leading global cybersecurity provider of technology-driven solutions singularly focused on protecting the Company’s customers. Except where the context otherwise requires or where otherwise indicated, all references in this report to “Secureworks,” “we,” “us,” “our” and “Company” refer to SecureWorks Corp. and our subsidiaries on a consolidated basis. References to “Dell” refer to Dell Inc. and its subsidiaries on a consolidated basis. The Company has one primary business activity, which is to provide customers with technology-driven cybersecurity solutions. The Company’s chief operating decision-maker, who is the Chief Executive Officer, makes operating decisions, assesses performance and allocates resources on a consolidated basis. There are no segment managers who are held accountable for operations and operating results below the consolidated unit level. Accordingly, Secureworks operates its business as a single reportable segment. On April 27, 2016, the Company completed its initial public offering, or IPO. Upon the closing of the IPO, Dell Technologies Inc., or Dell Technologies, owned, indirectly through Dell and its subsidiaries, all shares of the Company’s outstanding Class B common stock, which as of November 3, 2023, represented approximately 81.1% of the Company's total outstanding shares of common stock and approximately 97.7% of the combined voting power of both classes of the Company's outstanding common stock. Basis of Presentation and Consolidation The Company’s condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. The preparation of financial statements in accordance with GAAP requires management to make assumptions and estimations that affect the amounts reported in the Company’s financial statements and notes. The inputs into certain of the Company’s assumptions and estimations considered the economic implications of the Ukraine/Russia conflict and inflation concerns on the Company’s critical and significant accounting estimates. The condensed consolidated financial statements include assets, liabilities, revenue and expenses of all majority-owned subsidiaries. Intercompany transactions and balances are eliminated in consolidation. For the periods presented, Dell has provided various corporate services to the Company in the ordinary course of business, including finance, tax, human resources, legal, insurance, IT, procurement and facilities-related services. The cost of these services is charged in accordance with a shared services agreement that went into effect on August 1, 2015. For more information regarding related party transactions, see “Note 10—Related Party Transactions.” During the periods presented in the financial statements, Secureworks did not file separate federal tax returns, as the Company is 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 this 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. See “Note 9—Income and Other Taxes” for more information. Fiscal Year The Company’s fiscal year is the 52- or 53-week period ending on the Friday closest to January 31. The Company refers to the fiscal year ending February 2, 2024 and the fiscal year ended February 3, 2023 as fiscal 2024 and fiscal 2023, respectively. Fiscal 2024 consists of 52 weeks and fiscal 2023 consisted of 53 weeks. In fiscal 2024, each quarter has 13 weeks. In fiscal 2023, each quarter consisted of 13 weeks except for the fourth quarter, which consisted of 14 weeks. Unless otherwise indicated, all changes identified for the current-period results represent comparisons to results for the prior corresponding fiscal periods. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Estimates are revised as additional information becomes available. In the Condensed Consolidated Statements of Operations, estimates are used when accounting for revenue arrangements, determining the cost of revenue, allocating cost, estimating the impact of contingencies, and evaluating long-lived asset impairment. In the Condensed Consolidated Statements of Financial Position, estimates are used in determining the valuation and recoverability of assets, such as accounts receivables, inventories, fixed assets, capitalized software, goodwill and other identifiable intangible assets. Estimates are also used in determining the reported amounts of liabilities, such as taxes payable and the impact of contingencies. All estimates also impact the Condensed Consolidated Statements of Operations. Actual results could differ from these estimates due to risks and uncertainties, including uncertainty in the current economic environment due to the Ukraine/Russia conflict and impacts of inflation. The Company considered the potential impact of the current economic and geopolitical uncertainty on its estimates and assumptions and determined there was not a material impact to the Company’s condensed consolidated financial statements as of and for the three and nine months ended November 3, 2023. As the current economic environment continues to develop, many of the Company’s estimates could require increased judgment and be subject to a higher degree of variability and volatility. As a result, the Company’s estimates may change materially in future periods. Liquidity In recent periods, the Company has incurred losses from operations and operating cash outflows and, as of the Balance Sheet date, the Company has reported a deficit in working capital. During the second quarter of fiscal 2024, the Company completed reorganization actions which are expected to result in significant cost savings as the Company completes a transition to higher value, higher margin Taegis solutions. These efforts are expected to optimize the organizational structure and increase scalability to better position the Company for continued growth with improving operating margins over time. In the event that the Company’s financial results are below our expectations as a result of these or other factors, the Company may need to take additional actions to preserve existing cash reserves. As of November 3, 2023, the Company held $58.1 million of cash and cash equivalents. There were no amounts drawn on the $50 million Revolving Credit Facility with Dell as of November 3, 2023. We believe that our cash and cash equivalents and access to the Revolving Credit Facility will provide us with sufficient liquidity to meet our material cash requirements, including to fund our business and meet our obligations for at least 12 months from the filing date of this report. Recently Adopted Accounting Pronouncements None. Summary of Significant Accounting Policies There have been no significant changes to the Company’s significant accounting policies as of and for the three and nine months ended November 3, 2023, as compared to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the fiscal year ended February 3, 2023.

LOSS PER SHARE

9 Months Ended

Nov. 03, 2023

Earnings Per Share [Abstract]

LOSS PER SHARE

The following table sets forth the computation of loss per common share (in thousands, except per share amounts):


	Three Months Ended				Nine Months Ended
	November 3, 2023		October 28, 2022		November 3, 2023		October 28, 2022
Numerator:
Net loss	$	(14,421)	$	(28,146)	$	(77,750)	$	(74,463)
Denominator:
Weighted-average number of shares outstanding:
Basic and Diluted	86,278		84,584		85,943		84,277

Loss per common share:
Basic and Diluted	$	(0.17)	$	(0.33)	$	(0.90)	$	(0.88)

Weighted-average anti-dilutive share-based awards	8,845		6,099		7,693		6,020

CONTRACT BALANCES AND CONTRACT COSTS

9 Months Ended

Nov. 03, 2023

Revenue from Contract with Customer [Abstract]

CONTRACT BALANCES AND CONTRACT COSTS

The following table presents revenue by service type (in thousands):


	Three Months Ended				Nine Months Ended
	November 3, 2023		October 28, 2022		November 3, 2023		October 28, 2022
Net revenue:
Taegis Subscription Solutions	$	67,346	$	47,888	$	196,368	$	127,913
Managed Security Services	7,866		39,303		32,928		144,013
Total Subscription revenue	$	75,212	$	87,191	$	229,296	$	271,926
Professional Services	14,152		23,751		47,429		76,213
Total net revenue	$	89,364	$	110,942	$	276,725	$	348,139

Changes to the Company’s deferred revenue during the nine months ended November 3, 2023 and October 28, 2022 are as follows (in thousands):


	As of February 3, 2023		Upfront payments received and billings during the nine months ended November 3, 2023		Revenue recognized during the nine months ended November 3, 2023		As of November 3, 2023
Deferred revenue	$	156,332	$	150,135	$	(173,281)	$	133,186


	As of January 28, 2022		Upfront payments received and billings during the nine months ended October 28, 2022		Revenue recognized during the nine months ended October 28, 2022		As of October 28, 2022
Deferred revenue	$	176,068	$	175,301	$	(206,853)	$	144,516

Remaining Performance Obligation

As of November 3, 2023, the Company expects to recognize remaining performance obligations as follows (in thousands):


	Total		Expected to be recognized in the next 12 months		Expected to be recognized in 12-24 months		Expected to be recognized in 24-36 months		Expected to be recognized thereafter
Performance obligation - active	$	210,557	$	129,595	$	66,976	$	13,837	$	149
Performance obligation - backlog	2,901		1,003		1,002		896		—
Total	$	213,458	$	130,598	$	67,978	$	14,733	$	149

Deferred Commissions and Fulfillment Costs

Changes in the balance of total deferred commission and total deferred fulfillment costs during the nine months ended November 3, 2023 and October 28, 2022 are as follows (in thousands):


	As of February 3, 2023		Amount capitalized		Amount recognized		As of November 3, 2023
Deferred commissions	$	49,565	$	6,155	$	(12,964)	$	42,756
Deferred fulfillment costs	3,232		—		(2,562)		670


	As of January 28, 2022		Amount capitalized		Amount recognized		As of October 28, 2022
Deferred commissions	$	53,978	$	8,319	$	(13,319)	$	48,978
Deferred fulfillment costs	7,597		241		(3,635)		4,203

GOODWILL AND INTANGIBLE ASSETS

9 Months Ended

Nov. 03, 2023

Goodwill and Intangible Assets Disclosure [Abstract]

GOODWILL AND INTANGIBLE ASSETS

The Company did not recognize any impairment charges on goodwill or trade name asset during the period through November 3, 2023.

Intangible Assets

The Company’s intangible assets as of November 3, 2023 and February 3, 2023 were as follows:


	November 3, 2023						February 3, 2023
	Gross		Accumulated Amortization		Net		Gross		Accumulated Amortization		Net

	(in thousands)
Customer relationships	$	189,518	$	(144,101)	$	45,417	$	189,518	$	(133,530)	$	55,988
Acquired Technology	141,784		(138,783)		3,001		141,784		(128,612)		13,172
Developed Technology	15,933		(7,527)		8,406		11,827		(4,897)		6,930
Finite-lived intangible assets	347,235		(290,411)		56,824		343,129		(267,039)		76,090
Trade name	30,118		—		30,118		30,118		—		30,118
Total intangible assets	$	377,353	$	(290,411)	$	86,942	$	373,247	$	(267,039)	$	106,208

DEBT	9 Months Ended
DEBT	Nov. 03, 2023
Debt Disclosure [Abstract]
DEBT	DEBT Revolving Credit Facility SecureWorks, Inc., a wholly-owned subsidiary of SecureWorks Corp., is a party to a revolving credit agreement with a wholly-owned subsidiary of Dell under which the Company obtained a $50 million senior, unsecured revolving credit facility. Effective September 6, 2023, the Company executed an amendment to the revolving credit agreement that was effectuated on March 23, 2023. This amended agreement: (1) increased the maximum principal amount of borrowings outstanding under the revolving credit facility to $50 million, (2) removed the one-time increase of up to an additional $30 million in borrowings upon mutual agreement by lender and borrower, (3) extended the commitment and required repayment date under the revolving credit agreement to March 23, 2026, and (4) modified the rate at which interest accrues on funds drawn against the revolving credit agreement to SOFR plus 2.00%. Amounts under the facility may be borrowed, repaid and reborrowed from time to time during the term of the facility. The proceeds from loans made under the facility may be used for general corporate purposes. 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. There was no outstanding balance under the credit facility, and the Company was in compliance with all covenants as of November 3, 2023 or February 3, 2023. Additionally, there were no amounts borrowed under the credit facility during the three and nine months ended November 3, 2023. 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 SecureWorks Corp. or following a transaction in which SecureWorks, Inc. ceases to be a direct or indirect wholly-owned subsidiary of SecureWorks Corp. The facility is not guaranteed by SecureWorks Corp. or its subsidiaries.

COMMITMENTS AND CONTINGENCIES	9 Months Ended
COMMITMENTS AND CONTINGENCIES	Nov. 03, 2023
Commitments and Contingencies Disclosure [Abstract]
COMMITMENTS AND CONTINGENCIES	COMMITMENTS AND CONTINGENCIES Legal Contingencies— From time to time, the Company is involved in claims and legal proceedings that arise in the ordinary course of business. The Company accrues a liability when it believes that it is both probable that a liability has been incurred and that it can reasonably estimate the amount of the loss. The Company reviews the status of such matters at least quarterly and adjusts its liabilities as necessary to reflect ongoing negotiations, settlements, rulings, advice of legal counsel and other relevant information. Whether the outcome of any claim, suit, assessment, investigation or legal proceeding, individually or collectively, could have a material adverse effect on the Company’s business, financial condition, results of operations or cash flows will depend on a number of factors, including the nature, timing and amount of any associated expenses, amounts paid in settlement, damages or other remedies or consequences. To the extent new information is obtained and the Company’s views on the probable outcomes of claims, suits, assessments, investigations or legal proceedings change, changes in accrued liabilities would be recorded in the period in which such a determination is made. As of November 3, 2023, the Company does not believe that there were any such matters that, individually or in the aggregate, would have a material adverse effect on its business, financial condition, results of operations or cash flows. Customer-based Taxation Contingencies—Various government entities, or taxing authorities, require the Company to bill its customers for the taxes they owe based on the services they purchase from the Company. The application of the rules of each taxing authority concerning which services are subject to each tax and how those services should be taxed involves the application of judgment. Taxing authorities periodically perform audits to verify compliance and include all periods that remain open under applicable statutes, which generally range from three to four years. These audits could result in significant assessments of past taxes, fines and interest if the Company were found to be non-compliant. During the course of an audit, a taxing authority may question the Company’s application of its rules in a manner that, if the Company were not successful in substantiating its position, could result in a significant financial impact to the Company. In the course of preparing its financial statements and disclosures, the Company considers whether information exists that would warrant disclosure or an accrual with respect to such a contingency. As of November 3, 2023, the Company is under audit with various state taxing authorities in which rulings related to the taxability of certain of its services are pending; the Company has recorded an estimated liability of $8.9 million related to such matters. The Company expects to continue to appeal certain of these rulings, but should the Company not prevail, it could be subject to obligations to pay additional taxes together with associated penalties and interest for the audited tax period, as well as additional taxes for periods subsequent to the tax audit period, including penalties and interest. While Dell does provide an indemnification for certain state tax issues for tax periods prior to August 1, 2015, such indemnification would not cover a material portion of the current estimated liability. Indemnifications—In the ordinary course of business, the Company enters into contractual arrangements under which it agrees to indemnify its customers from certain losses incurred by the customer as to third-party claims relating to the services performed on behalf of the Company or for certain losses incurred by the customer as to third-party claims arising from certain events as defined within the particular contract. Such indemnification obligations may not be subject to maximum loss clauses. Historically, payments related to these indemnifications have been immaterial. Concentrations—The Company sells solutions to customers of all sizes through a combination of partners and its sales organization. During the three and nine months ended November 3, 2023 and October 28, 2022, the Company had no customer that represented 10% or more of its net revenue.

LEASES

9 Months Ended

Nov. 03, 2023

Leases [Abstract]

LEASES

The components of lease expense were as follows:


	Three Months Ended				Nine Months Ended
	November 3, 2023		October 28, 2022		November 3, 2023		October 28, 2022
	(in thousands)
Operating lease cost	$	1,079	$	1,161	$	3,243	$	3,543
Variable lease costs	98		121		249		326
Short term lease costs	—		40		—		87
Total lease costs	$	1,177	$	1,322	$	3,492	$	3,956
Supplemental cash flow information:
Cash paid for amounts included in the measurement of operating lease liabilities	$	1,352	$	1,419	$	4,013	$	4,575

Weighted-average information associated with the measurement of remaining operating lease obligations is as follows:


	November 3, 2023
Weighted-average remaining lease term	3.0 years
Weighted-average discount rate	5.4	%

The following table summarizes the maturity of the Company’s operating lease liabilities as of November 3, 2023 (in thousands):


Fiscal Years Ending	November 3, 2023
2024	$	1,350
2025	5,095
2026	4,526
2027	4,088
2028	—
Thereafter	—
Total operating lease payments	$	15,059
Less imputed interest	1,072
Total operating lease liabilities	$	13,987

STOCK-BASED COMPENSATION AND OTHER LONG-TERM PERFORMANCE INCENTIVES	9 Months Ended
	Nov. 03, 2023
Share-Based Payment Arrangement [Abstract]
STOCK-BASED COMPENSATION AND OTHER LONG-TERM PERFORMANCE INCENTIVES	STOCK-BASED COMPENSATION AND OTHER LONG-TERM PERFORMANCE INCENTIVES The SecureWorks Corp. 2016 Long-Term Incentive Plan, or the 2016 Plan, provides for the grant of options, stock appreciation rights, restricted stock, restricted stock units, whether time-based, performance-based or time- and performance-based, deferred stock units, unrestricted stock, dividend equivalent rights, other equity-based awards, and cash bonus awards. Awards may be granted under the 2016 Plan to individuals who are employees, officers, or non-employee directors of the Company or any of its affiliates, consultants and advisors who perform services for the Company or any of its affiliates, and any other individual whose participation in the 2016 Plan is determined to be in the best interests of the Company by the compensation committee of the board of directors. Under the 2016 Plan, the Company granted 222,185 and 8,276,147 restricted stock units during the three and nine months ended November 3, 2023, respectively, and 200,736 and 4,183,636 restricted stock units during the three and nine months ended October 28, 2022, respectively. The majority of the restricted stock units granted during these periods vest over a three-year period. Approximately 17% of such awards granted during each of the nine months ended November 3, 2023 and October 28, 2022 are subject to performance conditions. The majority of the 7,142,257 restricted stock unit awards made during the three months ended May 5, 2023 were subject to stockholder approval of an amendment to the 2016 Plan to increase the number of shares of Class A common stock issuable under the plan by 7,500,000 shares at the Company’s 2023 annual meeting on June 27, 2023. Such stockholder approval was obtained at the annual meeting, and those awards were deemed granted and outstanding for accounting purposes as of the approval date. The Company grants long-term cash awards to certain employees under the 2016 Plan. The Company granted zero and $0.1 million of cash awards during the three and nine months ended November 3, 2023, respectively, compared to $0.1 million cash awards granted during the three and nine months ended October 28, 2022. The Company recognized $0.4 million and $1.5 million of related compensation expense for the three and nine months ended November 3, 2023, respectively, and $1.0 million and $3.5 million of related compensation expense for the three and nine months ended October 28, 2022, respectively.

INCOME AND OTHER TAXES

9 Months Ended

Nov. 03, 2023

Income Tax Disclosure [Abstract]

INCOME AND OTHER TAXES


	Three Months Ended						Nine Months Ended
	November 3, 2023			October 28, 2022			November 3, 2023			October 28, 2022

Loss before income taxes	$	(18,569)		$	(36,667)		$	(98,465)		$	(95,838)
Income tax benefit	$	(4,148)		$	(8,521)		$	(20,715)		$	(21,375)
Effective tax rate	22.3		%	23.2		%	21.0		%	22.3		%

Net deferred tax balances are included in other non-current assets and other non-current liabilities in the Condensed Consolidated Statements of Financial Position.

RELATED PARTY TRANSACTIONS

9 Months Ended

Nov. 03, 2023

RELATED PARTY TRANSACTIONS

Allocated Expenses

Related Party Arrangements


	November 3, 2023		February 3, 2023
Related party payable (in accrued and other current liabilities)	$	3,530	$	1,141

Accounts receivable from customers under reseller agreements with Dell (in accounts receivable, net)	$	4,521	$	5,584

Net operating loss tax sharing receivable under agreement with Dell	$	7,641	$	3,472

FAIR VALUE MEASUREMENTS

9 Months Ended

Nov. 03, 2023

Fair Value Disclosures [Abstract]

FAIR VALUE MEASUREMENTS

•Level 1 - Quoted market prices in active markets for identical assets or liabilities

•Level 2 - Other observable market-based inputs or unobservable inputs that are corroborated by market data

•Level 3 - Significant unobservable inputs

Assets and Liabilities Measured at Fair Value on a Recurring Basis


	November 3, 2023		February 3, 2023
	Level 1		Level 1
Cash equivalents - Money Market Funds	$	1,669	$	16,451

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

The carrying amounts of the Company’s accounts receivable, accounts payable and accrued expenses approximate their respective fair value due to their short-term nature.

REORGANIZATION AND OTHER RELATED COSTS

9 Months Ended

Nov. 03, 2023

Restructuring and Related Activities [Abstract]

REORGANIZATION AND OTHER RELATED COSTS


	Workforce		Real estate-related		Other		Total
Balance as of January 28, 2022	$	—	$	—	$	—	$	—
Reorganization charge	7,550		4,570		3,351		15,471
Charges settled in cash	—		(90)		(325)		(415)
Charges settled in non-cash	—		(4,480)		(1,632)		(6,112)
Balance as of February 3, 2023	$	7,550	$	—	$	1,394	$	8,944
Reorganization charge	10,960		3,272		—		14,232
Charges settled in cash	(14,735)		—		(1,394)		(16,129)
Charges settled in non-cash	—		(3,272)		—		(3,272)
Balance as of November 3, 2023	$	3,775	$	—	$	—	$	3,775

DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION (Policies)	9 Months Ended
	Nov. 03, 2023
Organization, Consolidation and Presentation of Financial Statements [Abstract]
Basis of Presentation and Consolidation	Basis of Presentation and Consolidation The Company’s condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. The preparation of financial statements in accordance with GAAP requires management to make assumptions and estimations that affect the amounts reported in the Company’s financial statements and notes. The inputs into certain of the Company’s assumptions and estimations considered the economic implications of the Ukraine/Russia conflict and inflation concerns on the Company’s critical and significant accounting estimates. The condensed consolidated financial statements include assets, liabilities, revenue and expenses of all majority-owned subsidiaries. Intercompany transactions and balances are eliminated in consolidation. For the periods presented, Dell has provided various corporate services to the Company in the ordinary course of business, including finance, tax, human resources, legal, insurance, IT, procurement and facilities-related services. The cost of these services is charged in accordance with a shared services agreement that went into effect on August 1, 2015. For more information regarding related party transactions, see “Note 10—Related Party Transactions.” During the periods presented in the financial statements, Secureworks did not file separate federal tax returns, as the Company is 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 this 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. See “Note 9—Income and Other Taxes” for more information.
Fiscal Year	Fiscal Year The Company’s fiscal year is the 52- or 53-week period ending on the Friday closest to January 31. The Company refers to the fiscal year ending February 2, 2024 and the fiscal year ended February 3, 2023 as fiscal 2024 and fiscal 2023, respectively. Fiscal 2024 consists of 52 weeks and fiscal 2023 consisted of 53 weeks. In fiscal 2024, each quarter has 13 weeks. In fiscal 2023, each quarter consisted of 13 weeks except for the fourth quarter, which consisted of 14 weeks. Unless otherwise indicated, all changes identified for the current-period results represent comparisons to results for the prior corresponding fiscal periods.
Use of Estimates	Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Estimates are revised as additional information becomes available. In the Condensed Consolidated Statements of Operations, estimates are used when accounting for revenue arrangements, determining the cost of revenue, allocating cost, estimating the impact of contingencies, and evaluating long-lived asset impairment. In the Condensed Consolidated Statements of Financial Position, estimates are used in determining the valuation and recoverability of assets, such as accounts receivables, inventories, fixed assets, capitalized software, goodwill and other identifiable intangible assets. Estimates are also used in determining the reported amounts of liabilities, such as taxes payable and the impact of contingencies. All estimates also impact the Condensed Consolidated Statements of Operations. Actual results could differ from these estimates due to risks and uncertainties, including uncertainty in the current economic environment due to the Ukraine/Russia conflict and impacts of inflation. The Company considered the potential impact of the current economic and geopolitical uncertainty on its estimates and assumptions and determined there was not a material impact to the Company’s condensed consolidated financial statements as of and for the three and nine months ended November 3, 2023. As the current economic environment continues to develop, many of the Company’s estimates could require increased judgment and be subject to a higher degree of variability and volatility. As a result, the Company’s estimates may change materially in future periods.
Recently Adopted Accounting Pronouncements	Recently Adopted Accounting Pronouncements None.
Fair Value Measurements	The Company measures fair value within the guidance of the three-level valuation hierarchy. This hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The categorization of a measurement within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels are defined as follows: •Level 1 - Quoted market prices in active markets for identical assets or liabilities •Level 2 - Other observable market-based inputs or unobservable inputs that are corroborated by market data •Level 3 - Significant unobservable inputs

LOSS PER SHARE (Tables)

9 Months Ended

Nov. 03, 2023

Earnings Per Share [Abstract]

Schedule of Net Loss Per Common Share, Basic and Diluted

The following table sets forth the computation of loss per common share (in thousands, except per share amounts):


	Three Months Ended				Nine Months Ended
	November 3, 2023		October 28, 2022		November 3, 2023		October 28, 2022
Numerator:
Net loss	$	(14,421)	$	(28,146)	$	(77,750)	$	(74,463)
Denominator:
Weighted-average number of shares outstanding:
Basic and Diluted	86,278		84,584		85,943		84,277

Loss per common share:
Basic and Diluted	$	(0.17)	$	(0.33)	$	(0.90)	$	(0.88)

Weighted-average anti-dilutive share-based awards	8,845		6,099		7,693		6,020

CONTRACT BALANCES AND CONTRACT COSTS (Tables)

9 Months Ended

Nov. 03, 2023

Revenue from Contract with Customer [Abstract]

Schedule of Revenue by Service Type

The following table presents revenue by service type (in thousands):


	Three Months Ended				Nine Months Ended
	November 3, 2023		October 28, 2022		November 3, 2023		October 28, 2022
Net revenue:
Taegis Subscription Solutions	$	67,346	$	47,888	$	196,368	$	127,913
Managed Security Services	7,866		39,303		32,928		144,013
Total Subscription revenue	$	75,212	$	87,191	$	229,296	$	271,926
Professional Services	14,152		23,751		47,429		76,213
Total net revenue	$	89,364	$	110,942	$	276,725	$	348,139

Schedule of Deferred Revenue

Changes to the Company’s deferred revenue during the nine months ended November 3, 2023 and October 28, 2022 are as follows (in thousands):


	As of February 3, 2023		Upfront payments received and billings during the nine months ended November 3, 2023		Revenue recognized during the nine months ended November 3, 2023		As of November 3, 2023
Deferred revenue	$	156,332	$	150,135	$	(173,281)	$	133,186


	As of January 28, 2022		Upfront payments received and billings during the nine months ended October 28, 2022		Revenue recognized during the nine months ended October 28, 2022		As of October 28, 2022
Deferred revenue	$	176,068	$	175,301	$	(206,853)	$	144,516

Schedule of Expected Timing to Recognize Remaining Performance Obligation

As of November 3, 2023, the Company expects to recognize remaining performance obligations as follows (in thousands):


	Total		Expected to be recognized in the next 12 months		Expected to be recognized in 12-24 months		Expected to be recognized in 24-36 months		Expected to be recognized thereafter
Performance obligation - active	$	210,557	$	129,595	$	66,976	$	13,837	$	149
Performance obligation - backlog	2,901		1,003		1,002		896		—
Total	$	213,458	$	130,598	$	67,978	$	14,733	$	149

Schedule of Deferred Commissions and Fulfillment Costs

Changes in the balance of total deferred commission and total deferred fulfillment costs during the nine months ended November 3, 2023 and October 28, 2022 are as follows (in thousands):


	As of February 3, 2023		Amount capitalized		Amount recognized		As of November 3, 2023
Deferred commissions	$	49,565	$	6,155	$	(12,964)	$	42,756
Deferred fulfillment costs	3,232		—		(2,562)		670


	As of January 28, 2022		Amount capitalized		Amount recognized		As of October 28, 2022
Deferred commissions	$	53,978	$	8,319	$	(13,319)	$	48,978
Deferred fulfillment costs	7,597		241		(3,635)		4,203

GOODWILL AND INTANGIBLE ASSETS (Tables)

9 Months Ended

Nov. 03, 2023

Goodwill and Intangible Assets Disclosure [Abstract]

Schedule of Indefinite-Lived Intangible Assets

The Company’s intangible assets as of November 3, 2023 and February 3, 2023 were as follows:


	November 3, 2023						February 3, 2023
	Gross		Accumulated Amortization		Net		Gross		Accumulated Amortization		Net

	(in thousands)
Customer relationships	$	189,518	$	(144,101)	$	45,417	$	189,518	$	(133,530)	$	55,988
Acquired Technology	141,784		(138,783)		3,001		141,784		(128,612)		13,172
Developed Technology	15,933		(7,527)		8,406		11,827		(4,897)		6,930
Finite-lived intangible assets	347,235		(290,411)		56,824		343,129		(267,039)		76,090
Trade name	30,118		—		30,118		30,118		—		30,118
Total intangible assets	$	377,353	$	(290,411)	$	86,942	$	373,247	$	(267,039)	$	106,208

Schedule of Finite-Lived Intangible Assets

The Company’s intangible assets as of November 3, 2023 and February 3, 2023 were as follows:


	November 3, 2023						February 3, 2023
	Gross		Accumulated Amortization		Net		Gross		Accumulated Amortization		Net

	(in thousands)
Customer relationships	$	189,518	$	(144,101)	$	45,417	$	189,518	$	(133,530)	$	55,988
Acquired Technology	141,784		(138,783)		3,001		141,784		(128,612)		13,172
Developed Technology	15,933		(7,527)		8,406		11,827		(4,897)		6,930
Finite-lived intangible assets	347,235		(290,411)		56,824		343,129		(267,039)		76,090
Trade name	30,118		—		30,118		30,118		—		30,118
Total intangible assets	$	377,353	$	(290,411)	$	86,942	$	373,247	$	(267,039)	$	106,208

LEASES (Tables)

9 Months Ended

Nov. 03, 2023

Leases [Abstract]

Components of Lease Cost

The components of lease expense were as follows:


	Three Months Ended				Nine Months Ended
	November 3, 2023		October 28, 2022		November 3, 2023		October 28, 2022
	(in thousands)
Operating lease cost	$	1,079	$	1,161	$	3,243	$	3,543
Variable lease costs	98		121		249		326
Short term lease costs	—		40		—		87
Total lease costs	$	1,177	$	1,322	$	3,492	$	3,956
Supplemental cash flow information:
Cash paid for amounts included in the measurement of operating lease liabilities	$	1,352	$	1,419	$	4,013	$	4,575

Weighted-average information associated with the measurement of remaining operating lease obligations is as follows:


	November 3, 2023
Weighted-average remaining lease term	3.0 years
Weighted-average discount rate	5.4	%

Maturities of Operating Lease Liabilities

The following table summarizes the maturity of the Company’s operating lease liabilities as of November 3, 2023 (in thousands):


Fiscal Years Ending	November 3, 2023
2024	$	1,350
2025	5,095
2026	4,526
2027	4,088
2028	—
Thereafter	—
Total operating lease payments	$	15,059
Less imputed interest	1,072
Total operating lease liabilities	$	13,987

INCOME AND OTHER TAXES (Tables)

9 Months Ended

Nov. 03, 2023

Income Tax Disclosure [Abstract]

Schedule of Effective Income Tax Rate Reconciliation


	Three Months Ended						Nine Months Ended
	November 3, 2023			October 28, 2022			November 3, 2023			October 28, 2022

Loss before income taxes	$	(18,569)		$	(36,667)		$	(98,465)		$	(95,838)
Income tax benefit	$	(4,148)		$	(8,521)		$	(20,715)		$	(21,375)
Effective tax rate	22.3		%	23.2		%	21.0		%	22.3		%

RELATED PARTY TRANSACTIONS (Tables)

9 Months Ended

Nov. 03, 2023

Schedule of Related Party Transactions


	November 3, 2023		February 3, 2023
Related party payable (in accrued and other current liabilities)	$	3,530	$	1,141

Accounts receivable from customers under reseller agreements with Dell (in accounts receivable, net)	$	4,521	$	5,584

Net operating loss tax sharing receivable under agreement with Dell	$	7,641	$	3,472

FAIR VALUE MEASUREMENTS (Tables)

9 Months Ended

Nov. 03, 2023

Fair Value Disclosures [Abstract]

Schedule of Fair Value, Assets and Liabilities Measured on Recurring Basis


	November 3, 2023		February 3, 2023
	Level 1		Level 1
Cash equivalents - Money Market Funds	$	1,669	$	16,451

REORGANIZATION AND OTHER RELATED COSTS (Tables)

9 Months Ended

Nov. 03, 2023

Restructuring and Related Activities [Abstract]

Schedule of Restructuring Reserve by Type of Cost


	Workforce		Real estate-related		Other		Total
Balance as of January 28, 2022	$	—	$	—	$	—	$	—
Reorganization charge	7,550		4,570		3,351		15,471
Charges settled in cash	—		(90)		(325)		(415)
Charges settled in non-cash	—		(4,480)		(1,632)		(6,112)
Balance as of February 3, 2023	$	7,550	$	—	$	1,394	$	8,944
Reorganization charge	10,960		3,272		—		14,232
Charges settled in cash	(14,735)		—		(1,394)		(16,129)
Charges settled in non-cash	—		(3,272)		—		(3,272)
Balance as of November 3, 2023	$	3,775	$	—	$	—	$	3,775

DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION (Details) - USD ($)	9 Months Ended
	Nov. 03, 2023	Feb. 03, 2023	Oct. 28, 2022
Class of Stock [Line Items]
Cash and cash equivalents	$ 58,105,000	$ 143,517,000
Revolving Credit Facility \| Line of Credit
Class of Stock [Line Items]
Line of credit, outstanding balance	0	$ 0	$ 0
Maximum borrowing capacity	$ 50,000,000
IPO \| Denali
Class of Stock [Line Items]
Percent of outstanding shares owned	81.10%
Percent of voting interests owned	97.70%

LOSS PER SHARE (Details) - USD ($) $ / shares in Units, shares in Thousands, $ in Thousands	3 Months Ended		9 Months Ended
	Nov. 03, 2023	Oct. 28, 2022	Nov. 03, 2023	Oct. 28, 2022
Numerator:
Net loss	$ (14,421)	$ (28,146)	$ (77,750)	$ (74,463)
Denominator:
Weighted-average common shares outstanding (basic in shares)	86,278	84,584	85,943	84,277
Weighted-average common shares outstanding (diluted in shares)	86,278	84,584	85,943	84,277
Loss per common share:
Loss per common share (basic in usd per share)	$ (0.17)	$ (0.33)	$ (0.90)	$ (0.88)
Loss per common share (diluted in usd per share)	$ (0.17)	$ (0.33)	$ (0.90)	$ (0.88)
Weighted-average anti-dilutive share-based awards (in shares)	8,845	6,099	7,693	6,020

CONTRACT BALANCES AND CONTRACT COSTS - Disaggregation of Revenue by Service Type (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Nov. 03, 2023	Oct. 28, 2022	Nov. 03, 2023	Oct. 28, 2022
Disaggregation of Revenue [Line Items]
Total net revenue	$ 89,364	$ 110,942	$ 276,725	$ 348,139
Taegis Subscription Solutions
Disaggregation of Revenue [Line Items]
Total net revenue	67,346	47,888	196,368	127,913
Managed Security Services
Disaggregation of Revenue [Line Items]
Total net revenue	7,866	39,303	32,928	144,013
Subscription
Disaggregation of Revenue [Line Items]
Total net revenue	75,212	87,191	229,296	271,926
Professional services
Disaggregation of Revenue [Line Items]
Total net revenue	$ 14,152	$ 23,751	$ 47,429	$ 76,213

CONTRACT BALANCES AND CONTRACT COSTS - Narrative (Details)	9 Months Ended
	Nov. 03, 2023 USD ($) performanceObligationElement	Oct. 28, 2022 USD ($)
Disaggregation of Revenue [Line Items]
Deferred revenue billed in advance, percent	65.00%
Deferred revenue billed monthly or quarterly, percent	35.00%
Number of elements performance obligation is comprised of \| performanceObligationElement	2
Impairment losses on deferred commissions and deferred fulfillment costs \| $	$ 0	$ 0
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date [Axis]: 2023-11-04
Disaggregation of Revenue [Line Items]
Performance obligation period	1 year
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date [Axis]: 2023-11-04 \| Subscription-Based Solutions
Disaggregation of Revenue [Line Items]
Performance obligation period	2 years
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date [Axis]: 2023-11-04 \| Professional services
Disaggregation of Revenue [Line Items]
Performance obligation period	1 year
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date [Axis]: 2024-11-03
Disaggregation of Revenue [Line Items]
Performance obligation period	1 year
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date [Axis]: 2025-11-02
Disaggregation of Revenue [Line Items]
Performance obligation period	1 year
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date [Axis]: 2026-11-01
Disaggregation of Revenue [Line Items]
Performance obligation period

CONTRACT BALANCES AND CONTRACT COSTS - Deferred Revenue (Details) - USD ($) $ in Thousands	9 Months Ended
	Nov. 03, 2023	Oct. 28, 2022
Change in Contract with Customer, Liability [Roll Forward]
Deferred revenue, Beginning of period	$ 156,332	$ 176,068
Deferred revenue, Upfront payments received and billings	150,135	175,301
Deferred revenue, Revenue recognized	(173,281)	(206,853)
Deferred revenue, End of period	$ 133,186	$ 144,516

CONTRACT BALANCES AND CONTRACT COSTS - Remaining Performance Obligation and Timing (Details) $ in Thousands	Nov. 03, 2023 USD ($)
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction [Line Items]
Remaining performance obligation	$ 213,458
Performance obligation - active
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction [Line Items]
Remaining performance obligation	210,557
Performance obligation - backlog
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction [Line Items]
Remaining performance obligation	2,901
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date [Axis]: 2023-11-04
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction [Line Items]
Remaining performance obligation	$ 130,598
Performance obligation period	1 year
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date [Axis]: 2023-11-04 \| Performance obligation - active
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction [Line Items]
Remaining performance obligation	$ 129,595
Performance obligation period	1 year
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date [Axis]: 2023-11-04 \| Performance obligation - backlog
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction [Line Items]
Remaining performance obligation	$ 1,003
Performance obligation period	1 year
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date [Axis]: 2024-11-03
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction [Line Items]
Remaining performance obligation	$ 67,978
Performance obligation period	1 year
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date [Axis]: 2024-11-03 \| Performance obligation - active
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction [Line Items]
Remaining performance obligation	$ 66,976
Performance obligation period	1 year
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date [Axis]: 2024-11-03 \| Performance obligation - backlog
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction [Line Items]
Remaining performance obligation	$ 1,002
Performance obligation period	1 year
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date [Axis]: 2025-11-02
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction [Line Items]
Remaining performance obligation	$ 14,733
Performance obligation period	1 year
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date [Axis]: 2025-11-02 \| Performance obligation - active
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction [Line Items]
Remaining performance obligation	$ 13,837
Performance obligation period	1 year
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date [Axis]: 2025-11-02 \| Performance obligation - backlog
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction [Line Items]
Remaining performance obligation	$ 896
Performance obligation period	1 year
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date [Axis]: 2026-11-01
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction [Line Items]
Remaining performance obligation	$ 149
Performance obligation period
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date [Axis]: 2026-11-01 \| Performance obligation - active
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction [Line Items]
Remaining performance obligation	$ 149
Performance obligation period
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date [Axis]: 2026-11-01 \| Performance obligation - backlog
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction [Line Items]
Remaining performance obligation	$ 0
Performance obligation period

CONTRACT BALANCES AND CONTRACT COSTS - Deferred Commissions and Fulfillment Costs (Details) - USD ($) $ in Thousands	9 Months Ended
	Nov. 03, 2023	Oct. 28, 2022
Deferred commissions
Capitalized Contract Cost [Roll Forward]
Beginning balance	$ 49,565	$ 53,978
Amount capitalized	6,155	8,319
Amount recognized	(12,964)	(13,319)
Ending balance	42,756	48,978
Deferred fulfillment costs
Capitalized Contract Cost [Roll Forward]
Beginning balance	3,232	7,597
Amount capitalized	0	241
Amount recognized	(2,562)	(3,635)
Ending balance	$ 670	$ 4,203

GOODWILL AND INTANGIBLE ASSETS - Narrative (Details)	3 Months Ended		9 Months Ended
GOODWILL AND INTANGIBLE ASSETS - Narrative (Details)	Nov. 03, 2023 USD ($)	Oct. 28, 2022 USD ($)	Nov. 03, 2023 USD ($) reportingUnit	Oct. 28, 2022 USD ($)	Feb. 03, 2023 USD ($)
Goodwill and Intangible Assets Disclosure [Abstract]
Goodwill, period increase (decrease)			$ (300,000)
Goodwill	$ 425,241,000		$ 425,241,000		$ 425,519,000
Number of reporting units \| reportingUnit			1
Amortization expense	7,300,000	$ 7,900,000	$ 23,400,000	$ 23,300,000
Impairment charges	$ 0	$ 0	$ 0	$ 0

GOODWILL AND INTANGIBLE ASSETS - Intangible Assets (Details) - USD ($) $ in Thousands	Nov. 03, 2023	Feb. 03, 2023
Finite-Lived Intangible Assets [Line Items]
Gross	$ 347,235	$ 343,129
Accumulated Amortization	(290,411)	(267,039)
Net	56,824	76,090
Intangible Assets, Net (Excluding Goodwill) [Abstract]
Gross	377,353	373,247
Accumulated Amortization	(290,411)	(267,039)
Net	86,942	106,208
Trade name
Indefinite-lived Intangible Assets [Line Items]
Indefinite-Lived Intangible Assets	30,118	30,118
Customer relationships
Finite-Lived Intangible Assets [Line Items]
Gross	189,518	189,518
Accumulated Amortization	(144,101)	(133,530)
Net	45,417	55,988
Intangible Assets, Net (Excluding Goodwill) [Abstract]
Accumulated Amortization	(144,101)	(133,530)
Acquired Technology
Finite-Lived Intangible Assets [Line Items]
Gross	141,784	141,784
Accumulated Amortization	(138,783)	(128,612)
Net	3,001	13,172
Intangible Assets, Net (Excluding Goodwill) [Abstract]
Accumulated Amortization	(138,783)	(128,612)
Developed Technology
Finite-Lived Intangible Assets [Line Items]
Gross	15,933	11,827
Accumulated Amortization	(7,527)	(4,897)
Net	8,406	6,930
Intangible Assets, Net (Excluding Goodwill) [Abstract]
Accumulated Amortization	$ (7,527)	$ (4,897)

DEBT (Details) - Revolving Credit Facility - Line of Credit - USD ($)	9 Months Ended
	Nov. 03, 2023	Feb. 03, 2023	Oct. 28, 2022
Debt Instrument [Line Items]
Maximum borrowing capacity	$ 50,000,000
Additional borrowing capacity	$ 30,000,000
Commitment fee percentage	0.35%
Line of credit, outstanding balance	$ 0	$ 0	$ 0
Secured Overnight Financing Rate (SOFR) Overnight Index Swap Rate
Debt Instrument [Line Items]
Basis spread on variable rate	2.00%

COMMITMENTS AND CONTINGENCIES (Details) $ in Millions	9 Months Ended
COMMITMENTS AND CONTINGENCIES (Details) $ in Millions	Nov. 03, 2023 USD ($)
State and Local Jurisdiction
Other Commitments [Line Items]
Income tax examination, tax liability accrued	$ 8.9
Minimum
Other Commitments [Line Items]
Income tax examination, period	3 years
Maximum
Other Commitments [Line Items]
Income tax examination, period	4 years

LEASES - Narrative (Details) - USD ($) $ in Millions	3 Months Ended
LEASES - Narrative (Details) - USD ($) $ in Millions	Aug. 04, 2023	Nov. 03, 2023
Lessee, Lease, Description [Line Items]
Impairment loss	$ 2.9
Minimum
Lessee, Lease, Description [Line Items]
Remaining lease term		9 months 18 days
Maximum
Lessee, Lease, Description [Line Items]
Remaining lease term		3 years 2 months 12 days

LEASES - Components of Lease Expense (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Nov. 03, 2023	Oct. 28, 2022	Nov. 03, 2023	Oct. 28, 2022
Leases [Abstract]
Operating lease cost	$ 1,079	$ 1,161	$ 3,243	$ 3,543
Variable lease costs	98	121	249	326
Short term lease costs	0	40	0	87
Total lease costs	1,177	1,322	3,492	3,956
Supplemental cash flow information:
Cash paid for amounts included in the measurement of operating lease liabilities	$ 1,352	$ 1,419	$ 4,013	$ 4,575

LEASES - Weighted Average (Details)	Nov. 03, 2023
Leases [Abstract]
Weighted-average remaining lease term	3 years
Weighted-average discount rate	5.40%

LEASES - Maturities of Operating Lease Liabilities (Details) $ in Thousands	Nov. 03, 2023 USD ($)
Operating Leases, After Adoption of 842:
2024	$ 1,350
2025	5,095
2026	4,526
2027	4,088
2028	0
Thereafter	0
Total operating lease payments	15,059
Less imputed interest	1,072
Total operating lease liabilities	$ 13,987

STOCK-BASED COMPENSATION AND OTHER LONG-TERM PERFORMANCE INCENTIVES (Details) - USD ($)	3 Months Ended			9 Months Ended
	Nov. 03, 2023	Aug. 04, 2023	Oct. 28, 2022	Nov. 03, 2023	Oct. 28, 2022
2016 Long-Term Incentive Plan \| Common Class A [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of additional shares authorized	7,500,000
Restricted Stock Units (RSUs)
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Award vesting term				3 years
Restricted Stock Units (RSUs) \| 2016 Long-Term Incentive Plan
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Awards issued (in shares)	222,185	7,142,257	200,736	8,276,147	4,183,636
Restricted Stock and Restricted Stock Units \| 2016 Long-Term Incentive Plan
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Percentage of grants issued subject to performance conditions				17.00%
Incentive Cash Awards
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Awards granted	$ 0		$ 100,000	$ 100,000	$ 100,000
Compensation expense	$ 400,000		$ 1,000,000	$ 1,500,000	$ 3,500,000

INCOME AND OTHER TAXES - Effective Income Tax Rate (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Nov. 03, 2023	Oct. 28, 2022	Nov. 03, 2023	Oct. 28, 2022
Income Tax Disclosure [Abstract]
Loss before income taxes	$ (18,569)	$ (36,667)	$ (98,465)	$ (95,838)
Income tax benefit	$ (4,148)	$ (8,521)	$ (20,715)	$ (21,375)
Effective tax rate	22.30%	23.20%	21.00%	22.30%

INCOME AND OTHER TAXES - Narrative (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Nov. 03, 2023	Oct. 28, 2022	Nov. 03, 2023	Oct. 28, 2022	Feb. 03, 2023
Valuation Allowance [Line Items]
Effective tax rate	22.30%	23.20%	21.00%	22.30%
Expense relating to vesting of equity awards	$ 200	$ 100	$ 1,800	$ 700
Loss carryforwards	5,800		5,800		$ 5,800
Net deferred tax assets	21,300		21,300
Loss before income taxes	(18,569)	(36,667)	(98,465)	(95,838)
Income tax expense	(4,148)	(8,521)	(20,715)	(21,375)
Net loss	(14,421)	$ (28,146)	(77,750)	$ (74,463)
Other current assets	12,865		12,865		17,526
Unrecognized tax benefits	4,700		4,700		4,500
Dell Inc. \| Net Operating Loss Receivable \| Principal Owner
Valuation Allowance [Line Items]
Other current assets	7,641		7,641		3,472
Dell Inc. \| Other Noncurrent Assets \| Net Operating Loss Receivable \| Principal Owner
Valuation Allowance [Line Items]
Other current assets	$ 7,600		7,600		$ 3,500
Prepared using separate return method
Valuation Allowance [Line Items]
Loss before income taxes			(98,500)
Income tax expense			1,200
Net loss			$ (99,700)

RELATED PARTY TRANSACTIONS - Narrative (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Nov. 03, 2023	Oct. 28, 2022	Nov. 03, 2023	Oct. 28, 2022
Related Party Transaction [Line Items]
Charged under shared services agreement	$ 20,565	$ 24,725	$ 63,194	$ 74,359
Purchases of computer equipment from Dell			865	1,609
Revenues	89,364	110,942	276,725	348,139
Dell Inc. \| Principal Owner
Related Party Transaction [Line Items]
Charged under shared services agreement	700	900	2,300	2,800
Dell Inc. \| Principal Owner \| Contracts Not Yet Transferred
Related Party Transaction [Line Items]
Revenues	13,600	14,000	42,900	44,600
Performance bonds, outstanding	2,900		2,900
Dell Inc. \| Principal Owner \| Solutions Purchases
Related Party Transaction [Line Items]
Revenues	200	1,200	600	4,000
Dell Inc. \| Chief Executive Officer
Related Party Transaction [Line Items]
Revenues	34	35	200	200
Dell and EMC \| Principal Owner
Related Party Transaction [Line Items]
Purchases of computer equipment from Dell	7	200	400	600
EMC and VMware \| Subsidiary of Common Parent
Related Party Transaction [Line Items]
Purchase of annual maintenance services	23	500	700	1,000
VMware \| Subsidiary of Common Parent
Related Party Transaction [Line Items]
Revenues	200	100	400	400
Carbon Black Inc. \| Subsidiary of Common Parent \| Solutions Purchases
Related Party Transaction [Line Items]
Purchases of solutions from Carbon Black	$ 300	$ 800	$ 1,900	$ 2,500

RELATED PARTY TRANSACTIONS - Balances in Condensed Consolidated Statements of Financial Position (Details) - USD ($) $ in Thousands	Nov. 03, 2023	Feb. 03, 2023
Related Party Transaction [Line Items]
Accrued and other current liabilities	$ 60,890	$ 81,566
Other current assets	12,865	17,526
Principal Owner \| Dell Inc.
Related Party Transaction [Line Items]
Accounts receivable from customers under reseller agreements with Dell (in accounts receivable, net)	4,521	5,584
Related Party Payable \| Related Party
Related Party Transaction [Line Items]
Accrued and other current liabilities	3,530	1,141
Net Operating Loss Receivable \| Principal Owner \| Dell Inc.
Related Party Transaction [Line Items]
Other current assets	$ 7,641	$ 3,472

FAIR VALUE MEASUREMENTS (Details) - USD ($) $ in Thousands	Nov. 03, 2023	Feb. 03, 2023
Money Market Funds \| Fair Value, Measurements, Recurring \| Level 1
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Cash equivalents - Money Market Funds	$ 1,669	$ 16,451,000

REORGANIZATION AND OTHER RELATED COSTS - Narrative (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended		12 Months Ended
	Nov. 03, 2023	Oct. 28, 2022	Nov. 03, 2023	Oct. 28, 2022	Feb. 03, 2023
Restructuring and Related Activities [Abstract]
Reorganization and other related charges	$ 0	$ 0	$ 14,232	$ 0	$ 15,500

REORGANIZATION AND OTHER RELATED COSTS - Reorganization and Other Related Costs Activity (Details) - USD ($) $ in Thousands	9 Months Ended	12 Months Ended
	Nov. 03, 2023	Feb. 03, 2023
Restructuring Cost and Reserve [Line Items]
Beginning balance	$ 8,944	$ 0
Reorganization charge	14,232	15,471
Charges settled in cash	(16,129)	(415)
Charges settled in non-cash	(3,272)	(6,112)
Ending balance	3,775	8,944
Workforce
Restructuring Cost and Reserve [Line Items]
Beginning balance	7,550	0
Reorganization charge	10,960	7,550
Charges settled in cash	(14,735)	0
Charges settled in non-cash	0	0
Ending balance	3,775	7,550
Real estate-related
Restructuring Cost and Reserve [Line Items]
Beginning balance	0	0
Reorganization charge	3,272	4,570
Charges settled in cash	0	(90)
Charges settled in non-cash	(3,272)	(4,480)
Ending balance	0	0
Other
Restructuring Cost and Reserve [Line Items]
Beginning balance	1,394	0
Reorganization charge	0	3,351
Charges settled in cash	(1,394)	(325)
Charges settled in non-cash	0	(1,632)
Ending balance	$ 0	$ 1,394