SecureWorks IPO Brings Marginal Added Value To Investors

  • Dell is making its cybersecurity arm, SecureWorks, public to finance a portion of the EMC deal.
  • SecureWorks presents impressive top-line growth but a very disappointing bottom line for a 17-year-old company.
  • SecureWorks IPO does not offer investment opportunities over other players in the cybersecurity space.

SecureWorks (SCWX), the cybersecurity subsidiary of Dell, filed its S-1 with the SEC last week to go public. Making SecureWorks public is part of Dell’s strategy to finance the giant merger with EMC (NYSE:EMC) by selling some assets, making other assets public, and receiving debt financing for the remaining $67B Dell agreed to pay for EMC.

SecureWorks is one piece of the massive big-data/cybersecurity portfolio the combined Dell-EMC company will have and also includes EMC’s RSA, Pivotal and Virtustream. In an earlier article, I mentioned that the Dell-EMC deal could pave the way for additional mergers among the cybersecurity businesses mentioned above. EMC might want to keep RSA within the merged company as a strategic asset—Pivotal and Virtustream might be very good candidates for future mergers into SecureWorks. Such future mergers will allow the combined company to offload non-core and non-strategic assets, reduce operating costs, achieve cross-company efficiency, and improve business focus.

Financials Analysis

SecureWorks provides a broad range of cybersecurity solutions for enterprises that include firewall/malware protection, endpoint threats analysis, incident response services, threat intelligence, and other related products. SecureWorks provides both the software solution and the professional service to enable enterprises to ramp-up and maintain IT infrastructure security while using SecureWorks solutions. Most of the companies’ revenues—around 80%—are generated from subscription-based solutions, while professional service revenues account for the other 20%.

As shown in the chart below, SecureWorks generates an increasing amount of revenue year-over-year in an impressive 24% annual growth rate. While the comp any has kept a steady level of SG&A expenses over the years, it increased investment (mainly cash bonuses) in administrative and sales personnel in 2016 toward becoming a standalone company. This drove the SG&A expenses significantly higher and pushed operating loss to a record ~$80M at the end of this year.

SCWX_chart 2_122215

This year, SecureWorks issued a convertible note to its investors that will be changed into either SecureWorks common stock in the IPO or Denali’s (Dell’s parent company) common stock. Currently, this is the only debt on the SecureWorks balance sheet that is expected to be removed once the company goes public.

SecureWorks Valuation

As the demand for cybersecurity solutions has risen in the recent years, many software developers in this area experienced sharp top-line growth rates. As shown in the chart below, SecureWorks’ revenue increased to 89% over the last four years, which puts it between the ultra-growth companies of the sector like FireEye (NASDAQ:FEYE), Palo Alto Networks (NYSE:PANW) and CyberArk (NASDAQ:CYBR) and the bigger, more stable companies like Symantec (NASDAQ:SYMC) and Check Point Software (NASDAQ:CHKP).

SCWX_chart 1_122215

Even though SecureWorks underperforms the phenomenal growth rates of the top three mentioned above, its 24% annual revenue growth is very impressive and could easily appeal to investors. SecureWorks has not disclosed any expected price range, amount to raise, or valuation; however, different estimations project that the company will go public in a $2B valuation range. Using this figure enables us to add some more color to SecureWorks’ competitive positioning. Looking at the valuation metrics comparison below reveals that SecureWorks might be dragging on the price-to-earnings ratio due to the negative bottom line, but its price-to-sales ratio is reasonably competitive compared to its peers.

PANW -87.0 15.2
CHKP 22.4 9.4
CYBR 70.7 9.5
SYMC 21.1 2.2
FEYE -6.4 5.9
SCWX -26.1 6.1

Negative P/E and considerable P/S is usually common among young, fast-growing startups. SecureWorks has been in the cybersecurity business since its inception in 1998—for a 17-year-old company, this is a troubling indicator. This is a similar situation as Palo Alto Network and FireEye. However, SecureWorks grew significantly slower than they did, as presented in the chart above.


SecureWorks IPO is likely to take place next year as a part of Dell’s attempt to finance the EMC deal by selling and making public selected assets. SecureWorks is one piece of the significant cybersecurity portfolio in the merged Dell-EMC company and might be used by a target company to receive some of EMC’s security businesses in the future. SecureWorks presents impressive top-line growth. However, it underperformed compared to the leading growing players in the market. Taking into account SecureWorks’ growth rate and valuation, I see no real benefit in investing in SecureWorks IPO.

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