Rebecca Gardy - Head, Investor Relations Michael Cote - President and Chief Executive Officer Wayne Jackson - Chief Financial Officer.

Sterling Auty - JPMorgan Saket Kalia - Barclays Capital Matt Hedberg - RBC Capital Markets Jonathan Ho - William Blair Melissa Gorham - Morgan Stanley Rob Owens - KeyBanc Capital Markets Fatima Boolani - UBS Gabriela Borges - Goldman Sachs Michael Feldman - Bank of America/Merrill Lynch.

Good morning and welcome to the SecureWorks’ Second Quarter Fiscal 2018 Financial Results Conference Call. Following prepared remarks, we will conduct a question-and-answer session. [Operator Instructions] At this time, all participants are in a listen-only mode. We are webcasting this call live on the SecureWorks’ Investor Relations website.

After the completion of the call, a recording of the call will be made available on the same site. Now, I will turn the call over to Rebecca Gardy, Head of Investor Relations. Ms. Gardy, you may begin..

Good morning, everyone and thank you for joining us today to review SecureWorks’ financial results for the second quarter of fiscal 2018. This call is being recorded. This call is also being broadcast live over the Internet and can be accessed on the Investor Relations site of SecureWorks’ website at investors.secureworks.com.

The webcast will be archived at the same location for 1 year. This morning, SecureWorks issued a press release announcing results for its fiscal quarter ended August 4, 2017. You can access this press release on the Investor Relations section of the SecureWorks website.

During this call, our management will make forward-looking statements with the meaning of the Private Securities Litigation Reform Act of 1995 These forward-looking statements include, but are not limited to guidance with respect to GAAP and non-GAAP revenue and net loss per share as well as adjusted earnings with more interest taxes, depreciation and amortization.

Our forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those anticipated by these statements.

You can find a description of these risks and uncertainties in this morning’s earnings press release and in the company’s annual report in Form 10-K for the year ended February 3, 2017, which is available on our Investor Relations website and on the Securities and Exchange Commission’s website.

Additional information also will be set forth in the company’s quarterly report on Form 10-Q for the quarter ended August 4, 2017 and in its other SEC filings. All forward-looking statements made on this call are based on assumptions that we believe to be reasonable as of this date, September 6, 2017.

We undertake no obligation to update our forward-looking statements after this call as a result of new information or future events. Some of the financial measures we use on this call are expressed on a non-GAAP basis.

These non-GAAP measures exclude stock-based compensation, the impact of purchase accounting, amortization of intangibles and the related tax effect of those items. We have provided reconciliations of the non-GAAP financial measures to GAAP financial measures in today’s earnings press release available on our website.

Non-GAAP measures are not intended to be considered in isolation from, a substitute for, or superior to our GAAP results and we encourage you to consider all measures when analyzing SecureWorks’ performance. With us on today’s call are Michael Cote, President and Chief Executive Officer of SecureWorks and Wayne Jackson, Chief Financial Officer.

Following their prepared remarks, we will take your questions. We would appreciate you limiting your initial questions to two so that we may allow as many of you to ask questions as possible within our allotted time.

In the event you have additional questions that are not covered by others please feel free to re-queue and we will do our very best to come back to you. Thank you for your cooperation on this. And now, I would like to turn it over to Mr. Cote..

Thank you, Rebecca and thank you everyone for joining us on our second quarter earnings call. We are pleased with our overall performance this quarter. Revenue grew 12% year-over-year to $116 million resulting from increases in our subscription-based solutions.

Monthly recurring revenue grew over 8% year-over-year to $32.3 million and we generated cash flow from operations of $11 million.

In the midst of the ongoing digital transformation, our clients tell us they are facing challenges such as updating their legacy business processes and applications, moving workloads to the cloud, redefining themselves digitally and complying with greater regulatory requirements.

Not only are so many aspects of their technology ecosystem changing, but the pace of that change is also accelerating. Alongside these changes, cyber crime continues to present a significant business risk.

The online criminal landscape is complex, comprised of individuals, organized crime, hacktivists and nation states working with a diverse range of capabilities and motives. Organizations around the globe are looking for help as they navigate the landscape while keeping their focus on their core business.

Our clients choose us because security is at the heart of what we do. Through advanced analytics and machine learning, we leverage our years of knowledge of cyber threats and our deep understanding of the current threat actors’ tactics, techniques and procedures to make our Counter Threat Platform, or CTP smarter everyday.

Moreover, the CTP is also constantly enhanced with the network effect of thousands of clients with hundreds of thousands of devices in over 60 countries and our partnerships with best-of-breed technology companies.

We are constantly innovating to keep clients safe across their entire architecture, including on-premise devices, endpoints and public hybrid and private cloud deployments.

Regardless of where their workloads and data reside or where they are along the continuum of cybersecurity maturity, we help clients leverage their security spend to prevent attacks, detect those that cannot be prevented and take the appropriate prioritized action against cyber threat activity.

In the process, we also bring simplicity to complex security operations by working with our clients’ existing security infrastructure.

Before I highlight our recent technology developments that are driving greater client value and our key sales achievements during the quarter, I want to point out that in the spirit of transparency, I will be sharing greater insight into certain metrics this quarter. First, our advanced endpoint threat protection, or AETP solution.

SecureWorks and Carbon Black have come together to offer a new solution, which combines Carbon Black’s next-generation antivirus with our Red Cloak analytics platform to deliver an advanced AV solution with the power of SecureWorks threat intelligence and machine learning. The endpoint continues to be a key attack vector used by threat actors.

AETP is a fully managed solution that extends our prevention and detection capabilities and provides visibility into more client endpoints. We have several clients that are early adopters of this solution and it will be generally available in the next few weeks.

In a relatively short period of time, we have approximately $10 million of AETP opportunities already in our pipeline. Also this quarter, we extended our Red Cloak solution to Windows servers. Servers are at the nexus of data and processing for organizations making them highly valued targets for threat actors.

Using Red Cloak, clients can move quickly to detect and mitigate attacks on their networks. We believe this bundled solution, which is currently available to clients worldwide substantially increases the value of our server monitoring solution and augments our Red Cloak activity. Our current Red Cloak pipeline is over $60 million.

Lastly, we continue to extend the capabilities of our valuable attacker database to more industry leading firewalls. Our attacker database is part of our suite of threat intelligence solutions that leverage our global threat visibility across thousands of client’s networks and the expertise of our security research team.

Subscribers get access to our intellectual property to stop a variety of threats in cyber attacks. With this offering, clients using certain Cisco, Palo Alto and Juniper devices with our attacker database gain timely, actionable intelligence and increase the value of their existing security investments.

Our threat intelligence and our highly skilled security analysts comprised the human intelligence which is a key differentiator for us. We employed some of the world’s best security researchers, engineers and analysts.

Everyday, our Elite team with access to the latest threat intelligence and analysis deliver proactive prevention and detection capabilities and actionable insights to our clients. A great example was the work of our Counter Threat Unit, or CTU who covered a sophisticated cyber espionage campaign.

We announced our threat analysis 6 weeks ago at the annual Black Hat conference detailing how a threat group working on behalf of a foreign government created an online persona to lower technology, oil and gas, telecommunications and aerospace employees into unknowingly opening networks to remote access.

We alerted our clients to this suspicious activity and put in place protections for the malware and targeted infrastructure identified in this campaign in early 2017.

Another exciting area of growth for us is our advanced remediation management or ARM solution that helps enterprise clients perform the incident investigation and response steps referred to as security orchestration in the marketplace today.

We offer our clients meaningful value by taking our proprietary validation response procedures and enhancing them a client-specific context. We then investigate, prioritize and intermediate malicious activity identified by CTP taking the appropriate actions on behalf of our clients.

While I am pleased with the progress we are making with our technology investments, we must continue to innovate and bring solutions such as these to the marketplace.

During fiscal 2018, alongside our investments to maintain our technology excellence and differentiation, we also made investments to lay the foundation for an accelerated sales trajectory.

The changes we made in our sales organization include one, talent, hiring experienced enterprise sales leaders and strengthening the ranks of our sales engineers; two, coverage, aligning our sales force to more optimal territories putting them closer to our clients and prospects to drive deeper engagement; and three, improved quality of sale, rolling out and executing a sales process that is uniform, proven and targeted for the types of solutions we offer.

Let me touch on specific sales highlights this quarter. Quota carrying headcount reached 179 at the end of the second quarter, a 13% increase year-over-year and a 3% increase over last quarter. Attrition has stabilized this quarter and the number of quota carriers with tenure over 2 years has increased 15% over last year.

We saw strength this quarter in both the volume and size of deals with total value over $1 million with both measures increasing more than 50% over last quarter.

The number of large opportunities on North American pipeline increased by double-digits over last year and sales performance in EMEA and APJ during the quarter continued on our strong growth trajectory. I am excited to see our invigorated sales culture becoming established. Although we have made significant progress, we still have work to do.

Overall, we expect that the investments we made in the first half of the year will continue to become more productive and deliver increased benefits in the second half. And with that, I will turn the call over to Wayne.

Wayne?.

Thanks, Mike and good morning, everyone. Today, I will review with you our second quarter performance and share our outlook for the third quarter and full year fiscal 2018. All financial information I will refer to is non-GAAP and growth rates are compared to the prior year periods unless otherwise stated.

Our results in Q2 FY ‘18 exceeded our guidance on both the top and bottom line. We expanded gross margins, experienced some leverage in our operating expenses and maintain a strong liquidity position bolstered by cash flow from operations this quarter.

For the second quarter, revenue grew 12% to $116.3 million with the overall percent split of revenue between our MSS and our security risk consulting services remaining at approximately 80% and 20%. Revenue outside the U.S. grew to 16% of total revenue for the quarter, up from 13% last year.

Our average annual subscription revenue per client was $88,000 this quarter, a 7% increase over the prior year. While this growth was broad-based, we saw an increase in the mix of international accounts and in the average revenue derived from our enterprise client base.

In North America, enterprise clients generated approximately 10 times more average revenue than SMB clients. Our subscriber accounts stayed constant at approximately 4,400 clients for the quarter. Our monthly recurring revenue or MRR was $32.3 million, an increase of 8.4% over Q2 ‘17 and 1.3% sequentially.

To provide further color on Q2 sales activity, in the second quarter, we closed 23 transactions greater than $500,000 in total contract value, including 14 transactions over 1 million versus 9 transactions last quarter.

A few examples of 7-figured deals this quarter include a 3-year contract with a regional Middle Eastern bank that wants to mature security posture by increasing visibility across their existing security appliances and endpoints, a 3-year contract with a global business advisory firm that included Red Cloak, virtualized appliances and monitored Office 365 from our Cloud Guardian portfolio and a 2-year deal with a multinational brewing company that included cloud solutions and virtualized appliances.

Revenue retention in the period was 96% compared to 99% in the first quarter. This metric excludes backlog and is a reflection of active revenue. Our revenue retention can be impacted by the timing of exchanges and renewal rates.

An example of timing of an exchange would be if we turned off a particular service for a client in one period, but do not turn on or install the exchange revenue until the next quarter, this would negatively affect revenue retention. In the second quarter, we had one large client with this situation and the impact to revenue retention was about 1%.

Our Q2 gross margin was 54.7%, an increase of 210 basis points compared to last year. This margin expansion came from continued growth in our managed security solutions and reflects continued scale delivered from our – derived from our delivery model.

For the second quarter, total operating expenses were $71.4 million or 61.4% of revenue compared to 61.8% last year and 64.1% last quarter. Research and development expenses remain consistent at 16.3% of revenue.

Sales and marketing expenses this quarter were approximately 32% of revenue, up from 30.3% last year due to the increased investments in our sales and go-to-market strategy. We expect sales and marketing expenses as a percent of revenue to stabilize the Q2 levels for the remainder of the year.

General and administrative expenses in this quarter included a benefit of $1.6 million for state job tax credit, which help reduce our G&A expense to 13.1% of revenue from 15.5% last year and 15.2% last quarter. We expect G&A to return to Q1 levels as a percent of revenue for the balance of the year.

Operating loss was $7.8 million for the quarter and adjusted EBITDA loss was $4.6 million or 3.9% of revenue. Increased operational efficiency on higher revenue offset by investments in sales led to the slide improvement in our net loss for the quarter to $5.4 million compared to $5.6 million last year.

Based on 80.353 million shares outstanding, net loss per share was $0.07. We finished the second quarter with the strong balance sheet. We had cash and cash equivalents of $98 million, total accounts receivable of $123 million and total deferred revenue of $148 million. Our average contract length remains relatively constant at approximately 2 years.

Cash flow provided by operations for the quarter was $11.2 million bringing the total for the trailing 12 month period to $6.3 million. We continued to expect the cash inflow in the fourth quarter of approximately $25 million from Dell related to our current tax receivable.

Turning now to guidance and other key modeling points, our guidance takes into account our financial performance for the first half of fiscal year and the type of forward-looking information that Rebecca referred to earlier.

It also takes into account the impact we expect the changes that we introduced in the last two quarters in our sales organization. For Q3 fiscal 2018, we expect GAAP and non-GAAP revenue to be in the range of $115 to $116 million.

And we expect non-GAAP net loss per share to be in the range of $0.09 to $0.10 using approximately 80.362 million weighted average shares outstanding. For the fiscal year, we increased GAAP revenue guidance to be in the range of $462 million to $455 million and in the range of $463 million to $466 million on a non-GAAP basis.

We now expect our GAAP net loss to be in the range of $52 million to $54 million and we narrowed our adjusted EBITDA loss by $3 million to be in the range of $21 million to $25 million.

Based on approximately 80.286 million weighted average shares outstanding, we now expect net loss per share to be in the range of $0.65 and $0.68 and non-GAAP net loss per share to be in the range of $0.29 to $0.32.

We are reiterating our guidance to be in the range of $34.4 million to $36.4 million at the end of the first quarter – fourth quarter of fiscal 2018. We continued to expect our capital expenditures will be approximately $18 million to $20 million for the full year.

In summary, I am pleased with our results in Q2, so as Mike said earlier we have more work to do. We are executing according to our plan for second half acceleration.

We continue to believe that the increased investments we are making this year in our sales organization to capture the significant global demand for our solutions continues to be the right move. We look forward to sharing further evidence of our progress in the second half of fiscal 2018.

This concludes my prepared remarks and I will turn the call back over to the operator to begin the Q&A session..

I would now open the call for questions. [Operator Instructions] We will take our first question from the line of Sterling Auty with JPMorgan. Please go ahead..

Yes. Thanks.

Hi guys, just wondering in terms of where you have been layering in the incremental sales resources, where are you seeing the fastest ramp and is there anything that you can take from that and apply it to other regions or other areas?.

Sterling, great question and good morning, it’s Mike Cote. The new sales resources layered in the large enterprise market in particular in region around I will say the NFL cities in North America and neither high quality individuals who have relationships and connections with the prospective clients that we are looking at.

And it helped tremendously to get in the door quickly and to ramp fast. So clearly Jason is looking to continue to replicate that and until we get all of the markets filled..

Got it.

And then on technology side you mentioned the partnership with Carbon Black for the new antivirus acquisition that they had done and I am kind of curious what’s your relationship with them around EDR and let me just leave it at that?.

Around what?.

EDR, so beyond just antivirus, some of the remediation technology, is there a relationship there as well?.

To my knowledge right now, that maybe on the roadmap with nothing that we have announced publicly..

Got it. Alright, thanks guys..

Thank you..

Our next question comes from the line of Saket Kalia with Barclays Capital. Please go ahead..

Hey, good morning guys. Thanks for taking my questions here..

Sure. Good morning..

Hey, morning. Hey, maybe we will start you, Wayne, really quick housekeeping question. Did SRC outperformed your expectations at all? I know we said it was still roughly an 80:20 split, but I guess with MRR improved a little bit sequentially, but given the in-quarter revenue be.

I wonder, if there were any upfront components of revenue that maybe came in a little bit better than you expected?.

Hi, Saket. Thanks for the question. SRC, to answer your question if I understood it, SRC did not beat our expectations. MSS was a little bit above our expectation. And we had a very small amount of one-off that we had not included in our guidance from last quarter, but SRC was reasonably on track..

Got it.

And then for my follow-up, maybe more strategic for you, Mike, in your conversations with customers, how is their appetite for in-house security versus outsourcing through MSS changed if at all here?.

Saket, it’s a great question. In the last 6 months I will tell you that there seems to be an increased demand and interest in solving the problem and we still clearly have a, I guess, shortage of skilled and talented security people.

We still also have – we still have the problem of visibility and how do you understand what’s going on with something outside your network. So, from SecureWorks perspective, we are bringing visibility of 4,400 clients across geographies and verticals in small to medium-sized business through large enterprise and Fortune 100 organizations.

So, I think there has been an increased appetite in the traditional way you may think of us working, for example, with a very large organization. There is some things we have underway that may change. So, it’s not the traditional way you may think of us working with them.

But I think there is clearly, I should say, there is clearly, I should say, there is clearly an increased desire and appetite to find a mutually beneficial way from the small to medium-sized business all the way up through the largest organizations..

Very helpful. Thanks, guys..

Thank you..

Our next question comes from the line of Matt Hedberg with RBC Capital Markets. Please go ahead..

Hey, guys. Thanks for taking my questions. Wayne, you talked about several drivers for customers choosing SecureWorks right now in your prepared remarks and certainly I think the large deals tell us stood out the strength there that you saw this quarter.

Can you give us a bit more detail on what’s driving the large deal strength now? Is there just sort of more culmination of a lot of the market drivers or anything that maybe Jason is impacting on sales force?.

Thanks, Matt. Good morning. I think it’s some of all of what you mentioned if I understand the question. So I will start with the sales organization right, we have hired some more experienced sales talent. They are ramping 6 months into it.

We also added sales engineers which help us align the client’s expectations with ours, help us explain to the client our solutions that’s we are beginning to see traction in those areas. We rollout some new products that Mike has talked about as well. So, it’s a combination of all of those..

Got it.

And then maybe just a quick follow-up, it was great to hear the spice of the Red Cloak pipeline, I am curious can you give us a sense of how that $60 million pipeline is increased maybe on a year-over-year basis?.

On the Red Cloak, this is Mike, Matt.

On Red Cloak?.

Correct..

Yes. I don’t have the data in front of me, but it was a pretty substantial increase..

Yes, Matt, keep your eye on, we have rolled Red Cloak out about a year, maybe five quarters ago. So, it’s ramped significantly since five quarters ago..

We have got pretty nice installed base than what we do, yes..

Got it. Thanks, guys. Very helpful..

You are welcome..

Our next question comes from the line of Jonathan Ho with William Blair. Please go ahead..

Good morning. Congrats on the strong quarter.

Just wanted to start out with a question in terms of the public cloud, how do you think about that opportunity as more and more infrastructure transitions and what does that mean in terms of the MSSP market?.

So Jonathan, this is Mike. Thanks for the question. And we are excited about the movements that are occurring in the cloud. Actually we didn’t bring it up because although it’s still fairly small. Our cloud revenues quintupled in the quarter, so we have had nice growth in the solutions that we are providing around Cloud Guardians.

We talked about a little bit last quarter. And we are just – we are excited about the movement there and the opportunity..

Got it.

And then just in terms of your confidence around the reacceleration in the second half of the year, can you maybe walk through what underpins that confidence and maybe your visibility from a pipeline perspective into some of it the larger deal opportunities?.

Sure, so I will try and go into a little more depth, but reiterate some of the things that I have said, this is Mike, Jonathan in my prepared remarks which is it’s really focused on the consistency of talent, coverage and quality of sale.

And the maturing of the sales organization and continuing to get everybody in the same spot, we are sort of two quarters into this process which we expect to last a little bit longer, but I am excited about an opportunity – and feel really good about the results we have had to-date.

We have had as I mentioned 179 quota carriers that are onboard at the end of the quarter which is an increase over where we were before. We have got the tenure of 2 years plus, is increased by about 15% year-over-year.

Our sales productivity is beginning to improve and has improved from the second quarter – in the second quarter from the first quarter. We have seen a 55% increase in large deals that closed from 9 to 14 as Wayne mentioned. Those are deals over $1 million.

And as I mentioned we saw both an increase in the number of deals in the pipeline and the number – and the size of those deals that we have closed. We are also adding as we touched on new types of solutions. I mentioned the arm solution which has been growing very well. The Red Cloak being added to the server monitoring.

I mentioned – I just gave you the update on cloud, so we are very confident in the leadership position we have, the powerful combination of our machine and human intelligence as we are taking this to market, our analytics and are 100% focused on security and under the new leadership from our sales organization, the reinvigorated culture from the sales perspective.

So we clearly – I gave you some insights into the pipe, but clearly the sales pipeline we feel very good about as well..

Great. Thank you..

Your next question comes from the line of Melissa Gorham with Morgan Stanley. Please go ahead..

Great. Thanks for taking my question. So just a follow-up on that previous question, in terms of the changes to the sales force. Thanks for the color Mike that you provided.

I am just wondering if the bulk of the changes that you described whether it’s more coverage and I guess granting on the quota carrying sales sides, is that largely behind you and now you are just looking for improved sales productivity from the existing – your existing sales force, are you still making changes to the sales organization?.

No, it’s behind us and clearly we will continue to add to the sales organization as we feel that market can grow. And as I just mentioned a moment ago, we are excited about the increased productivity that we saw in Q2 over Q1 on per sales force basis or productivity per sales dollar invested and expect that to continue..

Great, okay. And then just one follow-up for Wayne, so in this quarter we did see a pretty nice speed on operating margins as you did speed on revenue and some of that flow through to operating income as we are heading into the second half of the year.

Can you just kind of remind us your philosophy in terms of either reinvesting any top line upside and back into the business are letting it kind of flow through to the leverage?.

Okay, but thanks Melissa for that.

So just real briefly on margin, as you said year-over-year strong growth 210 basis points, over the last ten quarters our margin has continued – has made quite significant improvements and we expect margins to stay strong relative to the next 6 months, for the rest of this year we – as I have talked about in my prepared remarks in each of the sections R&D and sales and marketing.

We expect to continue to invest in both of those areas, especially in sales and marketing as a percent of revenue. So we are not going to bring a lot of that down to the bottom line. We did improve EBITDA by $3 million for the second half. So, we are going to see some of it coming down, but not more than what I talked about..

Okay, sounds good. Thank you..

Does that answer your question, Melissa? I don’t know if you want more details. Okay, thank you..

It does. Great, thank you..

Thanks..

Your next question comes from the line of [Indiscernible] with Stifel. Please go ahead..

Great. Thanks for taking my question. So, my first question I wanted to ask about the MRR guide and specifically what needs to happen from a Red Cloak, AETP, Cloud Guardian and really the broader pipeline conversion to hit both the low end and the high end of the range that you have reiterated? Thank you..

So, if I understand the question, are you asking about the guidance itself the range and how comfortable we are or specifically for those solutions..

Effectively, yes, more of the former, but just so you have given some good metrics around the pipeline for Red Cloak and AETD and I am just sort of curious as to what sort of baked in, in terms of the assumptions to hit that MRR guidance plus conversion on that pipeline?.

Yes. So, this I Mike, I will jump in Wayne and then you can add if you want. The way I would respond to that is we clearly have the two components that will hit MRR are going to be new or across 8 new sales to new clients, new sales to existing clients minus client churn or service churn – client churn and service churn I should say.

So, it’s those four components and we are clearly working on all four components and have seen as I mentioned sales productivity both new sales to new clients and cross sales and we have the pipeline to support and expect to have continued increase in sales productivity, i.e., strong growth on the sales front is what we are shooting for.

And then it’s reducing service churn overall service and client logo churn or continuing to have it hit our expectations would basically put us within the range which is why we provided the guidance..

That’s helpful. Please go ahead..

I am sorry, maybe to touch on your specific questions relative to – we expect of course the pipeline to continue to grow as we accelerate and then the conversion – the conversion front in that pipe will need, Red Cloak is a fairly important part of that. Cloud Guardian is still early.

Our cloud offerings are still early and are not as significant to the second for us as it will be going forward..

That’s helpful.

And then Mike when you think about products like AETP and Red Cloak, how do you balance the idea of sort of being solution agnostic as Switzerland of sorts, while also advocating for your own native solutions that you are bringing to market with your customers?.

Well, if you look at what Red Cloak does first of all, a great question.

If you look at what Red Cloak does, it’s really the increased telemetry to allow us to do discovery, it’s the reason why for example in this case, we have partnered with Carbon Black and we are evaluating other endpoint technologies, where we can partner on the prevention and/or detection side.

The key components of Red Cloak are not – is its ability to give us the telemetry to allow us to do a better job in understanding what the threat actors are doing. So, the key component is the incremental revenue we can get in most cases around helping us do a better job on the telemetry.

And actually, while I am on advanced endpoint threat protections going back to a question, Sterling, if you are still on the line, the Carbon Black EDR that’s I guess it’s now Carbon Black Defense, which is a component of our advanced endpoint threat protection.

We use Carbon Black respond in our advanced endpoint solution, AETD and the AETP solution is Carbon Black Defense. So, we are working with them in the EDR area and it’s off track..

No worries and I’ll say thanks on both my behalf and Sterling’s behalf. Thank you..

Your next question comes from the line of Rob Owens with KeyBanc Capital Markets. Please go ahead..

Great. Good morning, guys..

Good morning, Rob..

What about your success with mid-market customers, because what you have highlighted to us kind of some of your success of market million dollar deals and what have you? You are just still not seeing a lot of growth in your total client base at this point.

So, I am curious more I don’t want to call it run-rate business, but probably more that big market segments kind of what you guys are seeing there?.

Yes. So, the small and the medium-sized business from small through mid-market is a very important market for us and continues to be. And as Jason came in, he focused first on reigniting the large enterprise part of the sales organization. We have recently put a new leader in charge of the SMB marketplace.

So, on the sales revenue growth front, we are expecting increased sales productivity and effectiveness in the SMB area as well going forward and we have a renewed effort in going after that market from a client relationship perspective in trying to draw or ensure that we get closer to the clients and what they are looking for helping them from a reporting perspective up through their organizations..

Yes, Michael. And the one thing I would add to that, because it is a very important segment for us. Some of the new solutions that Mike talked about we have put together specifically for the SMB space. So, we expect the things from that as well..

And when you speak to second half inflection given there is a lag in your model, obviously, it’s going to just show up probably in the gross MRR number first.

So, is the anticipation then that really this is kind of a first half of fiscal ‘19 thing where we actually see it in the revenue numbers?.

Absolutely. It will show up in MR first, because that includes backlog of course and then we will begin to see it early to mid. It depends on how late in Q3 and then when the sales are closed and also same in Q4.

The sooner we sign them, the sooner that we get them installed, because just as a reminder, it’s 90 to about 120, 140 days before our installed on depending on the complexity of the solution in the client. So, you got it right..

Alright, thanks..

Your next question comes from the line of Fatima Boolani with UBS. Please go ahead..

Good morning. Thank you for taking the question. Maybe the first one from Michael.

Michael, just a big picture question for you on artificial intelligence in the realm of cyber security, where does that get turnaround and I am wondering if you can help make the opportunity tangible for us and help us understand how you are incorporating artificial intelligence type techniques to get better efficiencies out of your finite resources and then a follow-up for Wayne if I may?.

Sure. It’s a great question, Fatima. Let me try and attack this from a couple of perspectives. This is all that we have done for over 15 years now and we have kept the historical attack data.

So, we use that as our training set and we have developed technologies such as 4C, which will effectively put a probability and confidence around using our current knowledge of the threat actors, our historical threat data that we have and the information coming in across our 4,400 clients figuring out what probability and confidence associated whether something is malicious or not, we will do that in a supervised manner and then we move it to an unsupervised manner effectively creating algorithms, which move into the artificial intelligence world if you will kind of machine learning and then artificial intelligent to make the appropriate decision.

So, where you can see that first of all is in the gross margin that Wayne talked about earlier.

Effectively, we have grown our revenue, our client base and the number of security incidents that we have coming into the organization and yet the people that we have dealing with things in our security operations center has remained relatively constant for the past roughly 2 to 3 years..

That’s very helpful. And then just a follow-up for Wayne, Wayne and Mike actually both, you had mentioned a focus on reducing turn churn containing the levels of churn to kind of drive the reacceleration in the back half.

I am wondering on the SMB side in particular and especially under the leadership of the new individual you have in place there, what are maybe the top two or three programmatic things you need to do to contain the level of churn in the SMB arena which maybe turns to be a little bit more sickle in the customer relative to your enterprise base and that’s it for me? Thank you..

Sure. So, another – this is Mike, another great question. Let me make sure that I address it in a couple of ways. The new leadership that we have in SMB is on the sales front.

So, some of the changes will be basically going back to the types of things that we have talked about in the enterprise which is the talent of individuals that we have there focusing on coverage into their specific areas and then the quality of sales from a training perspective in a discipline.

And the expanding that I would say from a sales perspective is going to be from relationships with their ongoing clients rather than having the sellers that are more focused on just selling and not if you will ongoing relationships. That will also impact dramatically by what we do from an operations perspective.

Our operations team is basically going through to ensure that we do on-boarding whether it’s a small to medium-size client largest clients in a quick efficient manner. We are actually doing NPS studies of our ongoing – our NPS I guess studies or surveys of our on-boarding right after we have on-boarded clients are within a 90-day to 120-day period.

Those results have been very, very helpful for us and very promising.

We are doing a lot around solution architecture and then continued communication with our clients to produce champions reports, i.e., to help ensure that the person is brought us into the organization understands the value that we are providing and helps them in the communication and education up through their organization, to their CIOs or their CFOs and/or CEOs.

One of the things that I would add that we have seen that’s been very interesting is as security and this goes across not just SMB by the way, but as security has become and continues to become more of a focus across boards and C-suites we are seeing more CFOs and CEOs actually get involved in sales processes towards the end not that their sales process has slowed down at all, but just that it’s quite frankly having to ensure that you are showing the value of the solution that you are providing both in renewals and in the sales process..

Very helpful. Thank you..

[Operator Instructions] Our next question will come from the line of Gabriela Borges with Goldman Sachs. Please go ahead..

Great. Good morning. Thanks for taking my question.

And maybe for Mike, maybe just a little more color on the competitive environment would be helpful for us, when I look at that longer term [indiscernible] targets around 16% and where the MRR and the revenue is coming and to say I think a lot of the delta there is some of the changes you are making in the go to market, but any additional color on how the competitive landscape is changing, what you view is the key differentiators of the scale that could be very helpful? Thank you..

Sure. Thank you, Gabriella. From a competitive landscape perspective I would not say that we are seeing a lot of changes in the last 90 bays to 180 days. Effectively in the large enterprise space it’s going to be the same two or three organizations that would get an RFP. We are clearly the only one that’s solely focused on doing what we do.

We are the only one that has CTP and the ability in a vendor neutral manner to work with all the best of breed technologies exist on the market – in the marketplace.

And our belief is that we have done a good job in moving the large enterprise sales organization particularly North America back to where we are going to win or are now winning, more than of offer a share and getting into more the opportunities.

In global markets outside of North America we have not seen the change there either, but we are as I mentioned in my prepared remarks continuing to see very nice growth and success that is far greater than the market growth although of smaller numbers in both EMEA and APJ.

From SMB perspective, we are for 15 years continued to see small companies come and go over the years and trying to attack the market from various perspectives, but there has been no player that had sort of size and scale that we have and the visibility to support the SMB market as well.

So competitively, I would say I think the biggest – we are not seeing a lot of different sales cycles, so roughly been the same over the last couple of quarters. And I think it’s really been our continued focus in execution in changing to a more sales led organization..

That makes a lot of sense. And as a follow-up if I could, on your relationship with Dell, could you expand a little on whether you are able to use your relationship there to help you go to market internationally, particularly in some of the large accounts? Thank you..

So another great question, I would say and so to Dell, I am going to call the Dell technologies companies because there is a lot opportunities for us there with the legacy EMC. So the Dell EMC sales organization as well as the recent announcement we had on AppDefense with VMware, so we are excited.

We are putting a stronger effort now that the Dell EMC integration is so I guess the acquisition/merger is over 1 year old.

And we are seeing help from the Dell sellers and it’s a good opportunity for the Dell EMC sellers to go to market in the North American large enterprise and the small to medium-size business market from a lead gen perspective and in APJ and in North America – and in EMEA, I am sorry where they have strong relationships with clients and can open the doors to bring us in and then we can go to market together..

That’s helpful color. Thank you..

Your next question comes from the line of Walter Pritchard with Citi. Please go ahead..

Hey, guys.

It’s [indiscernible] for Walter, it seems like larger deal performance was strong, like client count was felt flattish, do you expect large deals to become one of the driver going forward than in the past?.

So I will – this is Mike here. I would say to respond to that is that the majority as we have disclosed over time, majority of our clients are SMB, but the majority of our revenue comes from the larger deals. As Wayne mentioned in his prepared remarks the average large enterprise in North America deal is about 10x the SMB.

So both are very important to us and both are focus areas for us. But from a revenue perspective, I would expect that the large enterprise revenue is going to continue to be a significant part of our revenue mix in the future..

Okay, thank you..

Thank you..

Our final question will come from the line of Tal Liani with Bank of America/Merrill Lynch. Please go ahead..

Hi everybody. Thanks for taking my question. This is Michael Feldman on for Tal Liani.

So a couple of questions, what is the timeline – you mentioned Red Cloak has a pretty robust pipeline and it’s been growing, what is the timeline for when you expect that Red Cloak pipeline to convert into actual orders and how should we think about the margin impact from a higher mix of Red Cloak versus the rest of the business?.

So great question Michael, this is Mike Cote. Red Cloak was announced I think we are saying about for four to five quarters ago time goes by quickly these days..

March..

Last March?.

Yes..

Thank you, Wayne..

And typically Red Cloak conversion into sales is probably on the shorter end of the sales cycle and conversion into revenue from an implementation perspective is definitely on the shorter end and it happens pretty quickly.

So we have a – I don’t have the numbers in front of me, but we have got a nice install base of Red Cloak already and a growing install base or growing pipeline opportunity in front of us, so we would hope that we can convert as much of that as possible. We didn’t report to [indiscernible].

We did not report any pipeline data on other parts of solutions that we have, but we have overall seen a growth in the pipeline, nice growth in the pipeline from Q1 to the end of Q2..

And any impact – what impact do you think that will have on margins as that becomes the bigger piece of the business?.

So from a margin perspective we are marked with Red Cloak either individually as an endpoint as a cross sale or as perhaps even the only solution the client may have.

Those margins tend to build a bit higher to the extent it’s included with other solutions if that all gets blended into – and it looks a lot like our overall margin for a particular enterprise or SMB client. So nothing I am trying to give you a direct answer, it really depends on if its standalone or if its included with other offerings..

Okay.

And then you touched a little bit about public cloud earlier, but as your customers moved from deploying on-premise security solutions to more like Security-as-a-Service solutions like cloud based e-mail or cloud based security, what impact does that have on the revenue, you – the SecureWorks receives from those customers?.

Today, right now, this is Mike. Today right now it’s been expansion of the revenue because it’s not anticipated they are doing away with their on-prem or their hybrid environment.

And as they have moved into the public cloud in the shared responsibility model on the public cloud they need someone to help them ensure that their side is their shared responsibility is being done. So again I mentioned we are early in these stages, but we saw a great growth in cloud revenue and are cautiously optimistic..

Excellent. Thank you so much..

I think that was our last question. So thank you again for joining us on today’s call and for all your questions. We appreciate your support and we look forward to our third quarter call in early December. If we didn’t get to your questions during this session, please don’t hesitate to reach out to me and Investor Relations for follow-up. Thank you..

Thanks everyone..

Thank you..

Ladies and gentlemen, that concludes today’s call. You may all disconnect at this time..