Tech Companies Report Mixed Q2/Q3 2024 Earnings: Enghouse, Zenvia, and SecureWorks

Enghouse Systems Limited (EGHSF) Q3 2024 Earnings Call Transcript

Daniel Chan - TD Cowen Erin Kyle - CIBC Paul Treiber - RBC Capital Markets Good morning, ladies and gentlemen, and welcome to the Enghouse's Q3 2024 Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded on Friday, September 6, 2024. I'd now like to turn the conference over to Stephen Sadler, Chairman and CEO. Please go ahead. Stephen Sadler Good morning, everybody. I'm here today with Vince Mifsud, Global President; Rob Medved, VP, Finance; and Todd May, VP, Legal Counsel. Before we begin, I'll have Todd read our forward disclaimer. Todd May Certain statements made may be forward-looking by their nature. Such forward-looking statements are subject to various risks and uncertainties including those in Enghouse's continuous disclosure findings such as its AIF which could cause the company's actual results and experience to differ materially from anticipated results or other expectations. Undue reliance should not be placed on forward-looking information, and the company has no obligation to update or revise any forward-looking information, whether as a result of new information, future events, or otherwise. Stephen Sadler Thanks, Todd. Rob will now give an overview of the financial results. Rob Medved Thanks, Steve. I'll take us through the third quarter financial highlights. Revenue increased 17.6% to $130.5 million in the quarter from $111 million in Q3 2023, and for the nine-month period increased 13.9% to $376.8 million from $330.9 million last year. Recurring revenue, which includes SaaS and maintenance services, grew 22.8% to $88.8 million compared to $72.3 million in Q3 2023 and now represents 68.1% of total revenue. For the nine-month period, recurring revenue increased to $258.4 million from $210.4 million in the prior period, also an increase of 22.8% as we continue to prioritize this revenue stream. Results from operating activities increased to $34.3 million from $30.9 million in Q3 2023 and has increased for the nine-month period to $100.4 million from $86.4 million in the prior period. Net income was $20.6 million compared to $17.6 million in Q3 2023 and $58.7 million to date compared to $47.1 million last year as we grow our business with a focus on profitability. Adjusted EBITDA increased to $37.7 million from $33.4 million, growing by 12.9% while achieving a 28.9% margin. Year-to-date adjusted EBITDA was $108.2 million compared to $95.9 million in the prior year, an increase of 12.8%. Cash flow from operating activities, excluding changes in working capital, was $37.4 million compared to $35.5 million in the prior quarter, and $111.5 million year-to-date compared to $97 million in the comparable period. Cash, cash equivalents, and short-term investments reached near-record highs at $258.7 million as at July 31, 2024. Our third quarter operating performance continues its upward trend with revenue profitability and operating cash flow all exhibiting positive growth. Our commitment to operational efficiency alongside our capability in executing and integrating acquisitions continues to deliver positive results. This quarter, we completed the acquisition of SeaChange expanding our IPTV market presence, a growing sector for Enghouse. We have effectively integrated SeaChange into our asset management group, achieving profitability in its first quarter post-acquisition, although not yet at our standard levels. Our strategic direction remains steadfast as we continue to expand our business profitability. Offering both SaaS and on-premise solutions positions us uniquely in the marketplace. Operational enhancements across our existing businesses and recent acquisitions are driving positive outcomes, enabling us to maintain robust cash reserves while simultaneously increasing annual dividends, repurchasing shares, and pursuing acquisitions. Yesterday, the Board of Directors approved the company's eligible quarterly dividend of $0.26 per common share, payable on November 29, 2024, to shareholders of record at the close of business on November 15, 2024. Thanks, Rob. Vince will now give some operational highlights of the quarter. Vince Mifsud Thank you, Steve. We are pleased to announce another quarter of double-digit growth across all our key financial indicators, including total revenue, recurring revenue, and operating profit. This marks our fourth consecutive quarter of double-digit growth in both total and recurring revenue. It's been a particularly good quarter, delivering one of our strongest top line performances in our company's history, and achieving our highest revenue quarter since 2020. Sequential revenue for Q3 2024, in comparison to Q2 2024, is especially positive as historically, this quarter had seen seasonal dip in organic revenue due primarily to our customer summer cycles. However, this year we effectively mitigated that trend, maintaining total organic revenue in line with Q2 2024. We attribute our financial performance to three factors, our team's execution, acquisitions and our ability to integrate them, And our unique market position as one of the few companies offering true customer choice. I would like to highlight several examples of how we have enhanced our business execution. Our business delivered good performance across several key areas including our go-to-market sales teams, demand generation, product and engineering, operations, cost management, and collection efforts. Several of our sales regions achieved sequential improvement against the trend of a historically softer Q3. This quarter also marked one of our strongest performances in new order bookings. And key successes include expanding our partnership with a leading global telecom provider for our Enghouse cloud contact center product, securing additional deals in the Middle East, growing our transit business in Europe, and increasing the adoption of our video products into the government and pharmaceutical sectors. Our customer experience and renewals team also performed well helping to drive recurring revenue and improved customer retention. This team is focused on enhancing customer retention and expanding recurring revenue, and a key achievement this quarter was securing our largest ever three-year multi-million dollar SaaS renewal, which will contribute to revenue over the next 36 months. Our demand generation team also achieved one of their best quarters of inbound leads optimized with the use of AI tools. They made substantial progress in our organic SEO, securing first page rankings for over 50 industry terms, which is a significant improvement over 12 months ago and it's leading to cost-effective lead generation. From an operations standpoint, we achieved $18 million in professional services, an increase of 14% from last year, marking one of our highest professional service revenue quarters, while at the same time improving professional services gross margins. Our product and engineering teams also delivered a strong quarter. This team started to leverage AI tools to accelerate engineering velocity and we began using these tools in our contact center group and are now expanding them across all the engineering teams. We also completed the cloud uplift for our strategic networks products and introduced a new transit product for the America's markets. Another key aspect of execution came from our finance team which maintained a strong focus on cash collections, an important effort during a high interest rate environment where customers tend to hold on to their cash more tightly. We ended the quarter with a strong cash balance of $259 million after spending $30.8 million on the acquisition of SeaChange, $14.4 million on dividends, and $1.8 million on share buybacks. This reflects our finance team's effectiveness in cash collections and treasury management. Additionally, our 11% operating profit growth highlights our continued focus on cash management. Regarding our acquisitions, we've deployed $43.4 million on acquisitions so far in fiscal 2024, which includes the most recent acquisition of IPTV provider SeaChange that we completed at the start of Q3. IPTV is an important growth area for Enghouse, and this acquisition has elevated its importance. Since we launched our IPTV product, we have consistently added new customers in North America and grown our business quarterly. The purchase of each -- of SeaChange enhances our IPTV offering by expanding our presence into Europe and the LATAM market, as well as entering into a new IPTV market, enabling us to deliver video streaming solutions directly to content creators such as top media and sports organizations. This introduces a new market segment for us, complementing our existing market through operators. SeaChange contributed positive operating income as Rob mentioned, started immediately in Q3, although not in line with our normal profit margins yet given it's the first quarter post acquisition. Our choice offering has proven to be an effective business strategy, significantly aiding in customer retention. Choice allows our customers to migrate to SaaS at their own pace when and if they desire to do so. The expansion of our recurring revenue in the quarter is driven primarily by the growth in SaaS revenue. We view choice as a key competitive advantage which is helping build loyalty with our customers, ultimately driving recurring revenue growth. In summary, while we recognize there's always lots of room for improvement, we are pleased with the quarter's results driven by our team's execution across organic and acquisitions, and we remain confident that our choice strategy is well aligned with the needs of the customers and the markets we are in. Thanks, Vince. With respect to acquisitions, as both Rob and Vince have mentioned, we completed the acquisition of the assets of SeaChange in the quarter -- early in the quarter, but not for a full quarter. The acquisition has been integrated into our asset management business group. For the quarter, the business and profitability was not at our historic levels, as Vince has said. It was profitable in the first quarter, which is a little unusual because usually the first quarter of an acquisition has a negative impact on EBITDA and profitability. It was slightly profitable, but we expect to improve profitability in the next quarter and thereafter. We continue to see substantial opportunities in our industry sectors with some larger organizations having debt problems, staff reductions, and interest costs which are not supported by their slowing growth operations. [Operator Instructions] And your first question comes from the line of Daniel Chan with TD Cowen. Please go ahead. Daniel Chan Hi, good morning. Your MD&A states that the decline in software licenses revenue is due to a decrease in demand for on-prem software. Can you just provide any details on the major drivers behind that? Just wondering if there's any churn or... Yeah, just on the software licenses, what are the major drivers of the decrease in demand there? I know SaaS might be part of it, but just wondering if there's any churn or... Vince Mifsud Yeah. It's -- as I mentioned in my earlier discussion, it's mainly driven by our choice strategy and offering customers the ability to stand up a -- either their own SaaS or use our SaaS platform. So that's basically the delta there. You will notice, Daniel, that -- you'll notice that our amount of SaaS or recurring revenue as a percentage of total revenue increased a fair bit in the quarter. So some of the prem are moving there. I will say SaaS is not as profitable for most of our competitors or even us. So we've got to work to make some -- we get more efficiencies there. I believe investors may like it, but it does slow down profitability, cash flow at least at this stage, is everyone is fighting for basically new customers. If you look at our competitors, you'll find they are struggling, i.e., struggling being debt, interest, which is often not covered and their growth is slowing in that area. Daniel Chan Okay. Thanks for that. Just to be clear, is there any impact from increased churn or any pricing pressure that's impacting that? Stephen Sadler I would say churn is about as it always has been. We have some churn -- total churn out and some term goes from maintenance to SaaS or licenses going to SaaS as pricing pressure, yeah. The other -- for us, it's not too bad because we've always looked for profitable growth and profitable sales. Some of our competitors are starting to suffer. And again, if you analyze that, you'll see what I mean. Vince Mifsud And Daniel, just to add to that. If you look at our recurring revenue, you can see it's expanding and growing quite a bit, and that talks to our retention rate or retentions. This has also been positive. Daniel Chan Yeah, that's great. Thank you. Maybe on the R&D again, in the filings, it states it's up because of acquisitions, SaaS and AI. Are you able to quantify how much of that increased R&D as a result of the latitude, the SaaS and the AI part? Stephen Sadler The increase is probably more than you think, because without the SaaS and AI. When I say SaaS, you've got SeaChange in there now, too. I would think that, that ratio would be lower. So it adds to it. It takes a little bit of time when you do an acquisition, especially in the R&D area to get the cost out because you've got to finish off projects that you're already doing. So that's an area that lags a little bit in any streamlining we might do. Vince Mifsud And Daniel, I also touched on -- we did a fairly big initiative to make our networks products cloud-enabled, and we completed all the strategic ones by the end of Q3. So that investment, we got done. Stephen Sadler Yeah. I think the important thing, again, I'm not sure we focused enough or say enough, we spend a fair bit on R&D. Some would say more than we should. But in spite of that spending, we still have a good EBITDA that we believe will grow as we bring in the SeaChange acquisition, which was profitable in the quarter, but barely. Usually, we have a loss in the first quarter of an acquisition. So we do expect EBITDA profitability will improve in future quarters as some of the things we get in the quarter will impact future quarters. And your next question comes from the line of Erin Kyle with CIBC. Please go ahead. Erin Kyle Hi, good morning. Maybe just starting with a question on M&A integration, and you sort of touched on it there with your last comment. But just on the integration of the assets of SeaChange this quarter, you mentioned in the prepared remarks that it was profitable in Q3 slightly and which is not quite at standard levels. So when do you think you'll have it operating at standard levels? And what levers do you have to pull to achieve this? Stephen Sadler It's a complicated question. I'm usually on every call for about 10 years. I've said in the first quarter of acquisition, it's generally negative. The second quarter, you generally are flat. Third quarter is halfway to our normal margins. And by the fourth quarter, you're in normal margins. We've been tending to beat that a little bit, especially when you do an asset deal because you don't take on some of the costs. But we did take on a lot of the R&D. And in some countries, in this case, Poland, you've got to scale the reductions if you're doing it, for example, in R&D, you can't just do it all once there's regulations against it. So it does take about, I would say, two to three quarters to get to the full EBITDA margin level. Erin Kyle Okay. That's helpful on fee change. And maybe if I can actually switch gears to Mediasite. Last quarter, you mentioned some difficulties in integrating that business given it went into bankruptcy post acquisition. So my question is have these difficulties mostly been resolved now? And is Mediasite operating at your standard levels? Stephen Sadler Mediasite is operating close to it, and it's not the fourth quarter, so it's not quite at the full operational level. But as close to it, and most of the issues there still have been resolved. There's a few left. [Operator Instructions] Your next question comes from the line of Paul Treiber with RBC Capital Markets. Please go ahead. Paul Treiber Thanks very much. Good morning. Just in the prepared remarks, the tone on the organic business does sound more positive, probably at least I've heard over the past couple of years. Is that a fair characterization? And then what is driving that? Is that -- like are you seeing an improvement in the external environment? Or is it more that it reflects traction from some of the changes in the investments that you've made over the last couple of years? Stephen Sadler Well, I'll give a brief and let Vince speak to it. I think the improvement is just some of the execution we're doing. So yes, I do see some improvement. It's not like spectacular, but it's going in the right direction. And of course, having stopped the video major decline, that looks like improvement in everything else. So part of it is for that. The other side, I'll say, if you look at the industry, it's not because of the industry. Our competitors are having issues. They're having issues because they took unprofitable revenue and use debt to do it, and now they're struggling with their debt positions. And I mean it started with Avaya about 1.5 years ago when they went into receivership, but other major competitors are having pretty significant financial difficulties right now. Maybe, Vince, do you want to... Vince Mifsud Yeah. I mean I agree with what Steve said. It's partly due to execution. The whole -- although I always say it sounds trivial, this choice, our choice strategy, it takes time to, first of all, be able to offer choice, get all the products ready for SaaS and private cloud and all of that. And then to train up everybody on the whole choice strategy and the go-to-market and get the message out there to the market. So all that takes time and that's showing positive outcomes. So... Stephen Sadler A comment, just to add, as an example, some of the major competitors that we've talked about in the past, I won't identify them particularly now, you're now hearing great growth in the past are now laying off staff. That's usually an indicator of what they see in their future. And again, they're not making money. So they have to do things like that. That should be good for us. We never took that approach. We actually hurt our revenue a little bit by saying, we're not going to do unprofitable revenue. So that strategy is now starting to pay dividends for us and it's starting to show up in our competitors as an issue which they have to address. And they really have a culture of that trying to get growth at a loss. And how do you fix that, especially in a high interest environment and you already have a lot of debt with banks not really willing to lend as easily as they have in the past. Vince Mifsud And just one other thing maybe to add is we do also hear our competitors that don't offer choice upsetting their customers a lot. So we get some of that, we get some of that spillover effect, if somebody doesn't want to necessarily go to a multi-tenant cloud product or have a particular cloud preference because we were cloud agnostics that we work with all the leading cloud providers and that choice sometimes helps us win some business from other competitors that are forcing their customers on a timeline that they may not want to stick to. So that helps us. Paul Treiber And on the choice strategy across all your product lines, like, is it fully implemented across all your product lines or is it still, you have some work to do in some of the product lines? Vince Mifsud So, sometimes when we buy a company, they didn't have this kind of choice mantra and they've locked themselves into cloud vendors or offered only one way of taking their product. So we have to do some R&D efforts to enable the choice on acquisitions. So, other than that, our products that we've had for let's say 12, 18 months, yeah, they're choice enabled. Paul Treiber Thanks for that. Switching gears to capital allocations. So, you have a lot of cash. The stock is trading at a multi-year low in valuation. You bought back a little bit of stock. But why not more aggressively put some of your cash into share buybacks here? Okay, Can you elaborate a bit more on that, just in terms of, like, how you look at the return? Stephen Sadler Well, I think at a certain -- we've always looked at it at a certain price. It's better to buy back your stock. Some people buy back their stock even when it's really high. That's not such a bright idea if you have a better allocation for the capital. We do have a lot of opportunities. We've got to, of course, execute and get them done. But as you pointed out, we're at a low price in our stock, and I think there's probably an opportunity to take advantage of that currently, yes. And we always have blackout periods where you can't do it by regulation. So, I suspect in the next little while, we may -- if the stock stays where it is, we'll be buying back some stock. Paul Treiber And then the other half of that question is on M&A. You do mention, and you've been mentioning for a while now, there's a lot of opportunities out there. You've closed some, but I think there's still quite a gap versus the cash that you're generating. What are you seeing or why do you think that the deals that are out there aren't closing? And there's still valuation expectations are high from sellers. Is there anything else where maybe they're getting financing from? Stephen Sadler Yeah, I think the valuations are still a little above where we'd like to see them. That's one. But I also think the problem is, some of these companies have a lot of debt. We're not really keen to taking on their debt and paying off the problems that they create for themselves. So it takes a little bit longer. There's not a lot of interest. There's less interest in the space because of AI. AI is supposed to eliminate contact centers, which is not happening. It's actually helping contact centers service their customers more and that's how we see it. But yeah, it's always a challenge. You always got to get the right value and you got to have two people who agree on that value and want to do a deal. Thank you. And there are no further questions at this time. I'd like to turn it back to Stephen Sadler for closing remarks. Stephen Sadler Well, thank you everyone for attending the call. Enghouse is in a very strong financial position with growth, no financial debt, and substantial opportunities for deployment of capital. We are financially positioned to continue to enhance our products with new features, including AI technologies to improve internal revenue growth attainment and cost efficiencies for ourselves. AI technologies also assist in improving the quality of customer interactions. We look forward to providing our full-year update at the end of our next quarter. Thank you, presenters. And ladies and gentlemen, this concludes today's conference call. Thank you all for participating. You may now disconnect.

Zenvia Inc. (ZENV) Q2 2024 Earnings Call Transcript

Cassio Bobsin - Founder & Chief Executive Officer Shay Chor - Chief Financial Officer & Investor Relations Officer Caio Figueiredo - Investor Relations Good morning, and thank you for standing by. Welcome to Zenvia's Q2 2024 Earnings Conference Call. Today's speakers are Mr. Cassio Bobsin, Zenvia's Founder and CEO; and Shay Chor, CFO and Investor Relations Officer. Please be advised that today's conference is being recorded and a replay will be available on the company's IR website where you can also access today's presentation. At this time, all participants are in listen-only mode. After the prepared remarks, there will be a question-and-answer session. [Operator Instructions]. Now, I would like to welcome one of our speakers for today, Mr. Cassio Bobsin, Founder and CEO. Sir, the floor is yours. Cassio Bobsin Hello, everyone, and thank you for joining us at Zenvia's second quarter 2024 earnings call. I'm Cassio Bobsin, Founder and CEO. Thank you all for being with us today. Let me start by sharing with you that this quarter has been a significant one for us, as [we've been] (ph) laser-focused on rolling out our Zenvia Customer Cloud solution, and I'm pleased to report that the response from our clients has been extremely positive with healthy levels of recurring revenue, churn and cross adoption. We have also introduced, in June, our GenAI chatbot solution. This cutting-edge innovation delivers substantial value to our customers, as it is so simple that a chatbot can be built in just under six minutes. I'm happy to share that in this two months since its launch, about 100 companies across eight industries in Latin America build their chatbots. We are confident this number will keep increasing. Chatbots are evolving more and more and are expected to become the primary customer service channel for at least 25% of all global businesses by 2027, according to Gartner. This shift represents not just a simple automation, but a significant enhancement of the customer experience. Here at Zenvia, our long-term vision is to revolutionize customer service and business processes automation with the smarter and more intuitive chatbots. We're leading this transformation in Latin America, offering fluid and personalized solutions that boost efficiency and enhance the customers' experience, and they're more profitable to us. In terms of next steps, additional features of our GenAI chatbot will include real-time sentiment analysis, continuous learning from past interactions, and seamless integration with multiple systems. We're unlocking endless possibilities for the future of customer experience, all with the help of AI. These advancements highlight the tremendous opportunities ahead and reinforce our commitment to driving growth and solidifying our relationship position in the market. The dedication for our team and the enthusiastic feedback from our clients attest our confidence in the transformative potential of these solutions. We're committed to continuing this momentum and exceeding expectations as we move forward. Now, I'll hand it over to Shay to cover our performance in the quarter. Let's start on Slide 5. Here's a snapshot of our performance in the second quarter and first half of 2024 compared to the same periods of last year. As you can see, we are happy to report solid numbers in both periods. The second quarter 2024 results came again in line with our expectations, combining strong revenue growth and strict expense control that resulted in an EBITDA of almost R$34 million in the quarter and R$57 million in the first half. When looking at the last 12 months, our EBITDA totals R$110 million, allowing us to reaffirm our R$120 million to R$140 million full year guidance for 2024. Our revenues grew by 20% year-over-year in the second quarter of '24, reaching R$231 million. This growth was matched by a 20% increase in adjusted gross profit for the same period, while our adjusted gross margin remained stable at 43.3%. This is right in the middle of our 2024 guidance range. Our EBITDA figures also showed significant strength, with both periods recording more than double the EBITDA compared to the same period of last year, attesting our continued operational efficiency and growth. Let's now dive deeper to understand these results. Both SaaS and CPaaS kept expanding by two-digits in the second quarter and first half of '24, with the revenue increase driven mainly by large enterprise in both segments. In the CPaaS business, the performance keeps reflecting our ability to grow while maintaining profitability at healthy levels, leveraging on better cost structure. CPaaS revenues grew 22% in the second quarter after growing 23% in the first quarter and 30% in the fourth quarter of last year. This attest Zenvia quality and market leadership. Our SaaS business grew almost 16% in the second quarter compared to the same period of last year. The expansion came primarily from large enterprise customers, especially in the consulting business that has a low comparison base in Q2 '23. Looking ahead, we expect SMB clients to be the main growth driver of our new Zenvia Customer Cloud. When we look for the figures of the semester in the graph on the right of the slide, we see mostly the same picture, with growth variations that are very similar to the quarterly numbers. Let's now take a better look on how this expansion has translated into a balanced and profitable portfolio mix. We continue to pursue and convert revenue opportunities in the CPaaS business. Particularly in the second quarter, we gained some volumes with unusually high margins from certain large enterprises, expanding CPaaS contribution to our revenue mix. The second quarter number shows SaaS reaching 34% of net revenues and 42% of gross profit, while CPaaS made 66% of net revenues and 58% of gross profit. In the same quarter last year, we had just a little bit more of SaaS revenues, 35% versus 65% of CPaaS, that translated into a 50/50 participation in the gross profit mix. As you know, a higher CPaaS participation in the revenue mix impacts our margins. But I would highlight that the focus here was again on capturing volumes in CPaaS that are converted directly to EBITDA, given that we do not need additional G&A to generate that revenue. Here on Slide 8, you can see exactly what I just explained. As our growth this quarter was mainly driven by large enterprises in both segments and with a much higher CPaaS participation, we were expecting some decrease in margins. We recorded almost 38% CPaaS margins and 54% SaaS margins in Q2 '24. For the half year, the margin numbers are very similar. The lower SaaS margins are related to the mix of large enterprises with lower margins. This decrease was totally offset by the higher-than-expected CPaaS margins that we do not expect to be repeated going forward. The performance of both segments drove our consolidated margins. The adjusted gross margin remained stable when we compare the quarters. Worth noting here that we are reporting margins that are well within the guidance range, all according to our plan. And more importantly, looking at the margins as a percentage, we highlighted gross profit expanded 20% year-over-year or R$17 million, which is one of the drivers for our EBITDA more than doubling. The other driver for EBITDA expansion is our discipline on G&A execution, as you can see in the next slide. As I mentioned in the beginning of my remarks, we remain laser-focused on keeping costs strictly under control. We have been growing the top-line by double-digits without adding additional G&A, which enabled us to more than double our EBITDA in both periods. In fact, we are doing this while bringing down our G&A as a result of increased productivity. This led the G&A as a percentage of revenues to decrease to 14.4% in Q2 '24 from 19.4% in Q2 '23, representing a 500-basis-points drop, the lowest level since our pre-IPO years and a key factor positively impacting our EBITDA. When we compare the semesters, the drop was of 400 basis points, reaching 14.5% of revenues. Obviously, we are very happy with our EBITDA expansion that we just discussed, but we cannot lose sight of how this EBITDA is converted into cash. So, here we have a view of EBITDA minus CapEx. In the first half of last year, when we deducted the CapEx from our EBITDA, we still saw a negative figure. Small, but negative. This year, we generated a positive R$24 million from the EBITDA minus CapEx. Also, if we consider the midpoint of our EBITDA guidance of R$130 million for the year, and that our expected CapEx should be around R$50 million, [this index is] (ph) projected to be positive at R$80 million for 2024. EBITDA minus CapEx is a crucial metric for assessing our ability to generate cash flow from our core operations after accounting for the necessary investment in the business. These metrics not only highlights our operational efficiency, but also helps understand how well we are positioning ourselves to deleverage, fund future growth, maintain financial flexibility, and reward shareholders. Since we expect that our EBITDA will increase at a faster pace than our CapEx, as it has been the case for the last few years, we believe we will be able to start deleveraging our balance sheet by H2 of '25. Until then, we are working to obtain more flexibility in our cash flow through new debt or equity. On Slide 11, we are reiterating our guidance for the full year 2024. Our revenue growth of 19% in the first half of the year is tracking at the high end of our 15% to 20% full year guidance. In terms of margins, we are forecasting gross margin in line with '23 figures between 42% and 45%, and our first half results of 43.7% tracked slightly above the midpoint of the range. And finally, in terms of EBITDA, our first half of the year came in line with our expectations, including the seasonally weak first quarter. Considering second half seasonality, especially in Q4, we are confident in reiterating our EBITDA guidance of between R$120 million and R$140 million. To wrap up, let's talk about the next steps that we have been discussing with our Board. The conclusion of our liability management in the first quarter, which included both capital raise and debt refinance, was an important step to better align our cash flow from operations to the financial requirements we have. With greater financial flexibility, we can focus on executing our strategic planning, accelerating profitable growth, and deleveraging the balance sheet. As we roll out Zenvia Customer Cloud, that Cassio mentioned in his prepared remarks, we become even more confident that it will accelerate our organic growth. We are also preparing to expand organically outside Brazil, with a focus on Argentina and Mexico, where we already have operations and where we see high growth potential. Once again, we appreciate your continued trust as we move ahead. We are committed to building a profitable and exciting future for Zenvia, maximizing value to our shareholders. With this, we conclude our prepared remarks and ready to take your questions. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Gustavo Farias, sell-side analyst from UBS. Gustavo, we are now opening the audio so that you can ask your question live. Please go ahead. Hi, everyone. Thank you for taking my questions. Two questions from my end. The first one regarding the migration of the client base to Zenvia Customer Cloud. I'd like to know if you could put more color on how has been the feedback from clients, what kinds of clients you expect to have going forward in terms of large enterprise versus SMB. Just to confirm, my understanding, your focus will be on SMB. Just like to confirm that. And the second one is regarding the client-base cleanup that you mentioned this quarter on the report. I'd like to know if it's already over, or should we expect some more base cleanup for next quarters? That'll be it. Thank you. Cassio Bobsin All right, I'll take the first part of question, and then Shay will take the second part. So, talking about migration of customers to Zenvia Customer Cloud, we first started with launching this new platform for new customers. So, we have the cohorts of new customers coming from a portion of our demand generation already using this new platform. And we're seeing a very interesting increase in the usage, in retention, and cross adoption and deep adoption, which is translating it to a very, very healthy profile of these cohorts comparing to what we had on the standalone solutions before in the Customer Cloud. We've been rolling out the migration of these -- of all of our products to become a part of Zenvia Customer Cloud. So, this is a project that is being rolled out. We expect to finish that in terms of migration of products up to Q4 this year and a little bit up to Q1 next year. And at the same time, we are migrating customers from our former solutions to this new platform that is also being rolled out. We're still in the early days of that, but we're already seeing that we have a very good reception from these customers, because they are able to have access to more features. They're usually paying the same amount in the beginning. I mean, they migrate and they pay the same, but have access to more features. And as they keep using more, then we benefit from these usage with the volume-based business model that we have that make these customers be more monetized as they grow their usage. So, as we're rolling out this migration of customers, we expect that this will increase both customer retention and also customer expansion. That's what you are already seeing in the cohorts of new customers. And about customer size and profile for this new solution, we're seeing adoption from small, medium, and large companies. We have, of course, as we launched, we launched more towards SMBs. But as we are approaching our enterprise customers to -- with this new platform, we're having adoption of huge customers of this new platform. And we're very, I mean, happy and glad that they're already seeing value in this new platform. And we expect as we roll out to all of our customers, this platform to have improvement in both SMBs and enterprise in terms of both retention and expansion. And, Shay, I think you can now add on the second part of the question about cleaning up the customer base. Shay Chor Thanks, Cassio. So, Gustavo, pretty simple, we understand that most of what we needed to do was already done. So, we don't expect anything relevant going forward. Hugo, I see some questions here on the web. I'll take them. I'll read them. And then, we report to see if we have live questions again. So, congrats on the progress, particularly in resolving the earnings gap. Two questions. First on margins and the other one on working capital. On margins, the company's margins for both CPaaS and SaaS vary considerably a bit quarter to quarter. Over the past three years, CPaaS margins have been as low as 20%s and as high as 40%s, while SaaS has been as low as 40%s and as high as 60%. Beyond customer size, what is the best way to think about the long-term margin profile of Zenvia especially as it scales? Cassio, I don't know if you want to go on a more helicopter view and then I can go... Cassio Bobsin Yeah, sure. We've been investing a lot on the integration of the SaaS solutions and expect that these investments over the last two years are now starting to leverage the growth of SaaS, as we expect this to happen in the next couple of quarters in a higher pace than CPaaS, which will naturally bring our margins a bit higher in terms of revenue mix. And the variation of margins on CPaaS, it's mainly customer mix. There's this variation of different customer profiles over time as it is mostly volume-based depending on seasonality and depending of negotiations, especially on high-volume, low-margin customers. Sometimes, we have some boost on high-volume customers with lower-margins, and this creates this fluctuation of CPaaS margins. Looking at SaaS, it's mostly about the revenue mix of different products in the portfolio as we acquire companies, and we combine that with our R&D solutions. Each has its own profile of cost structure. Sometimes, we -- what we see in the terms of variation is that one solution is growing at a faster pace and carries different margin. We expect that our margin at the long term, as we have been -- as we gave in our IPO, our long-term range will probably be beyond 50% on long term as we have -- as expected the SaaS portion of the business to become a long term majority of our revenues. But, of course, this always be combined with some of the CPaaS volumes going on that, at some point, vary the margin profile of the company. Shay Chor Yeah. Thanks, Cassio. The only thing I would add here is as we move more and more all the businesses to the new model on the Zenvia Customer Cloud and it becomes on a -- similar to SaaS, right? So, it's a monthly subscription. It tends to soften, especially on the pure channel side as well. So, that's the only thing I would add here. On the second part of the question here on leverage, what is the best way to think about the negative working capital? I assume there's a significant amount from telcos that continue to be pushed out since late '22. Would be useful to understand if there is any liquidity gap related to this or does the company have agreements in place to keep extending this out? So, that's a good question. We've been focusing a lot on managing our working capital since mid of '22. By nature, this business does not have negative working capital. We usually receive from our clients before or at the same time that we have most of our costs, which is the SMS that we acquire from the telcos. So, there's no negative working capital by nature on this business. Obviously that we'll always do the effort as we've been doing since mid of '22 to improve our -- both our DSO and DPO. And we'll keep negotiating every time that we see room for that to postpone the payments for the telcos or to anticipate or to do deals that we can have prepaid from clients at interesting cost. So, it's a matter of analyzing opportunities versus cost of issuing short-term debt. So, as simple as that. There's no specific agreement with the telcos, but we understand that our relationship with the telcos is very symbiotic. They depend on us, we depend on them. So, it's been a healthy relationship from this perspective. Another question here. FX losses are up significantly in this quarter. What was the driver for the increase? The main reason for these FX is that -- it has no cash impact, so just to make it clear. Basically, we have some clients that we invoice them abroad, outside of Brazil. So, what happens is that, we incur the cost in local currency, in BRL. We then invoice them and the timing between the day that we invoice them and register the invoice on our balance sheet and the day we are paid, there could be some differences. But again, since the cost is in BRL and we end up receiving in BRL, it's just a matter of accounting these effects. It's related to the operations in Brazil, not outside Brazil. Another one here. Congratulations on great set of numbers. Two questions. How is the funding gap for the next year? Zenvia need additional capital in the near term? How is Zenvia progressing with the integration of companies? And what is the work left here? Cassio, I don't know if you want to talk about the integration of the companies, and then I'll go on the funding gap. Cassio Bobsin Yeah, sure. About integration of these companies, we have this project we disclosed, which we called, One Zenvia, and that is basically, the project that finishes all the integrations. We are very advanced in that project. Some of these integrations already finished, and we -- and what we mean as finished is now making these products, these former products, standalone products that were originated from these acquired companies to become part of Zenvia Customer Cloud. That's the end game of these -- of whole integration process. We expect now these to be finished. The majority will be finished within the year, and we'll have some components still to be finished on first quarter and second quarter next year. But we are very proud to say that we are now in this end phase of integrations. Hence, we are already seeing some of the benefits in terms of efficiency already being translated in G&A reduction, and we expect up to the next year to still have more benefits of the integrations into our cost structure and our -- that will, of course, be reflected in the profitability of the company. So, we're seeing these benefit not only that, but also big -- mainly by providing a better and more complete solution for our customers. So, we're happy -- very happy to see that being finished. Shay Chor Second part here. So, on the funding gap, as you know, we announced earlier this year in February a liability management which included rollover of the bank loans that we had, also renegotiation with extension of the period for payment on the seller's finance related to the M&As. And finally, a capital injection by Cassio of R$50 million. One important thing about this is that one of the benefits of the renegotiation especially in the seller finance is that we are able at the discretion of the company to convert up to R$100 million into equity if needed to accelerate the deleveraging of the balance sheet. So, with that said, it's part of our job to continue looking for alternatives, especially in terms of financing and alternatives to continue doing liability management if there are alternatives there. The fact that we are increasing the part of our -- the mix of our revenues that is subscription versus usage improves a lot the credit profile. So, it puts us in front of us alternatives that we didn't have in the past. So, that's something we've been looking all the time. And in terms of equity, we need to be opportunistic. So, we have an ATM, at-the-market, program running. So, if there is any investment that needs liquidity, the ATM is there for this reason. So, we've been very cautious on that to avoid a lot of dilution, but it's an important tool that helps us funding the business. By the end of the day, deleveraging, funding gap, everything will have to come from our capacity to generate EBITDA. Another question here. This is for Cassio. You already using, as per your comments, a lot of AI. Do you have visibility on what should we expect the next step for features on this front? Cassio Bobsin Sure. We have several features being deployed within the Customer Cloud platform, and they range from, as we already mentioned, GenAI chatbot generation. With this solution, customers are being able to create chatbots in an average of six minutes, and they go live within six minutes. And we have lots of customers already benefiting from that up to copiloting, which means helping sales reps or customer service agents to give better contextualized answers to customer demands and thus improving customer -- I mean, sales conversion and also improving customer engagement and satisfaction over customer support. And we have different tools being deployed also for customer context analysis, sentiment analysis, and insights from customer behavior or improvement of campaigns. And these -- all these already deployed. And we've been working on some interesting features that utilize not only the conversation with customers, but also data from past customer transaction with the customer transaction history, and what -- which correlation correlations can be made, and with -- from these transactions, so they can create better journeys that will help customers to buy more, to engage more, to renew, to avoid churn, and so forth and so on. So, we have lots of interesting things going on. The AI is very practical. We have practical use cases that are easy to understand and to utilize on a daily basis for our customers. That's why we're very happy to have this kind of technology now being made available and becoming cheaper and cheaper so we can create value for all of our customers. Shay Chor Thanks, Cassio. Here one for, I guess, Caio can take this one. Congrats on the G&A discipline. Is this the level we should expect going forward? Is the team size you have now enough for future growth? Caio Figueiredo Yes. What I expect here is minor adjustment, but the team, the structure that we have now is enough to support all the growth that we have planned ahead. So, all the growth in revenue and gross profit will leverage more than G&A that we have in place right now. Shay Chor Thanks. And a follow-up here for you, Caio. On EBITDA, is Q2 the level for the second half? Caio Figueiredo As the business, what we -- the business naturally has a seasonality, especially in Q4 due to the Christmas and Black Friday and everything. So, what we expect here is if we deliver the same EBITDA, we reached our guidance, but of course, [our aiming is] (ph) higher. So, our expectation is that the seasonality of the business will leverage EBITDA. Shay Chor Thanks, Caio. Hugo, we don't have any further questions here. Can you just report to see if anyone has additional questions? This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Cassio Bobsin for his closing remarks. Cassio Bobsin Thank you, everyone, for joining us this call. We are very proud and excited about what we achieved in Q2 and hoping that over the course of the year, we're able to keep our projections and our forecast, our guidance for the year. And we're building a very strong foundation for 2025. And so, I'm very glad to have all you guys on board with us. And Hugo, next call. The conference has now concluded. Zenvia's IR area is at your disposal to answer any additional questions. Thank you for attending today's presentation. You may now disconnect. Have a nice day.

Earnings call: SecureWorks Q2 FY2025 results show steady growth By Investing.com

SecureWorks Corp. (NASDAQ: NASDAQ:SCWX), a global cybersecurity leader, has reported a robust second quarter for the fiscal year 2025, with key financial metrics showing positive trends. The company's Taegis revenue rose 7% year-over-year to $71 million, contributing to a total revenue that surpassed $82 million. SecureWorks' annual recurring revenue (ARR) now stands at $290 million, reflecting a 5% year-over-year increase. The quarter concluded with a strong balance sheet, including $48 million in cash. SecureWorks continues to leverage its platform to address a wider range of security use cases, riding on the trend of customers moving from SIEMs to an XDR approach. With the majority of the transition from its legacy business now complete, the company is focused on maintaining strong customer relationships, expanding its product portfolio, and continuously improving SecOps delivery. Automation remains a key focus area, given its positive impact on customer retention and gross margins. As SecureWorks progresses, they plan to provide more transparency regarding the adoption rates of their newly launched products. SecureWorks Corp. (NASDAQ: SCWX) has demonstrated resilience in its second quarter of fiscal year 2025, with Taegis revenue and ARR showing upward trends. To further understand the company's financial health and future prospects, InvestingPro has provided key insights that may be of interest to investors. InvestingPro Data indicates that SecureWorks holds a market capitalization of approximately $727.23 million. Despite a challenging period, the company has managed to maintain a positive gross profit margin of 65.18% over the last twelve months as of Q2 2025. This is particularly noteworthy as it underscores the company's ability to manage its cost of goods sold effectively, a crucial factor in its financial stability. However, it is important to note that revenue has declined by 16.27% over the same period, which aligns with one of the InvestingPro Tips that analysts anticipate a sales decline in the current year. This trend could be a crucial consideration for investors evaluating the company's growth trajectory. Another InvestingPro Tip reveals that SecureWorks is not currently paying dividends to shareholders. This decision might reflect the company's strategy to reinvest earnings into the business to fuel growth, especially as they navigate through a period of declining revenue and work towards profitability. Furthermore, SecureWorks has more cash than debt on its balance sheet, which could provide a buffer against short-term market fluctuations and enable the company to invest in strategic initiatives. This is a positive sign for investors looking for companies with a solid financial foundation. For those seeking more in-depth analysis, there are additional InvestingPro Tips available on SecureWorks, which can be found at https://www.investing.com/pro/SCWX. These tips provide further insights into the company's financial performance and future outlook, helping investors to make more informed decisions. Operator: Good morning, my name is Carly and I'll be the conference operator for today. At this time I'd like to welcome everyone to the SecureWorks Second Quarter Fiscal 2025 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. A supplemental slide presentation to accompany the prepared remarks can be found on the company's website. After the speaker's remarks, there'll be a question-and-answer session. [Operator Instructions] At this time, I would like to turn the call over to Kevin Toomey, SecureWorks Vice President of Investor Relations. Mr. Toomey, please begin. Kevin Toomey: Thank you, operator. Good morning and welcome to SecureWorks' second quarter fiscal 2025 earnings call. Joining me today are Wendy Thomas, our Chief Executive Officer; and Alpana Wegner, our Chief Financial Officer. During this call, unless otherwise indicated, we will reference non-GAAP financial measures. You will find the reconciliations between these GAAP and non-GAAP measures in the press release and presentation posted on our website earlier today. Finally, I'd like to remind you that all statements made during this call that relate to future results and events are forward-looking statements based on current expectations. Actual results and events could differ materially from those projected due to a number of risks and uncertainties which are discussed in our press release, web deck, and SEC filings, which you can also find on the Investor Relations website at investors.secureworks.com. We assume no obligation to update our forward-looking statements. With that, I'll turn the call over to SecureWorks CEO, Wendy Thomas. Wendy Thomas: Thank you, Kevin, and welcome, everyone. Our business continued its strong momentum in the second quarter. Taegis revenue grew 7% year-over-year to $71 million, and we delivered on our Q2 total revenue commitment. Annual recurring revenue, or ARR, now stands at $290 million, driven by the strength in new customer acquisition and expansion. And our Taegis average revenue per customer, or ARPC, expanded to $150,000 per customer. Our non-GAAP Taegis gross margin of 74% remains strong, growing 360 basis points year-over-year. And we delivered positive adjusted EBITDA once again this quarter. We are demonstrating that the security outcomes delivered by our Taegis platform, the success of our partner ecosystem, and our advanced automation and AI capabilities are propelling the growth of our business profitably. And they give us ample runway to further benefit from the scale that our business model offers. And Taegis is increasingly receiving accolades from industry experts. SecureWorks was recently recognized as the gold winner in the Golden Bridge Awards in the category of AI and cybersecurity innovation. The only company out of more than 1,000 nominated to win this award. A testament to our commitment to excellence and innovation, helping organizations reduce cyber risk and prevent cyberattacks by harnessing the power of AI in managed detection and response. In the second quarter, we progressed our growth strategy in several key areas. Specifically, we launched Taegis IDR, our new identity threat detection and response solution, solving a threat vector that has plagued companies for years, and furthering the protection of our customers. We gained traction across our global partner ecosystem, adding new key partners, increasing momentum and sales productivity, and partner win rates. And we continue to increase the extensibility of our platform to enable customization of playbooks, integrations, and advanced detectors to drive scale in the platform and increasing margins for partners and for us. I'll turn to product innovation in the second quarter, starting with a significant product advancement in identity security. First, for background, as traditional cyber defenses have hardened, attackers are taking advantage of vulnerable user identity, with nearly 80% of breaches involving some form of identity compromise in the mix. And given that identity misconfigurations impact 95% of organizations, the risk here remains high. To put that risk into context, the average cost of a data breach reported last year was 4.5 million. In speaking with CISOs, this is often the number one fear that keeps them up at night, one that isn't covered by traditional controls such as Endpoint. This is why we built and launched Taegis IDR, our identity threat detection and response solution, to help security leaders detect, prioritize, and respond to identity-based threats across their organization's environment and on the dark web. Conventional identity and access management controls, like multi-factor authentication, are helpful but insufficient. Taegis IDR provides comprehensive attack surface coverage of credential access techniques, providing visibility into identities, monitoring for gaps in the environment, flagging risky user behaviors, alerting when credentials have been exposed on the dark web, and detecting and accelerating response to identity-based threats in lockstep with Taegis XDR. Like all threats, speed is of the essence, and these capabilities and a time to detect that's counted in seconds are superior to what we see in the market today. And these will make a meaningful difference in protecting our customers' environments from one of the most prevalent and lucrative attack vectors deployed by threat actors. I'm pleased with the feedback from our early adopters on Taegis IDR, and the results they are experiencing. Customers appreciate Taegis IDR's ability to rapidly detect gaps and other misconfigurations in their environment, particularly in areas of misconfiguration and vulnerable exposures across the Azure and Microsoft (NASDAQ:MSFT) ecosystems. Taegis IDR ensures customers can close those gaps, while preventing threat actors from accessing and then moving laterally within their network. This quarter, we also launched a more personalized MDR offering with guidance on proactive security posture management and defense called Taegis ManagedXDR Plus. Many organizations struggle to find tailored cybersecurity solutions that fit their unique needs at an affordable price. They often have to settle for one-size-fits-all approaches that don't offer the proactive defenses they need for resilience. The Taegis Plus offering addresses this gap by providing a more targeted threat hunting experience, personalized security health guidance, and customized reporting to support compliance with a growing set of regulatory requirements. With this offering, we are making good on our commitment to help our customers mature their security posture over time with a clear return on their investment. This too grows our share of wallet, further propelling our industry leading ARPC. Shortly after we launched our Plus offering last quarter, we won a multi-year contract with a leading real estate development company in the Middle East. This company had a local MSSP relationship that was not providing the capabilities that they needed to address. Gaps and threat detection were falling on their lean team, which meant they had little to no time to proactively manage the security posture of their organization in the face of rising cyberattacks on their business. This customer chose ManagedXDR Plus for the personalized proactive approach to getting ahead of the risk, improving their security posture, addressing their regulatory compliance requirements, while scaling their security team, all at a meaningful return on investment. Our Tejas platform is also supporting our go-to-market momentum, but the industry is experiencing an inflection point in the approach to security resilience. We see this in the displacement not only of legacy security technologies, but also in the consolidation of spend on and the number of technology partners. Via our Taegis XDR platform, we are expanding to address a growing set of security use cases, such as identity and exposure management. Our open and integrated approach de-risks the consolidation of technologies with full visibility into the efficacy of Taegis and point controls, ensuring Taegis is well positioned as organizations re-evaluate their security investments and resilience strategies. Our support of choice means that customers can work within their own time constraints around their technology evolution with optionality to evolve their security controls to save vendor spend and management costs at a compelling per endpoint pricing model that has no surprise variable data charges. Last quarter, we won a consolidation opportunity with the leading multinational electronics company where the team had invested in multiple security products in recent years but were not seeing the results they had hoped for. Their team was even more overwhelmed with alerts from a variety of costly and unconnected security controls, while facing rising cyber risks to their business. This customer was seeking valid detections and the automation required to scale their existing SecOps team. By consolidating on Taegis, they immediately benefited from fewer, higher fidelity detections with full threat context and automated response capabilities. The ability to seamlessly manage security operations 24/7 with a predictable and compelling total cost of ownership led them to make SecureWorks their global security partner. We also saw great momentum across our global partner ecosystem this quarter with the addition of new key partners and acceleration in our deals won together. This quarter, we expanded the number of partners we have with global reach, while offering all of our partners strong operating margins, customized sales and technical enablement, and marketing collaboration. The broader channel increasingly appreciates the competitive advantages that Taegis and the SecureWorks suite of solutions offer, demonstrably reducing risk and supporting resilience, increasing the market's recognition that XDR represents the next era in security. Supported by the growing success and our partner first go-to-market, we saw increasing momentum in sales productivity with our Better Together go-to-market motion in Q2. And our partner win rate improved to the highest level since we launched our partner first go-to-market motion. In Q2, approximately 80% of global Taegis new logo sales closed were partner deals, reflecting the security value Taegis-based solutions bring to their customers. In second quarter we also continue to add to the more than 50 managed security services partners in our program. I'll highlight one MSSP partnership signed this quarter with a premier provider of IT and technology solutions. This partner is delivering managed detection and response services powered by the Taegis XDR platform to protect its elite clients across the financial services, life sciences, and professional services sectors. This partner made a seven-figure ARR commitment upfront, beginning with the transition of customers from its legacy SIEM technology onto the Taegis platform to drive higher retention and margin expansion for their business. Partnerships like this provide further validation of Taegis' ability to drive scale for large managed security services providers, empowering them to provide organizations of all sizes with access to enterprise-level security within an attractive business model. In conclusion, Taegis is defining the future of threat detection and response, driving superior sustainable growth and value creation, our agile expansion of features and capabilities to protect against threat actor access vectors, delivering organizations improved security risk postures and the best security outcomes, and our open without compromise approach. These, combined with our growing successful partnership ecosystem, put us at an advantage. In an environment where vendor consolidation and scaling spend on both security technology and talent are top priorities, demand for our Taegis security offerings remains strong. Taegis is the platform of choice for organizations to bolster their security posture at a proven return on investment, driving our growth now and into the future. I want to thank you for investing in our mission to secure human progress and thank you to our customers and partners for joining forces with us. With that, I'd like to hand the call over to Alpana to cover our financial results and guidance. Alpana Wegner: Thanks, Wendy. Good morning, everyone. I will review our Q2 results before I provide expectations for Q3 in fiscal year 2025. We once again hit our financial commitments in Q2. We delivered total revenue exceeding $82 million, which was at the high end of our expectations, primarily on the strength of subscription deals closing earlier in the quarter. Year-over-year, total revenue growth was impacted by a $13 million decline in revenue from the wind down of our non-strategic legacy business. Taegis subscription revenue was $71 million, up 7% year-over-year. Total ARR increased 5% year-over-year to $290 million, in line with our expectations. Our ARPC was $150,000, up 14% year-over-year, and remains a premium to the industry average, underscoring the value that Taegis provides our customers. The growth in our ARPC was driven by strengths in new logo and existing customer expansion. We ended the quarter with 1,900 Taegis customers. We saw new customers added in the quarter at a higher ARPC than the customers that churned. As our Taegis pricing is largely on a per endpoint basis, growth in endpoints is another indicator of platform expansion. Our endpoint count grew more than 9% year-over-year in the second quarter. Our Q2 operating results are strong, reflecting our continued focus on operational efficiency, productivity improvements, and cost discipline. Q2 non-GAAP Taegis subscription gross margin of 74.3%, an improvement of 360 basis points versus second quarter a year ago, driven by automation, continued cloud architecture scaling, and by leveraging our AI and machine learning capabilities across the business. Total non-GAAP gross margin expanded by 680 basis points to approximately 69% in the quarter. Total non-GAAP gross margin expanded by 680 basis points to approximately 69% in the quarter. Total gross margins reflect the end of life of our other MSS business in Q1, resulting in revenue being nearly zero in Q2. Adjusted EBITDA was $1 million, in line with our guidance of $1 million to $3 million and an improvement from a loss of $10 million in Q2 of the prior year. EBITDA was impacted with more than $1.3 million of redundant or transitional costs associated with the end of life of our other MSS business. GAAP net loss was $15 million for the second quarter or $0.17 per share compared with GAAP net loss of $32 million or $0.38 per share in the same period last year. Non-GAAP net income was break even or $0.00 cents per share compared with non-GAAP net loss of $9 million or $0.10 per share in the same period last year. Turning to the balance sheet and capital allocation, we ended Q2 with a strong balance sheet with $48 million in cash, no debt, and an undrawn $50 million credit facility. Our cash flow from operations was $4 million in the quarter, compared with $27 million used in the prior year period. The decreased use of our operating cash is driven by our focus on cost discipline, reduction in duplicative costs, and increase in operational efficiencies. As a reminder, our cash flow can fluctuate from quarter-to-quarter, with the first half seasonally being a use of cash primarily due to the timing of annual incentive payouts, and the second half typically generating cash from operations. Now turning to third quarter and full year fiscal 2025 guidance. For Q3 fiscal year 2025, we expect total revenue of $80 million to $82 million, adjusted EBITDA to be between breakeven and $2 million, and we expect a range of non-GAAP net loss per share of $0.01 to non-GAAP net income per share of $0.01. For the full year fiscal 2025, we now expect total ARR to be $300 million or greater, total revenue of $328 million to $335 million, total non-GAAP gross margins to be 68%, inclusive of Taegis gross margins to be 74%. Adjusted EBITDA to be between $6 million and $12 million, non-GAAP net income per share to be between $0.03 and $0.09. Cash flow from operations to be between cash used of $2 million and cash generated of $8 million. And we expect CapEx to be in line with fiscal year 2024. In closing, our Q2 results give us confidence in our ability to meet our 2025 outlook. We are executing on our growth strategy and will continue to deliver additional value to our customers and partners by opportunistically investing in sales and marketing to accelerate our partner momentum and in product development on new and innovative capabilities both across add-on and native security products. We remain committed to EBITDA profitability as we continue to drive scale in our business. Thank you for joining us on the call today. Wendy will now rejoin us as we begin Q&A. Operator, can you please introduce the first question? Hamza Fodderwala: Hi. Good morning. Thank you for taking my question. Maybe, Wendy, I'll start with you. Obviously, a lot of macro uncertainty out there, but a very intense threat environment at the same time. I'm wondering, going into your new fiscal year, how are you feeling about the overall macro and spending environment? And then, maybe Alpana for you, how are you feeling about your position from an investment and a sales capacity standpoint to really drive that top-line growth sustainably going forward? Thank you. Wendy Thomas: Good morning. Thanks, Hamza, for the questions. When we look at the marketplace right now, we see continued good demand for cybersecurity in general and then specifically for Taegis, the acceleration in our opportunity around kind of legacy technology displacement, vendor consolidation, particularly SIEM replacements. When we look at the sort of macro factors for us, our sales cycles were stable, if not slightly better, kind of within the range of recent times. So we haven't seen a big shift there. And frankly, just given where we are in terms of about a little over 18 months into our partner first strategy, we saw a really good performance in terms of those relationships this quarter, highest win rates, 80% of new sales, increasing mix of deals coming from those partners. So from our position in terms of market tailwinds as well as our execution around our partner first strategy, we continue to see good demand going into the second half of our fiscal year. Alpana Wegner: And then to -- good morning. This is Alpana to address the second question that you had. Just from an investment and sales capacity standpoint, I'd say a couple things there. One is, we have done some -- as you know, from last year, done some restructuring within our go to market organization. And we do feel like we've got the right seller profile today, as well as the right capacity to be able to deliver on the top line. Our partner ecosystem, and as Wendy just said, the positive momentum that we're seeing there is a more efficient go-to-market, and we do see that that is generating the capability for us to deliver greater sales productivity. That being said, I do expect that, and you saw a little bit of that in Q2, that we'll continue to invest in the go-to-market as well as product. Those are two fundamental areas to ensure that we can hit what we want to do from a top-line perspective. And from an overall perspective, I'd say sales and marketing, where it came in on Q2 as a percentage of revenue is where we expect it to trend for the rest of the year. Operator: Thank you very much. Our next question comes from Mike Cikos of Needham. Mike, your line is now open. Mike Cikos: Hey, guys. Thanks for taking the questions here. I just wanted to cycle back to the prepared remarks. I think there was a comment that some deals had closed earlier in the quarter which benefited subscription revenues. It doesn't sound like it from a macro standpoint, but just wanted to see like that the positive from that would be, hey, linearity in the quarter improved to a certain degree. If someone was to read that negatively, they would say, hey, maybe there was something macro-related that may have weighed on demand in the back half of the quarter. Can you just clarify that dynamic to make sure that we're all being thoughtful here on that? Wendy Thomas: Yes. No, it is. It was a positive dynamic from our perspective, which is just typically we see more deals come in at the end of the quarter than at the beginning of the quarter. This is just unusual. And that we had some larger deals come through at the earlier part of the quarter. So definitely a positive from our perspective and did not necessarily pull away from what we saw towards the end of the quarter. Mike Cikos: And anything to read as far as potential sustainability for that improved linearity? Or was this quarter maybe too early to call a trend just yet? Wendy Thomas: Yes. I don't see it as a trend at this point. I would say that it was just a bit of anomaly for Q2. Look, as most CFOs would, I would love to see it happen every quarter on a repetitive basis, but it's a little early to call that a trend. Mike Cikos: Terrific. And then just a quick follow-up, if I could. I know that we were saying how EBITDA this quarter was impacted by those redundant costs. I believe it was $1.3 million is what you guys had cited. Just as a reminder for the audience, can you help us think about what are the remaining transitional costs from that end of life of other MSS that still need to flush out and how should we think about that over the rest of the year? Wendy Thomas: Yes, I am happy to say that we've got those costs behind us at this point. As you look at the second half of the year, you will see that we've got no remaining costs from a legacy business, the other MSS. And as you saw in Q2, the revenue had already come down to a very de minimis amount. So that goes to zero as well as the cost. We're at a point where we've transitioned and completed the wind down completely at the end of Q2, which, as you know is a pretty significant milestone for us and really enables the team to be focused on purely to go forward which is very exciting for us. Alpana Wegner: Yes. And you did ask, but I mean pretty tremendous execution by the team to complete that transition. This is what opens it up for us as a business to grow in total revenue and sustain profitability with a business that now is turned towards building go-to-market momentum and investing in that, as well as new product innovation as we've been able to leverage the platform we've built to take on more security use cases with a lot of investment that's already been made. So great incremental growth opportunities for us. Mike Cikos: Totally understand and excited to see that next chapter for SecureWorks. Thank you guys. Unidentified Analyst: Hi, thank you. You have Carly on for Saket today. Thank you so much for taking my question. I think really I want to focus on some of the trends that we're seeing in the industry right now. So first, given the consolidation that we've seen in the SIEM market recently, how are you and the team thinking about the velocity of SIEM displacements in the industry right now? And is this disruption creating opportunity for your broader Taegis platform? And I'd also love to just touch a little bit on that trend that you've been talking about consolidation spend in the industry, especially on the number of technology partners from customers, how secure is kind of positioned in that trend, especially now with some of your newer products to really benefit from that trend of consolidation? Thank you. Wendy Thomas: Thanks, Carly. It's Wendy. Glad to take that. So I'll speak to the SIEM particularly first, which is that, that has been an opportunity where we've increasingly seen customers more than ready to move away from noisy, hard and expensive to maintain SIEMs to an XDR approach to detection and response. So that trend is only accelerating, players forging together to try to fight that trend or get scale to invest. We started building this platform nearly seven years ago now. That is a very difficult thing to replicate in terms of the capabilities that we bring to bear to detection and automated response. So that is a trend that for us, we will continue to see more and more deals that I believe moving to Taegis as a result. When I think about the consolidation trend, the way we designed the platform was also keeping in mind that essentially niche security products would become features of the platform over time. And they would be able -- we would be able to address with this holistic approach to shielding a customer's entire technology estate with an XDR platform. And our IDR launch is a great example of that. Exposure management, our EDR launch, and sort of 2.0 launch of that last quarter. They're all examples of the ability for an integrated platform to provide complete protection, but at a really compelling return on investment for customers. So in both the consolidation conversation with native controls, as well as the core detection response capabilities to replace SIEMs, we like where we're positioned in the market in terms of those tailwinds. Operator: Thank you. [Operator Instructions] Our next question comes from Madeline Brooks with Bank of America (NYSE:BAC). Madeline, your line is now open. Madeline Brooks: Perfect. Good morning. Wendy, this question is for you. There's a lot of positive signals from the quarter, like endpoint growth, which is up more than 9%. ARPC is up 14%. But then we're seeing ARR, which, correct me if I'm wrong, is majority Taegis is up only 5% for the degradation from last quarter. So I guess, can you just help us understand the dynamics of bridging the gap between these really good positive points, like the Endpoint growth and ARPC growth, but kind of why we're not seeing that reflect in revenue right now? And maybe talk through some net retention or return dynamics that could be impacting that? Thank you. Wendy Thomas: So, good morning and thanks for the question. We absolutely see some sort of leading and lagging indicators in terms of different growth vectors, and that's why we look across all of them. Endpoint growth is clearly important given the growth in our managed services partner business model, which, if you recall, is when we really count those as one end customer, but continue to grow revenue, which drives our ARPC and our endpoint count according to those relationships. Then that's why we continue to kind of break those apart to just give you visibility into the different routes to market that we have. When I think about our ARR growth, we're very confident around the turn we're seeing in getting traction in our partner first model, both in terms of the partners we continue to sign with global reach, really high quality, scaled global reach type of partners. And our investments have increasingly turned towards the enablement and support of those customers. And as we exit 2Q and see the kind of growing pipeline as we head into the second half, that definitely underpins our confidence in our ability to see ARR endpoint and expansion in our ARPC continue. Madeline Brooks: Maybe just one follow-up question there, too, is have the dynamics you turn changed as you've gotten to the end of sunsetting your legacy business? Because I think if I recall correctly, there were a lot of customers who were able to transition over to the Taegis platform that was giving a nice boost to growth. So is that maybe weighing a little bit on [indiscernible] as well, just being naturally at the end of that transition period? Alpana Wegner: Yes. Maybe Madeline, this is Alpana. I'll maybe share a little bit there on what we're seeing from a churn perspective and where our focus is, just from our overall retention. To your point, I would say the preponderance of any sort of carryover from the transition and the legacy customer base is for the most part behind us at this point. We do see just as any normal business would, we do see some levels of attrition across the customer base. From an ARPC standpoint, we did see some variability in what we add from a new customer base being at a higher ARPC and the ones that are churning being at a lower ARPC. There could be some connectivity there that you could make, which is the lower ARPC from a FIT perspective isn't really the sort of market segment that is looking for our type of MDR services. And those oftentimes can be a nice opportunity for us to share and to transfer those over to our MSSP partners, because they are better suited for what they're offering. So there might be a little bit of overhang there, but we would say that the preponderance is sort of behind us. And really for us, the focus from a retention standpoint is around -- what we see is, where we get good retention across our customer base is when we've got good strong deep relationships. We've got the additional ROI and value that we can add to them through our product portfolio, which is very much centered on, as Wendy shared in her prepared remarks, the product portfolio expansion that we are investing in and focused on. And then I would say, at the core is just the constant continuous improvement that we see across with our platform and our delivery from a SecOps perspective in detection response. And that's really underpinned by the automation that you see that we're investing in and seeing some of the benefits of that not only from what we can do with our customer base in terms of retentiveness, but also get a little bit of that benefit, obviously, from a gross margin perspective as well. Madeline Brooks: Got it. That makes sense. And maybe just one more ending comment for me here is, competitors in your space disclose the number of modules and other products that their customers are adopting across the base, right? So some disclosed three plus modules, other are disclosing eight plus modules. Any qualitative discussions around more product adoption would be helpful and maybe going forward would be helpful too to see some disclosures as the platform story takes place around number of products that your customers are adopting. That's it for me. Thanks. Wendy Thomas: Yes, thank you for that. And certainly as we think more about the number of products that we're launching. We're in that early stages of that this year. It's definitely on our radar to be able to share that information, because I think it will be, to your point, meaningful for analysts and investors. Operator: Thank you. There are currently no further questions at this time. Mr. Toomey, I'd like to turn the call back over to you. Kevin Toomey: Great, thank you. That wraps the Q&A and today's call. A replay of this webcast will be available on our investor relations page at secureworks.com along with our supplemental web deck and additional financial tables. Thanks for joining us today. Operator: This concludes today's conference call. You may now disconnect your lines.