Dell Subsidiary SecureWorks Files To Go Public, Shows Ramping Losses

Today Dell subsidiary SecureWorks filed to go public, showing expanding revenue, and ramping losses. Dell, then a public company, acquired SecureWorks in 2011 for a reported $612 million. TechCrunch reported in October that SecureWorks had filed for an IPO privately.

The company’s S-1 filing, released today, fits into that timing.

Before we get into the numbers, keep in mind the moving parts. Dell and EMC are currently in deal dance worth around $67 billion. That, and EMC owns most of VMWare, which may stay public in a sense following the transaction, but may not. Oh, and there is fresh confusion regarding the how Dell and VMWare will interact.

If that all seems like a bit much, it’s fair to say that the current mix of financial and corporate movements inherent to the above are past the point of being arcane, and border on the asinine. The simple version is that Dell went private, it’s buying EMC, one subsidiary will remain partially public, perhaps, and another is being spun out. That last company is SecureWorks.

All that aside, the SecureWorks IPO has two interesting components: Its increasing rate of lossmaking, and its place in the larger Dell-EMC transaction.

Dell, EMC, And Secure Promises

SecureWorks’ S-1 filing contains quite a lot of language regarding its offering, and how the company’s assets were part of its corporate parents’s going private. However, in light of the offerings, things have changed.

Here’s SecureWorks on the prior situation:

Upon the completion of Dell Inc.’s going-private transaction, we guaranteed repayment of certain indebtedness incurred by Dell to finance the transaction and pledged substantially all of our assets to secure.

That is no longer the case. Here’s what’s going on now, in the wake of the proposed IPO:

Following this offering, all of our shares of common stock held by Dell Marketing L.P., an indirect wholly-owned subsidiary of Dell Inc. and Denali, or by any other subsidiary of Denali that is a party to the debt agreements, will be pledged to secure repayment of the foregoing indebtedness.

Going private is hard to do.

The filing goes on to note that even after the IPO, the company will not be independent, something that relates at least mildly to the situation of VMWare. Here’s SecureWorks:

Denali will continue to control us following this offering, and will be able to exercise control over all matters requiring approval by our stockholders, including the election of our directors and approval of significant corporate transactions.

Denali is the holding company that was created to take Dell private. Given that level of non-control for shareholders that may buy into its offering, it could be that appetite for SecureWorks’ equity will be depressed.

Financial Algebra

All that corporate bullshit aside, let’s dig into the numbers, which are far easier to gist and understand. First up, revenue expansion, comparing the first three quarters of 2015 (calendar), and 2014 (calendar):

  • 2014: $190.7 million
  • 2015: $245.4 million

So far, all good. Next up, gross margin off of that revenue, comparing the same time periods:

  • 2014: $85.2 million
  • 2015: $111.2 million

Which, after pairing the above numbers with expenses, the following pair of losses, again comparing 9 months to 9 months:

  • 2014: Negative $29.5 million
  • 2015: Negative $57.5 million

Those figures are less good. In short, while SecureWorks has shown both expansion in its top line, and gross margin, it also posted increasing losses. Investors have shown smaller appetite for company’s going public that fail to show falling losses and increasing revenues.

The company’s rate of loss is also troublesome when set next to its current cash position. Includin cash equivalents, SecureWorks has a slim $39.4 million in total cash. That figure will rise, of course, if its IPO happens has planned. The company listed a generic, $100 million offering total in its S-1, a sum that is usually employed as a placeholder for a later, more specific figure.

Up next for SecureWorks is pricing, and the like. But it will be more than interesting to see how investors react to the offering. If it fails to succeed, the IPO window could shut another inch.

SecureWorks competes with companies such as FireEye, Palo Alto Networks, and Cisco.