SecureWorks Corp. (SCWX) Q4 2021 Earnings Call Transcript

SecureWorks Corp. (NASDAQ: SCWX) Q4 2021 earnings call dated Mar. 11, 2021

Corporate Participants:

Paul Parrish — Chief Financial Officer

Michael R. Cote — Chief Executive Officer

Wendy Thomas — President of Customer Success

Analysts:

Saket Kalia — Barclays — Analyst

Hamza Fodderwala — Morgan Stanley — Analyst

Sterling Auty — J.P. Morgan — Analyst

Alex Henderson — Needham — Analyst

Brian Essex — Goldman Sachs — Analyst

Presentation:

Operator

Good morning, and welcome to the Secureworks’ Fourth Quarter and Full Year Fiscal 2021 Financial Results Conference Call. [Operator Instructions] We are webcasting this call live on the SecureWorks Investor Relations website. After the completion of the call, a recording of this call will be made available on the same site. Now, I will turn the call over to Paul Parrish, Chief Financial Officer. You may begin.

Now I will turn the call over to Paul Parrish, Chief Financial Officer. You may begin.

Paul Parrish — Chief Financial Officer

Thanks everyone for joining us. With me today is Mike Cote, our CEO and Wendy Thomas, our President of Customer Success, who will join us for questions at the end of our prepared remarks.

During this call, we will reference non-GAAP financial measures, including non-GAAP revenue, gross margin, operating expenses, operating income, net income, earnings per share, EBITDA, adjusted EBITDA and cash flow from operations. A reconciliation of these measures to their most directly comparable GAAP measures can be found in our web deck and press release, which are available on our IR website.

Please also note that all growth percentages refer to year-over-year change, unless otherwise specified. 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. We assume no obligation to update our forward-looking statements.

Now, I will turn it over to Mike.

Michael R. Cote — Chief Executive Officer

Thanks, Paul. Our fourth quarter marked a solid end to an unprecedented year. Despite the macro uncertainty, our path remained clear. We leaned into our strategy of becoming the cloud-native security analytics platform of choice and broaden our reach with the partner community to deliver our holistic approach to security at scale. Our security analytics platform, what we are now calling Taegis, is differentiated by intellectual property developed over more than 20 years.

As the managed security services leader, we have deep experience across tens of thousands of environments, allowing us to create the textures in security analytics that work in an integrated way. We also see how threat actors tactics, techniques and procedures avoid point product security controls on a daily basis and embed this understanding of the threat landscape and behaviors into our platform. Furthermore, our approach to security is vendor-inclusive. We use telemetry from both our sources and third-parties to create the most comprehensive effective security analytics platform.

Customers are consistently telling us about the value they are realizing with Taegis, and initial results are promising. Taegis ARR has grown to $55 million, up from approximately $15 million at the beginning of the year and now accounts for 13% of total ARR. Additionally, we drove robust Taegis customer growth, up 390% and increased the average revenue per customer to approximately $140,000. This lifted the total average revenue per customer to the highest in our company history.

I thank my teammates, who were undeterred by the challenges presented this past year, and I continue to be incredibly proud of the resiliency and adaptability they’ve shown in protecting our customers every day. They’ve done a terrific job. But we know in the security business, our work is never done. We must continue to defend our customers and get better each day to outpace and outmaneuver an ever evolving adversary.

Cyber threats continue to rise and cybercrime continues to accelerate with the explosion of data and devices expanding the vulnerable attack surface from the core to the edge. Recent well publicized breaches have once again demonstrated the capability of nation states to coordinate and execute a sophisticated attack. In response to this, we’ve leveraged the visibility of our global threat intelligence to keep all customers informed and apprised of their vulnerability status. Events like these also underscore the importance of our strategic focus.

We believe that the ability to outpace the adversary at scale requires an integrated, inclusive analytics platform, one that works with point products from across the industry, allowing the community to come together and defend against the threat. Historically, we delivered our security platform and software applications as an integrated part of our managed security services. With the decoupling of our software, we can now meet the needs of more customers regardless of their security strategy. Our security analytics platform positions us to compete in a total addressable market of $37 billion, growing in the mid-teens, and we are well positioned to capture this market spend.

I’ll take a few minutes now to discuss the three key focus areas, outlining why we win, starting with our portfolio. Taegis was built from the ground up by our world-class team of engineers and product developers using our decades of experience as the foundation. We have en-viewed the software with best practice investigation and remediation workflows, leaning on our leadership and security operations to understand how to best defend and support our customers.

The Taegis brand signals our evolution, offering best-in-class cloud-native software and higher value to our customers. It extends beyond detection to automated investigational response taken in context with each customer’s risks and vulnerabilities. And with cloud-native software, we rapidly build, scale and deploy the additional capabilities our customers seek to secure their organizations in an industry that requires constant innovation.

Here are two examples. In early December, we announced improvements in our Extended Detection and Response application, directly addressing customers’ needs for a compelling SIM alternative. With the addition of log retention, reporting and search capabilities, security operations teams can now detect, investigate and respond to security incidents with greater visibility. They can also proactively hunt and gain actionable insights on both known and unknown threats. Customers have told us, with these additions, they have a view to displacing some, if not all, of their legacy SIM spend, and you will see us extend this approach to additional use cases in the future.

We also expanded the Taegis platform with the Vulnerability Detection and Response application, demonstrating our intent to use both organic and inorganic strategies to layer on the additional capabilities our customers need. Additionally, our managed security services, incident response engagements and proactive research enhance our software capabilities with the latest threat intelligence and workflow improvements.

Our counter threat unit tracks global threat groups, creating an extensive list of countermeasures, rules and analytics to provide broad visibility and coverage. This allows us to improve our workflow design and automation as a combination of delivering both security services and building software in-house creates a cycle of rapid, continuous improvement. This unique combination of strength, our deep experience of the global MSSP leader paired with our software-enabled threat intelligence that is constantly evolving, distinguishes us in the marketplace.

Turning to customer success. We are actively working with existing customers to migrate their solutions to Taegis, while also expanding our customer base with new logos. We ended the year with nearly 400 customers on the platform and are seeing continued success with both new and existing customers, realizing the value of our security analytics. Customers see a significant benefit when deploying Taegis XDR. The potential ROI over a three year period in terms of total economic impact is north of 400% based on a study conducted by Forrester Consulting.

Let me give you two examples. A large European steel manufacturer selected Taegis-managed XDR to help streamline the identification and investigation of threats in their environment. By leveraging Taegis, this new customer gained full visibility across their environment with high fidelity alerts that are automatically enriched for threat intelligence from our CPU research team. And this is a repeatable use case. Our platform allows us to extend our security intelligence and operations expertise to customers of all sizes no matter the scale of their environment they need to protect.

Additionally, an existing regional bank customer was looking for a solution to integrate the visibility and coordination of their disparate security point products. They too turned to Taegis as their essential security hub. Given the platform’s inclusive approach to data sources and integrated workflows, the customer now has comprehensive visibility and security management through a single pane of glass. Stories like these emphasize the value proposition of our expanded software platform to both customers and our business.

Finally, our go-to-market acceleration and expansion. We are investing in our channel strategy and building momentum in the Secureworks partner community, most recently launching an MSSP track for our partner program. This push into the channel provides two key benefits. First, a robust partner program will help us accelerate Taegis sales. We are growing a broad community of service providers that mutually benefit from the expanded use of our platform at the heart of their security operations. MSSPs get to add our leading software capabilities to their portfolio, while managed service providers, who aspire to extend into security services, can accelerate their journey by leveraging the Taegis platform and applications, our best practices and our training programs.

In addition, our MSSP program addresses one of the fundamental challenges in our industry, a lack of security talent. Extending our security expertise to partners creates a larger force of well-trained security experts that benefit from our know-how in defending and securing customers around the globe. Our platform is designed to connect the security community, creating a force for good by leveraging Secureworks’ IP, we transform the way security is done for the benefit of both our and our partners’ customers.

In closing, I’m pleased with the progress we are making as we strengthen the security community to beat the adversary at scale. There is power in democratizing our security expertise and services leadership. We are using our deep security operations experience, understanding of threat intelligence and advancements in technology to reimagine how security should be done. As a broader set of customers embrace Taegis, there is a network effect through this connected community. More customers needs more visibility, increasing our ability to outmaneuver threat actors through collaboration to better protect all customers.

We are making great progress and remain laser focused on three goals. First, innovating and expanding the Taegis platform. Second, ensuring the protection and success of our customers. And finally, accelerating our go-to-market. We recognize this year will be an important one and are committed to providing incremental disclosures on Taegis as the year progresses. I’m confident we have the right strategy to help our customers, partners and teammates, while creating long-term values for our investors.

I’ll now turn it back to Paul.

Paul Parrish — Chief Financial Officer

Thanks, Mike. We made meaningful progress on our Taegis platform, which had a strong first year of growth. Taegis ARR ended the year at $55 million and Taegis revenue grew to approximately $30 million for the year. Our margins remained healthy while we balance the right investments for our future and strengthened our overall financial position. We generated more than $60 million in cash flow from operations for the year and ended with a record cash balance of $220 million. And for our total results, fiscal ’21 revenue grew 1% to $561 million. Gross margin was up 6% to $335 million or approximately 60% of revenue. And EPS of $0.02 was up from $0.01 in the prior year, reflecting our team’s solid execution as we position the company for future growth.

Moving to our Q4 performance. We’re excited about the momentum on our Taegis platform. Taegis revenue was $11.2 million and demonstrated consistent quarter-over-quarter growth throughout the year. Taegis now represents 400 customers with 35% sequential growth and $55 million of ARR with 31% sequential growth. These results reinforce our conviction and we can accelerate Taegis growth and scale the platform in the coming year.

Total Q4 revenue of $139.7 million was down 2%, primarily driven by a reduction in non-strategic areas of the business as we pivot toward Taegis growth opportunities. Gross profit was $84.2 million, translating to 60.2% gross margin. For Q4 and the full year, our gross margin percentage is up nearly 300 basis points from fiscal ’20, reflecting pandemic-related cost benefits. The flexibility required to navigate the past year’s environment also created new learnings, and we expect some of these efficiencies will continue to benefit us in the long-term.

Operating expense was $84.3 million, up 2%, primarily driven by strategic investments in R&D. Research and development expenses increased to 20% of revenue, up from 15.7% in Q4 of fiscal ’20 as we accelerate our security analytics platform development. Sales and marketing expenses were 25.8% of revenue, down 340 basis points, primarily due to a severance-related cost impact included in the prior year period and lower travel costs. General and administrative expenses totaled 14.5% of revenue, modestly above the prior year period. Operating loss was $100,000, up 1% and EPS was breakeven. Adjusted EBITDA was $3.2 million, up from $2.3 million on gross margin gains. Fiscal ’21 adjusted EBITDA was $33.2 million.

Turning to cash performance and the strength of our balance sheet. Cash flow from operations was $32.2 million, down from last year’s Q4 performance of $43 million with the decrease reflecting our investments in the Taegis platform along with channel and marketing. We ended the year in a strong liquidity position with record cash of $220 million, up from $182 million despite navigating through these uncertain times. Additionally, we have an untapped $30 million credit facility with an expansion provision of up to $60 million.

Now for our outlook, starting with Taegis. As Mike mentioned, we are focused on increasing the level of disclosure for this business. For the current year, we expect Taegis ARR of at least $150 million, up from a base of $55 million at the end of fiscal ’21. This translates to revenue of $90 million to $100 million, up from approximately $30 million this past year. We plan to drive new customer acquisitions by ramping our sales and marketing investments. And we anticipate an accelerated portion of existing customers will transition in fiscal ’22 as we look to benefit from the additional capabilities offered by the platform.

Looking at the overall business. In Q1, we expect GAAP revenue of $134 million to $136 million and a net loss per share of $0.16 to $0.17. We expect our non-GAAP revenue to be in line with the GAAP range and a non-GAAP loss per share of $0.02 to $0.04. For the full fiscal year, we expect GAAP revenue of $535 million to $545 million, a net loss of $63 million to $71 million and a loss per share of $0.76 to $0.86.

We expect our fiscal ’22 non-GAAP revenue to be consistent with the GAAP range. Our revenue outlook reflects our shift toward partner delivered services as we scale our MSSP program. Our non-GAAP net loss range is $18 million to $26 million with a non-GAAP loss per share of $0.22 to $0.31, reflecting several factors. First, an incremental $25 million in R&D to extend the Taegis platform. Second, an additional $15 million in sales and marketing related to the expansion of our partner program and promotion of Taegis. And finally, our portion of the pandemic-related cost savings coming back into the P&L.

Adjusted EBITDA is expected to be negative for the full year in the range of $13 million to $23 million. We expect cash flow from operations to range from breakeven to a $10 million use of cash. This includes a use in Q1 driven by our annual performance payouts, offset by cash generation in the later quarters. Capex for the full year is expected to be in the range of $3 million to $4 million.

Finally, we will compete effectively in the security software market that is growing double-digits, leveraging our differentiated expertise and approach, including our leading position as the trusted MSSP vendor of choice, our understanding of the constantly evolving threat landscape and our vendor-inclusive approach to telemetry. This will be a pivotal transition period, but we’ve already laid the foundation for a compelling long-term model, which we outlined at our December Investor Day. A replay of the event is available on our Investor Relations page. We’ve also added an abbreviated presentation along with our quarterly web deck that highlights the key tenets of our vision and multi-year strategy.

As a reminder, in the next three to five years, we expect to generate 100% of ARR and 90% of revenue on the Taegis platform, unlock partner growth scaling our channel business to 50% of our mix and migrate gross margins to the mid-70s as a result of increased software sales. Our journey to an integrated SaaS platform with rapidly expanding go-to-market capabilities will provide compelling future economics, including a highly reoccurring revenue model, significant margin expansion and strong cash flow, ultimately creating sustainable long-term value for our shareholders.

I invite Mike and Wendy to join me now for Q&A. Operator, can you please introduce the first question.

Questions and Answers:

Operator

Thank you. [Operator Instructions] We’ll take our first question from Saket Kalia with Barclays. Your line is now open.

Saket Kalia — Barclays — Analyst

Hey, good morning, folks. It’s Saket. Thanks for taking my questions here.

Michael R. Cote — Chief Executive Officer

Good morning, Saket.

Saket Kalia — Barclays — Analyst

Hey, good morning. Hey, Mike, maybe first for you. Can we just talk about the traditional MSS business to start. I believe Taegis products, like MDR for example, could supplement or even convert customers from kind of the traditional MSS business that we know to something more automated and higher value, to your point. Can you just talk about how that’s going and what customers — what MSS customers are saying about that shift to Taegis?

Michael R. Cote — Chief Executive Officer

Saket, thanks for the question. Happy to do that. I’ll — I’m going to tee this up and then I’m going to let Wendy jump in, since she has been integral in kind of moving forward with that effort. So we started the process to migrate or show our customers the capabilities on the Taegis platform in fiscal ’21. And we were selectively putting customers in cohorts with regard to the capabilities that we have and the incremental value we’d show them as we expanded the process. The receptivity and the incremental value they’re seeing has been very strong. It fits tremendously well with the majority of our customers and we accelerated that process into Q4 and expect that acceleration to continue through fiscal ’22, and quite frankly, into fiscal ’23.

I do want to touch on one thing then I’ll bounce it over to Wendy. From the perspective of — there is, however, a portion of our customer base that were doing much more customized solutions, really relating to other platforms. And some of that business, quite frankly, won’t fit in what we’re doing from a Taegis perspective. But having the capability on the — over — on the underlying Taegis platform with regard to the XDR capabilities, the VDR capabilities, the log retention capabilities we’ve talked about, some targeted threat handling capabilities and incremental features and functions we’re going to add over time through this fiscal year. We’re excited about the progress and the evolution of the progress we’ve had to date.

So Wendy, if you want to go into a little more depth and maybe touch on to Saket’s question a little bit of those things and the things we’re doing from a customer’s perspective.

Wendy Thomas — President of Customer Success

Sure, absolutely. Good morning. So it’s absolutely a great opportunity to take customers, particularly current MSS customers to really, as Mike said, extend from primarily detection into more automated investigations and response support. And that’s really the incremental value that our MSS customers see in moving to the new platform.

As part of the, what we call, a resolutioning process, when we engage those customers, we absolutely want existing customers because we know them to feel that as an upgrade experience, then it’s been a great opportunity to just make sure that they’ve got full coverage and great security hygiene in place. And so their reaction and really the time to visibility and value to them is incredibly fast, and that’s kind of in the reaction.

The ability to see things and move them through an investigation quickly is tremendous. And the time saved by my team has been also tremendous. In fact, we have a lot of anecdotal customer comments around the hours that we’ve saved, but we did do a study with Forrester, I think that Mike mentioned around. It not only reduced stockwork by about 85%, for our average customer, they’ll see productivity gains of about $500,000 over three years from just the automation of the work in this space. So it’s — that’s the real value for customers, its speed-to-value and efficiency.

Michael R. Cote — Chief Executive Officer

Touch on two other things [Indecipherable] Wendy. Touch on the technology, the cloud-native system and the capability it leads to training.

Wendy Thomas — President of Customer Success

Sure.

Michael R. Cote — Chief Executive Officer

And training the customer because we’ve got a lot of feedback on that and as well as the network effect, kind of the incremental aspect of the network effect.

Wendy Thomas — President of Customer Success

One of the key features of the new platform also is integrated chat within a way that lets customers’ teams really work seamlessly with our security experts through an investigation. They can view same thing, they can actively chat, they can confirm threat actor activity, was this a targeted attack, commodity attack in real time so that it really extends or supplements the expertise on their teams as well and kind of has their back, and again, just makes that process faster and higher fidelity.

And of course in terms of the ability to quickly benefit all customers with a cloud-native approach to security, the speed of our ability to improve the platform seamlessly for the customers to constantly add detections that we learn from our incident response engagements and investigations with current customers. Our ability to deploy protections for them is so rapid that they can feel the improvements each week. And we help our sales team kind of position that with customers as well.

Michael R. Cote — Chief Executive Officer

Yeah. I guess, the only other thing I’d add and then Saket would like to move, is the user group capability, right, which is different because of the way it’s architected. We setup a user group where people are able to — customers in our — super users, our employees are all able to work together in the environment to kind of drive the platform forward.

Saket Kalia — Barclays — Analyst

That’s great, guys. That’s super helpful. Paul, maybe for my follow-up for you, first of all, appreciate the additional transparency and disclosure on Taegis. Maybe just kind of thinking top down, as you look at the 2022 revenue guide, can you just talk broad-brush. I mean, I guess, we’ve got a Taegis guide as part of that in terms of $90 million to $100 million in revenue. But if you look at, how much of that revenue guide is going to be coming from Taegis versus traditional MSS versus SRC?

Paul Parrish — Chief Financial Officer

Yeah. Thanks for the question, Saket. And I’m glad you appreciate the additional disclosures. We’re excited about what we’re doing around our new product — our Taegis product, and we’re going to be providing more and more disclosures through the year as evidenced by our revenue or our guidance that we gave around Taegis. So if you take that revenue guidance of $90 million to $100 million for Taegis, which is basically three times the revenue that we had this year, SRC is going to be somewhat flattish, even though the mix within SRC will be leaning more toward IR. As we go through the year, we see the benefits of our IR services and our customers are seeing that and we see that is continuing to grow in that mix within SRC. And then the remaining number will shake out to be the old MSS platform. So you just follow through that logic there, you can get to the mix.

Saket Kalia — Barclays — Analyst

That’s super helpful. Thanks very much, guys.

Paul Parrish — Chief Financial Officer

Yeah, Saket. Thanks.

Michael R. Cote — Chief Executive Officer

Thanks, Saket.

Operator

Thank you. Our next question comes from the line of Hamza Fodderwala with SecureWorks. Your line is now open.

Hamza Fodderwala — Morgan Stanley — Analyst

With SecureWorks? Thank you, guys.

Michael R. Cote — Chief Executive Officer

Yeah. I didn’t see in the employee list.

Hamza Fodderwala — Morgan Stanley — Analyst

Yeah. I guess, I’m changing job. But thank you guys for taking my question. And likewise, really appreciate the incremental disclosure there. Maybe just a first question from a macro standpoint for you, Michael. Obviously, we’ve had some pretty significant breaches recently. Given SecureWorks sort of focus on threat hunting and response, I’m curious whether that drove any incremental pipeline or if that’s raising any customer awareness towards your platform? I know you’ve had some events around the incident and helping customers sort of respond to this. So just curious if there is anything that you saw in the most recent quarter?

Michael R. Cote — Chief Executive Officer

Yes. First of all, thank you for the question. I think unfortunately any time there are incidents, particularly when we’re seeing kind of the announcements that happened back to back to back over the last couple of months, it increases and validates the risk that exists out there. And I think it’s created a heightened desire from the board level down because we are having a lot of conversations with boards to figure out and ensure that processes and controls they can put in place and that they can work with their management teams to ensure that they’re getting the appropriate prevention, detection, response and prediction, if you will, of where the hackers are going.

So we did see an uptick and did do some incremental IR engagements, which are continuing quite frankly at this point. And we — it did create opportunities for us to open the door and have some increased conversations and show people what we’re doing from a Qualys — from a Taegis perspective on our platform and where we’re trying to go in driving things.

I guess, the other thing I’d sort of touch on from that perspective is that I think it’s highlighted, and what we’ve seen is an interest from our customers’ perspective and a lot of conversations in not just trusting a single point product. And there has been an uplift in looking at how do they have checks and balances throughout their whole system. Some are even looking at putting in multiple layers of defense, either at the network or at the endpoint layer or ensuring that they’ve got the full environment covered, but in a duplicative manner or controls and checking manner.

Hamza Fodderwala — Morgan Stanley — Analyst

And just a quick follow-up for Paul. Just around — I think there is, correct me if I’m wrong, but some initial headwinds just around the transition as you shift some of the revenues to your partners. Any sense, you could give us for sort of normalized revenue growth in Q4 or looking ahead, given that dynamic as you try to become more of an ARR focused company?

Paul Parrish — Chief Financial Officer

Yeah. And are you looking at Q4 of FY ’22 because when you say that, is that the reference?

Hamza Fodderwala — Morgan Stanley — Analyst

I’m sorry. No, just this most recent quarter from a revenue standpoint and then in FY ’22 from a revenue standpoint. Any color on sort of a transition impact or headwind that we should think about when we think about…

Paul Parrish — Chief Financial Officer

Right, right. So we took that in consideration when we set the guidance for FY ’22. And so that guidance is reflecting some headwinds from the switch over to partners taking some of the services as we continue to sell the software and then they take on the services. And that impact will start to shift more as we travel through FY ’22. So look at that growing mainly Q3, Q4, that type of growth and the shift over to the MSS piece.

Michael R. Cote — Chief Executive Officer

Can I add to what you said, Paul, just to make sure. So in instances where we are moving customers, existing customers over, there has typically been an uplift in the ARR that they pay us, roughly 20% sort of uplift. And it has what — the key component of what has caused our overall — the increase in our ARR and our overall customer base to $138,000 internally. And I think just to make sure where we are partnering with an MSSP or an MSP and they pick up the services component, we in those instances are getting just the software revenue and they are doing the services component of the work. And we expect that it is a component of that, but very small component. At this point, we expect that to increase. And that’s what’s in the guidance that I think as Paul referred to. Sorry, I stopped because Paul was shaking his head.

Paul Parrish — Chief Financial Officer

Yeah.

Michael R. Cote — Chief Executive Officer

Does that help?

Hamza Fodderwala — Morgan Stanley — Analyst

Yeah, that’s helpful. Thank you, guys so much.

Operator

Thank you. Our next question comes from the line of Sterling Auty with J.P. Morgan. Your line is now open.

Sterling Auty — J.P. Morgan — Analyst

Yeah, thanks. I’d like to start by asking what kind of compensation firms [Phonetic] are getting now they switched over?

Michael R. Cote — Chief Executive Officer

[Speech Overlap]

Sterling Auty — J.P. Morgan — Analyst

Yeah. Exactly, exactly. Mike, there is a lot of different types of MSSPs that are out there. So when you talk about kind of the partner model, I’m kind of curious, for Taegis, what is the type of partner that you see resonate — this resonating most with?

Michael R. Cote — Chief Executive Officer

So Sterling, first of all, thank you. Great question. We are actually — we started our pilot program last month on the MSSP partner program. We have signed up both current MSSPs and we have signed up managed service providers who would like to become MSSPs and are working with both regional players in those two categories and global players in those two categories and have sort of are going through the learning process of which ones are taking a little bit longer to really get to where they want to move along and become part of the program. And they’re both going through to understand the value proposition.

So it’s really a process around when the acceptance will happen with regard to their internal capabilities today. For example, an MSP has very little capabilities. They’re really excited to move forward. In our process, we’ve created a training program and a training certification program for one to become — you can’t just sign up and put your hand in the air. And so we can see through that program and who have passed the certifications, who is really interested in making the investments do this.

In many cases MSPs, particularly those that are focused on our target market, which tend to be what we would say mid-size, if you will, market tend to move quicker because they see the value, the increased revenue streams opportunity and are excited about it. Then we’ve been going through the program with the larger companies who understand it, but it’s a little bit heavier of a lift for them to move their incremental existing infrastructure. And the training is not just training on our platform, but it is actually training certified to show them our experiences, the workflows, the processes and all the things we’ve learned over the last 10 years we put into our training system. Does that help, Sterling?

Sterling Auty — J.P. Morgan — Analyst

It does. And my follow-up, I’m really curious, what is the gross margin for Taegis through that type of opportunity look like today? And what do you think as you scale that business what the gross margins will look like for you?

Michael R. Cote — Chief Executive Officer

So let me start then I’ll jump it over to Paul. In our partner program — and then I’ll get to your specific question. There is three types of partners we have signed up. There are referral partners who would fit into the normal area — normal margins that we will provide, but they would be referring to us software sales where it’s the XDR, VDR software application alone. So it’s typical software margins you would expect or the management of it. And we could do that management or as we continue to expand the MSSP program, the objective would be to move the management to our partners in many cases where it makes sense. There is resale solutions where the end customer versus referral, so beyond the partner paper. And then there is the example of the MSSP program we just talked about. And in the MSSP program, in those cases, the MSSP partner would be doing the services component. So to us, we would expect to see software margins.

Paul Parrish — Chief Financial Officer

Yeah. And I discussed this during the Analyst Day. In the long-term as we get more and more of the mix of software, you will see that flow through our overall margins. And as we continue to grow the Taegis platform, we’re exploring when is the time for the appropriate disclosures on segments and you’ll start seeing that when we start disclosing segments as size and scale of that product continues to mature.

Sterling Auty — J.P. Morgan — Analyst

Understood. Thank you.

Michael R. Cote — Chief Executive Officer

Thanks, Sterling.

Operator

Thank you. [Operator Instructions] Our next question comes from the line of Alex Henderson with Needham. Your line is now open.

Alex Henderson — Needham — Analyst

Thank you very much. It’s good to talk to you guys again. I was hoping you could talk a little bit about the mechanics around what you’re spending on sales and marketing and to what extent you’re adding additional reps whether you’re putting additional capabilities to support them. Can you flush out that sales and marketing spend, where it’s going? How it’s being orchestrated, please? Thanks.

Michael R. Cote — Chief Executive Officer

Sure, Alex. This is Mike. Thanks for the question. I think I have it, but let me try and address it. And then if I don’t, just let me know. So we are basically investing in various reps around the markets, around the globes, in the different geographies. So we are continuing to expand. We’re investing heavily in the go-to-market side of that — I mean, in the channel side of the house in our efforts as we’re expanding the channel through the MSSP program that we just talked about a few moments ago.

We are also spending heavily from increasing the amount from a marketing perspective. And I guess, a really good example of, a, really good example of one of the collaborative efforts we are doing is the self-service demo and trial, which is on our website, which we released about a month ago and are seeing very strong acceptance of it and people that are in the process of actually in a 30-day trial, free trial of looking at what Taegis does and how it operates. So it’s probably I would say a level amount of increased sales — level amount of spend over the prior year in our direct sales organization, an increased amount in the channel organization and an increased amount in the marketing organization year-over-year.

Alex Henderson — Needham — Analyst

I see. And just going back to the frictionless version, I’m a little confused why that requires an additional spend if it’s already been launched? How you’re expanding that or what needs to be addressed in order to improve it?

Paul Parrish — Chief Financial Officer

It’s cost around the self-service demos and trials.

Michael R. Cote — Chief Executive Officer

That was just an example. So the self-service demo and trial of the frictionless version, if you will, that you referred to is no incremental cost. It’s just purely an example of the types of things that we are doing to kind of drive forward from a demand-gen perspective as a software company to give people the opportunity. That’s not — I was trying to give an example of the types of things that we’re doing… [Speech Overlap]

Alex Henderson — Needham — Analyst

One more question, if I could. Can you talk a little bit about what’s going on with Dell? What’s going on with their integration of Carbon Black, whether that impacts you guys at all? And how all of that’s — those relationships are developing?

Michael R. Cote — Chief Executive Officer

Sure. This is Mike again. So I guess the first thing I’d say is, as we’ve talked about before, we’re really proud and it works great being a part of the Dell Technologies family. SecureWorks is a part of the Dell SafeGuard and Response as well as we’re integrated into the Dell SafeBIOS; prevention, detection and remediation of passive threats at the OS level. We are continuing to explore expansion of our relationship across the Dell organization in relation to some of the discussions that I was talking about earlier in our partner program and how we can accelerate the opportunities for us to work together between SecureWorks and Dell.

Within the VMware side of the house, as you touched on Carbon Black, I would say that — a couple of things. One is, our SecureWorks XDR ingest the Carbon Black cloud platform data. So we work closely with the Carbon Black organization as we do the other market-leading endpoints in the marketplace that our customers may choose since we’re vendor-inclusive. And we incorporate the endpoint controllability from Carbon Black into our XDR system.

And as we sort of have said over time, our experience shows that point product security alone is not necessarily sufficient. So we are looking — we’ve seen how the adversary is avoiding those point products or abated those point products. And we are looking to bring in Carbon Black aspect of things as well as the other leading products at the cloud network endpoint and business systems into the Taegis XDR platform.

Alex Henderson — Needham — Analyst

Great. Thank you very much. I appreciate the detail.

Michael R. Cote — Chief Executive Officer

Yeah. Thanks, Alex.

Operator

Thank you. We’ll now take our final question from the line of Brian Essex with Goldman Sachs. Your line is now open.

Brian Essex — Goldman Sachs — Analyst

Hi, great. Thank you. Good morning, and thank you for taking my question. Yeah, I was wondering maybe if I could dig in a little bit on the Taegis customers. I guess as of last quarter you had over 5,000 total customers. And I just wanted to understand what percentage of those, I guess, it’s nearly 400 customers on the Taegis platform, were migration of existing customers, how many net new? And what that addressable installed base for incremental conversion might look like over time?

Paul Parrish — Chief Financial Officer

Yeah. About half of the customers on Taegis represent existing customers. And so of that 400, roughly 200-ish are existing customers that moved over. And we see over time that net new logos is very important, and that’s why we’ve got so much emphasis on marketing spend and channel has continued low after net new logos and we see that growing in importance as we continued to develop the Taegis product.

Michael R. Cote — Chief Executive Officer

The other part of the question, maybe Wendy you could address, which was effectively how many of our existing base of managed security service customers as well as the 5,000 includes consulting customers are either an opportunity to migrate over — move to the new platform or if they’re not in that relationship doing for example that the consulting only customers have the ability to cross-sell or upsell them into what we’re doing from a Taegis perspective and show them the incremental value?

Wendy Thomas — President of Customer Success

Sure. From a consulting perspective, of course, we view that as continuing to be an important part of both lead generation opportunities for the platform, especially on incident response side and even on our adversarial testing side of the house. And the second is, frankly, the benefit of the learnings that we get from those engagements and making the overall Taegis platform and XDR and VDR products smarter. In terms of the — so that will continue going forward.

In terms of the existing MSS base, as Mike mentioned, while there is a portion of that base that is I’d say more bespoke and not necessarily strategic to the go-forward approach, a majority of the MSS customers, as we were talking about earlier, are a great MDR transition play in the future. And as Mike said, we really started that transition program in earnest back in third quarter and are seeing that accelerate as we build the muscle memory, we’ve been able to sales team with a lot of tools and support for that process. And so we’ll see that continue going forward.

Michael R. Cote — Chief Executive Officer

Actually I think it’s a little more granular than that to some extent, Wendy. And that some of those customers is a service that we’re performing for them that doesn’t necessarily fit where we’re going longer term than a partner somebody may pick up, but the customer may stay with us for the core of what we’re looking to do.

Wendy Thomas — President of Customer Success

Absolutely, and some partners are very interested in that.

Brian Essex — Goldman Sachs — Analyst

Got it. That’s helpful. And maybe to follow-up on that. Within your sales and marketing organization, I guess, that you’re kind of in the process of building out channel strategy with direct reps. How different are those customers? And what percentage of your sales force is kind of up-to-speed on Taegis at this point?

Michael R. Cote — Chief Executive Officer

So I would — great question. The customers are the same, the buyer is the same, the sales process is slightly different, which is why we’ve gone through a lot of training and enablement on our — in our sales organization. And we basically have the sales team divided between sales consultants who were really are, if you will, hunters. And almost all of our sales consultants had closed a deal or more on the — of Taegis in the account executives side of the house. Again, the vast majority of those individuals have been involved in moving customers or resolutioning customers to the new platform. And on the channel side of the house, our channel account managers are working closely with our account reps and our sales consultants in the process and are actively engaged in Taegis.

Brian Essex — Goldman Sachs — Analyst

Excellent. Thank you. That’s great color. I appreciate it.

Michael R. Cote — Chief Executive Officer

Thank you very much.

Operator

Thank you. I will now turn the call back to Mr. Parrish for closing remarks.

Paul Parrish — Chief Financial Officer

That wraps the Q&A. And I want to thank everyone for listening to us this morning and asking the questions. We value the relationships that we have with our investors. A replay of this webcast will be available on our Investor Relations page at secureworks.com along with our Q4 and full year fiscal ’21 web deck with additional financial tables. Thanks again for joining us today.

Operator

[Operator Closing Remarks]