SecureWorks Corp. (NASDAQ:SCWX) priced its IPO of 8 million shares (down from 9 million filed) at $14.00, below the anticipated range ($15.50-17.50), raising $112 million in proceeds. The company will have a market capitalization of approximately $1.14 billion. Active bookrunners for the offering are BofA Merrill Lynch, Morgan Stanley, Goldman, Sachs & Co., and J.P. Morgan. The proceeds of the offering will be used for working capital and general corporate purposes.
SecureWorks was purchased by Dell Inc. in 2011 (which subsequently went private through an acquisition by Denali holding). It is a global provider of intelligence-driven information solutions. It provides a counter-threat platform through advanced analytics, data sciences, and machine learning. The company says it processes 160 billion events per day, with 99.99% handled by its system. It has 4200 clients in 59 countries, including 36% of the Fortune 100.
The company describes its business model as a "land and expand" strategy. It claims to produce approx $3.80 in lifetime value per customer for every dollar in acquisition cost. It works with existing point solutions, building on existing solutions to fill the gaps. SecureWorks boasts that it moved to Gartner's magic quadrant in 2015 of managed security service providers (sharing the space with IBM Corp. (NYSE:IBM), Symantec (NASDAQ:SYMC) and Verizon (NYSE:VZ)).
The company has grown revenue from $216 million in FY 2014 (its fiscal year ends January) to $342 million in 2016. Its client count has grown from 3500 to 4200 over this period, and average revenue per client has grown from $64k to $81k. Gross margins of 52% are below the industry average, but the company says the higher cost of sales is due to its counter-threat operation, which is critical to its business.
SecureWorks competes primarily with point solutions and the companies described above in the "magic quadrant". However, for valuation purposes, some other cybersecurity software companies that have gone public in the last couple of years can be looked at: Rapid7 (NASDAQ:RPD), FireEye (NASDAQ:FEYE), and Mimecast (NASDAQ:MIME). The first two had strong opening debuts, and MIME opened up 10% despite pricing at the low end of the range. However, all three currently trade below. On the other hand, cybersecurity firm CyberArk (NASDAQ:CYBR), which priced in 2014, is trading well above its IPO price. The one significant difference between these firms is that CyberArk is profitable.
At the $14.00 price, SCWX is at approximately 2.9x TTM EV/Sales. The recent security IPOs listed above trade between 2.65x and 5.6x. Though the higher multiple is that of CYBR, which is a profitable company. Excluding CYBR, the range is 2.65x to 3.7x.
While the U.S. IPO market appears to be making strides, with successful debuts of BATS Global Markets (BATS:BATS) last week and MGM Growth Properties (NYSE:MGP) and American Renal Associates (NYSE:ARA) this week, the first tech IPO of the year doesn't appear to be following suit. While the below-range pricing could be viewed as being priced right to "work", the reality is that non-profitable tech growth stories are still a tough sell in this environment. SCWX stock was described as oversubscribed early in the week, but reports of price sensitivity emerged as the week progressed.
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