Stifel Downgrades Secureworks On Gross Margin Doubts

Secureworks Corp SCWX reported Wednesday before the open with a wider-than-expected non-GAAP loss in the fourth quarter of 2018, while revenue rose 1.4 percent to $120.7 million.

The cybersecurity firm's fiscal 2019 guidance also trailed the consensus estimate.

The Analyst

Stifel analyst Gur Talpaz downgraded Secureworks from Buy to Hold and lowered the price target from $14 to $9, suggesting about 6-percent upside. 

The Thesis

Secureworks' ability to deliver a 60-percent-plus gross margin in the near-to-mid-term is now in doubt, Talpaz said in a Wednesday note. This is in contrast to the analyst's earlier thesis that leverage in the company's model would lead to meaningful gross margin improvement. 

Falling short on this metric could hurt Securerworks due to the investor perception that any story with a sub-60-percent gross margin does not qualify as a software play, the analyst said. 

The decline in Secureworks' revenue retention rate from 97 percent in the third quarter to 96 percent in Q4 is a "concern," as the figure reflects trends in customer commitment, Talpaz said. 

Markets like security operations, analytics and reporting nd next-generation security information and event management are evolving and finding acceptance among enterprises.

" ... We believe that security-forward enterprises are now better-equipped to handle growing alert volumes, leveraging data-driven prioritization as a means to focus on the most critical events happening within the enterprise," the analyst said. 

The Price Action

Secureworks shares have lost about 25 percent over the past year.

The stock was down 4.6 percent at the time of publication Thursday. 

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