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SecureWorks Corp. (NASDAQ:SCWX)
Q2 2019 Earnings Conference Call
Sept. 5, 2018, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to the SecureWorks Second Quarter Fiscal 2019 Financial Results Conference Call. Following prepared remarks, we will conduct a question and answer session. If you have a question, simply press *1 on your telephone keypad at any time during the presentation. At this time, all participants are in a listen-only mode. We are webcasting this call live on the SecureWorks Investor Relations website. After the completion of the call, a recording of the call will be made available on the same site. Now, I will turn the call over to Ms. Teri Miller, Vice President and Chief Accounting Officer. You may begin.

Teri Miller -- Vice President and Chief Accounting Officer

Good morning, everyone, and thank you for joining us today to review SecureWorks' financial results for the second quarter of fiscal 2019. This call is being recorded. This call is also being broadcast live over the internet and can be accessed on the Investor Relations section of SecureWorks' website at investors.secureworks.com. The webcast will be archived at the same location for one year.

This morning, SecureWorks issued a press release announcing results for its fiscal quarter ended August 3rd, 2018. You can access this press release on the Investor Relations section of the SecureWorks website. During this call, management will make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, guidance with respect to GAAP and non-GAAP revenue and net loss per share as well as adjusted earnings before interest, taxes, depreciation, and amortization.

Our forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those anticipated by these statements. You can find a description of these risks and uncertainties in this morning's earnings press release and in the company's annual report on Form 10-K for the year ended February 2nd, 2018, which is available on our Investor Relations website and on the Securities and Exchange Commission's website. All forward-looking statements made on this call are based on assumptions that we believe to be reasonable as of this date, September 5th, 2018. We undertake no obligation to update our forward-looking statements after this call as a result of new information or future events.

Some of the financial measures we use on this call are expressed on a non-GAAP basis. These non-GAAP measures exclude stock-based compensation, the impact of purchase accounting, amortization of intangibles, and the related tax effect of these items. We have provided reconciliations of the non-GAAP financial measures to GAAP financial measures in today's earnings press release, available on our website. Non-GAAP measures are not intended to be considered in isolation from, a substitute for, or superior to our GAAP results, and we encourage you to consider all measures when analyzing SecureWorks' performance. Also, as a reminder, all financial information discussed is non-GAAP and growth rates are compared to the prior-year period unless otherwise stated.

With us on today's call are Michael Cote, President and Chief Executive Officer of SecureWorks, and Wayne Jackson, Chief Financial Officer. Following their prepared remarks, we will take your questions. We would appreciate you limiting your initial questions to two so that we may allow as many of you to ask questions as possible in our allotted time. In the event you have additional questions that are not covered by others, please feel free to requeue, and we will do our best to come back to you. Thank you for your cooperation on this. Now, I'd like to turn the call over to Mr. Cote.

Michael R. Cote -- President and Chief Executive Officer

Thank you, Teri, and thank you, everyone, for joining us this morning for our second-quarter 2019 earnings call. This was our best quarter ever on many fronts. We've continued to build sales momentum and our financial results show significant improvement. Key highlights for the second quarter include revenue of $129 million, which was above our expectations and up nearly 11% year over year, monthly recurring revenue of $36.2 million, up 12% over prior year, cash flow from operations of $29 million, and adjusted EBITDA of $1 million.

I am very pleased with the progress we have made to the first half of our fiscal year, and with strong market demand and our industry leadership, we have significant opportunity to achieve even greater results in the future. I would like to thank the entire SecureWorks team for their focus on protecting our clients and for executing on our operational objectives.

Q2 is Geoff Haydon's second quarter leading our go-to-market efforts, and we continue to make progress with improved results in many areas. We had another record sales quarter, which comes on the heels of a record Q1. With our sales leadership now in place, I have complete confidence that we will continue to see improvements in our sales motion and velocity. Second-quarter sales highlights include: The total annual value of contracts signed grew 37% year over year. In the quarter, we closed 19 contracts greater than $1 million, which represents a 36% increase in the number of seven-figure deals and a 30% increase in the total contract value of these deals on a year-over-year basis. The 19 deals above $1 million that we sold this quarter represents a broad distribution of clients, indicating that our value proposition resonates well with clients across industries and geographies.

North American sales were up 43% over second quarter last year. Although our performance in North America improved, we still see significant room for accelerating our growth domestically. Geoff continues to focus on talent and coverage in this important market, making sure we have the right sales teams in the right markets focused on the right opportunities.

Our international business remains strong with year-over-year revenue growth greater than 50% again this quarter. International operations now represent 22% of our overall revenue. Our industry leadership, management, GDPR compliance status, and operational execution continue to drive the growth of our international business. In fact, the IDC MarketScape has recognized our Asia/Pacific operations, a region where we've experienced strong growth in recent quarters, in two separate MarketScape publications. One is a leader in threat lifecycle services and the other is a major player in managed security services.

We have also made a lot of progress with our go-to-market approach by creating simple package solutions. We recently launched a Detect and Prevent package, a holistic, value-priced security solution for small and medium-sized businesses, and in the second quarter, we launched our Managed Detection and Response -- or MDR -- offering that combines several of our advanced detection and response solutions to form a comprehensive security offering, all in a simply priced package, giving the client predictability and scalability. The MDR package has targeted enterprises that are looking to expand their security team with technology and expertise of a trusted security partner.

The market has been asking for solutions that help streamline the detection and response functions. Our MDR offering pinpoints true security threats, reduces the burden of investigation, and gives clients enough context to timely take the right action to remediate threats or allow us to respond on their behalf. This offering is powered by our proprietary Red Cloak analytics and is a comprehensive security approach that keeps clients safe across their endpoints, network, and cloud deployments. I am really excited about the early results. We closed just over $5 million in annual contract value in the two months this offering was available during the second quarter while building an impressive pipeline to fuel future sales.

The industry has also taken note of our MDR capabilities, with Forrester recently recognizing SecureWorks as one of only two large MDR providers that have full-scale forensics. We were also recognized as a leader in the recent Forrester Wave for global managed security service provides. We have a strong track record of thought leadership and bringing innovative, technology-led cybersecurity capabilities and solutions to the market.

One of our advancements has been the expanded use of our proprietary Red Cloak analytics. Red Cloak was initially developed as an internal solution to support our threat hunting and incident response engagements when commercial products did not provide the telemetry or advanced analytics needed for effective hunting and investigation. We began to expand the use of the analytics with the introduction of the Red Cloak Endpoint Agent, and over the last year, we added Red Cloak behavioral analytics to our server monitoring and believe there are greater uses for these key capabilities regardless of the agent deploying.

As part of the effort to expand the use of our Red Cloak analytics, we've just launched our Red Cloak partner program. We see great power in combining our Red Cloak behavioral analytics and threat intelligence with best-of-breed endpoint products to provide superior detection capabilities. Red Cloak embodies our advanced analytics, which -- through the partnership program -- can be leveraged across a growing number of solution providers. I look forward to announcing new partners in future calls.

I am also excited about the opportunity we have working with a member of the Dell Technologies family. We completed development of our new manned solution that leverages VMWare's app defense technology to protect applications running on BeastFair-based virtualized and cloud environments. At the VMWorld 2018 event just this past week, we showcased our SecureWorks virtual application defense offering. By adding app defense to existing VMWare infrastructure tools, clients can reduce the attack surface and focus detection on unexpected application behavior. SecureWorks will work with the client to define best practices on response policies that match the client's risk profile.

As a thought leader in the industry, one of our goals is to help organizations manage their cyber risk and protect business value. Using our deep analytic capabilities, we have created a proprietary security model, a holistic approach to evaluating cybersecurity maturity based on an organization's business operations and risk profile. The easy-to-use assessment and model provide organizations with a pragmatic approach to evaluating their current security maturity and targeting areas for improvement. It combines controlled requirements from well-known frameworks such as MIF and ISO 27001 to create a consolidated model addressing the most critical security domains and capabilities to meet today's risk-focused requirements.

We believe this is a valuable tool that can be used by security leadership to help boards and executives have a better understanding of their organization's risk, help practitioners prioritize their activities, and allow us to help these organizations through their journey. I will now turn it over to Wayne to talk about our performance in the second quarter in more detail. Wayne?

Wayne Jackson -- Chief Financial Officer

Thanks, Mike, and good morning, everyone. Before I get into the details, let me say that our second quarter of FY '19 was a very good quarter. In addition to record sales, double-digit revenue, and MRR growth, we improved our operating leverage, generated positive cash flow from operations of $29 million, and were free-cash-flow-positive for the quarter.

Moving on to the results of Q2 FY '19, revenue total of $128.8 million, a 10.6% increase over Q2 FY '18 and a 2.1% increase sequentially. Our average annual subscription revenue per client increased to $100,000.00 this quarter, a 12.7% increase over the prior year. Sales results for contracts greater than $1 million were up 30% year over year as we continue to see productivity gains and leverage the investments we made last year in our sales team.

A couple of notable examples of new large deals that we signed in the second quarter include a $3 million, one-year agreement with a city municipality. This win is a prime example of the strategic advantage of our consulting services. We began the relationship with an incident response engagement, and based on our success and the insight gained into the client's existing security risk, we were able to convert the IR project into an ongoing subscription solution. A second notable example was a $2.4 million, two-year deal with a large global diversified financial company. The MDR solution Mike mentioned earlier was the foundation of this deal.

We exited the quarter with MRR of $36.2 million, an increase of 12% over the prior year and a 1.9% increase sequentially. Consulting revenue grew 22.7% year over year and comprised 23.6% of total revenue for the quarter versus 21.8% of total revenue in Q1. We anticipate our consulting-to-subscription-revenue mix will remain at a similar level to Q2 for the next several quarters as we are leveraging our SRC capabilities as an important component of a comprehensive security solution for our clients.

Revenue retention in the period was 98% versus 100% in the first quarter and 96% in the second quarter of last year. As a reminder, revenue retention measures how well we have maintained revenue from clients we had on the first day of the year. This metric reflects only subscription revenue at the beginning of the year and excludes backlog. For the quarter, revenue outside the U.S. grew to 22% of total revenue, up from 16% last year, on the consistently strong growth in the U.K., Middle East, and Japan.

Gross margin totaled $69.9 million in the second quarter of fiscal 2019 or 53.4% of revenue, compared with $69.3 million or 54.9% of revenue in the first quarter. Prior-year second-quarter gross margin was $64.1 million or 55.1% of revenue. On a year-over-year basis, gross margin as a percentage of revenue is lower, primarily related to the increasing mix of large contracts and the overall mix of our consulting business to total revenue and cost of operations.

Moving down the income statement, our second-quarter operating expenses totaled $72.2 million compared with $69.2 million last year. While an increase in absolute dollars, we continue to leverage our operating expenses, as OpEx as a percentage of revenue decreased 330 basis points year over year. Research and development expenses increased to 16.7% revenue in the quarter, up from 16.3% last year, as we continue to invest in innovative technologies to meet our clients' evolving needs. We will continue to make incremental R&D investments in fiscal 2019 to further advance our automation and new applications framework we have discussed in previous calls.

Sales and marketing expenses this quarter were approximately 27% of revenue, down from 30.1% last year, as we see productivity improvements from investments and organizational changes made in fiscal 2018. General and administrative expenses totaled 12.4% of revenue compared to 13.1% last year. We anticipate that we will continue to gain some additional leverage relating to G&A in the second half of the year as compared to prior year. We had positive EBITDA in Q2 of $1 million compared with a $1.8 million loss last year. Our net loss for the quarter also narrowed to $900,000.00 from $3.5 million last year, as the margin on higher revenue offset the increased R&D investments I just highlighted. Non-GAAP net loss per share was $0.01.

Regarding cash flow and balance sheet items, based on improved operating leverage and good collections activity, cash provided by operations was $29.3 million in the second quarter compared with an $18.4 million use of cash in Q1 and an $11.2 million cash provided by operations in Q2 last year. Recall that first-quarter cash flow from operations is usually negative, primarily due to the payment in the quarter of annual compensation. We finished the quarter with cash of $103.3 million. Our net accounts receivable totaled $133.3 million at the end of the quarter, down from $146.8 million in the prior quarter. DSO decreased to 94 days at the end of the quarter, down from 106 days in the first quarter. CapEx was $3.1 million in the second quarter.

Now, for FY '19 guidance. During our call to announce Q1 FY '19 earnings, we disclosed the fact that a contract with a large client was up for renewal at the end of the second quarter. We are very pleased to have extended the relationship with this client. Under the new agreement, the mix of solutions between our subscription and consulting offerings will be different and the run rate for subscription revenue may be lower than historical periods, which results in expanding our MRR guidance to a range of $37 million to $39 million. As we expect a new solution mix to be delivered in a more leveraged model, we also anticipate incurring reorganization costs of approximately $0.02 per share in the third quarter. The guidance ranges below fully reflect our estimated impact and timing of the changes with this relationship.

For the third quarter of fiscal 2019, we expect GAAP and non-GAAP revenue to be in the range of $130 million to $131 million and non-GAAP net loss per share to be in the range of $0.05 to $0.06 based on approximately 80.9 million weighted average shares outstanding. We have updated our full-year fiscal 2019 guidance and now anticipate the following: We expect GAAP and non-GAAP revenue to be in the range of $518 million to $520 million, our adjusted EBITDA loss to be in the range of $3 million to $5 million, and our non-GAAP net loss per share to be in the range of $0.15 to $0.17 per share, all improved measures compared with prior guidance, reflecting our higher Q2 revenue and EBITDA performance and continued sales momentum.

Additionally, we expect GAAP net loss per share to be in the range of $0.59 to $0.61. For modeling purposes, we estimate that the tax benefit rate will be approximately 24% in the second half of FY '19, and when combined with the tax benefit for the first half, the overall rate for the year is about 22%. As noted earlier, we expect our MRR to be in the range of $37 million to $39 million at the end of the fourth quarter of fiscal 2019.

We had strong first-half cash flow activity and now expect cash provided by operations to be in the range of $35 million to $40 million for the full fiscal year 2019, up from roughly $1 million in fiscal 2018. We anticipate we will be free-cash-flow-positive even without the monetization of the tax receivable from Dell that we will collect in the fourth quarter of this year. I will now return the call to Mike.

Michael R. Cote -- President and Chief Executive Officer

Thanks, Wayne. Today marks my tenth earnings call, and I'm in my 17th year as SecureWorks' CEO. I'm honored to hold this position and to lead a team of employees that passionately works to stay ahead of threat actors and protect our clients. We are uniquely positioned in the industry. While pleased with our progress this quarter, we recognize that much work remains to stay on top of such a quickly evolving threat landscape. On behalf of the SecureWorks team, I appreciate your continued interest and support. I look forward to providing further details on our progress next quarter.

Before I turn it over to the operator for questions, I want to again express my gratitude for the hard work and dedication of all of our team members and thank our clients for allowing SecureWorks to serve as their trusted cybersecurity partner. Operator, if you'll now open the lines for questions, please.

Questions and Answers:

Operator

I will now open the call for questions. If you have a question, press *1 on our telephone keypad. As a courtesy to others, please ask no more than two questions. We'll take our first question from Sterling Auty of JPMorgan. Your line is open.

Ugam Kamat -- JPMorgan Chase -- Analyst

Hey, guys. This is actually Ugam Kamat on for Sterling this morning. So, for the first half of this year, we are seeing an uptick of the consulting activity that you are seeing. What specifically are the areas where you are seeing the pickup in demand in terms of the consulting?

Michael R. Cote -- President and Chief Executive Officer

Our consulting picked up a little bit -- I think it was 1% or 2% from a percentage of revenue -- and it's really tied to our focus in the large enterprise space -- the enterprise and large enterprise space where we picked up some increased incident response work as well as where clients have looked for a more holistic solution that ties our subscription solution along with our consulting business in a larger holistic-type solution.

Ugam Kamat -- JPMorgan Chase -- Analyst

Got it. And, if we look at the MRR outlook that you gave for the full year, it is below what you had guided previously. How much of that would you actually attribute to the increased churn versus a lower demand for ongoing MSS services?

Michael R. Cote -- President and Chief Executive Officer

I wouldn't phrase it in either of those manners, and it doesn't relate to either of those two. The demand is high. As I mentioned in my prepared remarks, we had record sales in Q2 after having the best Q1 we've had in the history of the company. It really related to the large contract that Wayne referred to in his prepared remarks, which was a client we've had for many years. The service we did for them was firewall management services -- not a key value add in many instances -- and we have resigned that, but moved those solutions to more a leveraged model and some consulting solutions. What goes into MRR is our subscription business, so it really related to the change in the makeup of that contract.

Ugam Kamat -- JPMorgan Chase -- Analyst

Got it. And, if I could squeeze one last one in -- just a small question -- is any of the SRC revenue uptick that we are seeing recurring in nature?

Michael R. Cote -- President and Chief Executive Officer

First of all, I'm not sure what a small question is. Could you repeat the question for us, please?

Ugam Kamat -- JPMorgan Chase -- Analyst

Yeah, sure. I was saying it's a very quick question. In the sense that -- the SRC uptick that you are seeing -- is any of that recurring, or is it more one-time in nature?

Wayne Jackson -- Chief Financial Officer

Good morning. Relative to SRC, we do have some of our related SRC that is recurring. They're longer-term contracts, and we've mentioned that before. Some of those are two- to three-year contracts. So, the answer is yes, we have some.

Michael R. Cote -- President and Chief Executive Officer

Let me just add to what Wayne said. If you looked at our overall SRC -- strategic risk consulting -- business, the vast majority of it is long-term contracts, meaning a year. Much is longer than a year. For the most part, it is not shorter contracts. Things like incident response clearly would be in that bucket, but the majority of it is longer-term contracts.

Ugam Kamat -- JPMorgan Chase -- Analyst

Got it. Thank you so much.

Michael R. Cote -- President and Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Gabriela Borges of Goldman Sachs. Your line is open.

Gabriela Borges -- Goldman Sachs -- Analyst

Hi, good morning. Thank you for taking my questions. Maybe for Mike to start -- a follow-up on some of the commentary you've mentioned in the prepared remarks on the endpoint side. Maybe you could talk a little bit about how does the adoption of next-gen endpoint technology impact the customer's propensity to buy managed security or advanced threat services from SecureWorks? And, maybe just walk through the decision process. When a customer does adopt next-gen endpoint technology, how do they decide between a third-party services provider like SecureWorks versus maybe buying that managed service from the next-gen technology provider itself? Thanks.

Michael R. Cote -- President and Chief Executive Officer

Gabriela, there are a couple of different questions in there, so hopefully, I'll answer them all for you. If I miss one, please come back to me. But, I think the first thing that you touched on was basically in the endpoint world, what we have found is -- and, the reason we announced the partner program is -- there's a couple of different aspects of it. There's the better detection -- first of all, there's the prevention side of the endpoint and what can be prevented, but as we know, not everything will be prevented, so then the question becomes using analytics to detect what's happening, and then you've got the response and the ability to hunt.

Effectively, a handful -- a lot of our clients have approached us looking for us to help them in that process rather than just simply putting a tool out there, and to get involved in ensuring that we can respond appropriately and periodically hunt on their network for bad guys to ensure that the network is clean. So, what we've done is taken the Red Cloak, which is initially -- as I said in the prepared remarks -- used from an incident response engagement perspective or, outside of incident response, where somebody may ask us to do a targeted threat hunt across their network, and realized that a lot of the secret sauce in our clients -- as I mentioned -- is in the analytics and models to detect what's going on bad on the network.

So, we announced the partner program, and it's much like one of the partnerships we have today on the endpoint front with Carbon Black. We're gonna look to expand where we can apply our analytics to their endpoint technology and have the ability to hunt on their network on their behalf. So, we've seen a strong demand for this from the marketplace and we're excited about the opportunity and look forward to showcasing some of the things that we'll be announcing in the future. Did I touch on your questions?

Gabriela Borges -- Goldman Sachs -- Analyst

Yeah, I think that covers it. Thank you very much. The follow-up is for Wayne, which is also on the MRR outlook for 4Q. Understand the delta between last quarter because of the one large contract that's been renewed. Maybe just taking a step back, it implies a little bit of a deceleration relative to the 12% that you just put up this quarter. Could you explain the puts and takes as to why MRR would be decelerating even when adjusted for that one large contract? Thanks.

Wayne Jackson -- Chief Financial Officer

So, MRR -- we guided for the year $37 million to $39 million, and as Mike mentioned earlier, reduced the bottom side. MRR quarter over quarter ebbs and flows a little bit based on the sales that we have for the quarter and our renewal rate, so when we looked at it for the full year, we left the top end the same, but really reduced the bottom end.

Gabriela Borges -- Goldman Sachs -- Analyst

Okay, thank you.

Michael R. Cote -- President and Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Jonathan Ho of William Blair. Your line is open.

Jonathan Ho -- William Blair and Company -- Analyst

Hi, good morning. Just wanted to maybe delve a little bit into the new package offerings that you guys described. Can you maybe give us a sense of how that would potentially impact your ASPs as well as potentially win rates when we start looking at the bundled offerings?

Michael R. Cote -- President and Chief Executive Officer

I appreciate the question. The win rates have clearly gone up. As I mentioned, it's two and a half times what our historical win rates were, if for no other reason because it's a more comprehensive solution that's an easier package to buy, and it's been easier for the CSOs to explain up through their senior management team and the board where the case is they're explaining to the board. ASPs have also gone up because it's not a bespoke-type solution, and the sales cycles have been shorter to date.

Jonathan Ho -- William Blair and Company -- Analyst

Got it. And then, just as the follow-up, can you talk a little bit about what's driving the strength in international and how sustainable that is as we look at the course of the year?

Michael R. Cote -- President and Chief Executive Officer

Thanks for the question. The strength in international is really a combination of a few things: The experienced sales leader that we hired or general manager that we have in the region that's been driving it for the last few years now I think has done a tremendous job and continues to do a good job. From an operating perspective, the operation of the value we've provided is being seen. I mentioned earlier that we are GDPR-compliant, which has helped in the market, and there's clearly a -- as there is a North America business -- there's clearly a large demand throughout Europe, the Middle East, and in the Asia/Pacific market, but I would say in the Asia/Pacific market, clearly the largest of those in that market is Japan, and we've got leadership positions in those markets, our investments are working well, and so is our execution.

Jonathan Ho -- William Blair and Company -- Analyst

Thank you.

Operator

Your next question comes from the line of Rob Owens of KeyBanc Capital Markets. Your line is open.

Rob Owens -- KeyBanc Capital Markets -- Managing Director

Yeah, good morning. Question around customer count -- I'm just curious with the success you're seeing with regard to some of the record sales. Is that coming from increased velocity in terms of customers or larger deals in terms of customers? I don't think you actually gave a customer count. And, that only counts as one question even though there were three different things in there.

Wayne Jackson -- Chief Financial Officer

Good morning. I'll take the customer count. So, we didn't mention it, but what we did talk about was the 12% increase in RPU year over year as we focused more on the enterprise space. We talked about that before. You will see in the Q that we file later today that customer count actually rounded down this quarter to 3,300 --

Michael R. Cote -- President and Chief Executive Officer

Forty-three hundred.

Wayne Jackson -- Chief Financial Officer

I'm sorry, I keep saying that -- 4,300 from 4,400. So, a little bit of rounding down there, but again, our focus -- we've shifted to the enterprise 12% year-over-year RPU, is how I would address that.

Michael R. Cote -- President and Chief Executive Officer

Not "shifted the enterprise," increased the investment in the enterprise from a growth perspective, as we've talked about.

Rob Owens -- KeyBanc Capital Markets -- Managing Director

Sure. And, as I look at that 37% growth in total contract value that you guys talked about with a record bookings quarter, is that enterprise with duration extension, then? Is that how we should think about that, that you're getting larger customers to commit to longer deals?

Michael R. Cote -- President and Chief Executive Officer

It is larger customers. Clearly, we've seen growth -- as I mentioned, 19 over $1 million. From a deal-term perspective, Rob, I would tell you most of the larger contracts are gonna be in the --

Wayne Jackson -- Chief Financial Officer

Two to three.

Michael R. Cote -- President and Chief Executive Officer

-- two- to three-year term, and a few of the bigger ones we negotiated from a five-year term perspective.

Wayne Jackson -- Chief Financial Officer

That's correct.

Rob Owens -- KeyBanc Capital Markets -- Managing Director

All right, thanks.

Michael R. Cote -- President and Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Matt Hedberg of RBC Capital Markets. Your line is open.

Matthew Swanson -- RBC Capital Markets -- Analyst

Yeah, thanks for taking my question. This is Matt Swanson on for Matt. Wayne, this is a really solid quarter for revenue billings and MRR, but also profitability. Looking back to the investments you guys made last year, how are you thinking about investing for growth versus margin right now -- or, how do you feel about investments you already made in sales capacity?

Wayne Jackson -- Chief Financial Officer

Matt, good morning. I think relative to revenue versus margin, we clearly -- as we talked about several quarters, we made the investments in the sales and marketing group. From a gross margin perspective, we're still investing both for internal solutions as well as external solutions, we're investing in automation and orchestration, all to help drive efficiency so that long-term, we'll see the margin improvement that we've discussed over the quarters.

Matthew Swanson -- RBC Capital Markets -- Analyst

Thanks. And then, you've talked before about trying to take some of the positive things that you've been doing in the international regions and bringing them to the U.S. It seems like the domestic execution has been a bit better. Just some update on how that's gone.

Michael R. Cote -- President and Chief Executive Officer

You're correct. The leadership under Geoff Haydon and the changes that he's made as we've set the groundwork over the last six to 12 months are clearly showing that there's a large opportunity. Geoff runs our global sales organization. We have almost all of our leaders in place from a global perspective, a sales leadership perspective, and are building the team out. We've seen strong results with increased productivity, strong demand in the marketplace, and I would say I'm pleased but not satisfied that the productivity... I'm pleased but not satisfied in that the productivity will continue to increase.

Matthew Swanson -- RBC Capital Markets -- Analyst

All right, thanks a lot for the time, guys.

Michael R. Cote -- President and Chief Executive Officer

Thank you.

Wayne Jackson -- Chief Financial Officer

Thanks, Matt.

Operator

Your next question comes from the line of Melissa Franchi of Morgan Stanley. Your line is open.

Anjelo Austria -- Morgan Stanley -- Analyst

Hi, this is Anjelo Austria in for Melissa. Thanks for taking my question. I just wanna speak to large deals. Again, another strong quarter of double-digit deals greater than $1 million -- now, how does this compare to your expectations? In other words, looking forward, how should we think about the level of large deals that are baked into forward targets?

Michael R. Cote -- President and Chief Executive Officer

We have pretty consistently continued to -- well, let me back up. About a year or so ago -- maybe 18 months -- we invested heavily in the enterprise space and have clearly begun to see more traction in that space, and I would expect that going forward, we will continue to see more traction in the enterprise and large enterprise space, some of which will be -- we say "large deals," deals over $1 million -- I mentioned it in my prepared remarks. I was pleased that it was a good distribution across verticals and clients, so there were a lot more contracts in and around $1 million rather than some bigger whales that will move it. We've still got some deals we're chasing in that area, but if we can continue to grow the contracts that are about $1 million in annual contract value a year, I will be pleased, and that will be our plan -- our plan to support that.

Anjelo Austria -- Morgan Stanley -- Analyst

Got it, thank you. That's helpful. Just a quick modeling question: Obviously, a big EPS feat in Q2. Full-year EPS guidance is raised at the bottom end, but not at the high end. Is that just the reorganization costs? Where are the incremental expenses that we weren't taking account of before?

Wayne Jackson -- Chief Financial Officer

You got it. In Q3, it's the $0.02, and that is in full-year as well -- $0.02 related to the reorg.

Anjelo Austria -- Morgan Stanley -- Analyst

Got it. Thank you very much.

Michael R. Cote -- President and Chief Executive Officer

Thank you.

Wayne Jackson -- Chief Financial Officer

Thank you.

Operator

Your next question comes from the line of Fatima Boolani of UBS. Your line is open.

Fatima Boolani -- UBS Investment Bank -- Analyst

Good morning, everyone. Thanks for taking the questions. Wayne, maybe for you, you and Mike both have talked about the contract value and this trend in growth there, both in excess of 30%. I'm curious how I should be interpreting the delta between the 30% plus growth in contract values and MRR, and also, total revenue growth. And, a follow-up, if I may.

Wayne Jackson -- Chief Financial Officer

Relative to MRR, we have the guidance for the full year -- $38 million to $39 million-which included an assumption of the revenue growth that we're now seeing. I know we've improved the revenue growth over guidance in each of the last two quarters, but basically, that was considered in the $38 million to $39 million that we guided to earlier. The sales comps year over year, again, was anticipated. The renewal rate -- if you think about what impacts MRR, it's new sales and renewals. Our renewal rate for the year to date, is pretty much in line with the last several quarters. So, renewals are about the same, sales were anticipated in the MRR guidance to begin with.

Michael R. Cote -- President and Chief Executive Officer

Fatima, let me try and add to that because I wasn't sure we answered your question because I wasn't sure I understood it clearly, but I think one of the things is you've got to start with the recurring revenue base we have in the business each year, and what will be added to that would be the sales, and subtracted would be any business we lose or clients that leave us.

Of the churn that we've had, most of it is service churn, where clients may be buying something different, but I think the point when we talked about the good sales growth -- and, I mentioned the record Q2 that was a record in the history of the company and Q1 was the best Q1 we've had in the history of the company -- that is incremental sales that will be added to the current base. So, I think because of the way we're a subscription-based business, it's the recurring revenue that gets added to the base that we have, so the reason is a disconnect between the sales number of 30% or 36% growth versus our revenue growth. Does that make sense?

Fatima Boolani -- UBS Investment Bank -- Analyst

Yeah, that's very clear. Thanks for that. And then, maybe just on the cost front, Wayne, you mentioned in the prepared remarks that as you transact larger and larger deals, it is starting to put a little bit of pressure on gross margins. I just wanted to understand and flesh out that comment a little bit. As a follow-up, if you could clarify the scope of the reorganization costs in the quarter, that would be very helpful. Thank you.

Wayne Jackson -- Chief Financial Officer

Okay. So, first, relative to the large contract, we see two things with the larger enterprise contracts. First is many of these contracts have a combination of subscription and consulting, and the consulting generally comes with a little bit lower margin, so that's one item. And then, for the larger contracts, we do see some pricing pressure for the large deals, and we make the assessments based on the value that brings to our company and to our client. So, that's what that was relating to.

And then, the restructuring to $0.02 per share -- we had a long-term contract, we're pivoting the services to both a combination of subscription and consulting, and in that pivot, we anticipate we'll leverage our delivery model a little more, but we'll need to take out some costs related to that contract as well.

Michael R. Cote -- President and Chief Executive Officer

I think the other thing for clarity, though, is that that $0.02 in that reorganization is a Q3 event, not a Q2 event.

Wayne Jackson -- Chief Financial Officer

Correct.

Michael R. Cote -- President and Chief Executive Officer

To touch on the gross margin, we still believe in our long-range gross margin target of 50% or greater. Near-term, we're focused on offerings that can add maximal value to our clients, and we're doing a lot of work with regard to automation and orchestration to improve our efficiency over time.

Fatima Boolani -- UBS Investment Bank -- Analyst

Great color. Thank you so much.

Wayne Jackson -- Chief Financial Officer

Thank you, Fatima.

Operator

Your next question comes from the line of Gur Talpaz of Stifel. Your line is open.

Christopher Speros -- Stifel Financial Corporation -- Analyst

Hi. This is actually Chris Speros on for Gur. You noted the launch of the Red Cloak partner program this quarter. Can you talk about how you balanced these partnerships with these key endpoint players while also competing against these same players in the endpoint space?

Michael R. Cote -- President and Chief Executive Officer

We partnered -- I'll give you an example of this. We've partnered with Carbon Black for many years now, and most of where Red Cloak and the proprietary of aspect of Red Cloak and the value of the marketplace is in the behavioral analytics and the analytics we can have from a detection capability. So, we don't sell Red Cloak as a product directly competing with those players in most instances. We found with other partners that have approached us in the endpoint market that are market leaders and our clients, there has been a strong demand for us to take and to use our analytics and support, quite frankly, the process that we've had or the mantra we've had, which is to use the best-of-breed solutions from a point product perspective to secure our clients in a holistic manner, applying our intelligence to the various components.

I think we do the same thing in the network area, and as the endpoint area has matured, we have found it's maturing in a similar manner where people have basically -- our clients and the partners in the marketplace have asked us to work with them in a complimentary fashion. If I actually touched on this from a larger industry perspective, quite frankly, I think that the threat actors and people on the other side of the spectrum that are trying to attack our clients tend to work very well together in an orchestrated, coordinated fashion, and I am excited about the fact that parts of the security industry have realized that we need to work better together instead of viewing each other from a competitive perspective and need to do what's in the best interests of our clients. So, I am really excited about the opportunity here.

Christopher Speros -- Stifel Financial Corporation -- Analyst

That's great color. And, I know this has been touched on prior in the call, but with SRC revenues expected to remain at a similar percentage of the top line through the near term, how should we think about the gross margin profile and the potential for gross margin expansion going forward in the near term?

Wayne Jackson -- Chief Financial Officer

I think it gets back to something Mike just said earlier. Long-term, we're still focused on expanding the margin. We're making the investments that we talked about that provide -- that will help us provide maximum value to our clients, but also move the margin in the direction we'd like to see it go.

Christopher Speros -- Stifel Financial Corporation -- Analyst

All right, thank you guys.

Wayne Jackson -- Chief Financial Officer

Thank you.

Michael R. Cote -- President and Chief Executive Officer

So, I think that was our last question. This is Mike Cote. I just want to thank everybody for their time, attention, and interest in SecureWorks. We're very pleased with the quarter that we had and excited to report to you at the end of third quarter in the coming months. Have a great day. Thank you.

Wayne Jackson -- Chief Financial Officer

Thanks, everyone.

Operator

Ladies and gentlemen, that concludes today's call. You may all disconnect at this time.

Duration: 46 minutes

Call participants:

Teri Miller -- Vice President and Chief Accounting Officer

Michael R. Cote -- President and Chief Executive Officer

Wayne Jackson -- Chief Financial Officer

Ugam Kamat -- JPMorgan Chase -- Analyst

Gabriela Borges -- Goldman Sachs -- Analyst

Jonathan Ho -- William Blair and Company -- Analyst

Rob Owens -- KeyBanc Capital Markets -- Managing Director

Matthew Swanson -- RBC Capital Markets -- Analyst

Anjelo Austria -- Morgan Stanley -- Analyst

Fatima Boolani -- UBS Investment Bank -- Analyst

Christopher Speros -- Stifel Financial Corporation -- Analyst

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