What happened

Shares of SecureWorks (SCWX -0.79%) were down 19.2% week to date through Thursday, according to data provided by S&P Global Market Intelligence. The company announced on Oct. 13 it was expanding its Taegis portfolio of cybersecurity services with the introduction of Taegis NGAV and Taegis ManagedXDR Elite. 

There wasn't any bad news that would have sent the shares down. However, SecureWorks stock has been very choppy since surging to new highs in the second quarter. Year to date, the share price is up 31.5%. 

A lock with different flowing lines depicting cyber waves moving through it.

Image source: Getty Images.

So what

Taegis ManagedXDR is designed to significantly increase return on investment for companies that spend a lot of money to prevent hackers from breaching their systems. Management sees the new offering expanding its opportunity in the extended detection and response (XDR) market to $40 billion by 2025, representing a compound annual growth rate of 18%. 

Taegis surpassed $100 million in annual recurring revenue (ARR) in the second quarter. Management raised its full-year guidance and expects Taegis ARR to reach $155 million. This shows growing momentum for its software as a service, with total revenue up 160% year over year last quarter. That represents a massive jump over the 1.4% increase in the year-ago quarter. 

Now what

SecureWorks has been transitioning its business away from low-margin services and third-party resales. Moving more customers over to Taegis and away from its Counter Threat platform should improve profitability in the long run. Most of these customers should be transitioned over to the new platform by the end of 2022. 

It's encouraging that free cash flow has already showed great improvement over the last few years and totaled $35 million over the last four quarters. The transition to higher-margin services should only lead to further improvement over time. At a price-to-free-cash-flow of 43, this relatively small but fast growing cybersecurity stock could have plenty of upside over the long term.