| Significant Accounting Policies | SIGNIFICANT ACCOUNTING POLICIES Cash and Cash Equivalents. As of February 2, 2018 and February 3, 2017 , cash and cash equivalents is comprised of cash held in bank accounts and money market funds. The cash and cash equivalents are reported at their current carrying value, which approximates fair value due to the short-term nature of these instruments. The money market instruments are valued using quoted market prices and are included as Level 1 inputs. Accounts Receivable. Trade accounts receivable are recorded at the invoiced amount, net of allowances for doubtful accounts. Accounts receivable are charged against the allowance for doubtful accounts when deemed uncollectible. Management regularly reviews the adequacy of the allowance for doubtful accounts by considering the age of each outstanding invoice, each customer’s expected ability to pay, and the collection history with each customer, when applicable, to determine whether a specific allowance is appropriate. As of February 2, 2018 and February 3, 2017 , the allowance for doubtful accounts was $8.2 million and $6.1 million , respectively. Unbilled accounts receivable included in accounts receivable, totaling $18.1 million and $9.4 million as of February 2, 2018 and February 3, 2017 , respectively, relate to work that has been performed, though invoicing has not yet occurred. All of the unbilled receivables are expected to be billed and collected within the upcoming year. Allowance for Doubtful Accounts. The Company recognizes an allowance for losses on accounts receivable in an amount equal to the estimated probable losses, net of recoveries. The allowance is based on an analysis of historical bad debt experience, current receivables aging, and expected future write-offs, as well as an assessment of specific identifiable customer accounts considered at risk or uncollectible. The expense associated with the allowance for doubtful accounts is recognized in general and administrative expenses. Fair Value Measurements. The carrying amounts of the Company’s financial instruments, including cash equivalents, accounts receivable, accounts payable and accrued expenses, approximate their respective fair values due to their short-term nature. Inventories. Inventories consist of finished goods, which include hardware devices such as servers, log retention devices and appliances that are sold in connection with the Company’s solutions offerings. Inventories are stated at lower of cost or net realizable value, with cost being determined on a first-in, first-out (FIFO) basis. Prepaid Maintenance and Support Agreements. Prepaid maintenance and support agreements represent amounts paid to third-party service providers for maintenance, support and software license agreements in connection with the Company’s obligations to provide maintenance and support services. The prepaid maintenance and support agreement balance is amortized on a straight-line basis over the contract term and is primarily recognized as a component of cost of revenue. Amounts that are expected to be amortized within one year are recorded in other current assets and the remaining balance is recorded in other non-current assets. Property and Equipment. Property and equipment are carried at depreciated cost. Depreciation is calculated using the straight-line method over the estimated economic lives of the assets, which range from two to five years. Leasehold improvements are amortized over the shorter of five years or the lease term. For the fiscal years ended February 2, 2018 , February 3, 2017 , and January 29, 2016 , depreciation expense was $14.4 million , $11.7 million and $12.3 million , respectively. Gains or losses related to retirements or disposition of fixed assets are recognized in the period incurred. Intangible Assets Including Goodwill. Identifiable intangible assets with finite lives are amortized on a straight-line basis over their estimated useful lives. Finite-lived intangible assets are reviewed for triggering events on a quarterly basis. Goodwill and indefinite-lived intangible assets are tested for impairment on an annual basis in the third fiscal quarter, or sooner if an indicator of impairment occurs. To determine whether goodwill and indefinite-lived intangible assets are impaired, the Company first assesses certain qualitative factors. Based on this assessment, if it is determined that the fair value of the goodwill or indefinite-lived intangible asset is less than its carrying amount, the Company performs the quantitative analysis of the impairment test. The goodwill impairment test consists of a two-step process, if necessary. The first step is to compare the fair value of the reporting unit to its carrying value, including goodwill. The Company typically uses a discounted cash flow model to determine the fair value of the reporting unit. The assumptions used in the model are consistent with those which the Company believes hypothetical marketplace participants would use. If the fair value of the reporting unit is less than its carrying value, the second step of the impairment test must be performed in order to determine the amount of the impairment loss, if any. The second step compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit’s goodwill exceeds its implied fair value, an impairment charge is recognized in an amount equal to that excess. The loss recognized cannot exceed the carrying amount of goodwill. The Company has determined that it has a single goodwill reporting unit, and, accordingly, for the quantitative analysis, it compares the fair value of this goodwill reporting unit to its carrying value. For indefinite-lived assets, other than goodwill, if the carrying amount determined through the quantitative analysis exceeds the fair value, an impairment charge is recognized in an amount equal to that excess. Foreign Currency Translation. During the periods presented, Secureworks primarily operated in the United States. For the majority of the Company’s international businesses, the Company has determined that the functional currency of those subsidiaries is the local currency. Accordingly, assets and liabilities for these entities are translated at current rates of exchange in effect at the balance sheet date. Revenue and expenses from these international subsidiaries are translated using the monthly average exchange rates in effect for the period in which the items occur. Foreign currency translation adjustments are included as a component of accumulated other comprehensive loss, while foreign currency transaction gains and losses are recognized in the Statements of Operations within interest and other, net. These transaction (losses) gains totaled $(3.3) million , $2.2 million and $(0.8) million in the fiscal years ended February 2, 2018 , February 3, 2017 , and January 29, 2016 , respectively. Revenue Recognition. Secureworks derives revenue primarily from two sources: (1) subscription revenue related to managed security and threat intelligence solutions; and (2) professional services, including security and risk consulting and incident response solutions. Revenue is considered realized and earned when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the fee to its customer is fixed or determinable and collection of the resulting receivable is reasonably assured. Multiple-Element Arrangements Professional services contracts are typically sold separately from subscription-based solutions. For subscription offerings, revenue arrangements typically include subscription security solutions, hardware that is essential to the delivery of the service, and maintenance agreements. The nature and terms of these multiple deliverable arrangements will vary based on the customized needs of clients. A multiple-element arrangement is separated into more than one unit of accounting if both of the following criteria are met: ▪ the item has value to the client on a stand-alone basis; and ▪ if the arrangement includes a general right of return relative to the delivered item, delivery or performance of the undelivered item is considered probable and substantially in the Company’s control. If these criteria are not met, the arrangement is accounted for as a single unit of accounting, which would result in revenue being recognized ratably over the contract term or being deferred until the earlier of when such criteria are met or when the last undelivered element is delivered. If these criteria are met for each element, consideration is allocated to the deliverables based on its relative selling price. Subscription-Based Solutions Subscription-based arrangements typically include security solutions, the associated hardware appliance, up-front installation fees and maintenance agreements, which are all typically recognized over the life of the related agreement. The hardware appliance contains software components that do not provide customers with the right to take possession of software licenses supporting the solutions. Therefore, software is considered essential to the functionality of the associated hardware, and, accordingly, is excluded from the accounting guidance that is specific to the software industry. The Company has determined that the hardware appliance included in the subscription-based solutions arrangements does not have stand-alone value to the customer and is required to access the Company’s Counter Threat Platform. The related maintenance agreements support the associated hardware and similarly do not have stand-alone value to the customer. The related installations fees are non-refundable and also do not have stand-alone value to the customer. Therefore, Secureworks recognizes revenue for these arrangements as a single unit of accounting. The revenue and any related costs for these deliverables are recognized ratably over the contract term, beginning on the date on which service is made available to clients. Amounts that have been invoiced, but for which the above revenue recognition criteria have not been met, are included in deferred revenue. The Company has determined that it is the primary obligor in any arrangements that include third-party hardware sold in connection with its solutions, and, accordingly, the Company recognizes this revenue on a gross basis. Professional Services Professional services consist primarily of fixed-fee and retainer-based contracts. Revenue from these engagements is recognized under the proportional performance method of accounting. Revenue from time-and materials-based contracts is recognized as costs are incurred at amounts represented by the agreed-upon billing rates. The Company reports revenue net of any revenue-based taxes assessed by governmental authorities that are imposed on and concurrently with specific revenue-producing transactions. Deferred Revenue. Deferred revenue represents amounts contractually billed to customers or payments received from customers for which revenue has not yet been recognized. Deferred revenue that is expected to be recognized as revenue within one year is recorded as short-term deferred revenue and the remaining portion is recorded as long-term deferred revenue. Cost of Revenue. Cost of revenue consists primarily of compensation and related expenses, including salaries, benefits and performance-based compensation for employees who maintain the Counter Threat Platform and provide support services to clients, as well as perform other critical functions. Other expenses include depreciation of equipment and costs associated with maintenance agreements for hardware provided to clients as part of their subscription-based solutions. In addition, cost of revenue includes amortization of technology licensing fees, fees paid to contractors who supplement or support solutions offerings, maintenance fees and overhead allocations. Research and Development Costs. Research and development costs are expensed as incurred. Research and development expenses include compensation and related expenses for the continued development of solutions offerings, including a portion of expenses related to the threat research team, which focuses on the identification of system vulnerabilities, data forensics and malware analysis and product management. In addition, expenses related to the development and prototype of new solutions offerings also are included in research and development costs, as well as allocated overhead. The Company’s solutions offerings have generally been developed internally. Sales and Marketing. Sales and marketing expense includes compensation and related expenses, including salaries, benefits, and performance-based compensation, including sales commissions and related expenses for sales and marketing personnel, marketing and advertising programs, including lead generation, client advocacy events, other brand-building expenses, and allocated overhead. Advertising costs are expensed as incurred and were $14.7 million , $12.8 million and $13.0 million for the fiscal years ended February 2, 2018 , February 3, 2017 , and January 29, 2016 , respectively. General, and Administrative. General and administrative expense primarily includes the costs of human resources and recruiting, finance and accounting, legal support, management information systems and information security systems, facilities management and other administrative functions, offset by allocations of information technology and facilities costs to other functions. Software Development Costs. Qualifying software costs developed for internal use are capitalized when application development begins, it is probable that the project will be completed, and the software will be used as intended. In order to expedite delivery of the Company’s security solutions, the application stage typically commences before the preliminary development stage is completed. Accordingly, no significant software development costs have been capitalized during any period presented. Income Taxes. Current income tax expense is the amount of income taxes expected to be payable for the current year. Deferred tax assets and liabilities are recorded based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the Statements of Operations in the period that includes the enactment date. The Company calculates a provision for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized by identifying the temporary differences arising from the different treatment of items for tax and accounting purposes. The Company provides valuation allowances for deferred tax assets, where appropriate. In assessing the need for a valuation allowance, Secureworks considers all available evidence for each jurisdiction, including past operating results, estimates of future taxable income, and the feasibility of ongoing tax planning strategies. In the event Secureworks determines all or part of the net deferred tax assets are not realizable in the future, it will make an adjustment to the valuation allowance that would be charged to earnings in the period such determination is made. The accounting guidance for uncertainties in income tax prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. The Company recognizes a tax benefit from an uncertain tax position in the financial statements only when it is more likely than not that the position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits and a consideration of the relevant taxing authority’s administrative practices and precedents. During the periods presented in the financial statements, the Company did not file separate federal tax returns, as the Company was generally included in the tax grouping of other Dell entities within the respective entity’s tax jurisdiction. The income tax benefit has been calculated using the separate return method, modified to apply the benefits for loss approach. Under the benefits for loss approach, net operating losses or other tax attributes are characterized as realized or as realizable by the Company when those attributes are utilized or expected to be utilized by other members of the Dell consolidated group. Sales Commissions and Incentives. The Company recognizes commission expense in the period earned by the employee or when the Company’s rights to recover awards in the event of a customer cancellation have lapsed. During the fiscal years ended February 3, 2017 and January 29, 2016, when clients paid for one or more years of service in advance, sales commissions were paid 50% in the month subsequent to the execution of the service contract and the remaining 50% over the following 12 months. For these commission plans, the Company recognized the sales commission expense related to the entire contract ratably over the first year of the service contract. During the fiscal years ended February 3, 2017 and January 29, 2016 , the Company recognized $29.4 million and $29.5 million , respectively, in commission expense. All sales commission amounts were recoverable by the Company throughout the first year of a service contract. Therefore, the portion of any sales commissions paid upon the signing of a contract, for which the related sales commission expense had not yet been recognized, was recorded as a prepaid asset and amortized to expense during the first 12 months of the contract. As of February 3, 2017 and January 29, 2016 , the Company had a prepaid commission balance, included in other current assets, of $1.6 million and $1.9 million , respectively. During the fiscal year ended February 2, 2018 , the Company revised the design of many of its sales commission plans. Sales incentives were earned based on an individual’s performance relative to the individual’s annual sales goal or quota. Quarterly advances were paid throughout the year based on proportional performance. As a result of these new incentive plans, which no longer provide the Company with the ability to recover the commission from the employee in the event the customer contract is canceled, the Company recognized commission expense in the month it was earned. During the fiscal year ended February 2, 2018 , the Company recognized $42.1 million in commission expense, which included the ratable recognition of the remaining fiscal 2017 commissions earned under the former plans, which had been deferred. The Company typically expenses sales commissions paid to strategic and distribution partners upon entering contracts for the solutions sold and recognizes the revenue associated with such sales over the terms of the contracts. Stock-Based Compensation. The Company’s compensation programs include grants under the SecureWorks Corp. 2016 Long-Term Incentive Plan and, prior to the IPO date, grants under share-based payment plans of Dell Technologies. Under the plans, the Company, and prior to the IPO, Dell Technologies have granted stock options, restricted stock awards and restricted stock units. Compensation expense related to stock-based transactions is measured and recognized in the financial statements based on fair value. Fair value for restricted stock awards and restricted stock units under the Company’s plan is based on the closing price of the Company’s Class A common stock as reported on the NASDAQ Global Select Market on the day of the grant. The fair value of each option award is estimated on the grant date using the Black-Scholes option-pricing model and a single option award approach. This model requires that at the date of grant we determine the fair value of the underlying common stock, the expected term of the award, the expected volatility, risk-free interest rates and expected dividend yield. The restricted stock and restricted stock units issued during the fiscal year ended February 2, 2018 vest over an average service period of three years and approximately 50% of such awards are subject to performance conditions. Stock-based compensation expense, net of forfeitures and adjustments for attainment of performance criteria, is recognized using a straight-line basis over the requisite service periods of the awards, which is generally three to four years. The Company estimates a forfeiture rate, based on an analysis of actual historical forfeitures, to calculate stock-based compensation expense. Loss Contingencies. Secureworks is subject to the possibility of various losses arising in the ordinary course of business. An estimated loss contingency is accrued when it is probable that an asset has been impaired or a liability has been incurred and the amount of loss can be reasonably estimated. The Company regularly evaluates current information available to determine whether such accruals should be adjusted and whether new accruals are required. See “Note 6–Commitments and Contingencies” for more information about these loss contingencies. Recently Adopted Accounting Pronouncements Compensation - Stock Compensation . In March 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2016-09, “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Accounting.” The update simplifies the income tax accounting and cash flow presentation related to share-based compensation by requiring the recognition of all excess tax benefits and deficiencies directly on the income statement and classification as cash flows from operating activities on the statement of cash flows. This update also makes several changes to the accounting for forfeitures and employee tax withholding on share-based compensation. The Company adopted this guidance during the fiscal year ended February 2, 2018 with no material impact on its consolidated financial statements. Recently Issued Accounting Pronouncements Compensation - Stock Compensation. In May 2017, the FASB issued ASU No. 2017-09, “Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting.” The amendments in this update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting under Topic 718. The amendments are effective for the Company beginning with the Company’s 2019 fiscal year, although early adoption is permitted. The Company does not expect these amendments to have a material impact on its consolidated financial statements. Intangibles - Goodwill and Other. In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): “Simplifying the Test for Goodwill Impairment.” ASU 2017-04 eliminates Step 2 of the goodwill impairment test, which required the Company to determine the implied fair value of goodwill by allocating the reporting unit's fair value to each of its assets and liabilities as if the reporting unit was acquired in a business acquisition. Instead, the updated guidance requires an entity to perform its annual or interim goodwill impairment test by comparing the fair value of the reporting unit to its carrying value, and recognizing a non-cash impairment charge for the amount by which the carrying value exceeds the reporting unit's fair value with the loss not exceeding the total amount of goodwill allocated to that reporting unit. The updated guidance is effective for the Company beginning January 1, 2020, with early adoption permitted, and will be applied on a prospective basis. The Company does not expect that the adoption of this standard will have a material impact on its consolidated financial statements. Statement of Cash Flows. In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments - A consensus of the FASB Emerging Issues Task Force.” The update was issued with the objective of reducing the existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230 and other topics. The update is effective for the Company for fiscal years beginning with the Company’s 2019 fiscal year, including interim periods within those fiscal years. The Company does not expect that the adoption of this standard will have a material impact on its Consolidated Statements of Cash Flows. Financial Instruments - Credit Losses. In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The amendments in this update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The update is effective for the Company for fiscal years beginning with the Company’s 2021 fiscal year, including interim periods within those fiscal years. The Company is currently evaluating the impact of this guidance on its consolidated financial statements. Leases — In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842),” which requires lessees to recognize most lease liabilities on their balance sheets but recognize the expenses on their income statements in a manner similar to current practice. The update states that a lessee would recognize a lease liability for the obligation to make lease payments and a right-to-use asset for the right to use the underlying asset for the lease term. The update is effective for the Company for annual and interim periods beginning with the Company’s 2020 fiscal year, and early adoption is permitted. Although the Company is currently evaluating the impact of this guidance on its consolidated financial statements and related disclosures, the Company expects that most of its operating lease commitments will be subject to the new standard and recognized as operating lease liabilities and right-of-use assets upon adoption. Revenue from Contracts with Customers. In May 2014, the FASB issued amended guidance on the recognition of revenue from contracts with customers. The objective of the new standard is to establish a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and will supersede most of the existing revenue recognition guidance, including industry-specific guidance. The new standard requires entities to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new standard also provides guidance on the accounting for costs to fulfill or obtain a customer contract. Further, the new standard requires additional disclosures to help enable users of the financial statements to better understand the nature, amount, timing, risks and judgments related to revenue recognition and related cash flows from contracts with customers. Public entities are required to adopt the new standard for fiscal years, and interim periods within those years, beginning after December 15, 2017. The new revenue standard may be applied retrospectively to each prior period presented (full retrospective method) or retrospectively with the cumulative effect of initially applying the standard recognized at the date of initial application in retained earnings (modified retrospective method). The Company will adopt this standard and its amendments retrospectively to each period presented for the Company’s 2019 fiscal year, including interim periods. The adoption of this standard will have a material impact on the Company’s consolidated financial statements and related disclosures, primarily related to the Company’s accounting for costs to obtain a contract. These costs are defined as those that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained. Under the new standard, these costs to obtain a contract will now be capitalized and amortized on a systematic basis that is consistent with the transfer to the customer of the goods or services to which the assets relate. A significant portion of the Company’s sales commission cost related to the acquisition of sales contracts will be deferred and recognized over the average life of the arrangement, which is approximately 7 years . Additionally, the Company incurs certain costs to install and activate hardware and software used in its Managed Security Services, primarily related to a portion of the compensation for the personnel who perform the installation activities. These fulfillment costs will be deferred and recognized over the economic life of the services, or approximately 4 years . Based on the Company’s historical experience, customers may change the security services and associated hardware and software that they purchase from the Company over the span of the overall relationship. Therefore, the average economic life of the services is shorter than the overall average life of the arrangement. In addition, and with minimal impact starting in the fiscal year ended February 2, 2018, the Company’s adoption of the standard will result in the Company accelerating the recognition of revenue from its premium installation services, the impact of which will be partially offset by the deferral of revenue related to third-party appliances that will be accounted for as part of a single performance obligation upon adoption of the new standard. Based on the Company’s assessment and best estimates to date, the Company expects a cumulative adjustment to decrease its January 30, 2016 opening accumulated deficit by approximately $43 million . The Company expects to record non-current contract cost assets related to the deferral of certain sales commission and fulfillment costs of approximately $63 million and $51 million as of February 2, 2018 and February 3, 2017, respectively. Select consolidated statement of operations line items, which reflect the Company’s best estimate of the impact of the adoption of the standard, are as follows (in thousands): Fiscal Year Ended Fiscal Year Ended February 2, 2018 February 3, 2017 As Reported ASC 605 ASC 606 Adjustment (Estimated) ASC 606 (Estimated) As Reported ASC 605 ASC 606 Adjustment (Estimated) ASC 606 (Estimated) Net Revenue $ 467,904 $ — $ 467,904 $ 429,502 $ 3,200 $ 432,702 Cost of revenue 226,718 (1,600 ) 225,118 212,599 (110 ) 212,489 Gross margin 241,186 1,600 242,786 216,903 3,310 220,213 Research and development 80,164 — 80,164 71,030 — 71,030 Sales and marketing 151,341 (10,700 ) 140,641 124,950 (6,400 ) 118,550 General and administrative 92,726 — 92,726 86,876 — 86,876 Total operating expenses 324,231 (10,700 ) 313,531 282,856 (6,400 ) 276,456 Operating loss $ (83,045 ) $ 12,300 $ (70,745 ) $ (65,953 ) $ 9,710 $ (56,243 ) These amounts include estimates and will remain subject to change as the Company completes its evaluation of the new standard and final calculations of the impact of adoption. |
