It’s been a couple of years in the works, but Dell’s cybersecurity business unit SecureWorks is finally a public company.
The Atlanta, GA.-based company became the first technology business to go public in 2016. There’s been a relative drought in technology IPOs for the past couple of months. The last notable IPO occurred in December when enterprise software company Atlassian (TEAM) went public.
Both technology and Wall Street analysts were looking at SecureWorks’s performance on its first day of trading as an gauge of the rough market, which on Friday saw the stocks of multiple technology giants falter amid multiple weak earnings reports.
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The cybersecurity company originally planned on pricing its shares between $15.50 $17.50 range per share, but instead SecureWorks priced its shares at $14.00. Additionally, SecureWorks originally planned to offer nine million shares, but instead went with eight million.
In an interview with Fortune, SecureWorks CEO Michael Cote declined to comment on the company’s pricing, but Cote explained why he believes it was necessary for the company to go public.
Being a separate company from Dell, which employs over 100,000 workers, will allow the company to get “back to our entrepreneurial roots,” posited Cote. Cote said that being a smaller, independent company will allow it to be more agile. Essentially, with a staff of roughly 2,000 people it will be easier for the company to make business decisions and more quickly react to market changes without being weighed down by layers of bureaucracy.
That doesn’t mean that Dell is out of the picture, however. Dell still owns about 85% of SecureWorks, Cote cited, and SecureWorks will be using Dell’s sales resources and branding in other countries where Dell is more widely known.
Dell CEO Michael Dell and Silver Lake managing partner Egon Durban, who worked with Dell on the company going private, are also members of SecureWorks’s (SCWX) board of directors.
SecureWorks CFO Wayne Jackson said the IPO process began two years ago, and it was intended to give the company some leverage in expanding in other countries. While there has been some turbulence in the market, Cote asserted that had no effect on the company’s plans for an IPO.
“We were looking at this with Michael Dell from a longer-term perspective,” Cote said.
In business since 1999, SecureWorks may be an older and more mature company relative to numerous high-profile technology startups. But it does share one thing in common with these upstarts: Lots of losses relative to revenue.
SecureWorks’s net losses were $72.4 million for its fiscal 2016, an 88% increase from the $38.5 million it saw in losses the previous year, according to a regulatory filing. Jackson explained these losses were related to “conscious investments” that the company made to build its threat-detection cybersecurity technology and expand into regions such as Japan and elsewhere in Asia.
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That “spend money to make money” philosophy is common in Silicon Valley and the startup community, which is known for investing heavily in growth without formulating a solid revenue path.
Still, the fact that the SecureWorks’s sales have increased 30% to $339.5 million in 2016 is noteworthy because it demonstrates the company has a business model and is growing, explained Kathleen Smith, a Principal of Renaissance Capital, a manager of IPO-focused exchange traded funds.
However, that revenue growth doesn’t change the fact that SecureWorks is still losing money, which helps explain its rocky first day on the Nasdaq stock exchange. SecureWorks opened the day with shares trading at $13.61 instead of the planned $14.00. Smith warned that the public market is not going to treat companies that aren’t earning money very well.
Young, high-flying startups looking to go public would be wise to study the performance of SecureWorks over the next year even though the company may not technically be a startup. SecureWorks’s IPO is “a test of the public appetite of technology investors for a company that does not earn money,” Smith suggested.
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Despite the current market turbulence, Smith seemed optimistic that we will see more companies going public this year. While there may be startups that are losing money, there are also “hundreds of companies that have solid business models,” she noted.
“This isn’t going to slow down the IPO market,” said Smith. “We expect the market to continue to open.”
Kristin DeClark, a managing director and head of technology equity capital markets at Deutsche Bank, also believes that the market won’t shut down for IPOs. All eyes happened to be on SecureWorks because of the relative dearth of IPOs, DeClark explained. The company’s shares may have had a tough day, but that doesn’t mean it’s going to impact other technology companies that are closer than SecureWorks to being profitable.
“I don’t think it is going to have an impact for the ability of the other technology companies that are expected to have a successful IPO in this market,” said DeClark.
