Defecting customers hit service provider hard, underscore need to tamp down churn
Managed security service provider (MSSP) SecureWorks lost more than 8 percent of its market value yesterday despite posting strong year-over-year revenue gains. The culprit: high customer churn.
The Lowdown: The success of any managed service model, or of one based on protracted subscription-based services, is predicated on account retention. The steady, predictable revenue coming from recurring customer payments remains stable only if customers stay in the fold. If customers defect to other providers or simply drop the service, the recurring-revenue model breaks down. SecureWorks saw a significant increase in account churn. While it didn’t affect earnings, per se, it did signal future revenue performance challenges.
The Details: SecureWorks reported that its revenue retention rate for 2019 is 89 percent, down from 96 percent in 2018. A good chunk of the decline is due to one large account departing. Excluding that one account brings the retention rate to 93 percent, still down year over year.
The Impact: SecureWorks CEO Michael Cote says the situation is serious enough to warrant the company putting a focus on improving account retention and stabilizing recurring revenue.
Background: Atlanta-based SecureWorks is under a microscope. While it beat its own year-over-year quarterly earnings numbers, it didn’t meet Wall Street expectations. Contributing to the account churn problem is the MSSP grappling with changing security needs and expectations. Over the past year, SecureWorks released a number of new products and features to adjust its portfolio and value proposition. In February, rumors started circulating that its parent company, Dell Technologies, is interested in selling the unit, but nothing has yet come of those whispers.
Channelnomics Point of View: The service model is appealing to technology companies because it promises a stable, predictable recurring-revenue stream, opposed to the unpredictable revenue generated by transactional sales. Too often, though, vendors and solution providers going to market with a recurring-revenue model will focus on account acquisition, believing capturing customers and market share is the most important success factor. In reality, account retention is more significant; without a stable roster of accounts, the recurring-revenue model loses its luster, as SecureWorks has noted. Now the MSSP will focus more on customer retention, which is another way of saying it will look to improve the customer experience in order to lower attrition rates.