Rapid7, Inc. — Q1 2022 Form 10-Q Summary
Business Context and Reporting Period
Rapid7 provides cybersecurity visibility, analytics and automation through its Insight Platform, including vulnerability management, incident detection and response, cloud security, application security, threat intelligence and security orchestration. This unaudited report covers the three months ended March 31, 2022, compared with the three months ended March 31, 2021.
- More than 10,400 customers in 141 countries as of March 31, 2022; 49% of the Fortune 100 were customers.
- Recurring revenue represented 94% of total revenue, compared with 91% in the prior-year quarter.
- The IntSights acquisition contributed $6.9 million of Q1 2022 revenue and $10.9 million of net loss.
Financial Performance and Key Metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Total revenue | $157.4 million | $117.5 million | 34.0% increase |
| Product revenue | $149.0 million | $109.3 million | 36.4% increase |
| Professional services revenue | $8.4 million | $8.2 million | 2.4% increase |
| Gross profit | $106.1 million | $81.2 million | 30.7% increase |
| Gross margin | 67.4% | 69.1% | Down 1.7 percentage points |
| Loss from operations | $(40.4) million | $(23.1) million | Loss widened |
| Net loss | $(45.0) million | $(29.8) million | Loss widened |
| Net loss per share | $(0.78) | $(0.56) | Loss widened |
| Non-GAAP operating loss | $(5.6) million | $1.9 million income | Declined |
| Adjusted EBITDA | $(1.2) million | $5.8 million | Declined |
| Free cash flow | $3.8 million | $17.9 million | Declined |
| Annualized recurring revenue | $627.1 million | $455.8 million | 37.6% increase |
Revenue growth consisted of $33.0 million of organic growth and $6.9 million attributable to IntSights. Growth was primarily driven by renewals, upsells and cross-sells within the existing customer base. Customer count increased 16% year over year to 10,407.
Operating expenses increased 40.5% to $146.5 million, including research and development of $49.8 million, sales and marketing of $75.1 million, and general and administrative expense of $21.5 million. Stock-based compensation was $28.9 million, compared with $20.9 million in the prior-year quarter.
Operating cash flow was $10.4 million, compared with $20.6 million in Q1 2021. Investing cash outflow was $35.9 million, including $29.3 million of net investment purchases, $3.5 million of capitalized internal-use software and $3.1 million of capital expenditures. Financing cash inflow was $3.2 million, primarily from employee equity programs.
Balance Sheet, Debt and Liquidity
- Cash and cash equivalents were $141.4 million at March 31, 2022.
- Short- and long-term investments totaled $121.5 million, resulting in approximately $262.9 million of cash, cash equivalents and investments.
- Convertible senior notes had a net carrying amount of $813.0 million: $230.0 million of 2.25% notes due 2025 and $600.0 million of 0.25% notes due 2027.
- The $100.0 million revolving credit facility had no borrowings outstanding; $9.3 million of letters of credit reduced availability. The facility permits an accordion increase to $150.0 million and matures in December 2024.
- The company reported compliance with all credit facility covenants.
- Accumulated deficit was $781.0 million and stockholders’ deficit was $136.6 million.
- Management stated that available liquidity, expected operating cash flow and borrowing availability should satisfy operating and capital requirements for at least the next 12 months.
Material Changes Versus the Prior Comparable Period
- Revenue accelerated to 34.0% growth from 24.5% reported for Q1 2021, supported by IntSights and stronger organic renewals, upsells and cross-sells.
- ARR growth increased to 37.6% from 29.9%, and customer growth increased to 16% from 11%.
- Gross margin declined to 67.4% from 69.1%, primarily because cloud subscriptions and managed services carry lower margins than licensed software and because of additional IntSights-related amortization.
- Research and development expense increased 50.6%, while sales and marketing expense increased 36.7%, reflecting higher headcount, infrastructure, commissions and growth investments.
- GAAP net loss increased to $45.0 million from $29.8 million. Non-GAAP operating performance shifted from $1.9 million of income to a $5.6 million loss.
- Free cash flow decreased to $3.8 million from $17.9 million, despite positive operating cash flow.
- Interest expense decreased primarily because Q1 2021 included a $2.7 million induced conversion expense related to the former 2023 convertible notes.
Guidance, Outlook, Risks and Unusual Items
- The filing does not provide a clear numerical revenue, margin, ARR or earnings guidance range. Management expects continued investment in research and development, sales and marketing, international expansion and infrastructure, while continuing to generate losses for the foreseeable future.
- In March 2022, Rapid7 entered into a 36-month AWS cloud infrastructure agreement beginning April 1, 2022, with a total commitment of $300.0 million.
- The 2025 convertible notes became conditionally convertible from April 1 through June 30, 2022. An immaterial principal amount had been requested for conversion as of March 31, 2022; settlement was expected during Q2 2022. Conversion could require cash, shares or a combination and could affect liquidity and dilution.
- Rapid7 remains exposed to customer renewal and expansion risk, intense competition, cybersecurity incidents, service outages, cloud infrastructure dependence, privacy and regulatory requirements, foreign exchange movements, recruiting constraints and acquisition integration risk.
- The company reported no significant COVID-19 disruption during the quarter but stated that future effects remain uncertain. It also noted potential consequences from the Russia-Ukraine conflict, including sanctions, export controls, macroeconomic volatility and currency effects.
- Finjan litigation alleging infringement of seven patents remains outstanding. The filing states that the outcome and any potential liability are uncertain.
- Available-for-sale investments had $0.7 million of unrealized losses at March 31, 2022; management concluded the losses were not other-than-temporary.
Important Facts for Investors to Verify
- Whether ARR growth and customer expansion continue to offset rising operating expenses and sustained GAAP losses.
- The effect of the $300.0 million AWS commitment on future gross margins, cash flow and contractual obligations.
- The amount and settlement form of any 2025 note conversions, including potential cash requirements and equity dilution.
- Progress toward improving gross margin as the business mix shifts toward cloud-based subscriptions and managed services.
- Future free cash flow generation relative to the company’s $813.0 million carrying value of convertible debt and substantial lease obligations.
- Developments in the Finjan patent litigation and any related financial exposure.
- Whether cybersecurity incidents, service interruptions, privacy regulation, geopolitical events or customer renewal trends materially affect results.