Rapid7, Inc. — Q1 2019 Form 10-Q Summary
Business context and reporting period
Rapid7 provides cybersecurity analytics and automation through its Insight cloud, with offerings in vulnerability management, incident detection and response, application security, and security orchestration and automation response. The filing covers the three months ended March 31, 2019, compared with the three months ended March 31, 2018. Rapid7 reported 7,934 customers in 133 countries at quarter-end, with no customer representing more than 2% of revenue.
Key financial metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $73.2 million | $54.5 million | 34.2% increase |
| Products revenue | $56.3 million | $35.3 million | 59.6% increase |
| Maintenance and support revenue | $9.6 million | $10.8 million | 11.1% decrease |
| Professional services revenue | $7.3 million | $8.5 million | 13.5% decrease |
| Gross profit | $53.2 million | $37.9 million | 40.3% increase |
| Gross margin | 72.7% | 69.6% | Up 3.1 percentage points |
| Loss from operations | $(9.7) million | $(16.6) million | Improved by $6.8 million |
| GAAP net loss | $(11.7) million | $(16.4) million | Improved by $4.7 million |
| GAAP loss per share | $(0.24) | $(0.36) | Improved |
| Operating cash flow | $(13.6) million | $7.3 million | Declined by $20.9 million |
| Non-GAAP operating income | $0.6 million | $(8.9) million | Improved |
| Adjusted EBITDA | $2.6 million | $(7.4) million | Improved |
Subscription revenue was $47.0 million, up from $28.7 million. Recurring revenue represented 85% of total revenue, compared with 77% in the prior-year quarter. Annualized recurring revenue was $268.2 million, up 50.8% year over year, and the reported renewal rate was 120% in both periods.
Cash and cash equivalents were $89.9 million at March 31, 2019. Short- and long-term investments totaled $195.2 million, resulting in approximately $285.1 million of cash and investments. The company had $230.0 million principal amount of 1.25% convertible senior notes due 2023, reported at a net carrying amount of $177.2 million. The fair value of the notes was $313.4 million.
Total assets were $563.9 million and total liabilities were $475.1 million at quarter-end. Deferred revenue totaled $236.5 million. The company reported an accumulated deficit of $476.3 million.
Material changes versus the prior comparable period
- Revenue growth was driven primarily by products, including cloud-based subscriptions, managed services, and software licenses. Management attributed $13.8 million of the revenue increase to existing customers and $4.9 million to new customers.
- Maintenance and support revenue declined as Nexpose customers continued transitioning to the subscription-based InsightVM product. Professional services revenue declined due to lower bookings.
- Gross margin improved primarily because subscription-based and managed services offerings scaled, although product costs increased with cloud computing costs and personnel.
- Operating expenses increased 15.5% to $63.0 million, led by sales and marketing investment, which increased 20.9% to $35.1 million. Operating expenses declined as a percentage of revenue to 85.9% from 100.0%.
- Interest expense increased to $3.2 million from negligible expense in the prior-year period, primarily from the convertible notes, including $2.5 million of non-cash amortization of debt discount and issuance costs.
- Operating cash flow turned negative, partly reflecting seasonal decreases in deferred revenue and accrued expenses, annual bonus and commission payments, and increased prepaid expenses.
- Stock-based compensation increased to $8.6 million from $6.2 million. Unrecognized compensation expense was $112.5 million at March 31, 2019, including $107.1 million for restricted stock and restricted stock units.
- Rapid7 adopted ASC 842 lease accounting on January 1, 2019, recognizing a $15.4 million right-of-use asset and a $21.3 million lease liability at adoption. At March 31, operating lease liabilities were $21.6 million.
Guidance, outlook, commentary, risks, and unusual items
The filing does not provide a clear numeric revenue or earnings guidance range. Management expects continued investment in research and development, sales and marketing, international expansion, and general and administrative infrastructure. It expects research and development and general and administrative expenses to increase in absolute dollars, while sales and marketing expense is expected to decline as a percentage of revenue.
Management stated that existing cash, investments, and anticipated operating cash flows should be sufficient to meet working-capital and expenditure requirements for at least the next 12 months. However, Rapid7 expects to continue generating losses, and future capital needs may increase with growth, product development, infrastructure spending, and acquisitions.
On April 1, 2019, Rapid7 acquired NetFort Technologies Limited for $15.0 million in cash. NetFort provides network traffic visibility and analytics. The acquisition was subsequent to the reporting date and is intended to expand visibility and detection capabilities within the Insight cloud.
Material risks include continued GAAP losses and negative operating cash flow, dependence on subscription renewals and expansion, competition in a rapidly evolving cybersecurity market, reliance on vulnerability-management offerings, cybersecurity incidents or service outages, third-party cloud and software providers, international and foreign-currency exposure, privacy and data-protection regulation, intellectual-property litigation, and the ability to integrate acquisitions.
Rapid7 is defending a Finjan patent-infringement lawsuit involving seven patents. The case was in its early stages, and the filing states that the outcome and potential liability were uncertain. No material loss amount was provided.
Most important facts for investors to verify
- Whether high revenue and ARR growth can be sustained as the business transitions toward subscriptions and InsightVM.
- Whether recurring revenue growth and a 120% renewal rate continue, particularly amid competition and changing customer budgets.
- Whether gross-margin expansion offsets rising cloud, personnel, sales, and infrastructure costs.
- Whether operating cash flow returns to positive levels after seasonal working-capital effects.
- The future cash requirements and potential dilution or cash settlement associated with the $230.0 million convertible notes due 2023.
- The financial and operational impact of the NetFort acquisition, including integration costs and purchase accounting.
- The status and potential exposure from the Finjan patent litigation and other intellectual-property claims.
- The effect of stock-based compensation, with $8.6 million recorded in the quarter and substantial unrecognized expense remaining.
- The effect of the future headquarters lease, which had $82.1 million of future payments and was expected to commence in June 2019.