Rapid7, Inc. — Form 10-Q Summary
Business context and reporting period
Rapid7 provides cybersecurity analytics, visibility and automation through its Insight cloud, including vulnerability management, incident detection and response, application security, security orchestration and automation response, managed services and professional services. The filing covers the three and six months ended June 30, 2019, compared with the corresponding 2018 periods. Rapid7 reported 8,400 customers in 134 countries and operated as one reportable segment.
Financial results and key metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $79.0 million | $58.4 million | $152.1 million | $113.0 million |
| Year-over-year growth | 35.1% | 23.2% | 34.7% | 21.9% |
| Gross profit | $56.8 million | $41.0 million | $110.0 million | $79.0 million |
| Gross margin | 71.9% | 70.2% | 72.3% | 69.9% |
| Loss from operations | $(12.2) million | $(14.3) million | $(21.9) million | $(30.9) million |
| Operating margin | (15.4)% | (24.5)% | (14.4)% | (27.4)% |
| Net loss | $(13.4) million | $(14.3) million | $(25.1) million | $(30.7) million |
| Net loss per share | $(0.28) | $(0.31) | $(0.52) | $(0.67) |
| Non-GAAP income from operations | $0.5 million | $(6.0) million | $1.1 million | $(14.9) million |
| Adjusted EBITDA | $2.7 million | $(4.2) million | $5.4 million | $(11.7) million |
| Operating cash flow | $2.5 million | $(9.1) million | $(11.1) million | $(1.8) million |
Products revenue increased 61.9% to $63.2 million in Q2 and 60.8% to $119.5 million for the six-month period. Maintenance and support revenue declined 11.7% in Q2 and 11.4% year to date, while professional services revenue declined 27.4% and 20.6%, respectively. Subscription revenue was $52.3 million in Q2 and $99.3 million year to date.
- Recurring revenue represented 87% of Q2 revenue and 86% of six-month revenue, compared with 79% and 78% in the comparable 2018 periods.
- Annualized recurring revenue was $290.0 million at June 30, 2019, up 46.0% year over year.
- The dollar-based renewal rate was 116%, compared with 122% in Q2 2018.
- Stock-based compensation was $10.4 million in Q2 and $19.1 million year to date, compared with $7.4 million and $13.6 million in the prior-year periods.
- Cash and cash equivalents were $126.6 million. Short- and long-term investments totaled $137.8 million.
- Deferred revenue totaled approximately $244.0 million, including $199.0 million current and $44.9 million non-current.
Material changes versus the prior comparable periods
- Revenue growth accelerated, driven primarily by subscription products, renewals, upsells and cross-sells from existing customers. Management attributed $14.7 million of Q2 revenue growth to existing customers and $5.8 million to new customers.
- Gross margin improved as subscription-based and managed-services offerings scaled, although professional-services margin fell to 13.1% in Q2 from 34.7% because of lower revenue.
- Operating losses narrowed despite higher absolute operating expenses, as research and development, sales and marketing and general and administrative costs grew more slowly than revenue.
- Interest expense increased to $3.3 million in Q2 and $6.5 million year to date because of the 1.25% convertible senior notes and non-cash amortization of the related debt discount and issuance costs.
- Operating cash flow was positive in Q2 but negative for the first six months, reflecting the net loss, annual bonus and commission payments, increased prepaid expenses, contract acquisition costs and lower deferred revenue.
- Rapid7 acquired NetFort Technologies Limited on April 1, 2019, for $16.1 million in cash. The preliminary allocation included $6.1 million of developed technology and $9.4 million of goodwill.
- Rapid7 adopted ASC 842 lease accounting on January 1, 2019. At June 30, 2019, it reported $59.4 million of operating lease right-of-use assets and $77.8 million of operating lease liabilities.
- The company took possession of its new Boston headquarters in May 2019 and entered into an additional approximately $35.0 million lease commitment in July 2019, expected to commence in June 2021.
Guidance, outlook, risks and unusual items
The filing does not provide a clear numerical revenue, earnings or cash-flow guidance range. Management expects revenue and operating expenses to increase in absolute dollars, continued investment in research and development and sales and marketing, and losses for the foreseeable future. Management states that available cash, investments and expected operating cash flows should fund working-capital and capital-expenditure requirements for at least the next 12 months.
- Rapid7 remains unprofitable, with an accumulated deficit of $489.7 million at June 30, 2019.
- The company has $230.0 million of convertible notes due in 2023, with a net carrying amount of $179.8 million and quoted fair value of $351.0 million. The notes were not convertible as of June 30, 2019 and have no financial covenants.
- Potential dilution includes approximately 5.5 million shares underlying the notes, partly offset by capped-call transactions covering approximately the same number of shares, subject to limitations.
- Finjan, Inc. alleges infringement of seven patents in pending Delaware litigation and seeks unspecified damages, attorneys’ fees and injunctive relief. The outcome and potential liability are uncertain.
- Key operating risks include intense competition, dependence on vulnerability-management offerings, customer renewals and expansion, cloud-service reliability, cybersecurity incidents, product defects or missed vulnerabilities, international operations and foreign-exchange exposure.
- Additional risks include privacy and data-protection regulations, export controls affecting cybersecurity products, acquisition integration, channel-partner dependence, substantial stock-based compensation and the ability to achieve profitability.
- Management reported effective disclosure controls as of June 30, 2019 and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the rapid shift toward subscription revenue continues to offset declines in maintenance, support and professional services revenue.
- Whether the 116% renewal rate and 46% ARR growth remain sustainable as the customer base expands.
- Whether positive quarterly operating cash flow can become consistently positive for the full year, given ongoing investment and working-capital requirements.
- The effect of the $230.0 million convertible notes, potential conversion, capped-call protection and future cash requirements at maturity or upon a fundamental change.
- The final purchase-price allocation and integration results for NetFort, including any goodwill or intangible-asset impairment risk.
- The financial impact of the new Boston headquarters and the additional approximately $35.0 million lease commitment beginning in 2021.
- The status and potential exposure from the Finjan patent litigation and other intellectual-property claims.
- The reconciliation and sustainability of non-GAAP profitability, particularly given recurring stock-based compensation and non-cash convertible-debt expenses.