Rapid7, Inc. Form 10-K Summary
Business Context and Reporting Period
Rapid7 provides cybersecurity and IT analytics and automation solutions, including vulnerability management, incident detection and response, SIEM, application security testing, log analytics and security orchestration. The filing covers the fiscal year ended December 31, 2017. The company reports one operating segment and served 7,030 customers in 127 countries, including 52% of the Fortune 100.
For fourth-quarter context, unaudited Q4 2017 revenue was $57.7 million and net loss was $13.0 million. The audited filing primarily presents full-year results.
Financial Performance and Liquidity
| Metric | FY 2017 | FY 2016 | Change |
|---|---|---|---|
| Revenue | $200.9 million | $157.4 million | 27.6% increase |
| Products revenue | $116.7 million | $89.4 million | 30.6% increase |
| Maintenance and support | $46.3 million | $37.4 million | 23.7% increase |
| Professional services | $37.9 million | $30.6 million | 23.8% increase |
| Gross profit | $144.0 million | $117.7 million | 22.4% increase |
| Gross margin | 71.7% | 74.8% | Down 3.1 percentage points |
| Operating loss | $48.8 million | $49.0 million | Slight improvement |
| Net loss | $45.5 million | $49.0 million | 7.2% improvement |
| Net loss per share | $1.06 | $1.19 | Improved |
| Operating cash flow | $13.3 million | $9.1 million | Increase |
| Calculated billings | $256.4 million | $196.2 million | 30.7% increase |
| Annualized recurring revenue | $164.9 million | $121.2 million | 36.0% increase |
Recurring revenue represented 70% of total revenue, compared with 67% in 2016. Deferred revenue increased to $224.5 million from $169.1 million, providing visibility into future revenue recognition. Renewal rate, including upsells and cross-sells, was 122%; the expiring revenue renewal rate was 89%.
At December 31, 2017, cash and cash equivalents were $51.6 million and short- and long-term investments were $40.3 million. The company had no debt and total liabilities of $260.0 million, including $224.5 million of deferred revenue. Accumulated deficit was $434.9 million. Management stated that existing liquidity and operating cash flow should fund requirements for at least the next 12 months.
Material Changes Versus the Prior Comparable Period
- Revenue growth slowed to 27.6% from 42.4% in 2016, while customer count increased from 6,206 to 7,030.
- Gross margin declined primarily because cloud subscriptions and managed services, which generally carry lower margins than software licenses, represented a larger mix of revenue.
- Sales and marketing expense increased 23.3% to $111.6 million, while research and development increased 6.2% to $50.9 million. Operating expenses declined as a percentage of revenue to 96.0% from 105.9%.
- Products cost of revenue increased 105.5%, driven by personnel, cloud-computing and infrastructure costs.
- Operating cash flow improved despite a $45.5 million net loss, largely because deferred revenue increased $55.4 million.
- Rapid7 acquired Komand in July 2017 for $14.8 million in cash, adding orchestration and automation technology. The acquisition generated $8.1 million of goodwill and $9.4 million of developed technology intangible assets.
- Stock-based compensation increased to $19.5 million from $17.3 million and represented a significant recurring non-cash expense.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide a clear numerical revenue or earnings forecast. Management expects continued investment in research and development, sales and marketing, international expansion and infrastructure, with operating expenses increasing in absolute dollars. Management expects gross margins to decrease slightly as cloud subscriptions and managed services grow.
Rapid7 adopted the new revenue recognition standard, ASC 606, on January 1, 2018 using the modified retrospective method. Management expected a material impact on financial statement presentation and disclosures, including approximately $28.0 million of deferred contract acquisition and fulfillment cost assets. The filing states that the cumulative adjustment to deferred revenue was expected to be immaterial, but the timing of revenue recognition would change for certain perpetual licenses and professional services.
On January 30, 2018, Rapid7 completed a public offering of 1.5 million primary shares at $22.00 per share and received net proceeds of $30.9 million. Existing stockholders sold an additional 4.45 million shares and received the related proceeds.
Key risks include continued GAAP losses, dependence on revenue growth and customer renewals, transition from perpetual licenses to subscriptions, intense competition, cloud reliability and cybersecurity breaches, reliance on third-party infrastructure and channel partners, international and foreign-exchange exposure, evolving privacy and export-control regulations, intellectual-property claims, and the uncertain adoption of the SecOps market. Contractual commitments included $105.7 million of operating lease payments and $32.0 million of non-cancellable purchase obligations. Letters of credit totaled $7.7 million and were excluded from the contractual-obligations table.
The company recorded a $2.2 million income tax benefit in 2017, including a $2.6 million deferred tax benefit related to the Komand acquisition and a $0.4 million benefit from U.S. tax reform. Management continued to maintain a full valuation allowance against U.S., U.K. and Ireland deferred tax assets. Ordinary-course litigation was not expected to have a material adverse effect.
Important Facts for Investors to Verify
- Whether recurring revenue, ARR, calculated billings and renewal rates continue to grow as the company transitions toward subscriptions.
- Whether cloud and managed-service mix causes further gross-margin pressure and whether infrastructure costs scale efficiently.
- The actual effects of ASC 606 on revenue timing, deferred revenue, contract-cost assets and comparability with 2017 results.
- The company’s path toward profitability, given the $45.5 million 2017 net loss and $434.9 million accumulated deficit.
- Liquidity after the January 2018 equity offering and the effect of primary-share dilution versus secondary sales.
- Integration and commercial performance of the Komand acquisition, including potential milestone-related employee payments of up to $5.0 million.
- Exposure to cybersecurity incidents, service outages, privacy regulation, export controls and intellectual-property claims.
- The sustainability of operating cash flow, which was supported materially by the $55.4 million increase in deferred revenue.