Rapid7, Inc. 2017 First-Quarter Form 10-Q Summary
Business Context and Reporting Period
Rapid7 provides cybersecurity and IT operations analytics, including threat exposure management, incident detection and response, cloud-based subscriptions, managed services, software licenses, maintenance and support, and professional services. The unaudited report covers the three months ended March 31, 2017, compared with the same period in 2016.
As of March 31, 2017, Rapid7 had approximately 6,350 customers in 122 countries, including 39% of the Fortune 1000. The company operated as one reporting segment.
Financial Results and Key Metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total revenue | $45.2 million | $34.8 million | 30.0% increase |
| Gross profit | $33.0 million | $26.1 million | 26.4% increase |
| Gross margin | 72.9% | 75.0% | Down 2.1 percentage points |
| Operating loss | $(10.5) million | $(15.6) million | Improved by $5.1 million |
| Operating margin | (23.1)% | (44.8)% | Improved by 21.7 percentage points |
| Net loss | $(10.5) million | $(15.6) million | Improved by $5.0 million |
| Basic and diluted loss per share | $(0.25) | $(0.38) | Improved |
| Operating cash flow | $3.3 million | $(1.6) million | Improved by $4.9 million |
| Calculated billings | $43.8 million | $36.3 million | 20.6% increase |
- Products revenue increased 28.8% to $25.9 million; maintenance and support revenue increased 28.9% to $10.8 million; and professional services revenue increased 35.6% to $8.5 million.
- Recurring revenue represented 69% of total revenue, compared with 67% in the prior-year quarter. Revenue recognized from beginning-period deferred revenue represented 89% of total revenue, versus 86% in Q1 2016.
- Sales and marketing expense increased 9.0% to $24.8 million, while research and development expense decreased 7.7% to $11.4 million and general and administrative expense increased 9.9% to $7.2 million.
- Non-GAAP operating loss was $5.7 million, compared with $9.5 million in Q1 2016. Non-GAAP net loss was $5.8 million, or $0.14 per share, compared with $9.5 million, or $0.23 per share.
- Stock-based compensation expense was $4.3 million, compared with $5.5 million in the prior-year period. Unrecognized compensation expense totaled $47.5 million at March 31, 2017.
Balance Sheet, Liquidity, Debt and Cash Flow
- Cash and cash equivalents were $50.7 million at March 31, 2017, compared with $53.1 million at December 31, 2016.
- Short- and long-term investments totaled $45.4 million, consisting primarily of U.S. government agencies, commercial paper, corporate bonds and asset-backed securities.
- Deferred revenue totaled $167.6 million, including $116.6 million current and $51.1 million non-current.
- Total liabilities were $191.9 million and stockholders’ equity was $37.9 million. The filing reports an accumulated deficit of approximately $400.0 million.
- The filing does not report outstanding funded debt. Capital lease payments were zero during the quarter.
- Operating cash flow benefited from strong collections and a $15.2 million reduction in accounts receivable, partially offset by bonus and commission payments, a $7.2 million reduction in accrued expenses, and a $1.4 million reduction in deferred revenue.
- Investing activities used $7.8 million, including $7.4 million for investment purchases and $1.3 million for capital expenditures. Financing activities provided $2.1 million, primarily from employee stock purchases and option exercises.
- Management stated that existing cash, investments and expected operating cash flow should satisfy working-capital and capital-expenditure needs for at least the next 12 months, although additional financing may be required to support growth or acquisitions.
Material Changes Versus the Prior Comparable Period
- Revenue growth slowed to 30.0% from 47.6%, but the customer base increased by approximately 990 customers year over year.
- Gross margin declined because cloud-based subscriptions and managed services, which generally carry lower margins than licensed software, represented a larger portion of product revenue.
- Operating and net losses narrowed substantially as revenue growth outpaced operating-expense growth and prior-year acquisition-related and stock-based compensation costs declined.
- Operating cash flow turned positive, improving from a $1.6 million use of cash to $3.3 million of cash provided.
- Deferred revenue increased year over year from $131.9 million to $167.6 million, supporting future revenue visibility, although deferred revenue declined modestly during the quarter.
- Renewal rate was 120%, compared with 126% in Q1 2016; the expiring revenue renewal rate was 88%, compared with 89%.
Guidance, Outlook, Commentary and Risks
- The filing does not provide a clear numerical outlook or formal quarterly or annual guidance.
- Management expects continued investment in research and development, sales and marketing, international expansion, professional services and administrative infrastructure. These expenses are expected to increase in absolute dollars but generally decline as a percentage of revenue as the business scales.
- In April 2017, Rapid7 announced InsightVM for vulnerability management and InsightAppSec, then in beta, for application security testing.
- Rapid7 expects to adopt the new revenue-recognition standard in the first quarter of 2018 using a modified retrospective method. Management expects total revenue recognition to remain substantially unchanged but anticipates changes to professional-services allocation and capitalization of certain contract-commission costs.
- The company adopted ASU 2016-09 on January 1, 2017, resulting in a $0.1 million increase to accumulated deficit and a $3.4 million increase to gross deferred tax assets and the related valuation allowance.
- Key risks include continued operating losses, an accumulated deficit, dependence on sustained revenue growth and customer renewals, lower-margin cloud and managed-service expansion, intense competition, cybersecurity breaches or product defects, reliance on third-party hosting and software, international and foreign-exchange exposure, privacy and export-control compliance, intellectual-property litigation, and the potential need for additional capital.
- Rapid7 disclosed an ongoing lawsuit by a non-practicing entity alleging infringement of an expired patent. Management stated that ordinary-course litigation is not currently expected to have a material adverse effect, but outcomes cannot be predicted with certainty.
- Rapid7 recognized $0.9 million of sales and marketing expense for referral fees paid to McAfee LLC. A Rapid7 director became McAfee’s CFO in February 2017.
- Disclosure controls and procedures were assessed as effective at the reasonable-assurance level as of March 31, 2017, with no material change in internal control over financial reporting identified during the quarter.
Most Important Facts for Investors to Verify
- Whether revenue growth, calculated billings, deferred revenue and customer additions continue to support the company’s long-term path to profitability.
- Whether cloud and managed-service growth causes further gross-margin pressure.
- Whether renewal rates, particularly the 88% expiring revenue renewal rate, stabilize or decline.
- Whether positive operating cash flow is sustained without relying primarily on collections, working-capital movements or other timing effects.
- The extent of dilution from outstanding options, restricted stock units and future stock-based compensation; 7.97 million potentially dilutive securities were excluded from diluted share calculations because of the net loss.
- The eventual effects of revenue-recognition adoption, including the treatment of bundled professional services and sales commissions.
- Developments in the disclosed patent litigation, privacy and export-control matters, and any need for external financing.