Rapid7, Inc. Form 10-Q Summary
Business Context and Reporting Period
Rapid7 provides analytics-driven cybersecurity and IT operations solutions, including threat exposure management, incident detection and response, managed services, cloud subscriptions, licensed software, and professional services. This unaudited report covers the three and six months ended June 30, 2017, compared with the same periods in 2016.
As of June 30, 2017, Rapid7 had 6,559 customers in 123 countries, including 39% of the Fortune 1000. No customer represented more than 2% of revenue. Recurring revenue represented 70% of second-quarter revenue and 69% for the first six months.
Financial Performance and Key Metrics
| Metric | Q2 2017 | Q2 2016 | Six Months 2017 | Six Months 2016 |
|---|---|---|---|---|
| Total revenue | $47.4 million | $37.3 million | $92.7 million | $72.1 million |
| Revenue growth | 27.3% | 44.5% | 28.6% | 46.0% |
| Gross profit | $34.4 million | $28.0 million | $67.3 million | $54.1 million |
| Gross margin | 72.4% | 75.1% | 72.7% | 75.0% |
| Loss from operations | $(11.9) million | $(13.3) million | $(22.4) million | $(28.9) million |
| Operating margin | (25.1)% | (35.6)% | (24.1)% | (40.1)% |
| Net loss | $(11.6) million | $(13.5) million | $(22.2) million | $(29.0) million |
| Net loss per share | $(0.27) | $(0.33) | $(0.52) | $(0.71) |
| Calculated billings | $60.2 million | $50.1 million | $104.1 million | $86.5 million |
| Operating cash flow | $(4.0) million | $1.9 million | $(0.7) million | $0.3 million |
- Q2 revenue consisted of products of $27.2 million, maintenance and support of $11.3 million, and professional services of $8.9 million.
- Six-month revenue consisted of products of $53.1 million, maintenance and support of $22.1 million, and professional services of $17.4 million.
- Stock-based compensation was $5.2 million in Q2 and $9.5 million for the first six months.
- Non-GAAP net loss was $5.9 million, or $0.14 per share, in Q2, and $11.7 million, or $0.28 per share, for the first six months. These measures exclude stock-based compensation, amortization of acquired intangibles, and acquisition-related expenses.
Liquidity, Capital Resources, and Balance Sheet
- Cash and cash equivalents were $53.1 million at June 30, 2017, compared with $53.1 million at December 31, 2016.
- Short- and long-term investments totaled approximately $40.0 million, bringing cash, cash equivalents, and investments to approximately $93.1 million.
- Deferred revenue was $180.4 million, including $126.1 million current and $54.3 million non-current, compared with $169.1 million at December 31, 2016.
- Total liabilities were $207.2 million and stockholders’ equity was $34.6 million. The filing does not report outstanding debt or borrowings; liabilities are primarily deferred revenue and operating obligations.
- Six-month investing cash outflow was $4.1 million, including $2.6 million of capital expenditures, $0.3 million of capitalized internal-use software, and net investment purchases of $1.2 million.
- Six-month financing cash inflow was $4.6 million, principally from stock option exercises and employee stock purchases, partially offset by a $0.8 million deferred acquisition payment.
- Management stated that existing cash, investments, and expected operating cash generation should satisfy working-capital and capital-expenditure requirements for at least the next 12 months, although the company expects continued losses and may require additional capital in the future.
Material Changes Versus the Prior Comparable Period
- Revenue increased 27.3% in Q2 and 28.6% for the first six months, although growth decelerated from the prior-year comparable rates of 44.5% and 46.0%.
- Revenue growth reflected both new and existing customers. In Q2, approximately $5.1 million of the increase came from new customers and $5.1 million from existing customers. For the six-month period, the increases were approximately $11.4 million and $9.2 million, respectively.
- Gross margin declined by 270 basis points in Q2 and 230 basis points for the six-month period, primarily because cloud-based subscriptions and managed services carry lower margins than licensed software.
- Operating losses improved by $1.4 million in Q2 and $6.5 million for the first six months, mainly because operating expenses grew more slowly than revenue and prior-year acquisition-related and departmental costs did not recur.
- Sales and marketing expense rose 25.1% in Q2 and 16.9% for the first six months as the company expanded its sales organization, commissions, marketing activities, and infrastructure.
- Research and development expense declined 8.2% in Q2 and 7.9% for the first six months, partly reflecting prior-year acquisition-related bonuses and capitalization of certain internal-use software costs.
- Operating cash flow changed from $1.9 million provided in Q2 2016 to $4.0 million used in Q2 2017, and from $0.3 million provided to $0.7 million used for the six-month period.
- The Q2 renewal rate was 119%, compared with 126% in Q2 2016; the expiring renewal rate was 88%, compared with 89%.
- Deferred revenue increased to $180.4 million from $144.7 million a year earlier, supporting future revenue visibility.
Guidance, Outlook, Risks, and Unusual Items
- The filing does not provide clear quantitative revenue, earnings, or cash-flow guidance. Management expects continued investment in research and development, sales and marketing, international expansion, professional services, and infrastructure.
- Management expects gross margins to decrease slightly as cloud-based subscription revenue becomes a larger portion of the business. It expects operating expenses to increase in absolute dollars but generally decline as a percentage of revenue.
- Rapid7 expects to continue generating losses for the foreseeable future and maintained full valuation allowances on U.S., U.K., and Ireland deferred tax assets.
- On July 12, 2017, after quarter-end, Rapid7 acquired Komand, Inc. for $14.8 million in cash. Certain retained employees received 295,600 restricted stock units and may receive up to $5.0 million of milestone-based incentive payments over four years.
- Rapid7 adopted ASU 2016-09 for stock-based compensation on January 1, 2017, increasing accumulated deficit by $0.1 million and gross deferred tax assets and related valuation allowances by $3.4 million.
- Rapid7 plans to adopt the new revenue recognition standard, ASC 606, in the first quarter of 2018 using the modified retrospective method. Management expects total revenue recognition to remain substantially unchanged but anticipates changes in timing and presentation for certain perpetual licenses, professional services, and commission costs.
- Key risks include continued operating losses, decelerating growth, lower margins from cloud offerings, customer renewal variability, intense competition, reliance on Nexpose and Metasploit, cybersecurity and service outages, third-party hosting dependencies, international and foreign-exchange exposure, privacy and export regulations, intellectual-property litigation, acquisition integration, and the need for additional capital.
- The company disclosed an ongoing lawsuit by a non-practicing entity alleging infringement of an expired patent. Management states ordinary-course litigation is not currently expected to have a material adverse effect, but outcomes cannot be predicted with certainty.
- Disclosure controls and procedures were assessed as effective at the reasonable assurance level as of June 30, 2017, with no material change in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Whether revenue growth can remain near current levels as year-over-year growth has decelerated and renewal rates have declined.
- Whether the shift toward cloud subscriptions and managed services produces the expected recurring-revenue benefits without further substantial gross-margin pressure.
- Progress toward operating-cash-flow breakeven and the company’s cash runway after the $14.8 million Komand acquisition and related contingent consideration.
- The effect of ASC 606 adoption in 2018 on revenue timing, deferred revenue, professional-services presentation, and commission capitalization.
- The sustainability of non-GAAP improvements given recurring stock-based compensation of $9.5 million in the first six months.
- Integration results and accounting impacts from the Komand acquisition, including the potential $5.0 million of contingent employee payments.
- Exposure to cybersecurity incidents, cloud-provider outages, privacy regulation, export controls, foreign-currency movements, and intellectual-property claims.