Rapid7, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2022; filed November 3, 2022. Rapid7 provides cybersecurity software and services through its Insight Platform, including vulnerability management, incident detection and response, cloud security, application security, threat intelligence, and security orchestration. The company had 10,791 customers in 144 countries as of September 30, 2022.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Total revenue | $175.8 million | $139.9 million | $500.6 million | $383.8 million |
| Revenue growth | 25.6% | 33.1% | 30.4% | 28.6% |
| Gross profit | $121.9 million | $96.4 million | $341.2 million | $264.7 million |
| Gross margin | 69.4% | 68.9% | 68.2% | 69.0% |
| Loss from operations | $(23.2) million | $(34.3) million | $(98.3) million | $(79.4) million |
| Net loss | $(28.7) million | $(37.7) million | $(113.3) million | $(101.7) million |
| Net loss per share | $(0.49) | $(0.67) | $(1.95) | $(1.86) |
| Cash flow from operations | $20.1 million | $19.4 million | $38.0 million | $49.2 million |
| Free cash flow | $9.7 million | $14.3 million | $12.2 million | $37.2 million |
Products revenue increased 27.0% in the quarter and 32.0% year to date; professional services revenue increased 6.0% and 7.3%, respectively. Recurring revenue represented 94% of total revenue, compared with 92% in the comparable periods. Annualized recurring revenue was $683.8 million, up 24.3% year over year, while customer count increased 9% year over year.
Non-GAAP income from operations was $13.0 million in Q3 and $10.9 million for the first nine months, compared with $5.7 million and $13.7 million, respectively, in 2021. Adjusted EBITDA was $17.9 million in Q3 and $24.7 million year to date. These measures exclude significant recurring stock-based compensation; stock-based compensation expense was $31.0 million in Q3 and $92.3 million year to date.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $168.4 million at September 30, 2022. Short- and long-term investments totaled $99.9 million.
- Cash, cash equivalents and restricted cash increased modestly to $168.9 million from $165.0 million at December 31, 2021.
- Convertible senior notes had a net carrying value of $814.9 million, consisting principally of $230.0 million of 2025 Notes and $600.0 million of 2027 Notes. The notes are senior unsecured obligations with no financial covenants.
- The $100.0 million revolving credit facility had no borrowings outstanding; $9.8 million of letters of credit reduced availability. Rapid7 was in compliance with its covenants.
- Stockholders’ deficit was $(142.3) million, compared with $(126.0) million at December 31, 2021. Accumulated deficit was $849.4 million.
- Management stated that existing liquidity, available credit and expected operating cash flow should meet operating and capital requirements for at least the next 12 months, although the company expects to remain loss-making for the foreseeable future.
Material changes versus the prior comparable period
- Revenue growth remained strong but decelerated to 25.6% in Q3 from 33.1% in Q3 2021; year-to-date growth increased to 30.4% from 28.6%.
- Q3 operating and net losses narrowed, but nine-month losses increased because operating expenses grew faster than gross profit.
- Q3 gross margin improved slightly, while nine-month gross margin declined to 68.2%, primarily due to a greater mix of cloud subscriptions and managed services and higher professional-services personnel costs.
- Sales and marketing expense increased 20.5% in Q3 and 31.5% year to date. Research and development increased 10.8% in Q3 and 31.2% year to date.
- General and administrative expense decreased 13.7% in Q3, primarily because of lower acquisition-related and professional consulting expenses, but increased 9.5% year to date.
- Operating cash flow declined $11.3 million year to date, and free cash flow declined $25.0 million, despite revenue growth.
- The company entered into a 36-month AWS cloud infrastructure agreement beginning April 1, 2022, with a total commitment of $300.0 million.
Outlook, risks and unusual items
The filing does not provide a clear numerical revenue, profitability or ARR guidance figure. Management continues to emphasize growth in existing-customer renewals, upsells and cross-sells, expansion of cloud-based offerings, international growth, and investment in product development and sales capacity.
- Rapid7 reported continuing GAAP losses and expects additional investments in research and development, sales and marketing, international expansion, infrastructure and potential acquisitions.
- COVID-19, macroeconomic uncertainty, inflation, higher interest rates, foreign exchange volatility and the Russia-Ukraine war may affect demand, renewals, sales cycles and operating costs. The company reported no significant COVID-19 disruption during the period but stated that future effects remain uncertain.
- Foreign currency losses increased other expense by $2.2 million in Q3 and $5.2 million year to date. The company uses forward contracts to hedge certain foreign-currency expenses.
- Rapid7 faces competition across its product categories and depends substantially on customer renewals, expansion within existing accounts, continued adoption of cloud offerings and successful execution of its consolidated platform sales strategy.
- Cybersecurity incidents, product defects, service outages, third-party hosting or software failures, data privacy regulation and intellectual-property claims could materially affect results and reputation.
- Finjan patent litigation remains outstanding. The filing states that the outcome and potential liability are uncertain; no clear loss amount is provided.
- Convertible-note conversions, redemptions or a fundamental change could require significant cash payments or cause shareholder dilution. As of September 30, 2022, the 2025 and 2027 Notes were not convertible at the holder’s option.
Important facts for investors to verify
- Whether ARR growth, customer additions and renewal, upsell and cross-sell rates remain resilient as reported revenue growth moderates.
- The effect of the $300.0 million AWS commitment and rising cloud infrastructure costs on future gross margins and free cash flow.
- The company’s path toward GAAP profitability and the sustainability of positive operating cash flow after excluding stock-based compensation and other non-cash items.
- Liquidity and refinancing capacity ahead of the 2025 and 2027 convertible-note maturities, including potential conversion or redemption obligations.
- Progress and costs associated with integrating acquired technologies, particularly IntSights, and the risk of goodwill or intangible-asset impairment.
- Developments in the Finjan patent litigation, cybersecurity incidents, data-privacy compliance and other disclosed contingencies.