Rapid7, Inc. annual report, FY2023

Rapid7, Inc. 2023 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2023. The filing is an annual Form 10-K, not a standalone fourth-quarter filing. Rapid7 provides cybersecurity software, managed services and professional services through an integrated security operations platform. The company reported more than 11,500 customers in 151 countries and operated as one reportable segment.

Key Financial Metrics

Metric	2023	2022	Change
Total revenue	$777.7 million	$685.1 million	13.5% increase
Product revenue	$740.2 million	$647.5 million	14.3% increase
Professional services revenue	$37.5 million	$37.5 million	Approximately flat
GAAP gross profit	$546.0 million	$470.7 million	Gross margin increased to 70.2% from 68.7%
GAAP loss from operations	$(80.7) million	$(111.6) million	Improved by $30.9 million
GAAP net loss	$(149.3) million	$(124.7) million	Loss increased by $24.5 million
GAAP net loss per share	$(2.46)	$(2.13)	Loss per share increased
Non-GAAP operating income	$102.2 million	$30.4 million	Non-GAAP margin increased to 13.1% from 4.4%
Adjusted EBITDA	$126.7 million	$49.4 million	Increased by $77.2 million
Net cash from operating activities	$104.3 million	$78.2 million	Increased by $26.1 million
Free cash flow	$84.0 million	$40.7 million	Increased by $43.4 million

Recurring and Operating Metrics

Recurring revenue represented 95% of total revenue, compared with 94% in 2022.
Annualized recurring revenue was $805.7 million, up 12.8% from $714.2 million.
Customers increased 5.5% to 11,526 from 10,929.
ARR per customer increased 7.0% to approximately $69,900.
Revenue from outside North America represented 22% of total revenue, compared with 21% in 2022.
Channel partners generated approximately 62% of revenue, compared with 57% in 2022.

Financial Position, Liquidity and Debt

Cash and cash equivalents were $213.6 million at December 31, 2023.
Available-for-sale investments totaled $225.7 million, consisting primarily of U.S. government agency securities and agency bonds.
Cash, cash equivalents and restricted cash totaled $214.1 million at year-end.
Convertible senior notes had a net carrying amount of approximately $930.0 million, comprising $46.0 million of 2025 Notes, $600.0 million of 2027 Notes and $300.0 million of 2029 Notes, net of issuance costs.
Rapid7 issued $300.0 million of 2029 Notes in September 2023 and used approximately $201.0 million of the proceeds to repurchase and retire $184.0 million of 2025 Notes.
The company had no borrowings outstanding under its $100.0 million revolving credit facility, with $8.8 million of letters of credit reducing available capacity. It was in compliance with all covenants.
Management stated that cash, investments, available borrowings and expected operating cash flow should meet operating and capital requirements for at least the next 12 months.
Operating lease liabilities totaled $94.6 million on a present-value basis, and non-cancellable purchase commitments totaled $185.7 million, primarily for cloud infrastructure and software subscriptions.

Material Changes Versus 2022

Revenue growth moderated to 13.5% from 28.0%, while ARR growth moderated to 12.8% from 19.2%.
Gross margin improved to 70.2% from 68.7%, driven primarily by scaling in products and lower professional-services personnel costs.
Research and development expense declined 6.9%, and sales and marketing expense increased 1.7%; both decreased as a percentage of revenue.
The company recorded $30.8 million of long-lived asset impairment charges related to idle office space and $22.2 million of restructuring expense.
In August 2023, Rapid7 approved a restructuring plan that reduced its workforce by approximately 16%. Execution was substantially complete by year-end, with $3.8 million of accrued restructuring liability remaining, expected to be paid by the end of the first quarter of 2024.
Interest expense increased to $64.7 million from $11.0 million, primarily because of a $53.9 million non-cash induced conversion expense related to the 2025 Notes repurchase.
Other expense increased to $14.5 million from $1.5 million, primarily reflecting a $15.5 million change in the fair value of derivative assets related to settlement of the 2023 capped calls.
Cash used in investing increased to $178.8 million, including $126.4 million of net investment purchases, $34.8 million for the Minerva Labs acquisition and $15.9 million of capitalized internal-use software costs.
Rapid7 acquired Minerva Labs on March 14, 2023, for aggregate consideration of approximately $34.6 million and recorded $20.7 million of goodwill. The acquisition was not material to reported revenue or net loss.

Outlook, Management Commentary and Risks

Management is emphasizing consolidated security operations offerings, integrated cloud security, managed services, strategic partnerships, customer expansion and international growth. The filing states that research and development, sales and marketing, and general and administrative expenses are expected to decline as a percentage of revenue in the near term, although the company expects to continue investing in product development and growth.

The company has incurred a net loss in every year since inception and had an accumulated deficit of approximately $1.0 billion at year-end. Profitability remains dependent on sustained revenue growth, renewals, upsells, cross-sells and realization of restructuring efficiencies.

Economic uncertainty may lengthen sales cycles, reduce IT spending, pressure renewals and lead to pricing or bundling concessions.
Customer retention and expansion are critical because most revenue is recurring and recognized over contract terms.
Competition is intense across SIEM, XDR, vulnerability management, cloud security, application security and managed security services, including from larger vendors with greater resources and bundling capabilities.
Cybersecurity incidents, service outages, product defects, false positives or failures to detect threats could cause reputational damage, customer losses, liability and higher costs.
Rapid7 faces evolving privacy, cybersecurity, AI, export-control and other regulatory requirements across multiple jurisdictions.
Debt obligations may constrain financial flexibility. The 2025 Notes mature in May 2025, the 2027 Notes in March 2027 and the 2029 Notes in March 2029; the filing states that the notes were not convertible at the holder’s option as of December 31, 2023.
Stock-based compensation remained significant at $108.1 million, and approximately $145.1 million of unrecognized compensation expense related to unvested RSUs and PSUs remained at year-end.
The company has substantial U.S. and foreign net operating loss carryforwards, but utilization is subject to expiration and ownership-change limitations.
Ordinary-course litigation was not expected to have a material adverse effect, although the filing notes that outcomes cannot be predicted with certainty.

Important Facts for Investors to Verify

Whether ARR growth, customer additions and ARR per customer stabilize or continue to decelerate.
Whether the restructuring produces sustainable expense savings without impairing sales execution, product development, customer support or employee retention.
Whether GAAP profitability improves after excluding restructuring, impairment, stock-based compensation, amortization and debt-related items.
The company’s ability to generate sufficient cash flow to service or refinance approximately $946 million of principal convertible debt, including the 2025 maturity.
Whether the higher channel-partner mix increases reach and growth or creates margin, pricing and partner-dependence risks.
Progress in integrating Minerva and converting acquired and internally developed technology into commercial growth.
Potential dilution from convertible notes, employee equity awards and capped-call settlement terms.
Changes in cybersecurity incidents, data-privacy obligations, AI regulation, litigation exposure and cloud infrastructure commitments.