Rapid7, Inc. — Q2 2023 Form 10-Q Summary
Business Context and Reporting Period
Rapid7 provides cybersecurity software and services through its Insight Platform, including incident detection and response, cloud security, vulnerability risk management, application security, threat intelligence, and security orchestration. The filing covers the three and six months ended June 30, 2023, compared with the corresponding 2022 periods. Rapid7 reported more than 11,000 customers in 149 countries, with no customer representing more than 1% of revenue.
Key Financial Metrics
| Metric | Q2 2023 | Q2 2022 | Six Months 2023 | Six Months 2022 |
|---|---|---|---|---|
| Total revenue | $190.4 million | $167.5 million | $373.6 million | $324.8 million |
| Revenue growth | 13.7% | 32.5% | 15.0% | 33.2% |
| Gross profit | $132.3 million | $113.2 million | $259.4 million | $219.3 million |
| GAAP gross margin | 69.5% | 67.6% | 69.4% | 67.5% |
| Loss from operations | $(51.7) million | $(34.7) million | $(75.6) million | $(75.0) million |
| GAAP net loss | $(66.8) million | $(39.6) million | $(92.7) million | $(84.6) million |
| GAAP net loss per share | $(1.10) | $(0.68) | $(1.54) | $(1.46) |
| Non-GAAP operating income | $13.0 million | $3.5 million | $24.0 million | $(2.1) million |
| Non-GAAP operating margin | 6.8% | 2.1% | 6.4% | (0.7)% |
| Adjusted EBITDA | $19.1 million | $8.0 million | $35.9 million | $6.8 million |
| Free cash flow | $25.6 million | $(1.3) million | $24.4 million | $2.6 million |
Products generated $181.7 million of Q2 revenue, up 14.2%, while professional services generated $8.7 million, up 4.7%. Recurring revenue represented 95% of Q2 revenue and 94% of revenue for the first six months. ARR was $750.9 million at June 30, 2023, up 14.1% year over year. Customers increased 6.2% to 11,287, and ARR per customer increased 7.4% to $66.5 thousand.
Six-month operating cash flow was $37.1 million, compared with $17.9 million in the prior-year period. Cash, cash equivalents and restricted cash declined to $186.4 million from $207.8 million at December 31, 2022, primarily because of acquisition spending and net investment purchases. Cash and cash equivalents were $185.9 million, and investments totaled $110.0 million at June 30, 2023.
Debt consisted primarily of $229.99 million principal amount of 2.25% convertible notes due 2025 and $600.0 million principal amount of 0.25% convertible notes due 2027. The net carrying amount was $817.9 million. No revolving credit facility borrowings were outstanding; $9.8 million of letters of credit reduced availability under the $100 million facility. Rapid7 was in compliance with its covenants.
Material Changes Versus the Prior Comparable Period
- Revenue growth decelerated to 13.7% in Q2 and 15.0% for the first half, versus 32.5% and 33.2%, respectively, in 2022.
- Gross margin improved by approximately 190 basis points in Q2 and 190 basis points for the first half, reflecting operating scale and improved professional services economics.
- GAAP losses widened primarily because of a $27.2 million impairment charge related to idle Boston office space and a $12.7 million loss from the change in fair value of the 2023 capped-call derivative.
- Non-GAAP profitability improved materially after excluding stock-based compensation, amortization, the impairment, acquisition-related costs, debt issuance cost amortization, and capped-call valuation changes.
- Operating cash flow and free cash flow improved substantially, supported by collections and non-cash charges.
- Rapid7 acquired Minerva Labs on March 14, 2023, for aggregate consideration of $34.6 million, including $35.0 million of cash at closing, a purchase-price adjustment receivable, and equity issued to founders. The acquisition was not material to reported revenue or net loss.
Guidance, Outlook, Commentary, Risks and Unusual Items
The filing text does not provide a clear numerical revenue, ARR, margin, or earnings guidance range. Management expects research and development, sales and marketing, and general and administrative expenses to decline as percentages of revenue in the second half of 2023. Rapid7 states that its available cash, investments, credit facility and expected operating cash flow should satisfy operating and capital requirements for at least the next 12 months, while noting that additional financing may be required in the future.
On August 7, 2023, after the quarter-end, the board approved a restructuring plan reducing the workforce by approximately 18% and closing certain offices. Estimated charges are $24 million to $32 million, including approximately $22 million to $30 million of future cash outlays, with most charges expected in the third and fourth quarters of 2023. Additional office closures are expected to result in approximately $4 million of impairment charges. Execution is subject to local-law and consultation requirements.
Rapid7 received $17.5 million on August 3, 2023 from settlement of the 2023 capped calls. The filing identifies risks related to slower software spending, customer renewals and expansions, intense competition, cybersecurity incidents, cloud-service reliability, international operations and foreign exchange, privacy regulation, intellectual property claims, employee retention, restructuring execution, significant convertible debt, potential dilution, and continued GAAP losses.
The Finjan patent litigation was settled for an immaterial amount and dismissed on April 5, 2023. Management believes other ordinary-course litigation is not expected to have a material adverse effect, although outcomes cannot be predicted with certainty. Disclosure controls and procedures were considered effective as of June 30, 2023, and no material change in internal control over financial reporting was reported.
Most Important Facts for Investors to Verify
- Whether the restructuring plan delivers the expected cost savings without impairing product development, sales execution, customer retention, or growth.
- The timing and cash impact of the estimated $24 million to $32 million restructuring charges and approximately $4 million of additional office impairment.
- Whether ARR growth, customer additions, ARR per customer, renewals, upsells, and cross-sells remain consistent with the company’s growth objectives.
- The sustainability of positive free cash flow despite continuing GAAP losses and substantial recurring stock-based compensation.
- Liquidity and refinancing or settlement requirements for the $230 million 2025 notes and $600 million 2027 notes, including potential conversion-related cash needs or dilution.
- The integration and commercial contribution of Minerva Labs and the success of Rapid7’s broader platform-selling strategy.
- The effect of the capped-call settlement, foreign currency movements, interest rates, and future non-recurring valuation or impairment charges on reported results.