Business Context and Reporting Period
Rapid7, Inc. provides cybersecurity products and services through its Insight Platform, including incident detection and response, cloud security, vulnerability risk management, application security, threat intelligence, and security orchestration and automation. The unaudited Form 10-Q covers the three and six months ended June 30, 2022, compared with the corresponding 2021 periods.
Rapid7 reported 10,624 customers as of June 30, 2022, serving customers in 141 countries. Recurring revenue represented 94% of total revenue in both the quarter and six-month period. No customer represented more than 1% of revenue.
Financial Performance and Position
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Total revenue | $167.5 million, up 32.5% | $324.8 million, up 33.2% |
| Product revenue | $159.1 million, up 33.6% | $308.1 million, up 34.9% |
| Professional services revenue | $8.3 million, up 14.6% | $16.7 million, up 8.1% |
| Gross profit | $113.2 million | $219.3 million |
| Gross margin | 67.6%, versus 68.9% | 67.5%, versus 69.0% |
| Loss from operations | $(34.7) million | $(75.0) million |
| Net loss | $(39.6) million, or $(0.68) per share | $(84.6) million, or $(1.46) per share |
| Non-GAAP income (loss) from operations | $3.5 million | $(2.1) million |
| Adjusted EBITDA | $8.0 million | $6.8 million |
| Free cash flow | $(1.3) million | $2.6 million |
Operating expenses for the quarter were $147.8 million, including research and development of $48.9 million, sales and marketing of $78.0 million, and general and administrative expense of $20.9 million. Six-month operating expenses were $294.3 million. Stock-based compensation was $32.4 million for the quarter and $61.3 million for the six months.
Annualized recurring revenue was $658.2 million, up 34.6% year over year. Customer count increased 14% year over year. The filing does not provide a clear dollar value for bookings or retention rates.
As of June 30, 2022, Rapid7 had $163.5 million of cash and cash equivalents and $90.6 million of short- and long-term investments. Cash, cash equivalents and restricted cash totaled $166.2 million. The company generated $17.9 million of operating cash flow in the first six months, compared with $29.8 million in the prior-year period.
Convertible senior notes had a net carrying value of $814.0 million, consisting primarily of $230.0 million principal amount due 2025 and $600.0 million due 2027. The fair values of the notes were $292.9 million and $540.6 million, respectively. Rapid7 had no borrowings under its $100.0 million revolving credit facility, but $9.8 million of letters of credit reduced available capacity. The company was in compliance with all credit facility covenants.
Total assets were $1.29 billion and stockholders’ deficit was $148.2 million at June 30, 2022. The accumulated deficit was $820.6 million.
Material Changes Versus the Prior Comparable Period
- Revenue growth accelerated to 32.5% in the second quarter and 33.2% for the first six months, supported primarily by renewals, upsells and cross-sells to existing customers.
- IntSights contributed $8.1 million of second-quarter revenue and $15.0 million of six-month revenue. The acquisition also contributed $10.4 million and $21.3 million of net loss, respectively.
- Gross margin declined 130 basis points in the quarter and 150 basis points for the six months, primarily due to higher amortization of acquired technology, increased stock-based compensation, cloud costs and personnel costs.
- Operating losses widened to $34.7 million for the quarter and $75.0 million for the six months, as research and development and sales and marketing investments grew faster than revenue.
- Operating cash flow declined by $11.9 million for the six months, while free cash flow declined by $20.3 million, primarily reflecting higher operating investments and capitalized internal-use software costs.
- Interest expense decreased year over year because the 2023 convertible notes were largely repurchased or retired in 2021 and the prior period included a $2.7 million induced conversion expense.
- Other expense increased due primarily to realized and unrealized foreign currency losses related to the euro and British pound sterling.
- The company entered into a 36-month AWS cloud infrastructure agreement beginning April 1, 2022, with a total commitment of $300.0 million.
Guidance, Outlook, Commentary, Risks and Unusual Items
The filing discusses the company’s ability to meet publicly announced guidance but does not provide clear numerical quarterly or full-year guidance in the filing text. Management expects continued investment in research and development, sales and marketing, international expansion, infrastructure and general and administrative capabilities. Management stated that existing cash, investments, available borrowing capacity and expected operating cash flow should be sufficient for at least the next 12 months.
Key risks include continued GAAP losses, substantial convertible debt, possible future cash requirements for debt repayment or conversion, customer renewal and expansion risk, intense competition, dependence on cybersecurity talent, cloud infrastructure and third-party providers, foreign currency volatility, privacy and cybersecurity regulation, and potential service outages or security breaches.
Rapid7 has ongoing patent litigation with Finjan, Inc. alleging infringement of seven patents. The potential liability and outcome remain uncertain, and the filing does not provide a clear estimate of possible damages.
The company reported no significant COVID-19 disruption during the period but continues to identify uncertainty regarding demand, sales cycles, renewals, customer spending and broader economic conditions. The company also identified potential effects from the Russia-Ukraine conflict, inflation, increased interest rates and macroeconomic volatility.
Unusual or non-recurring items affecting comparability included IntSights acquisition-related activity, acquired-intangible amortization, substantial stock-based compensation, foreign currency losses, prior-year acquisition and litigation expenses, and the prior-year induced conversion expense.
Important Facts for Investors to Verify
- Whether ARR growth and customer additions translate into sustained GAAP revenue growth and improved operating leverage.
- The durability of customer renewal, upsell and cross-sell trends, particularly as recurring contracts renew under potentially weaker economic conditions.
- The effect of the $300.0 million AWS commitment on future gross margins, cash flow and liquidity.
- The company’s path toward profitability given the $84.6 million six-month net loss, $61.3 million of stock-based compensation and continued elevated sales and research spending.
- Liquidity and refinancing requirements for the $230.0 million 2025 notes and $600.0 million 2027 notes, including potential conversion or redemption obligations.
- Integration and performance of IntSights, including its reported net loss contribution and acquired goodwill and intangible assets.
- The outcome and potential financial exposure from the Finjan patent litigation.
- Exposure to foreign currency losses, cloud-service dependencies, cybersecurity incidents, privacy regulation and competitive pressure.