Rapid7, Inc. 2020 Form 10-K Summary
Business context and reporting period
Rapid7 provides cybersecurity software, cloud subscriptions, managed services, professional services, and research through its Insight Platform. Offerings address vulnerability risk management, incident detection and response, application security, cloud security, and security orchestration and automation. The filing covers the fiscal year ended December 31, 2020, including fourth-quarter results.
- Customers: 9,736 at December 31, 2020, up 7.9% from 9,022.
- Operations in 144 countries; 46% of Fortune 100 organizations were customers.
- Employees: 1,847 full-time employees at year-end.
- Recurring revenue represented 90% of total 2020 revenue, compared with 87% in 2019.
Financial performance and key metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Total revenue | $411.5 million | $326.9 million | +25.9% |
| Product revenue | $382.9 million | $297.9 million | +28.5% |
| Professional services revenue | $28.6 million | $29.1 million | -1.7% |
| Gross profit | $290.0 million | $235.8 million | +23.0% |
| Gross margin | 70.5% | 72.1% | -160 basis points |
| Loss from operations | $(74.1) million | $(46.0) million | Loss increased |
| Net loss | $(98.8) million | $(53.8) million | Loss increased |
| Net loss per share | $(1.94) | $(1.10) | Loss increased |
| Operating cash flow | $4.9 million | $(1.4) million | Improved |
| Non-GAAP operating income | $2.0 million | $2.4 million | Declined |
| Adjusted EBITDA | $15.5 million | $12.5 million | Improved |
| Annualized recurring revenue | $432.9 million | $338.7 million | +27.8% |
Subscription revenue was $304.7 million, up from $220.6 million, while term and perpetual software license revenue increased to $46.0 million from $38.9 million. Maintenance and support revenue declined to $31.6 million from $36.8 million. Fourth-quarter 2020 revenue was $113.2 million, compared with $91.6 million in the fourth quarter of 2019; fourth-quarter net loss was $28.9 million, compared with $14.3 million.
Product gross margin declined to 74.7% from 77.1%, primarily because of increased mix from cloud subscriptions and managed services. Professional services gross margin declined to 13.7% from 20.9%, reflecting lower services revenue and COVID-19-related delays. Stock-based compensation expense increased to $63.9 million from $40.7 million.
Liquidity, debt, and capital resources
- Cash and cash equivalents: $173.6 million at December 31, 2020, compared with $123.4 million.
- Short- and long-term investments: $149.0 million; total cash, cash equivalents, and investments were approximately $322.6 million.
- Total debt carrying value: $378.6 million; aggregate principal of convertible notes was $460.0 million.
- The notes comprise $230.0 million of 1.25% convertible senior notes due 2023 and $230.0 million of 2.25% convertible senior notes due 2025.
- The 2023 Notes became conditionally convertible from January 1 through March 31, 2021; the 2025 Notes were not convertible at the holder’s option as of year-end.
- A revolving credit facility was increased to $50.0 million. No borrowings were outstanding at year-end; $8.1 million of letters of credit reduced availability.
- Contractual obligations totaled $741.3 million, including $460.0 million of note principal, $111.1 million of operating lease payments, and $138.3 million of non-cancellable purchase obligations.
Management stated that cash, investments, operating cash flow, and available borrowings were expected to satisfy working-capital and other liquidity requirements for at least the next 12 months. The company nevertheless reported an accumulated deficit of $617.3 million and expects to continue generating losses for the foreseeable future.
Material changes versus the prior comparable period
- Revenue growth decelerated to 25.9% from 33.9%, while ARR growth was 27.8% versus 34.5%.
- Customers increased 7.9%, compared with 15.5% growth in 2019.
- Operating loss widened by $28.1 million and net loss widened by $45.0 million, despite higher revenue.
- Interest expense increased by $10.7 million because of the 2025 Notes and related non-cash debt discount amortization.
- Operating cash flow improved by $6.3 million and turned positive, aided in part by a $37.4 million increase in deferred revenue.
- Rapid7 acquired DivvyCloud on May 1, 2020 for aggregate consideration of approximately $137.8 million. DivvyCloud contributed $6.3 million of revenue and $18.5 million of net loss in 2020.
- Cash used for investing activities was $156.3 million, including $125.8 million for the DivvyCloud acquisition.
- Channel partners generated 47% of 2020 sales, up from 43% in 2019.
Guidance, outlook, commentary, risks, and unusual items
The filing does not provide a clear numerical outlook for 2021 revenue, ARR, margins, or earnings. Management expects continued investment in research and development, sales and marketing, international expansion, infrastructure, and acquisitions, and expects operating expenses to rise in absolute dollars. The company does not expect to achieve profitability in the near term based on its stated investment plans and history of losses.
- COVID-19 negatively affected 2020 operating and financial performance, including professional services scheduling, sales cycles, customer spending, travel, and in-person marketing. Management expects uncertainty and potential effects to continue.
- Customer renewal rate was 103% for the quarter ended December 31, 2020, down from 108% in the comparable 2019 quarter.
- Cloud migration and the shift toward subscriptions support recurring revenue growth but may reduce gross margins relative to licensed software.
- Cybersecurity incidents, product defects, service outages, cloud-provider dependence, and failures to detect threats could result in customer losses, liability, and reputational damage.
- Competition is intense across all product categories, including from larger vendors with greater financial, technical, sales, and distribution resources.
- Rapid7 faces execution and integration risks related to DivvyCloud and the January 28, 2021 acquisition of Alcide.IO for approximately $50 million in cash.
- Finjan, Inc. is pursuing patent-infringement claims involving seven patents. Potential damages, fees, injunctive relief, and the ultimate outcome are uncertain.
- Privacy and data-transfer regulations, including GDPR, UK GDPR, CCPA, and post-Privacy Shield transfer requirements, may increase compliance costs and restrict operations.
- Convertible debt creates refinancing, liquidity, conversion, dilution, and cash-repayment risks. The company also faces potential interest-rate and LIBOR-transition risks.
- Foreign currency exposure was partially hedged beginning in the third quarter of 2020; outstanding forward contracts had a $12.5 million notional value at year-end.
- As of year-end, management and the independent auditor concluded that internal control over financial reporting was effective.
Important facts for investors to verify
- Whether ARR growth, renewal rates, customer additions, and subscription adoption stabilize or continue to decelerate.
- Whether cloud and managed-service mix produces sustained gross-margin pressure or eventual operating leverage.
- The company’s ability to fund $460.0 million of convertible-note principal and comply with credit-facility covenants.
- The cash impact and integration results of the DivvyCloud and Alcide acquisitions.
- The ongoing financial and legal exposure from the Finjan patent litigation and other indemnification obligations.
- The duration and effect of COVID-19 on customer spending, renewals, collections, professional services, and sales cycles.
- The extent to which stock-based compensation, non-cash debt amortization, and other adjustments explain the difference between GAAP losses and non-GAAP profitability.
- The company’s ability to utilize federal, state, and foreign net operating losses, which may be limited by future taxable income and ownership changes.