Rapid7, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Rapid7 provides cybersecurity products and professional services through its Insight Platform, including vulnerability management, incident detection and response, application security, cloud security, security orchestration and automation, and threat intelligence. The filing covers the three and nine months ended September 30, 2021; results are unaudited and presented under U.S. GAAP.
Rapid7 reported 9,909 customers in 144 countries as of September 30, 2021, including 39% of the Fortune 100. Recurring revenue represented 92% of total revenue for both the quarter and nine-month period.
Financial Performance and Liquidity
| Metric | Q3 2021 | Q3 2020 | Change |
|---|---|---|---|
| Total revenue | $139.9 million | $105.1 million | 33.1% increase |
| Product revenue | $131.1 million | $98.6 million | 33.1% increase |
| Professional services revenue | $8.7 million | $6.5 million | 34.2% increase |
| Gross profit | $96.4 million | $74.0 million | 30.2% increase |
| Gross margin | 68.9% | 70.5% | Down 1.6 percentage points |
| Loss from operations | $(34.3) million | $(17.9) million | Loss increased |
| Net loss | $(37.7) million | $(25.5) million | Loss increased |
| GAAP net loss per share | $(0.67) | $(0.50) | Loss increased |
| Operating cash flow | $19.4 million | $11.1 million | Increase |
| Free cash flow | $14.3 million | $6.4 million | Increase |
| Metric | Nine Months 2021 | Nine Months 2020 | Change |
|---|---|---|---|
| Total revenue | $383.8 million | $298.3 million | 28.6% increase |
| Gross profit | $264.7 million | $210.5 million | 25.7% increase |
| Gross margin | 69.0% | 70.6% | Down 1.6 percentage points |
| Loss from operations | $(79.4) million | $(53.5) million | Loss increased |
| Net loss | $(101.7) million | $(69.9) million | Loss increased |
| Operating cash flow | $49.2 million | $4.3 million | Increase |
| Free cash flow | $37.2 million | $(7.2) million | Improved |
Annualized recurring revenue was $550.0 million, up 38.0% year over year. Customer count increased 17% year over year, and management reported non-GAAP income from operations of $5.7 million for the quarter and $13.7 million for the nine months. Adjusted EBITDA was $9.9 million for the quarter and $25.7 million for the nine months.
Cash and cash equivalents were $227.1 million at September 30, 2021. Short- and long-term investments totaled $82.5 million, and cash, cash equivalents and restricted cash totaled $227.5 million. The company reported an accumulated deficit of $691.4 million and stockholders’ deficit of $105.0 million.
Operating cash flow for the nine months benefited from increased deferred revenue, collections of accounts receivable and non-cash charges, including $73.9 million of stock-based compensation. Investing cash flow was $(307.9) million, primarily due to $358.4 million of cash used for acquisitions. Financing cash flow was $313.4 million, primarily reflecting issuance of the 2027 convertible notes.
Debt, Acquisitions and Other Material Changes
- Rapid7 issued $600.0 million aggregate principal amount of 0.25% convertible senior notes due 2027 and received approximately $585.0 million of net proceeds.
- It used cash and 2.2 million common shares to repurchase and retire approximately $182.6 million of 2023 convertible notes. The remaining $45.4 million principal amount of 2023 Notes was subject to redemption on November 30, 2021 and was classified as current.
- Net carrying value of convertible senior notes was $855.9 million at September 30, 2021, consisting of the 2023, 2025 and 2027 Notes. The 2023 and 2025 Notes were convertible at the holders’ option from October 1 through December 31, 2021; the 2027 Notes were not convertible as of September 30.
- The company had no borrowings under its $50.0 million revolving credit facility, had $7.6 million of outstanding letters of credit, and was in compliance with its covenants.
- Rapid7 acquired Alcide for approximately $50.5 million in January, Velocidex for approximately $3.0 million in April, and IntSights for aggregate fair value of approximately $322.2 million in July. IntSights contributed $3.8 million of Q3 revenue and $11.0 million of Q3 net loss.
- Goodwill increased to $515.3 million from $213.6 million at December 31, 2020, primarily from the Alcide and IntSights acquisitions. Intangible assets increased to $115.7 million from $44.3 million.
- Stock-based compensation expense was $29.2 million in Q3 and $73.9 million for the nine months, compared with $17.1 million and $46.9 million, respectively, in the prior-year periods. A modified stock award generated $3.1 million of expense in Q3 and the nine-month period.
- The company early adopted ASU 2020-06 on January 1, 2021, increasing reported debt and reducing stockholders’ equity through a cumulative-effect adjustment.
Material Changes Versus the Prior Comparable Period
- Revenue growth accelerated to 33.1% in Q3 from 26.4% in Q3 2020, supported primarily by existing-customer renewals, upsells and cross-sells; IntSights contributed $3.8 million of Q3 revenue.
- Gross margin declined to 68.9% from 70.5%, primarily due to higher cloud computing costs and amortization of acquired IntSights technology.
- Research and development expense increased 53.9% in Q3 and sales and marketing expense increased 30.1%, reflecting headcount and investment growth. General and administrative expense increased 58.7%, primarily due to acquisition-related and other professional fees.
- GAAP operating and net losses widened despite higher revenue. Non-GAAP operating income and adjusted EBITDA improved, but these measures exclude significant recurring stock-based compensation and other expenses.
- Interest expense declined because adoption of ASU 2020-06 reduced amortization of debt discounts, partially offset by higher debt issuance costs and the 2021 induced conversion expense.
- Cash generation improved materially, but acquisition spending and capitalized investments resulted in substantial investing cash outflows.
Guidance, Outlook, Commentary and Risks
The filing discusses publicly announced guidance and future expectations but does not provide a clear numerical update to revenue, ARR, profitability or cash-flow guidance in the supplied text. Management expects continued investment in research and development, sales and marketing, international expansion and general and administrative infrastructure. It also expects cost of revenue and operating expenses to increase in absolute dollars, with sales and marketing expected to decline as a percentage of revenue over time.
Management stated that existing cash, investments, available credit and operating cash flow are expected to satisfy working capital and capital expenditure requirements for at least the next 12 months. The company nevertheless expects to continue generating GAAP losses for the foreseeable future.
- COVID-19 effects remain uncertain and could affect sales cycles, renewals, customer spending, collections, operations and future results, although the company reported no significant disruption during the period.
- Rapid7 faces intense competition, dependence on customer renewals and expansions, and execution risk in integrating Alcide, Velocidex and IntSights.
- Cybersecurity incidents, product defects, service outages, third-party hosting or software failures, and misuse of security tools could damage reputation, reduce demand and create liabilities.
- Privacy, data-transfer, cybersecurity, export-control and other regulatory requirements may increase costs or restrict international operations.
- The company has significant convertible debt, including debt that may require cash settlement or create dilution upon conversion. The 2023 Notes redemption and the potential conversion of the 2025 Notes could affect liquidity and capitalization.
- Foreign-currency fluctuations, competition for personnel, acquisition-related charges, goodwill and intangible-asset impairment, and the pending Finjan patent litigation remain material contingencies.
Rapid7 disclosed that its disclosure controls and procedures were effective as of September 30, 2021 and that no material change in internal control over financial reporting occurred during the quarter.
Investor Verification Checklist
- Verify post-quarter settlement or redemption of the remaining 2023 Notes and any cash impact.
- Assess the conversion status and potential dilution associated with the 2025 and 2027 Notes, including the effect of capped-call transactions.
- Track IntSights integration, revenue contribution, losses, retention of acquired employees and achievement of expected synergies.
- Reconcile GAAP losses with non-GAAP income and adjusted EBITDA, particularly the recurring $73.9 million year-to-date stock-based compensation expense.
- Monitor ARR growth, customer renewals, expansion activity and the proportion of revenue from recurring offerings.
- Evaluate gross-margin pressure from cloud infrastructure costs and acquired-intangible amortization.
- Review liquidity after acquisition spending, debt obligations, lease commitments and potential litigation or tax payments.
- Follow developments in the Finjan patent litigation, COVID-19 impacts, cybersecurity incidents and applicable privacy regulations.