Rapid7, Inc. — Q1 2020 Form 10-Q Summary
Business context and reporting period
Rapid7 provides cybersecurity software and services through its Insight Platform, including vulnerability risk management, incident detection and response, application security, security orchestration and automation, and professional services. The filing covers the three months ended March 31, 2020, with comparative results for the three months ended March 31, 2019. Rapid7 reported more than 9,000 customers in 141 countries as of March 31, 2020.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Total revenue | $94.3 million | $73.2 million | 28.9% increase |
| Products revenue | $87.5 million | $65.8 million | 33.0% increase |
| Professional services revenue | $6.8 million | $7.3 million | 7.5% decrease |
| Gross profit | $66.6 million | $53.2 million | 25.2% increase |
| Gross margin | 70.6% | 72.7% | Decreased 210 bps |
| Loss from operations | $(19.8) million | $(9.7) million | Loss increased |
| Net loss | $(22.9) million | $(11.7) million | Loss increased |
| Net loss per share | $(0.46) | $(0.24) | Loss increased |
| Operating cash flow | $(7.2) million | $(13.6) million | Improved by $6.4 million |
| Non-GAAP operating income/(loss) | $(3.9) million | $0.6 million | Declined |
| Adjusted EBITDA | $(0.8) million | $2.6 million | Declined |
Subscription revenue was $68.6 million, up from $47.0 million. Recurring revenue represented 90% of total revenue, compared with 85% in the prior-year quarter. Annualized recurring revenue was $350.9 million, up 30.8% year over year. The customer count increased 14% to 9,024, while the reported renewal rate declined to 106% from 117%.
Operating expenses were $86.4 million, or 91.6% of revenue, compared with $63.0 million, or 85.9%, in the prior-year quarter. Research and development, sales and marketing, and general and administrative expense increased 35.5%, 37.0%, and 41.7%, respectively. Stock-based compensation increased to $13.3 million from $8.6 million.
Liquidity, debt and cash flow
- Cash and cash equivalents were $204.4 million at March 31, 2020, compared with $123.4 million at December 31, 2019.
- Short- and long-term investments totaled $49.2 million at March 31, 2020, down from $139.0 million at year-end 2019, primarily reflecting investment sales and maturities.
- Net cash used in operating activities was $7.2 million. Investing activities provided $85.4 million, principally from $113.9 million of investment sales and maturities. Financing activities provided $3.4 million.
- The company had $230.0 million principal amount of 1.25% convertible senior notes due 2023, carried at $187.9 million net on the balance sheet. The notes had a quoted fair value of $278.7 million at March 31, 2020.
- Operating lease liabilities totaled $80.5 million. Accumulated deficit was $541.4 million.
- Management stated that existing cash, investments and available borrowing capacity were expected to satisfy working capital and capital expenditure requirements for at least the next 12 months.
Material changes versus the prior comparable period
- Revenue growth remained strong, but slowed to 28.9% from 34.2% in Q1 2019.
- Growth was driven primarily by existing customers, which contributed $20.1 million of the $21.2 million year-over-year revenue increase; new customers contributed $1.1 million.
- Products revenue increased substantially, while professional services revenue declined as customers rescheduled services in response to COVID-19.
- Gross margin declined because cloud-based subscriptions and managed services generally carry lower margins than licensed software, and professional services utilization weakened.
- Operating losses widened as the company continued investing in personnel, research and development, sales and marketing, infrastructure and related overhead.
- Operating cash flow improved year over year, but remained negative and was affected by seasonal reductions in deferred revenue and accrued expenses.
Guidance, outlook, risks and unusual items
Rapid7 did not provide a clear numerical full-year outlook in the filing text. Management expects COVID-19 to negatively affect operating and financial performance during 2020 and beyond. The company shifted to a virtual sales model, allowed most employees to work remotely, slowed hiring and reduced discretionary spending. Management stated that the pandemic could delay sales cycles, reduce renewals or subscription scope, increase requests for payment deferrals or concessions, and affect future ARR. The company expected Q2 2020 ARR to be lower than initially anticipated.
Subsequent to quarter-end, Rapid7 acquired DivvyCloud on May 1, 2020 for approximately $130.8 million in cash at closing, $7.4 million of deferred cash payments, shares to be issued to the founders and approximately $12.0 million of restricted stock units for certain employees. On the same date, Rapid7 issued $230.0 million of 2.25% convertible senior notes due 2025, generating approximately $223.2 million of net proceeds before the $27.3 million cost of capped calls. On April 23, 2020, it entered into a three-year $30.0 million revolving credit facility, expandable to $70.0 million; no borrowings were outstanding as of May 8, 2020.
Material risks include the uncertain duration and economic effects of COVID-19, continued operating losses, dependence on subscription renewals and vulnerability management offerings, intense competition, cybersecurity and service reliability incidents, reliance on third-party infrastructure including AWS, privacy and data protection regulation, foreign currency exposure, acquisition integration, substantial convertible debt, potential dilution, and the pending Finjan patent litigation. The filing states that the Finjan matter remains in an early stage and that the outcome and any liability are uncertain.
Most important facts for investors to verify
- Whether COVID-19-related delays, concessions and lower customer spending caused the expected Q2 ARR reduction and affected renewal rates.
- Whether recurring revenue and subscription growth can offset declining professional services and lower subscription-related gross margins.
- The pace at which Rapid7 can reduce operating losses and reach sustainable positive operating cash flow, excluding the effects of non-cash compensation and amortization.
- The post-acquisition financial contribution, integration costs and potential goodwill or intangible-asset risks associated with DivvyCloud.
- Liquidity after the DivvyCloud acquisition, the 2025 notes issuance and capped-call purchase, including compliance with the revolving facility’s minimum liquidity and recurring-revenue covenants.
- Potential cash settlement, refinancing requirements or equity dilution associated with the 2023 and 2025 convertible notes.
- The status, costs and potential exposure from the Finjan patent litigation and other intellectual-property claims.