Rapid7, Inc. 10-Q Summary
Business Context and Reporting Period
Rapid7 provides security and IT analytics and automation solutions, including vulnerability management, incident detection and response, SIEM, application security, log analytics, managed services and professional services. The filing covers the three months ended March 31, 2018, compared primarily with the three months ended March 31, 2017. Rapid7 reported more than 7,100 customers in 128 countries, including 55% of the Fortune 100, and operated as one reportable segment.
Key Financial Metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $54.5 million | $45.2 million | 20.5% increase |
| Gross profit | $37.9 million | $33.0 million | 14.9% increase |
| Gross margin | 69.6% | 72.9% | Down 3.3 percentage points |
| Loss from operations | $(16.6) million | $(10.5) million | Loss increased |
| Net loss | $(16.4) million | $(10.5) million | Loss increased |
| Net loss per share | $(0.36) | $(0.25) | Loss per share increased |
| Operating cash flow | $7.3 million | $3.3 million | Increased $4.0 million |
| Annualized recurring revenue | $177.8 million | $128.4 million | 38.1% increase |
Products revenue increased 36.0% to $35.3 million, while maintenance and support revenue declined 0.5% to $10.8 million and professional services revenue declined 0.2% to $8.5 million. Recurring revenue represented 77% of total revenue under ASC 606, compared with 69% in Q1 2017. The company reported a 120% renewal rate and an 89% expiring renewal rate for Q1 2018.
Operating expenses totaled $54.5 million, or 100.0% of revenue, compared with 96.0% in Q1 2017. Research and development increased 46.8% to $16.7 million, sales and marketing increased 17.1% to $29.1 million, and general and administrative expense increased 20.5% to $8.7 million. Stock-based compensation was $6.2 million, compared with $4.3 million in the prior-year period.
Cash and cash equivalents were $99.6 million at March 31, 2018, and short- and long-term investments totaled $30.7 million. Total assets were $320.5 million and total liabilities were $246.5 million. Deferred revenue totaled $218.9 million. The filing does not report outstanding debt. Stockholders’ equity was $73.9 million, while accumulated deficit was $425.4 million.
Material Changes Versus the Prior Comparable Period
- Revenue growth slowed to 20.5% from the prior-year growth rate of 30.0%, partly because Q1 2018 revenue was reported under ASC 606 and Q1 2017 under ASC 605.
- Management attributed the revenue increase to $2.7 million from new customers and $10.3 million from existing customers, partially offset by a $3.7 million reduction attributable to ASC 606.
- Gross margin declined because of a greater mix of cloud-based subscriptions and managed services, lower professional-services utilization, and ASC 606 revenue allocation effects.
- The operating loss widened by $6.1 million, primarily due to increased investment in research and development, sales and marketing, and general and administrative functions.
- Operating cash flow improved to $7.3 million, aided by $34.7 million of accounts-receivable collections, partially offset by a $6.5 million decline in deferred revenue and a $1.7 million investment in deferred contract acquisition and fulfillment costs.
- Cash increased materially following a January 2018 public offering. Rapid7 sold 1.5 million primary shares and received approximately $30.9 million of net proceeds; selling stockholders sold an additional 4.45 million shares.
Accounting, Outlook, Risks and Unusual Items
Rapid7 adopted ASC 606 on January 1, 2018 using the modified retrospective method. The adoption increased deferred contract acquisition and fulfillment costs by approximately $27.2 million at transition and reduced opening accumulated deficit by approximately $25.9 million on a net basis, based on the adjustments disclosed. Under ASC 606, reported Q1 2018 revenue was $54.5 million and net loss was $16.4 million; on a pro forma ASC 605 basis, revenue would have been $58.2 million and net loss would have been $14.4 million. The periods are therefore not directly comparable.
Management expects research and development, sales and marketing, and general and administrative expenses to increase in absolute dollars as the company invests in product innovation, sales capacity, international expansion and infrastructure. Management expects research and development expense to remain consistent as a percentage of revenue and sales and marketing and general and administrative expense to decline as percentages of revenue over time. The company expects to remain loss-making for the foreseeable future but believes existing cash, investments and operating cash flow are sufficient to meet requirements for at least the next 12 months.
Key risks include continued operating losses, dependence on sustaining revenue growth and customer renewals, execution of the transition toward subscription offerings, intense competition, reliance on vulnerability-management products, cloud and third-party infrastructure availability, cybersecurity incidents, product errors or false positives, data privacy and regulatory requirements including the European Union GDPR, foreign currency exposure, intellectual-property claims, acquisition integration, and the need for additional capital if operating requirements increase.
The company accrued an additional $0.4 million for a Massachusetts wage-and-hour class action, bringing the litigation accrual to $0.6 million based on a preliminary settlement amount. It also recorded $0.1 million of secondary offering costs. Non-GAAP operating loss was $8.9 million and non-GAAP net loss was $8.6 million, excluding stock-based compensation, amortization of acquired intangibles, offering costs and litigation-related expenses.
Rapid7 reported no material changes in contractual obligations, no off-balance-sheet financing arrangements, and effective disclosure controls as of March 31, 2018. The filing does not provide formal numerical revenue or earnings guidance for future periods.
Important Facts for Investors to Verify
- Reconcile year-over-year trends using the ASC 606 transition disclosures rather than relying solely on reported revenue comparisons.
- Assess whether ARR growth and the 120% renewal rate translate into sustainable revenue growth and improving gross margins.
- Monitor the widening GAAP operating loss, ongoing stock-based compensation, and the pace of investment in sales, marketing and research and development.
- Evaluate liquidity after the January equity offering, including operating cash flow, deferred revenue trends and future capital requirements.
- Review the $0.6 million litigation accrual and any subsequent developments in the Massachusetts wage-and-hour matter.
- Assess exposure to cybersecurity incidents, cloud-service disruptions, privacy regulation, foreign currency movements and competition in the SecOps market.