Rapid7, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Rapid7 provides cybersecurity data and analytics solutions, including threat exposure management, incident detection and response, cloud-based subscriptions, managed services, maintenance and support, and professional services. The filing covers the three and nine months ended September 30, 2016, compared with the corresponding 2015 periods.
- Customers increased to 5,873 from 4,423 year over year; no customer represented more than 2% of revenue.
- Recurring revenue represented 62% of total revenue in both comparable periods.
- Third-quarter renewal rate was 121%, while the expiring revenue renewal rate was 89%.
Financial Performance and Key Metrics
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Revenue | $40.3 million | $28.3 million | $112.4 million | $77.7 million |
| Revenue growth | 42.5% | 39.3% | 44.7% | 41.4% |
| Gross profit | $30.3 million | $21.2 million | $84.4 million | $57.4 million |
| Gross margin | 75.1% | 75.1% | 75.1% | 73.9% |
| Loss from operations | $(10.2) million | $(10.5) million | $(39.1) million | $(25.7) million |
| Net loss | $(10.2) million | $(11.8) million | $(39.2) million | $(28.8) million |
| Net loss per share | $(0.25) | $(0.79) | $(0.96) | $(3.99) |
| Operating cash flow | $1.8 million | $2.3 million | $2.1 million | $(2.0) million |
Products revenue was $23.1 million in Q3 and $64.7 million for the first nine months. Maintenance and support revenue was $9.7 million and $27.0 million, respectively, while professional services revenue was $7.5 million and $20.7 million.
- At September 30, 2016, cash and cash equivalents were $87.7 million, including $30.0 million in money market funds.
- Deferred revenue was $149.3 million, consisting of $104.7 million current and $44.6 million non-current.
- The company reported no term-loan balance; its prior term loan was repaid and terminated in July 2015.
- Accumulated deficit was $379.6 million, and stockholders’ equity was $47.6 million.
- Nine-month investing cash outflow was $3.3 million, primarily capital expenditures. Financing cash inflow was $2.3 million, primarily employee stock purchases and option exercises, partly offset by equity-award withholding taxes.
Material Changes Versus the Prior Comparable Period
- Revenue increased 42.5% in Q3 and 44.7% for the first nine months. Management attributed most of the increase to revenue recognized from beginning deferred revenue, supplemented by expansion within existing customers and new-customer sales.
- Gross margin was flat in Q3 but improved for the nine-month period, primarily because of improved professional services scale efficiencies. Product margin declined because of higher cloud-computing costs and a $0.3 million obsolete-appliance inventory write-off.
- Operating expenses grew faster in absolute dollars as the company expanded. Nine-month research and development, sales and marketing, and general and administrative expenses increased 50.6%, 49.6%, and 42.4%, respectively.
- Stock-based compensation increased to $4.2 million in Q3 and $13.3 million for the first nine months, compared with $1.4 million and $2.8 million in the prior periods.
- Interest expense largely disappeared following repayment of the term loan, improving pre-tax results by $1.1 million in Q3 and $2.5 million for the first nine months.
- The company discontinued its Mobilisafe product during Q3, accelerated $0.2 million of remaining intangible amortization, and wrote off its $2.3 million gross intangible balance and related accumulated amortization.
- Non-GAAP Q3 operating loss was $5.3 million, compared with $7.8 million in 2015; nine-month non-GAAP operating loss was $23.8 million, compared with $20.6 million.
Outlook, Risks, Contingencies and Unusual Items
- Management expected continued revenue growth and increasing absolute spending on research and development, sales and marketing, and general administration, with the expectation that certain expenses would decline as a percentage of revenue over time. The filing does not provide specific quarterly or annual revenue or earnings guidance.
- Management stated that existing cash and expected operating cash generation should fund working-capital and capital-expenditure needs for at least the next 12 months, but additional financing could be required to support growth or acquisitions.
- The company expects to remain loss-making for the foreseeable future and maintains a full valuation allowance against U.S. and Ireland deferred tax assets.
- A $0.4 million settlement and licensing payment was recorded in general and administrative expense during Q3. A $0.6 million Northern Ireland employment grant reduced operating expenses; a pro rata repayment could be required if compliance criteria are not met.
- The company disclosed a pending non-practicing-entity patent lawsuit and stated that ordinary-course litigation is not currently expected to have a material adverse effect. The BIS export-control voluntary self-disclosure remained under review and could result in penalties.
- Key risks include continued operating losses, dependence on sustained revenue growth and renewals, intense competition, product defects or cybersecurity breaches, reliance on third-party hosting and software providers, international and foreign-exchange exposure, privacy and export-control regulation, acquisition integration, intellectual-property claims, and potential need for additional capital.
- International operations represented approximately 14% of nine-month revenue. The company had not implemented foreign-exchange hedging and was monitoring risks related to Brexit and cross-border data transfers.
Most Important Facts for Investors to Verify
- Whether revenue growth and the 121% renewal rate remain sustainable as the contribution from beginning deferred revenue normalizes.
- Whether operating-expense growth, particularly sales and marketing and research and development, converts into improved operating leverage and eventual profitability.
- The cash-burn trajectory, capital requirements, and the company’s ability to fund operations without additional equity or debt financing.
- The effect of elevated recurring stock-based compensation and future dilution; unrecognized compensation expense totaled $22.6 million at September 30, 2016.
- The status and potential exposure associated with the BIS export-control matter, patent litigation, data-privacy requirements, and other regulatory contingencies.
- Whether product discontinuation, cloud-computing costs, third-party hosting dependencies, and cybersecurity incidents affect margins, customer retention, or future demand.