Rapid7, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Rapid7 provides security data and analytics solutions for vulnerability management, incident detection and response, and security advisory services. The filing covers the unaudited three months ended March 31, 2016, compared with the three months ended March 31, 2015. Rapid7 had 5,360 customers in more than 100 countries at March 31, 2016, including 36% of the Fortune 1000.
During the quarter, Rapid7 launched InsightIDR, a cloud-based incident detection and response offering incorporating technology acquired through Logentries. The company operated as one reportable segment.
Financial Metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Total revenue | $34.8 million | $23.6 million | 47.6% increase |
| Gross profit | $26.1 million | $17.1 million | 52.7% increase |
| Gross margin | 75.0% | 72.5% | 2.5 percentage-point increase |
| Operating loss | $(15.6) million | $(6.6) million | Loss increased |
| Operating margin | (44.8)% | (28.0)% | 16.8 percentage-point decline |
| Net loss | $(15.6) million | $(7.7) million | Loss increased |
| Net loss per share | $(0.38) | $(1.50) | Improved; prior period included preferred-stock accretion |
| Operating cash flow | $(1.6) million | $(3.0) million | Use of cash decreased |
- Revenue by category: products $20.1 million, maintenance and support $8.4 million, and professional services $6.3 million.
- Recurring revenue represented 61% of total revenue, compared with 62% in the prior-year quarter. Deferred revenue was $131.9 million at March 31, 2016, versus $88.6 million at March 31, 2015.
- Professional services gross margin increased to 29.3% from 9.5%; total product gross margin declined to 87.1% from 88.7%, while maintenance and support gross margin increased to 79.9% from 79.1%.
- Operating expenses were $41.7 million, or 119.8% of revenue, compared with $23.7 million, or 100.5% of revenue. Research and development, sales and marketing, and general and administrative expenses increased 92.4%, 72.1%, and 62.7%, respectively.
- Stock-based compensation increased to $5.5 million from $0.6 million. Non-GAAP operating loss was $9.5 million, compared with $5.8 million in Q1 2015.
- Cash and cash equivalents were $83.5 million at March 31, 2016, down from $86.6 million at December 31, 2015. Total assets were $213.8 million and total liabilities were $153.2 million.
- Deferred revenue totaled $131.9 million, consisting of $90.1 million current and $41.8 million non-current. The filing indicates that the term loan was repaid in full and terminated in July 2015; no material long-term debt balance is reported in the March 31, 2016 balance sheet.
- Capital expenditures were $1.1 million. Financing cash flow was negative $0.5 million, primarily reflecting $3.1 million of taxes paid on net share settlements of equity awards, partly offset by $2.1 million from the employee stock purchase plan.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven primarily by $9.9 million of additional revenue recognized from beginning deferred revenue, $0.5 million of increased purchases by existing customers, and $0.8 million of increased sales to new customers.
- Customer count increased from 3,902 to 5,360, and the company added 228 net customers during Q1 2016 versus 169 in Q1 2015.
- The dollar renewal rate improved to 126% from 112%, while the expiring revenue renewal rate improved to 89% from 85%.
- Gross margin improved despite higher absolute costs, primarily because of stronger professional services margins.
- Rapid7 continued to invest substantially in growth. Headcount increased in cost of revenue, research and development, sales and marketing, and general and administrative functions.
- The net loss attributable to common stockholders improved on a per-share basis because Q1 2015 included $11.3 million of preferred-stock accretion and used a substantially lower weighted-average share count.
- Interest expense declined substantially following repayment of the term loan, while other income benefited from foreign-currency gains.
Guidance, Outlook, Commentary, Risks and Unusual Items
- The filing does not provide specific revenue, earnings, margin, or cash-flow guidance. Management expects revenue and operating expenses to increase in absolute dollars in the near term, with research and development, sales and marketing, and general and administrative expenses expected to decline as percentages of revenue over time.
- Management expects continued losses for the foreseeable future and states that cash on hand, together with cash generated from operations, should satisfy working-capital and capital-expenditure needs for at least the next 12 months. Additional financing may nevertheless be required to support growth, acquisitions, or product development.
- Revenue recognition is substantially ratable over one- to three-year agreements; approximately 86% of Q1 2016 revenue came from deferred revenue existing at the beginning of the quarter. This creates future visibility but may delay the effect of changes in bookings, renewals, or demand.
- Major risks include inability to sustain rapid growth or achieve profitability, intense competition, reliance on Nexpose and Metasploit, product defects or failure to detect vulnerabilities, cyberattacks and service outages, dependence on third-party hosting and software, reliance on channel partners, international and foreign-exchange exposure, and difficulty integrating acquisitions.
- Rapid7 disclosed an ongoing lawsuit by a non-practicing entity alleging infringement of an expired patent. Management also stated that ordinary-course litigation is not expected to have a material adverse effect, although outcomes cannot be predicted.
- The company’s voluntary disclosure to the U.S. Department of Commerce concerning historical export-control issues remained under review. OFAC previously issued a cautionary letter and did not pursue a civil monetary penalty; potential BIS penalties or other sanctions remained possible.
- Rapid7 was reviewing alternatives for transferring European data after invalidation of the EU-U.S. Safe Harbor framework. Data-protection authorities could impose sanctions, including fines or restrictions on transfers.
- Massachusetts sales-tax audits were ongoing. The filing does not provide a clear quantified exposure.
- Recent adoption of certain accounting updates had no material impact. The company was evaluating future adoption of revenue-recognition, share-based compensation, lease, and deferred-tax standards.
- Management concluded that disclosure controls and procedures were effective at the reasonable-assurance level as of March 31, 2016, with no material changes to internal control over financial reporting during the quarter.
Most Important Facts for Investors to Verify
- Whether high revenue growth and the 126% dollar renewal rate continue after the substantial contribution from beginning deferred revenue.
- Whether operating-expense growth, particularly sales and marketing and research and development, begins to moderate relative to revenue.
- The sustainability of cash balances and the timing of operating cash-flow breakeven, given the $15.6 million quarterly net loss and continued expected losses.
- The recurring nature and valuation impact of stock-based compensation, which increased to $5.5 million and materially affects the difference between GAAP and non-GAAP results.
- The outcome and potential financial exposure from the BIS export-control review, data-transfer compliance matters, Massachusetts tax audits, and the disclosed patent litigation.
- Customer adoption and monetization of InsightIDR and other newer cloud-based offerings, as well as continued dependence on Nexpose and Metasploit.
- The effects of acquisition integration, international expansion, foreign-currency movements, third-party infrastructure dependencies, and cybersecurity incidents.