Rapid7, Inc. — Q2 2021 Form 10-Q Summary
Business context and reporting period
Rapid7 provides cybersecurity visibility, analytics, and automation through its Insight Platform, including vulnerability risk management, incident detection and response, application security, cloud security, security orchestration, and professional services. The filing covers the three and six months ended June 30, 2021, compared with the corresponding 2020 periods.
Rapid7 reported more than 9,300 customers in 144 countries as of June 30, 2021. Recurring revenue represented 93% of second-quarter revenue and 92% of year-to-date revenue.
Financial performance and liquidity
| Metric | Q2 2021 | Q2 2020 | Change |
|---|---|---|---|
| Total revenue | $126.4 million | $98.9 million | 27.8% increase |
| Product revenue | $119.1 million | $92.4 million | 28.9% increase |
| Professional services revenue | $7.3 million | $6.5 million | 12.2% increase |
| Gross profit | $87.1 million | $69.8 million | 24.8% increase |
| Gross margin | 68.9% | 70.6% | Down 170 basis points |
| Loss from operations | $(21.9) million | $(15.7) million | Loss increased |
| Net loss | $(34.2) million | $(21.5) million | Loss increased |
| GAAP net loss per share | $(0.62) | $(0.42) | Loss increased |
| Operating cash flow | $9.2 million | $0.4 million | Improved |
| Free cash flow | $5.0 million | $(2.2) million | Improved |
For the six months ended June 30, 2021, revenue was $243.9 million, up 26.2% from $193.3 million. Gross profit was $168.3 million, with a 69.0% gross margin versus 70.6% in the prior-year period. Operating loss was $45.0 million versus $35.6 million, and net loss was $64.0 million versus $44.4 million. Operating cash flow was $29.8 million versus cash used of $6.8 million, and free cash flow was $22.9 million versus negative $13.7 million.
- Annualized recurring revenue was $488.9 million, up 28.7% year over year.
- Customers totaled 9,315, up 13% year over year under a revised customer definition.
- Non-GAAP income from operations was $6.1 million in Q2 and $8.0 million for the first six months, compared with $4.3 million and $0.3 million, respectively, in the prior-year periods.
- Adjusted EBITDA was $10.0 million in Q2 and $15.8 million year to date.
- Stock-based compensation was $23.8 million in Q2 and $44.7 million year to date, a significant recurring non-cash expense.
Balance sheet, debt, and liquidity
- Cash and cash equivalents were $493.6 million at June 30, 2021, compared with $173.6 million at December 31, 2020.
- Short- and long-term investments totaled $119.7 million, bringing cash, cash equivalents, and investments to approximately $613.3 million.
- Total debt carrying value was $854.8 million, consisting primarily of convertible senior notes. Principal outstanding was $875.4 million.
- The company issued $600.0 million of 0.25% convertible senior notes due 2027, generating approximately $585.0 million of net proceeds.
- Rapid7 used cash and 2.2 million common shares to repurchase and retire approximately $182.6 million of 2023 Notes. The remaining 2023 Notes had $45.4 million of principal outstanding and were classified as current.
- The 2023 and 2025 Notes were convertible at the holders’ option from July 1 through September 30, 2021 because conversion conditions were met. The 2027 Notes were not convertible as of June 30, 2021.
- The $50.0 million revolving credit facility had no borrowings outstanding. Letters of credit totaling $7.6 million reduced available borrowing capacity, and the company was in compliance with its covenants.
- Management stated that existing liquidity, investments, operating cash flow, and available credit were expected to fund requirements for at least the next 12 months, while noting that the company expects to continue generating losses.
Material changes versus the prior comparable period
- Revenue growth accelerated to 27.8% in Q2, driven primarily by renewals, upsells, and cross-sells to existing customers. Revenue from existing customers accounted for $26.3 million of the $27.5 million quarterly increase.
- Gross margin declined because cloud-based subscriptions and managed services carry lower margins than licensed software, while cloud computing costs increased by $5.4 million in Q2 and $9.5 million year to date.
- Research and development expense increased 35.2% in Q2 and 35.9% year to date as Rapid7 expanded personnel and infrastructure investment.
- Sales and marketing expense increased 25.1% in Q2 but declined as a percentage of revenue to 44.5% from 45.5%; year-to-date expense increased 19.5% and declined to 45.6% of revenue from 48.2%.
- Interest expense decreased in Q2 primarily because adoption of ASU 2020-06 reduced amortization of debt discounts, although the first-quarter 2023 Notes transaction produced a $2.7 million induced conversion expense year to date.
- The company recorded $9.0 million of tax expense related to an intercompany sale of acquired Alcide intellectual property, materially increasing the tax provision.
- Rapid7 acquired Alcide for approximately $50.5 million in January and Velocidex for approximately $3.0 million in April. Alcide added approximately $40.8 million of goodwill and $10.4 million of developed technology intangibles.
- Rapid7 early adopted ASU 2020-06 on January 1, 2021. The adoption increased reported debt and reduced stockholders’ equity through a cumulative-effect adjustment; prior periods were not recast.
Guidance, outlook, commentary, and risks
The filing does not provide a clear numerical update to quarterly or full-year revenue, ARR, profitability, or cash-flow guidance. Management emphasized continued investment in research and development, sales and marketing, international expansion, cloud offerings, and acquisitions. It expects operating expenses to increase in absolute dollars, with sales and marketing expected to decline as a percentage of revenue over time.
Management reported no significant COVID-19 disruption during the periods presented but stated that the pandemic could affect sales cycles, renewals, customer spending, collections, operations, and future results. The subscription model may delay the recognition of downturns or upturns in sales.
- Rapid7 remains loss-making, with an accumulated deficit of $653.7 million, and does not expect near-term profitability to be assured.
- Key business risks include customer renewal and expansion rates, competition, cloud infrastructure reliability, cybersecurity breaches, product defects or false positives, privacy and data-transfer regulation, foreign exchange exposure, employee retention, and acquisition integration.
- Finjan, Inc. has asserted infringement of seven patents in ongoing Delaware litigation. Damages and the ultimate outcome are uncertain.
- Convertible debt creates potential cash repayment requirements, dilution, refinancing risk, and reduced financial flexibility.
- On July 16, 2021, after quarter-end, Rapid7 acquired IntSights for approximately $321.0 million of consideration, including stock and deferred cash payments. Net cash outflow at closing was approximately $308.3 million.
- The company stated that disclosure controls and procedures were effective as of June 30, 2021, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether ARR growth and customer expansion remain strong after the revised customer-count definition and following the IntSights acquisition.
- Whether cloud-computing costs and the shift toward lower-margin subscriptions continue to pressure gross margin.
- The amount and timing of any cash or share settlement for the convertible Notes, particularly the $45.4 million of 2023 Notes classified as current.
- The effect of the IntSights acquisition on cash, goodwill, operating expenses, integration costs, and future guidance.
- Whether recurring stock-based compensation, acquisition costs, amortization, and other excluded items materially narrow the difference between GAAP and non-GAAP results.
- The resolution and potential financial exposure from the Finjan patent litigation and other intellectual-property claims.
- The ongoing effects of COVID-19, cybersecurity incidents, privacy regulation, foreign exchange movements, and competition on renewals, sales cycles, and liquidity.