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, and security advisory services. This unaudited Form 10-Q covers the three and six months ended June 30, 2016, with comparisons to the comparable 2015 periods.
- Customers totaled 5,628 at June 30, 2016, versus 4,156 a year earlier; no customer represented more than 2% of revenue.
- Rapid7 introduced InsightIDR, a cloud-based incident detection and response offering, during the first quarter of 2016.
- Recurring revenue represented 62% of total revenue in both the quarter and six-month period, compared with 61% in the comparable 2015 periods.
Financial performance and liquidity
| Metric | Three months ended June 30, 2016 | Three months ended June 30, 2015 | Six months ended June 30, 2016 | Six months ended June 30, 2015 |
|---|---|---|---|---|
| Revenue | $37.3 million | $25.8 million | $72.1 million | $49.4 million |
| Revenue growth | 44.5% | 44.2% | 46.0% | 42.6% |
| Gross profit | $28.0 million | $19.1 million | $54.1 million | $36.1 million |
| Gross margin | 75.1% | 73.9% | 75.0% | 73.2% |
| Operating loss | $(13.3) million | $(8.6) million | $(28.9) million | $(15.2) million |
| Net loss | $(13.5) million | $(9.2) million | $(29.0) million | $(16.9) million |
| Net loss per share | $(0.33) | $(2.59) | $(0.71) | $(4.10) |
| Operating cash flow | $1.9 million | $(1.2) million | $0.3 million | $(4.3) million |
- Quarterly revenue consisted of products of $21.5 million, maintenance and support of $9.0 million, and professional services of $6.9 million. Six-month revenue was $41.6 million, $17.3 million, and $13.1 million, respectively.
- Sales and marketing was the largest operating expense at $21.7 million for the quarter and $44.4 million for the six months. Research and development was $12.9 million and $25.3 million, respectively.
- Stock-based compensation increased to $3.6 million for the quarter and $9.2 million for the six months, compared with $0.8 million and $1.4 million in the comparable periods.
- Cash was $84.8 million at June 30, 2016, compared with $86.6 million at December 31, 2015. Deferred revenue was $144.7 million, including $99.4 million current and $45.4 million non-current.
- Total assets were $223.9 million and total liabilities were $172.7 million at June 30, 2016. The accumulated deficit was $369.4 million.
- The filing reports no material debt balance; Rapid7 stated that its term loan was repaid and terminated in July 2015. Capital lease payments during the first six months were $68,000.
- Management believes existing cash and cash generated from operations will meet working-capital and expenditure requirements for at least the next 12 months, but expects continued losses and states that additional financing may be required in the future.
Material changes versus the prior comparable period
- Revenue increased 44.5% in the second quarter and 46.0% in the first six months. Management attributed most of the increase to revenue recognized from deferred revenue: $10.8 million of the quarterly increase and $16.9 million of the six-month increase.
- Gross margin improved by 1.2 percentage points in the quarter and 1.8 percentage points for the six months, primarily due to improved professional services efficiencies. Product gross margin declined because of higher AWS cloud-computing costs.
- Operating losses widened as operating expenses grew faster than revenue. Quarterly research and development, sales and marketing, and general and administrative expenses increased 59.0%, 50.0%, and 31.6%, respectively.
- Six-month operating cash flow improved from a use of $4.3 million to positive $0.3 million, primarily due to a $14.4 million increase in deferred revenue, strong collections, and higher non-cash charges.
- Net loss per share improved substantially because the 2015 periods included $23.8 million of quarterly and $35.1 million of six-month preferred-stock accretion; no such accretion occurred in 2016. Weighted-average shares increased to 41.1 million in the quarter from 12.7 million a year earlier following the 2015 IPO and related capital structure changes.
- The renewal rate was 126% in the second quarter of 2016 versus 115% in the second quarter of 2015; the expiring revenue renewal rate was 89% versus 87%.
Guidance, outlook, risks, contingencies, and unusual items
- The filing does not provide clear numerical revenue, earnings, or cash-flow guidance. Management expects revenue and operating expenses to increase in absolute dollars, continued investment in research and development and sales and marketing, and losses for the foreseeable future.
- Rapid7 has a full valuation allowance against its U.S. and Ireland deferred tax assets and expects to maintain it in the near term.
- Material risks include continued operating losses, dependence on revenue recognition from prior-period sales and renewals, intense competition, product defects or missed vulnerabilities, cybersecurity breaches, cloud and third-party infrastructure reliance, international and foreign-exchange exposure, and the need for additional capital.
- Rapid7 disclosed a voluntary self-disclosure to the Bureau of Industry and Security concerning historical export-control issues involving certain Metasploit products. The matter remained under review and could result in monetary or other penalties. OFAC previously issued a cautionary letter and did not pursue a civil monetary penalty.
- The company is involved in a lawsuit brought by a non-practicing entity alleging infringement of an expired patent. Management states that ordinary-course litigation is not currently expected to have a material adverse effect, but outcomes are uncertain.
- Rapid7 disclosed that Chief Financial Officer Steven Gatoff will transition out of the company for personal family reasons effective January 2017.
- Management reported that disclosure controls and procedures were effective as of June 30, 2016, with no material change in internal control over financial reporting during the quarter.
- New accounting standards on expected credit losses, stock compensation, leases, deferred taxes, and revenue recognition were under evaluation; the filing states that adopted 2015 standards had no material impact.
Important facts for investors to verify
- Whether high reported growth and renewal rates continue after the substantial contribution from deferred revenue already on the balance sheet.
- The path to profitability, including whether sales and marketing and research and development spending can decline as a percentage of revenue.
- Cash burn, deferred-revenue growth, collections, and the adequacy of the $84.8 million cash balance as losses continue.
- The effect of elevated stock-based compensation and future dilution from outstanding options, restricted stock, and other equity awards.
- The resolution and potential financial impact of the BIS export-control review and the disclosed patent litigation.
- The impact of the CFO transition, competitive pressure, cybersecurity incidents, AWS dependence, foreign-exchange movements, and evolving privacy and export regulations.