Rapid7, Inc. Form 10-Q Summary
Business context and reporting period
Rapid7 provides cybersecurity software and services through its Insight Platform, including incident detection and response, cloud security, vulnerability risk management, application security, threat intelligence, and security orchestration. This unaudited report covers the three months ended March 31, 2023, compared with the same period in 2022. Rapid7 reported 11,034 customers in 147 countries and recurring revenue represented 95% of total revenue.
Financial performance and liquidity
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Total revenue | $183.2 million | $157.4 million | 16.4% increase |
| Product revenue | $173.8 million | $149.0 million | 16.6% increase |
| Professional services revenue | $9.4 million | $8.4 million | 12.5% increase |
| Gross profit | $127.2 million | $106.1 million | 19.9% increase |
| Gross margin | 69.4% | 67.4% | 200 basis-point expansion |
| Loss from operations | $(24.0) million | $(40.4) million | Improved by $16.4 million |
| GAAP net loss | $(25.9) million | $(45.0) million | Improved by $19.1 million |
| GAAP diluted loss per share | $(0.43) | $(0.78) | Improved |
| Non-GAAP operating income | $11.0 million | $(5.6) million | Improved by $16.6 million |
| Non-GAAP operating margin | 6.0% | (3.6%) | Improved by 960 basis points |
| Net cash from operations | $5.8 million | $10.4 million | Decrease of $4.6 million |
| Free cash flow | $(1.2) million | $3.8 million | Decrease of $5.0 million |
Operating expenses were $151.1 million, compared with $146.5 million in the prior-year quarter. Research and development expense decreased 7.0% to $46.3 million, while sales and marketing increased 7.2% to $80.6 million and general and administrative expense increased 12.5% to $24.2 million. Stock-based compensation was $29.4 million, compared with $28.9 million in Q1 2022.
As of March 31, 2023, cash and cash equivalents were $205.8 million, short- and long-term investments totaled $63.8 million, and total cash, cash equivalents and restricted cash were $206.3 million. Total debt consisted primarily of $816.9 million of net convertible senior notes: $229.9 million principal due in 2025 and $600.0 million principal due in 2027. No borrowings were outstanding under the $100.0 million revolving credit facility, although $9.8 million of letters of credit reduced availability. The company stated that it was in compliance with all credit facility covenants.
Total liabilities were $1.44 billion and stockholders’ deficit was $110.2 million at quarter-end. The company had an accumulated deficit of $886.7 million and stated that it expects to continue incurring losses for the foreseeable future.
Material changes versus the prior comparable period
- Revenue growth slowed to 16.4% from 34.0% in Q1 2022, but growth remained broad-based: $3.3 million came from new customers and $22.5 million from existing customers through renewals, upsells and cross-sells.
- ARR increased 16.1% year over year to $727.9 million, while customer count increased 6.0% to 11,034 and ARR per customer increased 9.5% to approximately $66,000.
- Gross margin improved to 69.4% from 67.4%, primarily due to operating scale and improved professional services profitability.
- GAAP operating and net losses narrowed substantially, and Rapid7 moved from a non-GAAP operating loss to non-GAAP operating income.
- Operating cash flow declined despite the lower net loss, largely because of working-capital effects, including lower accrued expenses and deferred revenue. Free cash flow turned negative after capital expenditures and capitalized internal-use software costs.
- Rapid7 acquired Minerva Labs on March 14, 2023, for $35.0 million in cash and issued founders shares valued at $3.6 million. The acquisition added $22.4 million of goodwill and a $12.6 million developed-technology intangible asset; its quarterly revenue and net-loss contribution was not material.
- Deferred revenue declined to $445.6 million from $457.6 million at December 31, 2022, while accounts receivable declined to $116.7 million from $152.0 million.
Outlook, commentary, risks and unusual items
The filing does not provide a clear numerical revenue, ARR, margin or earnings guidance update. Management expects continued investment in research and development, sales and marketing, infrastructure, international expansion and potential acquisitions. It also stated that existing cash, investments, available credit and expected operating cash flow should satisfy operating and capital requirements for at least the next 12 months, while noting that additional financing may be required in the future.
- Key demand risks include macroeconomic uncertainty, inflation, higher interest rates, delayed sales cycles, customer renewal or expansion weakness, pricing concessions and reduced information-technology spending.
- Rapid7 faces intense competition from larger and specialized cybersecurity providers, including CrowdStrike, Microsoft, Palo Alto Networks, Qualys, Tenable, Splunk and others.
- Cybersecurity incidents, service outages, product defects, third-party provider failures and misuse of Metasploit could damage customer trust, create liabilities and reduce renewals.
- Privacy, data-transfer, cybersecurity, export-control and other regulatory requirements may increase compliance costs or limit international operations.
- The company has substantial convertible debt, including the $230.0 million 2025 Notes and $600.0 million 2027 Notes. The notes were not convertible at the holder’s option as of March 31, 2023, but future conversion, redemption or fundamental-change obligations could affect liquidity and dilution.
- Finjan patent litigation was settled for an immaterial amount during Q1 2023 and was formally closed on April 5, 2023. The filing states that ordinary-course litigation is not expected to have a material adverse effect, although outcomes cannot be predicted with certainty.
- Unusual or non-GAAP adjustments included $29.4 million of stock-based compensation, $5.2 million of amortization of acquired intangible assets and $0.4 million of acquisition-related expenses.
Important facts for investors to verify
- Whether ARR growth, customer additions and ARR per customer remain durable as revenue growth moderates.
- Whether improved GAAP and non-GAAP operating margins continue without excessive reliance on stock-based compensation and other exclusions.
- Whether operating cash flow and free cash flow recover after the Q1 working-capital outflows and Minerva acquisition spending.
- The maturity, refinancing, redemption and potential dilution implications of the 2025 and 2027 convertible notes.
- The integration and commercial contribution of Minerva Labs, including the realization of expected synergies and goodwill recoverability.
- Customer renewal, upsell and cross-sell trends, particularly amid economic pressure and competition.
- Exposure to cybersecurity incidents, cloud infrastructure dependencies, privacy regulation, foreign exchange movements and international operating risks.