Rapid7, Inc. — Q2 2020 Form 10-Q Summary
Business context and reporting period
Rapid7 provides cybersecurity software and professional services through its Insight Platform, including vulnerability management, incident detection and response, application security, cloud security, and security orchestration and automation. The filing covers the three and six months ended June 30, 2020, compared with the corresponding 2019 periods.
Rapid7 reported 9,142 customers in 139 countries as of June 30, 2020, including 46% of the Fortune 100. No individual customer represented more than 1% of revenue.
Financial performance and liquidity
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total revenue | $98.9 million, up 25.3% | $193.3 million, up 27.0% |
| Products revenue | $92.4 million, up 27.4% | $180.0 million, up 30.0% |
| Professional services revenue | $6.5 million, up 1.6% | $13.3 million, down 3.3% |
| Gross profit | $69.8 million | $136.5 million |
| GAAP gross margin | 70.6%, versus 71.9% | 70.6%, versus 72.3% |
| Loss from operations | $15.7 million | $35.6 million |
| Net loss | $21.5 million, or $0.42 per share | $44.4 million, or $0.88 per share |
| Operating cash flow | $0.4 million | $(6.8) million |
| Non-GAAP income from operations | $4.3 million | $0.3 million |
| Adjusted EBITDA | $7.6 million | $6.8 million |
Recurring revenue represented 91% of second-quarter revenue and 90% of first-half revenue, compared with 87% and 86%, respectively, in the prior-year periods. Annualized recurring revenue was $379.9 million, up 31.0% year over year. Renewal rate was 105% for the quarter and 113% for the six months. Management reported that second-quarter ARR was lower than initially anticipated because of customer spending pullbacks related to COVID-19.
Cash and cash equivalents were $279.3 million at June 30, 2020, with total cash, cash equivalents and restricted cash of $280.6 million. Short- and long-term investments totaled $41.7 million. The company had an accumulated deficit of $562.8 million and expects to continue generating losses for the foreseeable future.
Cash used in operating activities improved from $11.1 million in the first half of 2019 to $6.8 million in the first half of 2020. Investing cash flow was $(35.3) million, primarily reflecting the DivvyCloud acquisition, while financing cash flow was $199.6 million, primarily from the issuance of convertible notes.
Material changes versus the prior comparable period
- Revenue growth continued but slowed to 25.3% in the quarter from 35.1% in the prior-year quarter; first-half growth declined to 27.0% from 34.7%.
- Products revenue increased substantially, driven primarily by renewals, upsells and cross-sells. Professional services growth weakened because customers delayed services during the pandemic.
- Gross margin declined as the mix shifted toward cloud subscriptions and managed services, which have lower margins than licensed software, and as professional services utilization declined.
- Operating expenses increased 24.1% in the quarter and 30.4% in the first half, led by research and development, sales and marketing, and general and administrative investments.
- Stock-based compensation increased to $16.4 million in the quarter and $29.8 million in the first half, compared with $10.4 million and $19.1 million, respectively.
- Interest expense increased to $5.9 million in the quarter and $9.4 million in the first half, primarily because of the 2025 convertible notes and related non-cash amortization.
Acquisition, financing and other unusual items
- On May 1, 2020, Rapid7 acquired DivvyCloud, a cloud security posture management company, for aggregate consideration of $137.8 million, including $130.8 million of cash paid at closing, deferred cash payments and purchase-price adjustments. The preliminary allocation included $115.8 million of goodwill and $21.2 million of identifiable intangible assets.
- Rapid7 issued $230.0 million principal amount of 2.25% convertible senior notes due May 1, 2025, generating $222.8 million of net proceeds. The company used $27.3 million to purchase capped calls intended to offset potential conversion dilution. Existing 1.25% convertible notes due 2023 had a $230.0 million principal balance.
- Net carrying value of the convertible notes was $368.2 million at June 30, 2020. The notes were not convertible at the holders’ option as of that date.
- Rapid7 entered into a revolving credit facility, increased to $50.0 million in May 2020, with a potential accordion increase to $70.0 million. No borrowings were outstanding at quarter-end. The facility includes minimum recurring revenue and liquidity covenants.
- Rapid7 amended its AWS contract, adding purchase obligations of $15.0 million in 2021, $40.0 million in 2022 and $50.0 million in 2023, for $105.0 million of additional obligations.
Guidance, outlook, commentary and risks
The filing does not provide a clear numerical quarterly or full-year revenue or earnings guidance figure. Management expects COVID-19-related economic weakness to negatively affect operational and financial performance in the second half of 2020 and beyond. The company slowed hiring, reduced discretionary spending, shifted to virtual sales and marketing activities, and benefited from lower travel and event costs.
Management stated that existing cash, investments, expected operating cash flow and available credit capacity should fund working capital and capital requirements for at least the next 12 months. This assessment remains subject to uncertainty regarding the duration and severity of COVID-19, customer renewals and spending, collections, sales-cycle delays, pricing concessions and payment-term deferrals.
Key risks include continued COVID-19 disruption; slower ARR and renewal growth; dependence on subscription renewals, upsells and cross-sells; lower cloud and managed-service margins; integration and performance risks related to DivvyCloud; cybersecurity, service availability and third-party hosting risks; privacy and data-transfer regulation; competition; the Finjan patent litigation; significant convertible debt and related liquidity, conversion and dilution risks; and the company’s continuing operating losses.
Rapid7 reported that disclosure controls and procedures were effective as of June 30, 2020, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether COVID-19-driven reductions in customer spending continue to pressure ARR, renewal rates, sales cycles and professional services revenue.
- Progress integrating DivvyCloud and whether expected cloud-security revenue, synergies and growth benefits materialize.
- Cash burn, operating cash flow and liquidity relative to the $460.0 million principal amount of convertible notes and the credit-facility covenants.
- Whether the shift toward cloud subscriptions and managed services causes sustained gross-margin pressure.
- The outcome and potential cost of the Finjan patent litigation and other intellectual-property claims.
- Future stock-based compensation, acquisition-related costs, convertible-note accounting expense and potential dilution.
- Execution against the $105.0 million increase in AWS purchase commitments and other contractual obligations.