Rapid7, Inc. — FY2019 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2019. The filing is an annual report, not a standalone Q4 filing; Q4 2019 quarterly data are included. Rapid7 provides cybersecurity products and services through its Insight Platform across vulnerability risk management, incident detection and response, application security, and security orchestration and automation.
Business Context
- More than 9,000 customers in 144 countries at year-end, including 47% of the Fortune 100.
- Customers increased to 9,022 from 7,808 in 2018.
- Recurring revenue represented 87% of total revenue, up from 81% in 2018.
- Annualized recurring revenue was $338.7 million, up 34.5% year over year.
- Channel partners generated approximately 43% of revenue, compared with 39% in 2018.
Financial Performance
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Total revenue | $326.9 million | $244.1 million | +33.9% |
| Products revenue | $261.1 million | $168.6 million | +54.9% |
| Maintenance and support revenue | $36.8 million | $42.2 million | -12.9% |
| Professional services revenue | $29.1 million | $33.3 million | -12.8% |
| Gross profit | $235.8 million | $173.0 million | +36.3% |
| Gross margin | 72.1% | 70.9% | +1.2 percentage points |
| Loss from operations | $(46.0) million | $(53.0) million | Improved by $7.0 million |
| Operating margin | (14.1%) | (21.7%) | Improved by 7.6 percentage points |
| GAAP net loss | $(53.8) million | $(55.5) million | Improved by $1.7 million |
| GAAP net loss margin | (16.5%) | (22.8%) | Improved by 6.3 percentage points |
| Non-GAAP operating income | $2.4 million | $(20.4) million | Improved by $22.8 million |
| Adjusted EBITDA | $12.5 million | $(13.4) million | Improved by $25.9 million |
| Operating cash flow | $(1.4) million | $6.1 million | Declined by $7.5 million |
Products and maintenance and support revenue together increased 41%, reflecting the shift from perpetual licenses toward subscription-based InsightVM and other cloud products. Product gross margin increased to 77.1% from 76.4%, while professional services gross margin declined to 20.9% from 29.1% due primarily to lower revenue.
Liquidity, Capitalization and Cash Flow
- Cash and cash equivalents were $123.4 million at December 31, 2019, compared with $99.6 million at year-end 2018.
- Short- and long-term investments totaled $139.0 million, producing total cash, cash equivalents and investments of approximately $262.5 million.
- Net cash used in operating activities was $1.4 million. The decline from 2018 reflected higher accounts receivable, prepaid expenses, and deferred contract acquisition and fulfillment costs, partially offset by higher deferred revenue.
- Capital expenditures were $29.4 million, and $6.1 million was capitalized for internal-use software.
- Rapid7 paid $14.6 million in cash for the NetFort acquisition.
- The company had $230.0 million principal amount of 1.25% convertible senior notes due August 2023, with a net carrying value of $185.2 million. The notes had a fair value of $342.7 million at year-end.
- The notes became conditionally convertible for the period January 1 through March 31, 2020. No conversion notices had been received through the audit report issuance date.
- Contractual obligations totaled approximately $404.9 million, including $230.0 million of note principal, $104.8 million of operating lease payments, $11.5 million of contractual note interest, and $58.7 million of purchase obligations.
- In January 2020, an AWS contract amendment added $105.0 million of purchase obligations for 2021 through 2023.
- Management stated that existing cash, investments, and expected operating cash flow should meet working capital and expenditure requirements for at least the next 12 months, while noting that additional financing may be required in the future.
Material Changes Versus FY2018
- Revenue growth accelerated to 33.9% from 21.5%, led by subscription and managed-services products.
- Revenue from existing customers increased by $63.9 million, while revenue from new customers increased by $19.0 million.
- Operating loss narrowed despite continued investment in research and development, sales and marketing, and general and administrative functions.
- Sales and marketing expense increased 27.9% but declined to 48.2% of revenue from 50.5%; research and development declined to 24.3% from 27.8% of revenue.
- Stock-based compensation increased to $40.7 million from $27.6 million.
- Interest expense increased to $13.4 million from $4.9 million, primarily due to amortization of the convertible notes’ debt discount and issuance costs.
- Rapid7 adopted the new lease accounting standard in 2019, recognizing operating lease right-of-use assets of $61.0 million and lease liabilities of $79.5 million at year-end.
- Rapid7 acquired NetFort for $16.1 million in April 2019, recording $9.4 million of goodwill and $6.1 million of developed technology intangible assets.
- Renewal rate declined to 108% from 119%, although the metric includes upsells and cross-sells and excludes professional services and Logentries.
Outlook, Commentary and Risks
- Management expects continued investment in product development, sales and marketing, international expansion, customer success, infrastructure, and strategic acquisitions.
- Management expects research and development, sales and marketing, and general and administrative expenses to increase in absolute dollars in the near term.
- The company expects to remain loss-making for the foreseeable future and maintains full valuation allowances on deferred tax assets in the United States, United Kingdom, and Ireland.
- Key operating risks include intense competition, dependence on subscription renewals and expansion, reliance on vulnerability-management products, execution of the transition to cloud subscriptions, cybersecurity breaches or service outages, dependence on third-party infrastructure including AWS, privacy and data-protection regulation, foreign exchange exposure, and difficulty attracting qualified personnel.
- Rapid7 is defending patent litigation brought by Finjan alleging infringement of seven patents. The outcome and potential liability are uncertain; the company has not quantified a potential loss.
- Other unusual or non-recurring items included NetFort acquisition costs, litigation-related expenses, amortization of acquired intangible assets, and $10.5 million of non-cash amortization of convertible-note discount and issuance costs.
Facts Investors Should Verify
- Whether ARR growth and the 108% renewal rate remain durable as customer contract lengths shorten and the company continues migrating customers to subscriptions.
- Whether the shift toward cloud products can sustain or improve gross margins despite rising cloud infrastructure costs and the AWS commitment increase.
- The timing and form of settlement for the $230.0 million convertible notes, including potential cash requirements and equity dilution.
- Whether Rapid7 can convert non-GAAP operating profitability into sustained GAAP profitability and positive operating cash flow.
- The collectability of rising accounts receivable and the recoverability of $51.3 million of deferred contract acquisition and fulfillment costs.
- The financial and operational impact of the Finjan patent litigation and any other intellectual-property claims.
- The integration and commercial performance of NetFort and the return on the company’s continued acquisition and infrastructure investments.
- The effects of the additional $105.0 million AWS purchase commitment and future Boston and Belfast lease obligations on liquidity and operating leverage.