Rapid7, Inc. — Q1 2021 Form 10-Q Summary
Business Context and Reporting Period
Rapid7 provides cybersecurity software and professional services through its Insight Platform, including vulnerability risk management, incident detection and response, application security, cloud security, and security orchestration and automation. The filing covers the three months ended March 31, 2021, compared with the three months ended March 31, 2020. Rapid7 reported more than 8,900 customers in 140 countries as of March 31, 2021.
Key Financial Metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Total revenue | $117.5 million | $94.3 million | +24.5% |
| Product revenue | $109.3 million | $87.5 million | +24.8% |
| Professional services revenue | $8.2 million | $6.8 million | +20.2% |
| Gross profit | $81.2 million | $66.6 million | +21.8% |
| Gross margin | 69.1% | 70.6% | Down 150 bps |
| Loss from operations | $(23.1) million | $(19.8) million | Loss widened |
| Net loss | $(29.8) million | $(22.9) million | Loss widened |
| Basic and diluted loss per share | $(0.56) | $(0.46) | Worsened |
| Operating cash flow | $20.6 million | $(7.2) million | Improved |
| Free cash flow | $17.9 million | $(11.4) million | Improved |
Recurring revenue represented 91% of total revenue, compared with 90% in the prior-year quarter. Annualized recurring revenue was $455.8 million, up 29.9% year over year. The reported customer count was 8,945, up 11%; the company revised its customer definition and recast the prior-period amount.
Non-GAAP income from operations was $1.9 million, compared with a non-GAAP operating loss of $3.9 million in Q1 2020. Non-GAAP net loss was $1.4 million, or $0.03 per share, compared with $4.3 million, or $0.09 per share, in the prior-year quarter. Adjusted EBITDA was $5.8 million, compared with $(0.8) million.
Liquidity, Debt, and Balance Sheet
- Cash and cash equivalents were $503.8 million at March 31, 2021, compared with $173.6 million at December 31, 2020.
- Short- and long-term investments totaled $113.1 million, with maturities ranging from one to thirteen months.
- Total assets were $1.22 billion, while total liabilities were $1.30 billion. Stockholders’ equity was $(81.2) million, primarily reflecting the accounting impact of convertible debt adoption and continued accumulated losses.
- Net carrying value of convertible senior notes was $855.7 million, consisting of $47.4 million of 2023 Notes, $224.0 million of 2025 Notes, and $585.1 million of 2027 Notes.
- Rapid7 issued $600.0 million of 0.25% convertible senior notes due 2027 and received approximately $585.0 million of net proceeds. It used $182.6 million of proceeds and 2.2 million shares to repurchase 2023 Notes and spent $76.0 million on related capped calls.
- The company had no borrowings outstanding under its $50.0 million revolving credit facility, had $7.6 million of letters of credit outstanding, and was in compliance with its financial covenants.
- Management stated that existing cash, investments, operating cash generation, and available credit were sufficient to meet expected requirements for at least the next twelve months.
Material Changes Versus the Prior Comparable Period
- Revenue increased $23.1 million, primarily from existing customers, which contributed $21.9 million of the increase through renewals, upsells, and cross-sells. New customers contributed $1.2 million.
- Gross margin declined because cloud-based subscriptions and managed services, which generally carry lower margins than licensed software, represented a larger portion of revenue. Cloud computing costs increased by $4.1 million.
- Research and development expense increased 36.7% to $33.1 million, reflecting higher headcount, acquired employees, and infrastructure costs.
- Sales and marketing expense increased 14.2% to $55.0 million, although it declined to 46.8% of revenue from 51.0%.
- Stock-based compensation increased to $20.9 million from $13.3 million and remained a significant recurring expense.
- Operating cash flow improved primarily because of collections of accounts receivable and changes in working capital.
- Rapid7 acquired Alcide.IO Ltd., a Kubernetes security provider, on January 28, 2021, for $50.5 million in cash. The preliminary allocation included $39.7 million of goodwill and $10.4 million of developed technology intangible assets.
- Rapid7 early adopted ASU 2020-06 for convertible debt accounting on January 1, 2021. The adoption increased reported debt and reduced stockholders’ equity through a $71.4 million cumulative-effect adjustment.
Outlook, Commentary, Risks, and Unusual Items
The filing does not provide a clear numerical revenue, margin, ARR, or earnings forecast. Management expects cost of revenue, research and development, sales and marketing, and general and administrative expenses to increase in absolute dollars as the company continues investing in growth, products, infrastructure, and international expansion.
- Rapid7 stated that it had not experienced significant operational disruption from COVID-19 during Q1 2021, but the duration and ultimate financial impact remained uncertain. The company continued remote-work, virtual sales, and other pandemic-related operating measures.
- Management expects continued losses for the foreseeable future and reported an accumulated deficit of $619.5 million at March 31, 2021.
- The 2023 Notes became conditionally convertible from April 1 through June 30, 2021. An immaterial principal amount had been submitted for conversion as of March 31, 2021; the filing states no additional requests had been received through the filing date.
- The company recognized $2.7 million of induced conversion expense in connection with the 2023 Notes repurchase, contributing to higher interest expense.
- Key risks include customer renewal and expansion rates, intense cybersecurity competition, cloud-service reliability, cybersecurity breaches, privacy and data-transfer regulations, international operations and foreign exchange, acquisition integration, substantial convertible debt, stock dilution, and the company’s ability to achieve profitability.
- Rapid7 remains a defendant in patent litigation brought by Finjan, Inc. alleging infringement of seven patents. The filing states that the outcome and potential liability are uncertain.
- Internal controls over financial reporting and disclosure controls were evaluated as effective at the reasonable assurance level, with no material changes reported during the quarter.
Most Important Facts for Investors to Verify
- Whether ARR growth and recurring revenue conversion remain strong after the customer-definition change and as COVID-19 effects evolve.
- Whether gross-margin pressure from cloud subscriptions, managed services, and higher infrastructure costs stabilizes or continues.
- Progress toward sustainable GAAP profitability, given the continued net losses, accumulated deficit, and substantial stock-based compensation.
- Integration and commercial performance of Alcide and the prior DivvyCloud acquisition, including any impairment or acquisition-related costs.
- Potential cash requirements, dilution, and settlement terms associated with the convertible notes, particularly the 2023 Notes and the 2027 Notes.
- Resolution and potential financial exposure from the Finjan patent litigation and other intellectual-property claims.
- Exposure to cybersecurity incidents, service outages, privacy regulation, international data-transfer restrictions, and foreign currency movements.