Rapid7, Inc. 2015 Q2 Form 10-Q Summary
Business context and reporting period
Rapid7 provides cybersecurity data and analytics solutions, including threat exposure management, incident detection and response, and security advisory services. The filing covers the three and six months ended June 30, 2015, with comparisons to the corresponding 2014 periods. Rapid7 reported 4,156 customers in more than 90 countries, including 34% of the Fortune 1000, and operated as one reportable segment.
Financial performance and liquidity
| Metric | Three months ended June 30, 2015 | Three months ended June 30, 2014 | Six months ended June 30, 2015 | Six months ended June 30, 2014 |
|---|---|---|---|---|
| Total revenue | $25.8 million | $17.9 million | $49.4 million | $34.6 million |
| Revenue growth | 44.2% | 22.9% | 42.6% | 22.7% |
| Gross profit | $19.1 million | $13.7 million | $36.1 million | $26.5 million |
| Gross margin | 73.9% | 76.5% | 73.2% | 76.7% |
| Loss from operations | $(8.6) million | $(7.4) million | $(15.2) million | $(15.1) million |
| Net loss | $(9.2) million | $(8.2) million | $(16.9) million | $(16.7) million |
| Net loss attributable to common stockholders | $(33.0) million | $(23.7) million | $(52.0) million | $(44.3) million |
| Operating cash flow | $(1.2) million | $(2.3) million | $(4.3) million | $(4.4) million |
Products revenue increased 32.9% in the quarter and 30.8% year to date. Maintenance and support revenue increased 39.8% in both periods. Professional services revenue increased 104.7% in the quarter and 106.6% year to date.
- Deferred revenue was $97.5 million at June 30, 2015, compared with $67.4 million at June 30, 2014.
- Cash was $27.0 million at June 30, 2015, compared with $36.8 million at December 31, 2014.
- Total liabilities were $136.5 million, including $17.1 million of term loan payable and $97.5 million of deferred revenue.
- Accumulated deficit was $293.2 million at June 30, 2015.
- Cash used in investing activities was $4.5 million, including $3.3 million for the acquisition of NT OBJECTives and $1.2 million for capital expenditures.
- Non-GAAP operating loss was $7.1 million for the quarter and $12.9 million year to date; non-GAAP net loss was $7.8 million and $14.6 million, respectively.
Material changes versus the prior comparable period
- Revenue growth accelerated substantially, driven primarily by $6.8 million of additional deferred-revenue recognition in the quarter and $11.9 million year to date.
- Professional services grew faster than product and maintenance revenue, increasing its share of quarterly revenue to 19.0% from 13.4%.
- Gross margin declined 2.6 percentage points in the quarter and 3.5 percentage points year to date, primarily because of sales mix and the lower-margin professional services business.
- Operating expenses increased 31.2% in the quarter and 23.2% year to date, reflecting higher investment in research and development, sales and marketing, personnel, infrastructure, marketing programs, and public-company readiness.
- Net loss attributable to common stockholders increased primarily because preferred-stock accretion rose to $23.8 million in the quarter and $35.1 million year to date.
- Renewal rate increased to 115% in the second quarter from 108% in the prior-year quarter; the expiring renewal rate increased to 87% from 85%.
- Customer count increased to 4,156 from 3,097, and Rapid7 added 254 net customers in the quarter and 423 year to date.
Guidance, outlook, risks and unusual items
- Management expects continued operating losses for the foreseeable future and expects cost of revenue, research and development, sales and marketing, and general and administrative expenses to increase in absolute dollars.
- Management stated that cash on hand, together with expected operating cash generation, was sufficient to meet working-capital and capital-expenditure requirements for at least the next 12 months. Future capital needs depend on growth, product development, international expansion, sales and marketing investment, and acquisitions.
- Rapid7 completed its IPO on July 22, 2015, issuing 7,417,500 shares at $16.00 per share for approximately $107.4 million of net proceeds. It also raised $5.0 million in a concurrent private placement.
- All preferred stock converted into 18,322,605 common shares upon the IPO, materially changing the capital structure and eliminating preferred-stock accretion prospectively.
- Rapid7 repaid its $18.0 million term loan on July 23, 2015 for $18.7 million, including a termination payment and accrued interest, and recorded a $0.9 million charge for unamortized debt discount. The undrawn $10.0 million line of credit was terminated on August 5, 2015.
- On April 30, 2015, Rapid7 acquired NT OBJECTives for total consideration of $6.0 million, including $3.4 million in cash, $0.1 million in stock, and $2.5 million of deferred payments. The acquisition added $4.5 million of goodwill and $2.1 million of identifiable intangible assets.
- The company disclosed substantial risks related to continued losses, competitive pressure, dependence on Nexpose and Metasploit, cybersecurity incidents, product defects or false positives, third-party hosting and software providers, international operations, channel partners, intellectual property litigation, privacy and export regulations, and reliance on continued revenue growth and renewals.
- Rapid7 filed voluntary disclosures regarding certain historical unauthorized exports of Metasploit products. OFAC issued a cautionary letter and declined to pursue a civil monetary penalty; the BIS review remained open and could result in monetary or other penalties.
- The company was involved in a lawsuit by a non-practicing entity alleging infringement of an expired patent. Management stated that no current legal proceedings were expected to have a material adverse effect, but adverse outcomes could still result in costs or operational disruption.
- Rapid7 entered into a lease amendment for approximately 20,000 additional square feet of Boston office space, with approximately $3.4 million of base-rent obligations over 42 months.
Most important facts for investors to verify
- Whether revenue growth and renewal rates remain strong after the IPO-related period and the elevated recognition of deferred revenue.
- Whether gross-margin pressure from professional services and customer mix persists.
- The pace at which Rapid7 can reduce operating losses and achieve positive operating cash flow.
- Post-IPO cash balances, use of proceeds, and the effect of debt repayment on liquidity and interest expense.
- The final resolution and potential financial impact of the BIS export-control review, intellectual-property litigation, and tax audits.
- The effect of preferred-stock conversion, IPO shares, private-placement shares, options, restricted stock, and other securities on dilution.
- Progress integrating NT Objectives and the contribution of its products to revenue and operating results.