Rapid7, Inc. 2015 Form 10-K Summary
Business context and reporting period
Rapid7 provides security data and analytics products and services spanning threat exposure management, incident detection and response, machine-data search, and security advisory services. The filing covers the fiscal year ended December 31, 2015; supplemental quarterly data includes the three months ended December 31, 2015.
Rapid7 had more than 5,100 customers in 99 countries, including 37% of the Fortune 1000. Products included Nexpose, Metasploit, AppSpider, InsightUBA, Analytic Response, and Logentries. The company completed its initial public offering in July 2015 and acquired NT OBJECTives in April 2015 and Logentries in October 2015.
Financial performance and key metrics
| Metric | FY 2015 | FY 2014 | Change |
|---|---|---|---|
| Total revenue | $110.5 million | $76.9 million | 43.8% increase |
| Gross profit | $81.3 million | $58.4 million | 39.2% increase |
| Gross margin | 73.5% | 76.0% | Down 2.5 percentage points |
| Operating loss | $46.6 million | $29.1 million | Loss increased |
| Net loss | $49.9 million | $32.6 million | Loss increased |
| Net loss attributable to common stockholders | $99.1 million | $85.0 million | Loss increased |
| Operating cash flow | $(1.9) million | $(3.4) million | Improved |
| Cash at year-end | $86.6 million | $36.8 million | Increased |
| Deferred revenue | $130.3 million | $85.1 million | Increased |
| Total debt | None | $16.9 million | Term loan repaid |
Revenue consisted of products of $63.4 million, maintenance and support of $26.9 million, and professional services of $20.2 million. Recurring revenue, defined by management as content subscriptions, managed services, cloud-based subscriptions, and maintenance and support, represented 62% of total revenue, compared with 62% in 2014.
Operating expenses were $127.8 million, including research and development of $38.7 million, sales and marketing of $67.4 million, and general and administrative expense of $21.7 million. Stock-based compensation was $10.7 million, compared with $2.2 million in 2014.
Non-GAAP loss from operations was $32.8 million and non-GAAP net loss was $36.1 million. These measures excluded stock-based compensation, amortization of acquired intangible assets, acquisition-related expenses, and impairment charges.
Fourth-quarter 2015 results
| Metric | Q4 2015 | Q4 2014 | Change |
|---|---|---|---|
| Revenue | $32.9 million | $21.9 million | 49.8% increase |
| Gross profit | $23.9 million | $16.2 million | 47.6% increase |
| Gross margin | 72.7% | 73.8% | Down approximately 1.1 percentage points |
| Operating loss | $20.9 million | $8.1 million | Loss increased |
| Net loss | $21.1 million | $9.0 million | Loss increased |
Material changes versus the prior comparable period
- Revenue growth accelerated to 43.8% for the full year, driven by deferred-revenue recognition, increased purchases by existing customers, and new-customer additions.
- Customer count increased by approximately 37%; the filing reports either 5,123 or 5,132 customers at year-end in different sections.
- Sales and marketing expense increased 37.5%, while research and development expense increased 51.5% and general and administrative expense increased 67.5%, reflecting investments in growth, product development, acquisitions, and public-company infrastructure.
- Gross margin declined because of revenue mix, particularly the higher proportion of professional services revenue, whose 2015 gross margin was 19.3%.
- Rapid7 raised approximately $112.3 million of net proceeds from its IPO and concurrent private placement, repaid its $18.0 million term loan, and terminated its line of credit.
- Logentries contributed to a substantial increase in goodwill, from $11.3 million to $74.6 million, and intangible assets, from $1.2 million to $11.4 million.
- Revenue concentration remained low: no individual customer represented more than 1% of revenue, while channel partners generated approximately 39% of 2015 revenue, compared with 41% in 2014.
Cash flow, liquidity, debt, and commitments
Operating activities used $1.9 million of cash. Investing activities used $42.9 million, primarily for the Logentries and NTO acquisitions and $4.1 million of property and equipment purchases. Financing activities provided $94.8 million, primarily from the IPO and private placement, partially offset by $18.5 million paid to repay and terminate the term loan.
Management stated that cash on hand, together with expected operating cash flows, would be sufficient to meet working-capital and expenditure requirements for at least the next 12 months. The company nevertheless expected to continue generating losses and cautioned that additional financing might be required to support growth or acquisitions.
Contractual commitments totaled $16.2 million, consisting primarily of operating leases. The company reported no material off-balance-sheet financing arrangements.
Outlook, management commentary, risks, and unusual items
- Management planned continued investment in sales and marketing, research and development, international expansion, professional services, and the Insight Platform. The filing does not provide clear numerical revenue or earnings guidance.
- Rapid7 announced InsightIDR for first-quarter 2016 availability, combining Logentries search technology with behavioral analytics and contextual data collection.
- The company remained unprofitable, with an accumulated deficit of $340.3 million, and expected losses to continue for the foreseeable future.
- Significant risks include intense competition, uncertain adoption of the emerging security-data-and-analytics market, dependence on Nexpose and Metasploit, reliance on channel partners, customer renewals, cloud-service reliability, cyberattacks, data privacy regulation, and difficulty attracting qualified personnel.
- Rapid7’s voluntary disclosure to the U.S. Department of Commerce regarding historical export-control issues remained under review. OFAC had issued a cautionary letter and decided not to pursue a civil monetary penalty for the disclosed free downloads.
- The company disclosed an ongoing lawsuit by a non-practicing entity alleging infringement of an expired patent, although management stated that no pending legal proceedings were expected to have a material adverse effect.
- The $99.1 million loss attributable to common stockholders included $35.1 million of preferred-stock accretion and a $14.2 million beneficial-conversion charge associated with the IPO participation payment; these items were not comparable to 2014 operating performance.
Most important facts for investors to verify
- Reconcile the reported year-end customer count discrepancy of 5,123 versus 5,132.
- Assess whether rapid revenue growth can continue while operating losses and cash investment remain substantial.
- Review recurring revenue, renewal rates, deferred revenue, and channel-partner dependence as indicators of revenue durability.
- Evaluate the integration and performance of Logentries and NTO, including the significant goodwill balance created by the acquisitions.
- Monitor the unresolved BIS export-control disclosure, intellectual-property litigation, privacy-transfer compliance, and other regulatory exposures.
- Consider the effects of $10.7 million of stock-based compensation, continued equity issuance, and potential dilution.
- Verify management’s liquidity assessment against projected operating cash burn, acquisition spending, lease commitments, and the absence of debt at year-end.