Rapid7, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2017; filed November 8, 2017. Rapid7 provides cybersecurity and IT operations analytics, including threat exposure management, incident detection and response, cloud subscriptions, managed services, and professional services. The company operated in one reportable segment and had 6,735 customers in 125 countries at quarter-end.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Revenue | $50.5 million | $40.3 million | $143.2 million | $112.4 million |
| Revenue growth | 25.2% | 42.5% | 27.4% | 44.7% |
| Gross profit | $36.2 million | $30.3 million | $103.5 million | $84.4 million |
| Gross margin | 71.6% | 75.1% | 72.3% | 75.1% |
| Loss from operations | $(13.0) million | $(10.2) million | $(35.4) million | $(39.1) million |
| Net loss | $(10.3) million | $(10.2) million | $(32.5) million | $(39.2) million |
| Net loss per share | $(0.24) | $(0.25) | $(0.76) | $(0.96) |
| Operating cash flow | $5.7 million | $1.8 million | $5.1 million | $2.1 million |
| Calculated billings | $58.7 million | $44.9 million | $162.8 million | $131.4 million |
- Revenue mix in Q3 was $29.6 million of products, $11.7 million of maintenance and support, and $9.2 million of professional services. Recurring revenue represented 70.5% of Q3 revenue and 69.8% for the first nine months, including term software licenses.
- Deferred revenue increased to $188.6 million at September 30, 2017, from $169.1 million at December 31, 2016, providing reported revenue visibility.
- Cash and cash equivalents were $49.1 million, with short- and long-term investments of $35.9 million. Management stated that these resources, together with operating cash generation, should fund requirements for at least the next 12 months.
- Total assets were $251.4 million and stockholders’ equity was $31.8 million at September 30, 2017. The filing does not disclose material outstanding debt; capital lease payments were zero during the first nine months.
- Cash declined by $4.1 million during the first nine months, primarily reflecting the $14.7 million Komand acquisition and capital expenditures, partly offset by operating and financing cash inflows.
Material changes versus the prior comparable period
- Q3 revenue increased $10.2 million, driven by $4.2 million from new customers, upsells and cross-sells and $6.0 million from existing-customer renewals. The nine-month increase was $30.8 million, including $12.5 million from new customers, upsells and cross-sells and $18.3 million from renewals.
- Renewal rate was 119% in Q3 2017 versus 121% in Q3 2016; the expiring renewal rate remained 89% in both periods.
- Gross margin declined 350 basis points in Q3 and 280 basis points for the nine-month period, primarily because cloud-based subscriptions and managed services generally carry lower margins than licensed software. Management expects gross margins to decrease slightly as these offerings grow.
- Sales and marketing expense increased 32.6% in Q3 and 22.0% for the nine-month period as the company expanded its sales organization, commissions, marketing programs, and infrastructure.
- Operating losses improved for the nine-month period but widened in Q3, reflecting continued investment in growth. Non-GAAP operating loss was $6.8 million in Q3 and $18.6 million for the nine-month period.
- On July 12, 2017, Rapid7 acquired Komand for $14.8 million in cash. The transaction added $8.1 million of goodwill and $9.4 million of developed technology intangible assets. The company recorded a $2.6 million deferred tax benefit from a partial release of its valuation allowance.
- Stock-based compensation increased to $14.7 million for the first nine months from $13.3 million in the prior-year period and remained a significant recurring expense.
Outlook, commentary, risks and unusual items
- Management expects revenue, research and development, sales and marketing, and general and administrative expenses to increase in absolute dollars as the business expands. Management expects certain expense categories to decline as a percentage of revenue over time.
- The company expects to adopt ASC 606 revenue recognition in the first quarter of 2018 using the modified retrospective method. Management expected total revenue recognition to remain substantially unchanged overall, but anticipated changes in the timing and classification of certain perpetual licenses, professional services, and sales commissions.
- Rapid7 expects to continue incurring losses for the foreseeable future. Its accumulated deficit was $421.9 million at September 30, 2017.
- In October 2017, the company entered an 86-month lease for approximately 26,000 square feet in Austin, Texas, with total rent obligations of approximately $7.6 million. Occupancy was expected in September 2018.
- Key risks include failure to sustain revenue growth or customer renewals, intense competition, lower margins from cloud and managed services, cybersecurity breaches or service outages, reliance on third-party hosting and software, international and foreign-exchange exposure, privacy and regulatory changes, intellectual-property claims, acquisition integration, and the company’s continuing operating losses.
- The company disclosed an ongoing lawsuit by a non-practicing entity alleging infringement of an expired patent. Management stated that ordinary-course litigation was not expected to have a material adverse effect, but litigation could still create costs and management distraction.
- Disclosure controls and procedures were deemed effective at the reasonable assurance level, and no material change in internal control over financial reporting was identified during the quarter.
Important facts for investors to verify
- Whether recurring revenue, renewal rates, deferred revenue, and calculated billings continue to support future revenue growth as reported revenue growth moderates.
- Whether cloud and managed-service expansion causes further gross-margin compression and whether operating leverage eventually offsets elevated sales and marketing spending.
- The integration, customer adoption, incremental compensation obligations, and milestone payments associated with the Komand acquisition.
- The company’s ability to fund continued losses, acquisitions, and growth investments from cash, investments, and operating cash flow without additional financing.
- The eventual impact of ASC 606 on revenue timing, revenue classification, deferred revenue, commissions, and opening retained earnings.
- Exposure to cybersecurity incidents, cloud-service interruptions, privacy regulation, intellectual-property litigation, foreign-exchange movements, and competitive pressure.