Rapid7, Inc. — Fiscal 2021 Form 10-K Summary
Business context and reporting period
Rapid7 provides cloud-based cybersecurity, vulnerability management, incident detection and response, cloud security, application security, threat intelligence, security orchestration and automation, managed services, and professional services through its Insight Platform. The filing covers the fiscal year ended December 31, 2021, with comparisons to 2020 and 2019.
Rapid7 had 10,283 customers at December 31, 2021, across 142 countries, and 2,353 full-time employees. Recurring revenue represented 92% of total revenue in 2021, up from 90% in 2020 and 87% in 2019. Channel partners generated 52% of sales, compared with 47% in 2020.
Key financial metrics
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Total revenue | $535.4 million | $411.5 million | 30.1% increase |
| Product revenue | $500.8 million | $382.9 million | 30.8% increase |
| Professional services revenue | $34.6 million | $28.6 million | 21.0% increase |
| Gross profit | $366.5 million | $290.0 million | 26.4% increase |
| Gross margin | 68.4% | 70.5% | Down 2.1 percentage points |
| Loss from operations | $(120.1) million | $(74.1) million | Loss widened |
| Net loss | $(146.3) million | $(98.8) million | Loss widened |
| Net loss per share | $(2.65) | $(1.94) | Loss widened |
| Non-GAAP income from operations | $7.6 million | $2.0 million | Improved |
| Adjusted EBITDA | $23.8 million | $15.5 million | Improved |
| Operating cash flow | $53.9 million | $4.9 million | Improved |
| Free cash flow | $35.1 million | $(15.0) million | Improved |
| Annualized recurring revenue | $599.0 million | $432.9 million | 38.4% increase |
Revenue, profitability, cash flow, liquidity and debt
- Revenue growth included $114.8 million of organic growth and $9.1 million attributable to IntSights, acquired in July 2021. Growth from existing customers contributed $111.4 million, while new customers contributed $3.4 million of organic growth.
- Subscriptions generated $492.6 million, or approximately 92% of total revenue. Perpetual software licenses generated $7.7 million and professional services generated $34.6 million.
- Gross margin declined primarily because cloud subscriptions and managed services generally carry lower margins than licensed software, and because of higher cloud-computing costs and acquired intangible amortization.
- Research and development expense increased 48.1% to $160.8 million, while sales and marketing expense increased 26.3% to $247.5 million. Stock-based compensation rose to $102.6 million from $63.9 million.
- GAAP losses widened despite improved non-GAAP operating income and adjusted EBITDA. Management continues to invest for growth and states that it has incurred a net loss in every year since inception.
- Operating cash flow improved to $53.9 million, supported in part by an $85.6 million increase in deferred revenue and other working-capital changes. Free cash flow was $35.1 million after $9.0 million of capital expenditures and $9.9 million of capitalized internal-use software costs.
- At December 31, 2021, cash and cash equivalents were $164.6 million, short- and long-term investments were $92.9 million, and total cash, cash equivalents and restricted cash were $165.0 million.
- Convertible senior notes had a net carrying amount of $812.1 million, consisting of $230.0 million of 2.25% notes due 2025 and $600.0 million of 0.25% notes due 2027, net of issuance costs. The fair values were $460.5 million and $773.3 million, respectively.
- The company had no borrowings under its $100.0 million revolving credit facility, which was expanded from $50.0 million in December 2021. However, $9.3 million of letters of credit reduced borrowing availability, and the facility includes minimum recurring-revenue and liquidity covenants.
- Stockholders’ equity declined to a deficit of $126.0 million, compared with positive equity of $71.5 million at December 31, 2020, largely reflecting the net loss and adoption-related accounting adjustments.
Material changes versus the prior comparable period
- Revenue accelerated from 25.9% growth in 2020 to 30.1% growth in 2021, while ARR growth increased from 27.8% to 38.4%.
- Customer count increased 18.0% to 10,283, although the company modified its customer definition and revised the prior-period count accordingly.
- Gross margin declined from 70.5% to 68.4%, reflecting greater mix toward cloud and managed services and increased delivery costs.
- Rapid7 acquired Alcide for $50.5 million, Velocidex for $3.0 million, and IntSights for aggregate consideration of $322.2 million. IntSights contributed $9.5 million of 2021 revenue and a $23.0 million net loss after its July acquisition date.
- Rapid7 issued $600.0 million of 2027 convertible notes, used part of the proceeds and 2.2 million shares to repurchase $182.6 million of 2023 notes, and redeemed or converted the remaining 2023 notes during 2021.
- The company early adopted ASU 2020-06 for convertible debt accounting, increasing reported debt and reducing stockholders’ equity through a cumulative-effect adjustment.
- The 2025 notes became conditionally convertible from January 1 through March 31, 2022, subject to the applicable conversion conditions. The 2027 notes were not convertible at the holder’s option as of December 31, 2021.
Outlook, management commentary, risks and unusual items
Management expects continued investment in research and development, sales and marketing, international expansion, infrastructure, customer success, and potential acquisitions. The filing does not provide a clear numerical revenue or earnings guidance figure. Management expects existing cash, investments, available credit, and operating cash generation to satisfy operating and capital requirements for at least the next 12 months, but notes that additional financing may be required in the future.
- Key risks include continued GAAP losses, the ability to sustain customer renewals and expansion, dependence on vulnerability-management offerings, intense competition, execution and integration risk from acquisitions, and the ability to scale operations.
- Cybersecurity incidents, product defects, service outages, cloud-provider disruptions, misuse of Metasploit, and failures to detect vulnerabilities could damage the company’s reputation and cause customer losses or liability.
- COVID-19 continued to create uncertainty around sales cycles, renewals, customer spending, employee operations, and global economic conditions, although Rapid7 reported no significant disruption during 2021.
- International operations expose Rapid7 to foreign-exchange, privacy, data-localization, export-control, tax, geopolitical, and regulatory risks. The company generated 22.5% of 2021 revenue outside the United States.
- Unusual or non-recurring items included $2.7 million of induced-conversion expense, $16.2 million of acquisition-related adjustments in the non-GAAP net-loss reconciliation, $9.0 million of tax expense related to an intercompany intellectual-property transaction, and $6.9 million of incremental stock-based compensation from accelerated vesting.
- Rapid7 is defending patent litigation brought by Finjan alleging infringement of seven patents. The potential outcome and liability are uncertain, and the filing does not provide a clear quantified exposure.
- The company had $65.2 million of non-cancellable purchase commitments, primarily for cloud infrastructure and software subscriptions, and $100.5 million of operating lease liabilities.
Important facts for investors to verify
- Whether ARR growth, customer expansion, renewals, and cross-selling remain strong after the 2021 acquisitions and the change in customer-count definition.
- Whether gross margins stabilize or decline further as cloud subscriptions and managed services become a larger portion of revenue.
- Whether operating cash flow and free cash flow remain positive without relying heavily on deferred-revenue growth or other working-capital benefits.
- The company’s path to GAAP profitability given $736.0 million of accumulated deficit, ongoing investment plans, and substantial stock-based compensation.
- Debt conversion, refinancing, cash-settlement, dilution, and liquidity implications associated with the 2025 and 2027 convertible notes.
- Integration results and impairment risk related to IntSights, Alcide, Velocidex, and prior acquisitions, including the $515.3 million goodwill balance.
- The status and potential financial impact of the Finjan patent litigation and any other intellectual-property, privacy, cybersecurity, or regulatory claims.
- Compliance with revolving-credit covenants and the availability of liquidity after letters of credit, lease obligations, purchase commitments, acquisitions, and potential note-related cash payments.