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Rapid7 Announces Third Quarter 2019 Financial Results

November 5, 2019 7:00 AM

BOSTON, Nov. 05, 2019 (GLOBE NEWSWIRE) -- Rapid7, Inc. (Nasdaq: RPD), a leading provider of security analytics and automation, today announced its financial results for the third quarter of 2019.

"Rapid7 had a great third quarter. Our results reflect a good demand environment, great expense control and excellent execution across the board. With a strong focus on product innovation and a well-diversified product portfolio, we see a large opportunity in front of us and are well positioned for future growth. As a result, we are raising our total revenue and non-GAAP operating income guidance for the full-year 2019," said Corey Thomas, Chairman and CEO of Rapid7.

Third Quarter 2019 Financial Results and Other Metrics

Three Months Ended September 30,
2019 2018 % Change
(dollars in thousands)
Annualized recurring revenue $310,184 $217,415 43%
Number of customers 8,625 7,399 17%
ARR per customer $36.0 $29.4 22%
Recurring revenue as a percentage of total revenue 88% 82%
Renewal rate* 111% 118%

*For the three months ended September 30, 2018, our renewal rate was adjusted from 120%, as previously disclosed, to 118% based on a reclassification of certain upsells and cross-sells.

Three Months Ended September 30,
2019 2018 % Change
(in thousands, except per share data)
Products revenue$67,298 $43,829 54%
Maintenance and support revenue 9,178 10,614 (14)%
Professional services revenue 6,679 7,922 (16)%
Total revenue $83,155 $62,365 33%
North America revenue $69,883 $53,232 31%
Rest of world revenue 13,272 9,133 45%
Total revenue $83,155 $62,365
GAAP gross profit $59,525 $44,555
GAAP gross margin 72% 71%
Non-GAAP gross profit $61,865 $45,934
Non-GAAP gross margin 74% 74%
GAAP loss from operations $(11,756) $(11,301)
GAAP operating margin (14)% (18)%
Non-GAAP income (loss) from operations $542 $(2,822)
Non-GAAP operating margin 1% (5)%
GAAP net loss $(14,406) $(11,831)
GAAP net loss per share, basic and diluted $(0.29) $(0.25)
Non-GAAP net income (loss) $571 $(2,056)
Non-GAAP net income (loss) per share, basic $0.01 $(0.04)
Non-GAAP net income (loss) per share, diluted $0.01 $(0.04)
Adjusted EBITDA $3,446 $(1,102)
Cash provided by (used in) operating activities $1,839 $(4,050)

Recent Business Highlights

Fourth Quarter and Full-Year 2019 Guidance

Rapid7 anticipates total revenue, non-GAAP income (loss) from operations, and non-GAAP net income (loss) per share to be in the following ranges:

Fourth Quarter and Full-Year 2019 Guidance (in millions, except per share data)
Fourth Quarter 2019 Full-Year 2019
Revenue $87.4 to$89.0 $322.7 to$324.3
Year-over-year growth 27%to29% 32%to33%
Non-GAAP (loss) income from operations $(1.6)to$(0.6) $— to$1.0
Non-GAAP net (loss) income per share $(0.02)to$— $0.03 to$0.05
Weighted average shares outstanding 49.6 52.1

Guidance for the fourth quarter and full-year 2019 does not include any potential impact of foreign exchange gains or losses. The weighted average shares outstanding for the fourth quarter of 2019 represent basic shares outstanding given our projected non-GAAP net loss. The weighted average shares outstanding for full-year 2019 represent diluted shares outstanding given our projected non-GAAP net income.

Non-GAAP guidance excludes estimates for stock-based compensation expense, amortization of acquired intangible assets, amortization of debt discount and issuance costs, and certain other items. Rapid7 has provided a reconciliation of historical non-GAAP financial measures to the most comparable GAAP measures in the financial statement tables included in this press release. A reconciliation of non-GAAP guidance measures to the most comparable GAAP measures is not available on a forward-looking basis without unreasonable efforts due to the high variability, complexity and low visibility with respect to the charges excluded from these non-GAAP measures.

Conference Call and Webcast Information

Rapid7 will host a conference call today, November 5, 2019, to discuss its results at 8:00 a.m. Eastern Time. The call will be accessible by telephone at 877-357-4230 (domestic) or 629-228-0721 (international). The call will also be available live via webcast on the Company’s website at https://investors.rapid7.com. A telephone replay of the conference call will be available at 855-859-2056 or 404-537-3406 (access code 9168155) until November 12, 2019. A webcast replay will be available at https://investors.rapid7.com.

About Rapid7

Rapid7 (Nasdaq: RPD) is advancing security with visibility, analytics, and automation delivered through our Insight cloud. Our solutions simplify the complex, allowing security teams to work more effectively with IT and development to reduce vulnerabilities, monitor for malicious behavior, investigate and shut down attacks, and automate routine tasks. Over 8,500 customers rely on Rapid7 technology, services, and research to improve security outcomes and securely advance their organizations. For more information, visit our website, check out our blog, or follow us on Twitter.

Non-GAAP Financial Measures and Other Metrics

To supplement our consolidated financial statements, which are prepared and presented in accordance with generally accepted accounting principles in the United States, or GAAP, we provide investors with certain non-GAAP financial measures and other metrics, which we believe are helpful to our investors. We use these non-GAAP financial measures and other metrics for financial and operational decision-making purposes and as a means to evaluate period-to-period comparisons. We also use certain non-GAAP financial measures as performance measures under our executive bonus plan. We believe that these non-GAAP financial measures and other metrics provide useful information about our operating results, enhance the overall understanding of past financial performance and future prospects and allow for greater transparency with respect to metrics used by our management in its financial and operational decision-making.

While our non-GAAP financial measures are an important tool for financial and operational decision-making and for evaluating our own operating results over different periods of time, you should review the reconciliation of our non-GAAP financial measures to the comparable GAAP financial measures included below, and not rely on any single financial measure to evaluate our business.

Non-GAAP Financial MeasuresWe disclose the following non-GAAP financial measures: non-GAAP gross profit, non-GAAP income (loss) from operations, non-GAAP net income (loss), non-GAAP net income (loss) per share and adjusted EBITDA.

We define non-GAAP gross profit, non-GAAP income (loss) from operations, non-GAAP net income (loss) and non-GAAP net income (loss) per share as the respective GAAP balances excluding the effect of stock-based compensation expense, amortization of acquired intangible assets, amortization of debt discount and issuance costs and certain other items such as acquisition-related expenses, follow-on public offering costs, and litigation-related expenses. Non-GAAP net income (loss) per basic and dilutive share is calculated as non-GAAP net income (loss) divided by the weighted average shares used to compute net income (loss) per share, with the number of weighted average shares decreased to reflect the anti-dilutive impact of the capped call transactions entered into in connection with the 1.25% convertible senior note issued in August 2018.

We believe these non-GAAP financial measures are useful to investors in assessing our operating performance due to the following factors:

Stock-based compensation expense. We exclude stock-based compensation expense because of varying available valuation methodologies, subjective assumptions and the variety of equity instruments that can impact our non-cash expense. We believe that providing non-GAAP financial measures that exclude stock-based compensation expense allows for more meaningful comparisons between our operating results from period to period.

Amortization of acquired intangible assets. We believe that excluding the impact of amortization of acquired intangible assets allows for more meaningful comparisons between operating results from period to period as the intangible assets are valued at the time of acquisition and are amortized over several years after the acquisition.

Amortization of debt discount and issuance costs. In August 2018, we issued $230 million of convertible senior notes, which bear interest at an annual fixed rate of 1.25%. The imputed interest rate of the convertible senior notes was approximately 7.37%. This is a result of the debt discount recorded for the conversion feature that is required to be separately accounted for as equity, and debt issuance costs, which reduce the carrying value of the convertible debt instrument. The debt discount is amortized as interest expense together with the issuance costs of the debt. The expense for the amortization of debt discount and debt issuance costs is a non-cash item, and we believe the exclusion of this interest expense provides a more useful comparison of our operational performance in different periods.

Litigation-related expenses. We exclude certain litigation-related expenses consisting of professional fees and related costs incurred by us related to significant litigation outside the ordinary course of business. We believe it is useful to exclude such expenses because we do not consider such amounts to be part of our ongoing operations.

Acquisition-related expenses and follow-on public offering costs. We exclude acquisition-related expenses and follow-on public offering costs as costs that are unrelated to the current operations and neither are comparable to the prior period nor predictive of future results.

Anti-dilutive impact of capped call transaction. In connection with the issuance of our convertible senior notes, we entered into capped call transactions to offset potential dilution from the embedded conversion feature in the notes. Although we cannot reflect the anti-dilutive impact of the capped call transactions under GAAP, we do reflect the anti-dilutive impact of the capped call transactions in non-GAAP net income (loss) per basic and diluted share to provide investors with useful information in evaluating the financial performance of the company on a per share basis.

Adjusted EBITDA (non-GAAP). Adjusted EBITDA is a non-GAAP measure that we define as net loss before (1) interest income, (2) interest expense, (3) other income (expense), net, (4) provision for (benefit from) income taxes, (5) depreciation expense, (6) amortization of intangible assets, (7) stock-based compensation expense, and (8) certain other items. We believe that the use of adjusted EBITDA is useful to investors and other users of our financial statements in evaluating our operating performance because it provides them with an additional tool to compare business performance across companies and across periods. Adjusted EBITDA should not be considered as a substitute for other measures of financial performance reported in accordance with GAAP. There are limitations to using this non-GAAP financial measure, including that other companies may calculate this measure differently than we do, that it does not reflect our capital expenditures or future requirements for capital expenditures and that it does not reflect changes in, or cash requirements for, our working capital and excludes some items that are cash based.

Other MetricsAnnualized Recurring Revenue (ARR). ARR is defined as the annual value of all recurring revenue related contracts in place at the end of the period. ARR should be viewed independently of revenue and deferred revenue as ARR is an operating metric and is not intended to be combined with or replace these items. ARR is not a forecast of future revenue and can be impacted by contract start and end dates and renewal rates, and does not include revenue reported as perpetual license or professional services revenue in our consolidated statement of operations.

Number of Customers. We define a customer as any entity that has (1) an active Rapid7 contract or a contract that expired within 90 days or less of the applicable measurement date; and for Logentries products, those customers with a contract value equal to or greater than $2,400 per year, or (2) purchased Rapid7 professional services within the 12 months preceding the applicable measurement date.

ARR per Customer. We define ARR per customer as ARR divided by the number of customers at the end of the period.

Recurring Revenue. We define recurring revenue as revenue from term software licenses, content subscriptions, managed services, cloud-based subscriptions and maintenance and support.

Renewal Rate. We calculate our renewal rate by dividing the dollar value of renewed customer agreements, including upsells and cross-sells of additional products, but excluding professional services, in a trailing 12-month period by the dollar value of the corresponding customer agreements.

Cautionary Language Concerning Forward-Looking Statements

This press release includes forward-looking statements. All statements contained in this press release other than statements of historical facts, including, without limitation, statements regarding our anticipated total revenue and our future financial and business performance for the fourth quarter and full-year 2019, market opportunities and future growth are forward-looking statements. The words “anticipate,” “believe,” “continue,” “estimate,” “expect,” “intend,” “may,” “will” and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives and financial needs. These forward-looking statements are subject to a number of risks and uncertainties, including, without limitation, risks related to our rapid growth and ability to sustain our revenue growth rate, the ability of our products and professional services to correctly detect vulnerabilities, competition in the markets in which we operate, market growth, our ability to innovate and manage our growth, our ability to integrate acquired operations, our ability to operate in compliance with applicable laws as well as other risks and uncertainties set forth in the “Risk Factors” section of our Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission for the quarter ended June 30, 2019 filed with the Securities and Exchange Commission on August 1, 2019, and subsequent reports that we file with the Securities and Exchange Commission. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, we cannot guarantee future results, levels of activity, performance, achievements or events and circumstances reflected in the forward-looking statements will occur. We are under no duty to update any of these forward-looking statements after the date of this press release to conform these statements to actual results or revised expectations, except as required by law. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this press release.

Neeraj Mahajan, CFAVice President, Investor Relations[email protected](857) 990-4074

Press contact:

Caitlin Doherty[email protected](857) 990-4240

RAPID7, INC.Consolidated Balance Sheets (Unaudited)(in thousands)

September 30, 2019 December 31, 2018
Assets
Current assets:
Cash and cash equivalents$114,925 $99,565
Short-term investments 131,815 159,210
Accounts receivable, net 62,422 74,935
Deferred contract acquisition and fulfillment costs, current portion 14,905 12,321
Prepaid expenses and other current assets 15,827 9,746
Total current assets 339,894 355,777
Long-term investments 10,997 44,892
Property and equipment, net 51,519 17,523
Operating lease right-of-use assets 61,217 —
Deferred contract acquisition and fulfillment costs, non-current portion30,452 27,634
Goodwill 97,866 88,420
Intangible assets, net 29,183 23,955
Other assets 5,466 1,168
Total assets $626,594 $559,369
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable $6,549 $7,048
Accrued expenses 33,174 37,376
Operating lease liabilities, current portion 6,460 —
Deferred revenue, current portion 200,314 189,855
Other current liabilities 285 707
Total current liabilities 246,782 234,986
Convertible senior notes, net 182,471 174,688
Operating lease liabilities, non-current portion 73,266 —
Deferred revenue, non-current portion 36,620 58,716
Other long-term liabilities1,280 3,660
Total liabilities 540,419 472,050
Stockholders’ equity:
Common stock 493 476
Treasury stock (4,764) (4,764)
Additional paid-in-capital594,226 556,223
Accumulated other comprehensive income (loss) 304 (31)
Accumulated deficit (504,084) (464,585)
Total stockholders’ equity86,175 87,319
Total liabilities and stockholders’ equity $626,594 $559,369

RAPID7, INC.Consolidated Statements of Operations (Unaudited)(in thousands, except share and per share data)

Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 2019 2018
Revenue:
Products$67,298 $43,829 $186,793 $118,151
Maintenance and support 9,178 10,614 28,107 31,977
Professional services 6,679 7,922 20,399 25,193
Total revenue 83,155 62,365 235,299 175,321
Cost of revenue:
Products15,627 10,294 42,668 28,380
Maintenance and support 2,076 1,901 6,041 5,757
Professional services 5,927 5,615 17,075 17,660
Total cost of revenue 23,630 17,810 65,784 51,797
Total gross profit59,525 44,555 169,515 123,524
Operating expenses:
Research and development 20,154 17,111 57,645 49,915
Sales and marketing 39,904 30,570 113,214 90,779
General and administrative 11,223 8,175 32,336 25,056
Total operating expenses 71,281 55,856 203,195 165,750
Loss from operations (11,756) (11,301) (33,680) (42,226)
Other income (expense), net:
Interest income 1,448 813 4,761 1,520
Interest expense (3,399) (1,679) (9,940) (1,681)
Other income (expense), net (492) 181 (727) (67)
Loss before income taxes (14,199) (11,986) (39,586) (42,454)
Provision for (benefit from) income taxes 207 (155) (87) 71
Net loss $(14,406) $(11,831) $(39,499) $(42,525)
Net loss per share, basic and diluted $(0.29) $(0.25) $(0.82) $(0.92)
Weighted-average common shares outstanding, basic and diluted 49,020,449 46,914,077 48,437,686 46,139,978

RAPID7, INC.Consolidated Statements of Cash Flows (Unaudited)(in thousands)

Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 2019 2018
Cash flows from operating activities:
Net loss $(14,406) $(11,831) $(39,499) $(42,525)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization 4,598 2,660 11,969 7,737
Amortization of debt discount and issuance costs 2,679 1,296 7,783 1,296
Stock-based compensation expense 10,426 7,424 29,490 20,999
Provision for doubtful accounts 429 24 1,782 480
Deferred income taxes — — (761) —
Foreign currency re-measurement loss 379 95 570 566
Other non-cash (income) expense (345) (274) (1,635) (345)
Changes in operating assets and liabilities:
Accounts receivable 6,311 (5,299) 10,860 19,287
Deferred contract acquisition and fulfillment costs (2,231) (1,854) (5,403) (6,385)
Prepaid expenses and other assets (544) 1,168 (9,878) (2,434)
Accounts payable (1,052) (1,826) 1,132 565
Accrued expenses 2,490 5,632 (4,822) (2,174)
Deferred revenue(7,058) (1,312) (12,124) (2,313)
Other liabilities 163 47 1,292 (622)
Net cash provided by (used in) operating activities 1,839 (4,050) (9,244) (5,868)
Cash flows from investing activities:
Business acquisition, net of cash acquired 14 — (14,607) —
Purchases of property and equipment (9,341) (2,754) (27,053) (8,404)
Capitalization of internal-use software costs(1,534) (1,092) (4,686) (2,505)
Purchases of investments (41,776) (168,290) (114,208) (178,945)
Sales/maturities of investments 36,985 6,448 177,287 39,576
Net cash (used in) provided by investing activities (15,652) (165,688) 16,733 (150,278)
Cash flows from financing activities:
Proceeds from issuance of convertible senior notes, net of issuance costs — 223,529 — 223,529
Purchase of capped calls related to convertible senior notes — (26,910) — (26,910)
Proceeds from follow-on public offering, net of offering costs — — — 30,907
Taxes paid related to net share settlement of equity awards (2,087) (707) (4,926) (1,712)
Proceeds from employee stock purchase plan 2,887 2,005 5,521 3,637
Proceeds from stock option exercises 1,866 1,864 7,924 6,521
Net cash provided by financing activities 2,666 199,781 8,519 235,972
Effect of exchange rate changes on cash, cash equivalents and restricted cash (497) (114) (648) (428)
Net increase in cash, cash equivalents and restricted cash (11,644) 29,929 15,360 79,398
Cash, cash equivalents and restricted cash, beginning of period 126,569 101,231 99,565 51,762
Cash, cash equivalents and restricted cash, end of period $114,925 $131,160 $114,925 $131,160

RAPID7, INC.GAAP to Non-GAAP Reconciliation (Unaudited)(in thousands, except share and per share data)

Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 2019 2018
GAAP gross profit $59,525 $44,555 $169,515 $123,524
Add: Stock-based compensation expense1 679 478 1,970 1,321
Add: Amortization of acquired intangible assets2 1,661 901 4,681 2,702
Non-GAAP gross profit $61,865 $45,934 $176,166 $127,547
Non-GAAP gross margin 74.4% 73.7% 74.9% 72.8%
GAAP gross profit - Products $51,671 $33,535 $144,125 $89,771
Add: Stock-based compensation expense 216 142 580 424
Add: Amortization of acquired intangible assets 1,661 901 4,681 2,702
Non-GAAP gross profit - Products$53,548 $34,578 $149,386 $92,897
Non-GAAP gross margin - Products79.6% 78.9% 80.0% 78.6%
GAAP gross profit - Maintenance and support $7,102 $8,713 $22,066 $26,220
Add: Stock-based compensation expense 170 73 456 161
Non-GAAP gross profit - Maintenance and support $7,272 $8,786 $22,522 $26,381
Non-GAAP gross margin - Maintenance and support 79.2% 82.8% 80.1% 82.5%
GAAP gross profit - Professional services $752 $2,307 $3,324 $7,533
Add: Stock-based compensation expense 293 263 934 736
Non-GAAP gross profit - Professional services $1,045 $2,570 $4,258 $8,269
Non-GAAP gross margin - Professional services 15.6% 32.4% 20.9% 32.8%
GAAP Loss from operations $(11,756) $(11,301) $(33,680) $(42,226)
Add: Stock-based compensation expense1 10,426 7,424 29,490 20,999
Add: Amortization of acquired intangible assets2 1,694 940 4,789 2,821
Add: Acquisition-related expenses3— 115 514 115
Add: Follow-on public offering costs4 — — — 205
Add: Litigation-related expenses5 178 — 506 400
Non-GAAP Income (loss) from operations $542 $(2,822) $1,619 $(17,686)
GAAP Net loss $(14,406) $(11,831) $(39,499) $(42,525)
Add: Stock-based compensation expense1 10,426 7,424 29,490 20,999
Add: Amortization of acquired intangible assets2 1,694 940 4,789 2,821
Add: Acquisition-related expenses3 — 115 514 115
Add: Follow-on public offering costs4 — — — 205
Add: Litigation-related expenses5 178 — 506 400
Add: Release of valuation allowance, acquisition-related — — (761) —
Add: Amortization of debt discount and issuance costs 2,679 1,296 7,783 1,296
Non-GAAP Net income (loss) $571 $(2,056) $2,822 $(16,689)
Reconciliation of net income (loss) per share, basic
GAAP net loss per share, basic $(0.29) $(0.25) $(0.82) $(0.92)
Non-GAAP adjustments to net loss 0.30 0.21 0.88 0.56
Non-GAAP net income (loss) per share, basic $0.01 $(0.04) $0.06 $(0.36)
Reconciliation of net income (loss) per share, diluted
GAAP net loss per share, diluted $(0.29) $(0.25) $(0.82) $(0.92)
Non-GAAP adjustments to net loss 0.30 0.21 0.87 0.56
Non-GAAP net income (loss) per share, diluted $0.01 $(0.04) $0.05 $(0.36)
Weighted average shares used in GAAP per share calculation, basic and diluted 49,020,449 46,914,077 48,437,686 46,139,978
Weighted average shares used in non-GAAP per share calculation:
Basic 49,020,449 46,914,077 48,437,686 46,139,978
Diluted 52,404,657 46,914,077 51,879,345 46,139,978
1 Includes stock-based compensation expense as follows:
Cost of revenue $679 $478 $1,970 $1,321
Research and development 3,996 2,984 11,224 8,400
Sales and marketing 3,047 2,066 8,453 5,684
General and administrative 2,704 1,896 7,843 5,594
2 Includes amortization of acquired intangible assets as follows:
Cost of revenue $1,661 $901 $4,681 $2,702
Sales and marketing 32 38 105 115
General and administrative 1 1 3 4
3 Includes acquisition-related expenses as follows:
General and administrative $— $115 $514 $115
4 Includes follow-on public offering costs as follows:
General and administrative $— $— $— $205
5 Includes litigation-related expenses as follows:
General and administrative $178 $— $506 $400

RAPID7, INC.Reconciliation of Net Loss to Adjusted EBITDA (Unaudited)(in thousands)

Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 2019 2018
GAAP net loss $(14,406) $(11,831) $(39,499) $(42,525)
Interest income (1,448) (813) (4,761) (1,520)
Interest expense 3,399 1,679 9,940 1,681
Other (income) expense, net 492 (181) 727 67
Provision for (benefit from) income taxes 207 (155) (87) 71
Depreciation expense 2,520 1,591 6,426 4,616
Amortization of intangible assets 2,078 1,069 5,543 3,121
Stock-based compensation expense 10,426 7,424 29,490 20,999
Acquisition-related expenses — 115 514 115
Follow-on public offering costs — — — 205
Litigation-related expenses 178 — 506 400
Adjusted EBITDA $3,446 $(1,102) $8,799 $(12,770)

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