Q4 2020 Rapid7 Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the fourth quarter 2020 rapid seven earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question during that time, you will need to press star one on your telephone.
And as I said today's conference is being recorded if you require any further assistance. Please press star zero and I will now hand, the conference over to you and speaker today, So Neal Shah Vice President of Investor Relations.
Thank you operator, and good afternoon, everyone.
We appreciate you joining us today to discuss rapid seven's fourth quarter and full year 2020 financial and operating results and in addition to our financial outlook for the first quarter and full fiscal year 2021.
With me on the call today are Corey Thomas our CEO and Jeff <unk> our CFO.
We distributed our earnings press release over the wire and it is now posted on our website at investors day rapid seven dotcom.
Along with the updated company presentation and financial metrics file.
This call is being broadcast live via webcast and following the call and audio replay will be available at investors day rapid seven dotcom until February 16, and 'twenty and 'twenty one.
During this call we may make statements related to our business that are forward looking under federal Securities laws.
These statements are made pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 1995 and include statements related to the company's positioning our future goals and financial guidance for the first quarter and full year 'twenty 'twenty one.
Assumptions underlying such goals and guidance, including the anticipated impact of COVID-19 on our financial guidance business financial condition results of operations and renewals and our assumptions on the pace of economic recovery and the global economy on our future results of operations and product strategy.
These forward looking statements are based on our current expectations and beliefs and on information currently available to us.
Actual outcomes and results may differ materially from the expectations contained in these statements due to a number of risks and uncertainties, including those contained in our most recent quarterly report on form 10-Q, and and its subsequent reports will be filed with the SEC and.
Information provided on this conference call should be considered and might've such risks actual results and the timing of certain events may differ materially from the results or timing predicted or implied by such forward looking statements and reported results should not be considered as an indication of future performance.
Rapid seven's does not assume any obligation to update the information presented on this conference call except to the extent required by applicable law.
And our commentary today will primarily be and non-GAAP terms and reconciliations between our historical GAAP and non-GAAP results and guidance can be found in today's earnings press release and.
Times, and our prepared remarks or in response to your questions. We may offer incremental metrics to provide greater insight into the dynamics of our business or our quarterly results. Please be advised that this additional detail maybe onetime in nature, and we may or may not provide an update and the future on these metrics.
With that I'd like to turn the call over to our CEO Corey Thomas Corey.
Thank you from Neil and good afternoon, everyone.
Thank you all for joining us today for our fourth quarter and full year, 'twenty and 'twenty earnings call.
I am pleased to report that rapid 17 delivered a strong finish to 2020 that exceeded our expectations across both security transformation solutions and vulnerability management.
Full year AOR growth of 28 per cent to $433 million demonstrates our ability to capture the large and growing opportunity as organizations transform their security operations for the cloud.
Rapid seven remains steadfast in our effort to help customers.
And securely into the cloud.
To further this goal we began 2021 by expanding and strengthening our cloud security offerings with the recently announced acquisition of outfit, which I'll touch on and a moment.
Looking back on 2020.
I am proud of our team's resilience and commitment to serving our customers and makes it challenging year for many.
I'll begin today by sharing some insights and customer engagements that provide clarity and confidence and terrific long term position and prospects.
I will then touch briefly on our innovation and focus and enduring goals before turning it to Jeff to detail, our financial results and guidance.
Over the last two months, we have seen organizations respond to unprecedented global disruption by accelerating digital transformation to cope with a more distributed cloud centric world.
Enterprises and mid market businesses alike are overhauling their systems to build a new cloud native applications to digitally engage with customers employees and partners.
These investments are happy and across the industry lives and retail manufacturing education and healthcare to name a few.
But in the midst of this massive increase and digital investments recent events and the cyber security landscape or a sobering reminder, that digital risk has never been greater volume.
Covid put security squarely back and focus for boards and management teams.
<unk> security is a critical component of ongoing transformation investments.
Even prior to these events, we thought escalated security focus amongst our customers and prospects throughout 2020, and security was we prioritize alongside and digital initiatives.
During the fourth quarter, we saw strong demand for our insight platform products as customers look me odd investing to work from home enablement to an enduring set of initiatives tied to securing cloud and digital investment.
One initiative is that customers expand their technology footprint. They are engaging with rapid 7% up with their stock with modern detection response to better monitor expanding threat vectors.
This was the case, what and existing fortune 500, retail customer with actively transforming their customer strength.
They were channel it's to consolidate risk visibility of profit expanding footprint with an assortment of disconnect with security technologies and services.
Having a single trusted security partner that they could scale with spoke volume for them.
For this customer centralized their security architecture on the insight platform by adding RDR alongside their existing inside the M deployment.
Our cloud native offerings, and unified and sat agent discussed and was actively monitoring within two weeks of purchase.
This time to value is critical to our customer success and today's dynamic threat environment.
So our 2020, we saw ADR resonate with international customers and part for this reason.
For example in the fourth quarter, we engaged with the international health care customer, we're seeking and improve threat visibility after experiencing a security book.
And this customer love the ease of getting IV are up and running along with the visibility it provided across their external attack surface.
And so realize the platform value of a unified agent that both detect threats and.
And monitors from Warner abilities, and as a result purchase inside P. M. At the same time.
Another enduring security initiative is and its customers accelerate cloud investments theyre rapidly with limited insight and I tried to rapid seven and four improved visibility and control and their cloud environment.
And then the fourth quarter, we continued to see growing interest for our cloud security technology across both new and existing customers. A great example of this was a cloud security deal in the quarter with an existing rapid and seven technology customer.
Upon evaluating cloud this customer recognized the power of its automation capabilities and adaptability for their environment driving them to consolidate ultra rapid seven by replacing their existing cloud security offerings.
This still resulted in a greater than 10 fold increase and this customers are are.
These deals clearly validate rapid sell and success and expanded beyond our vulnerability management routes to become a leading cloud native security operations company today.
And they demonstrate the increasingly strategic nature of rapid Seven's best and switch approach to solving the full scope of our customer security operations challenges from B M to detection and response, the cloud security and automation.
The result is that once again, we experienced strong demand for our security transformation solutions and the quarter, which grew over 40% exiting the year.
We expect continued momentum as we look ahead to 2021 and our <unk>.
Excited about the opportunity to build upon the success.
We remain focused on delivering and insight platform experience that combines market, leading technology and platform value for a differentiated customer experience.
One great proof point is early validation, we saw in the fourth quarter with our attach motion spin.
Specifically, we saw strong early customer demand for our capability to attach automation that the add on two other insight product purchases driving a record quarter for in fact and Nick.
Coupled with the old ball and success of our network traffic analysis, and enhanced endpoint and telemetry molecules.
See a compelling opportunity to drive deeper customer engagement on our insight platform.
A great example of this with a new manufacturer and customer we signed in the quarter.
This customer was lifted the scale security operations and improved visibility and respond to a breach but.
But managing desperate tools with a major pain point for them.
They recognize that a single insight platform experience could improve coverage and make management significantly easier.
They purchase and Fabienne to remediate risks and <unk>.
<unk> with NTIA to detect and respond to threats and and so.
And Nick for automation across the platform.
We remain early and a plethora of attorney, but see tremendous opportunity here and we will continue to evolve our bundling and packaging opportunities throughout 2021, we expect this will support durable growth and on a per customer which ended the year at $44500.
<unk> growth of 18% over the prior year.
Turning now to innovation, starting with the cloud and.
And as companies migrate to the cloud the influence of Dev ops is critical to the process.
Rapid seven and focus on delivering cloud security and sits at the intersection of Dev and ops. So I'm excited to share more about our recently announced acquisition of biopsy.
As developers rapidly adopt kubernetes for freedom and flexibility and cloud Native development security must keep pace.
I'll teach leading cloud workload protection platform is designed to enable organizations to innovate and the cloud without sacrificing security by providing real time visibility.
And a one time monitoring and threat detection.
And our feet cloud workload protection to rapid seven existing cloud posture management and cloud identity capabilities Divi cloud positioned us to deliver a market leading cloud native security platform that delivers continuous security to our customers across multi cloud environments.
The acquisition of our feeds puts us another step forward and solve and the security stakeholders need to manage risk and compliance while meeting the Dev ops teams, where they are and the cloud.
Shifting to vulnerability management.
It's important to note that the cloud is not the only place today, where customers lack visibility.
And the organizations asset footprint expand with Ot and Iot connected devices, so too does the threat footprint.
Security teams are increasingly responsible and protecting and managing risk in these environments, but often lack the visibility and controls to do so.
Rapid Seven's recent strategic partnership with <unk>, a market leader and industrial cyber security and mitigate a leading medical device security provider provided our respective joint customers with a more holistic risk visibility and management across the digitally connected environment.
And these integrations will aid.
Oh.
Visibility to Ot, Iot and medical device information directly and insight secure.
And security teams can perform active scan to gain improved visibility into those environments.
Rapid up with a brief update on our goals.
Last year, our share at three enduring goals for our business that remain core to our focus today as we look ahead.
Our first goal is to be a leader and enabling customers to transform their security operations around the cloud.
Over the past year, we have invested and our product capabilities and built a meaningful position and cloud security and we recognize that customer challenges and the cloud are multifaceted and during 2021, we will continue to innovate as our customers leverage our security transformation solutions to secure their digital right.
Our second goal is to accelerate our platform distribution agent.
The early success, we've seen with our evolve and expand motion and 2020 validates our long term opportunity to expand <unk> per customer.
Over the coming year, we will continue to focus on lowering the barriers for our customers to more easily adopt a broader set of our best in class and site platform product and solutions.
Finally, our third goal is to drive long term operating leverage while investing for growth.
We're proud to have demonstrated strong execution and operational discipline. This past year, while maintaining profitability, while absorbing our largest ever acquisition and navigating a volatile macro environment.
Moreover.
We have done so while continuing to invest aggressively behind a large and compelling market opportunity.
Which positions us to continue driving durable growth as we focus on scale and free cash flow over the long term.
In closing I'm excited about the opportunity that lies ahead and we would like to thank our entire rapid 17 for their ongoing efforts to make the best and security operations accessible to all.
Before I turn the call over to our CFO, Jeff I would like to take a moment to invite all of you to our upcoming virtual investor day to be held on the afternoon of March 10th 2021.
If you and not yet received and invite please reach out to our IR team. We hope you can attain.
Well sure.
Thanks, Corey and good afternoon, everyone.
Before I begin a brief reminder, that except for revenue all financial results. We will discuss today are non-GAAP financial measures unless otherwise stated and reconciliations between our GAAP and non-GAAP results can be found in today's earnings press release.
We're pleased to report solid execution as rapid seven delivered a strong finish to the fourth quarter and full year 2020.
Total ending <unk> of $432 $9 million grew 28% over the prior year as customers turn to rapid seven to help solve their security transformation and vulnerability management challenges.
The strong reaction, we see across our business fuels, our confidence and continuing to invest for durable growth and margin expansion ahead.
Full year revenue of $411 5 million exceeded the high end of our guidance growing 26% over the prior year.
We experienced strong demand for our insight platform products during the year, resulting in better than expected products revenue growth of 29% over the prior year to $382 9 million.
As Corey shared earlier, we see the early stages of and enduring way for organizations to secure the growing cloud and digital investments.
This is reflected and the success of our security transformation solutions, which once again grew over 40% led by strong demand from detection and response cloud and automation offerings.
Rapid stuff it is well positioned to help customers advanced securely into the cloud with our insight platform and we're investing to capture this high growth market opportunity.
This is evident and our operating results as we reinvested topline over performance back into the business, while still delivering operating profit at the top end of our guidance range of $2 million from the full year.
Our success in 2020 was once again driven by balanced contribution of business from both new and existing customers throughout the year with our security transformation solutions, representing over 50% of new <unk> for the full year.
And we saw continued healthy growth and our customer base as we ended the year, serving over 9700 customers globally, a year over year increase of 8%.
We also experienced great success, expanding relationships with existing customers throughout the year as they leverage more of our VM and security transformation products to secure the growing digital footprint.
As a result, we ended 2020 with AOR per customer of approximately $44500 growth of 18% over the prior year.
Turning to fourth quarter results.
Fourth quarter total revenue of $113 2 million was above the high end of our guidance and grew 23% year over year, while products revenue grew 26% year over year to $104 4 million.
Looking at the business geographically North America revenue grew by 23% year over year and comprised 83% of total revenue from the fourth quarter, while rest of world grew by 26% representing 17% of total revenue.
Total gross margin for the fourth quarter was 73% down slightly from the prior quarter and down from 75% a year ago, driven by a growing mix of our cloud based offerings.
Sales and marketing expenses grew 22% year over year, reflecting continued investment and growth and improved to 44% of revenue and the quarter compared to 45% and the year ago period.
R&D expenses grew 34% over the prior year and represented 20% of revenue up slightly from 19% and Q4 2019, as we continue to invest and innovation.
G&A expenses grew 12% and improved to 9% of revenue compared to 10% a year ago.
Fourth quarter operating loss of $7 million was slightly better than the high end of our guidance range of <unk> $8 million, reflecting strong execution, coupled with our focus on reinvest and top line outperformance to support durable growth and profit expansion ahead.
Adjusted EBITDA for the fourth quarter was approximately $3 million net income per share was a loss of seven.
Moving to our balance sheet and cash flows. We ended Q4 with cash cash equivalents and investments of $322 $6 million compared to $331 4 million and at the end of Q3 2020.
Fourth quarter operating cash flow of $6 million.
It was better than expected driven by strong billings and collections activity in the quarter.
As a result full year operating cash flow of $4 9 million exceeded our prior expectation of approximately breakeven.
During 2020, we completed a significant portion of our facilities expansion projects, resulting in full year capital expenditures of $13 8 million.
We also incurred $6 $1 billion and capitalized software spend.
<unk> and full year 2020 free cash flow of a loss of $15 million a notable improvement from the prior year loss of $36 9 million.
Shifting now to guidance for 2021.
The strong demand we experienced during the second half of 2020 validates our thesis that organizations of all sizes are undergoing digital transformation driving a need to modernize their security architectures as customers lean into the cloud, they're leveraging rapid seven's best and sweet insight platform to extend their security operations and our club.
Good.
Looking ahead, we plan to continue investing behind our best in class security transformation, and vulnerability management offerings, and 2021 to provide enhanced monitoring automation and cloud security capabilities to our customers.
Given these trends, we see a compelling opportunity to drive durable growth from 2021, but recognize that some magnitude of pandemic induced economic risk remains due to an uncertain resolution timeframe as.
As a result and framing our initial expectations for 2021, we are balancing long term optimism for our business with ongoing near term global health challenges.
With that framework in mind, let me start by sharing our full year expectations for.
For the full year 2021, we expect to deliver total <unk> growth of approximately 20%.
We will aim to share relevant updates to this expectation as we gain increased visibility to a more broad based resolution of the pandemic lightly likely during the second half of the year.
We anticipate total revenue for the year to be and the range of 488 million to $496 million.
<unk> approximately 20% growth at the midpoint.
We expect non-GAAP operating income to be and the range of 12 million to $16 million for the full year.
This reflects ongoing investments and growth and innovation, while still delivering on our growth and profitability framework.
And as does our typical approach, we expect to reinvest any upside back into the business to support our long term objectives.
Before I provide non-GAAP EPS guidance a brief aside on the updated accounting standard ASU 2020, dashboards six issued in mid 2020 and related to the accounting for convertible debt instruments. The.
And the updated standard changes the way that convertible debt. This accounted for among other things require your use of the if converted method for diluted EPS calculations.
We intend to early adopt this standard on a modified retrospective basis as of the start of our new fiscal year beginning January one 2021.
The updated standard will have the effect of reducing our GAAP net interest expense on our income statement. It will have no impact on our reported non-GAAP net income.
Based on our current expectations. The if converted method is not dilutive to non-GAAP EPS to the full year 2021. So at this time, we do not expect adoption of this standard to impact our non-GAAP diluted EPS calculation for the full year 2021.
The updated standard will also result in and increased the carrying value of our convertible debt on our balance sheet to the principal value less any unamortized debt issuance costs with an offsetting decrease to stockholders' equity.
The standard will have no impact on our cash flow from operations.
With that turning back to guidance, we anticipate non-GAAP net income per share for the full year to be and the range of a loss of <unk> <unk> to a positive <unk> <unk> per share, which is based on an estimated 53 and 5 million basic and $56 4 million diluted weighted average shares outstanding.
With our major facilities expansion and investments now behind us our focus turns to scaling positive free cash flow over the long term as we invest for durable growth and our business.
For the full year 2021, we expect to generate free cash flow of approximately $10 million.
As a reminder, we define free cash flow as cash flow from operations, plus capital expenditures and capitalized internal use software costs.
Moving to quarterly guidance.
And the first quarter of 2021, we anticipate total revenue to be and the range of $113 2 million to $114 8 million.
Growth of 20% to 22%.
We anticipate non-GAAP operating income for the first quarter to be and the range of a loss of <unk> 7 million positive.
Positive <unk> 3 million.
And non-GAAP net income per share to be in the range of a loss of eight.
And the loss of six months, which is based on and anticipated $52 5 million basic weighted shares weighted average shares outstanding.
Note that our first quarter and full year 2021 guidance includes the anticipated impact of the <unk> acquisition, which as we shared is not expected to have a material impact to our financials.
In conclusion as we enter 2021, we remain excited about our opportunity to drive durable growth, while scaling profitability and cash flow over the long term as we work to make the best and security operations accessible to all with that we appreciate your time and support and we'll now open the call for any questions.
Operator.
Thank you ladies and gentlemen.
And at this time just price.
And then one on your telephone keypad to withdraw your question press, the pound or hash key.
Please stand by while we compile daycare and Iowa.
Our first question comes from Scott can you kind of walk with Barclays. Your question. Please.
Hey, guys. Thanks for taking my questions here how are you.
Doing well and challenging.
Yes, same here, Hey, Corey maybe maybe first for you.
You touched on this a little bit and the prepared remarks, but can you just talk about what customers that you speak with are saying post solar wins breach on the importance of vulnerability management and maybe Relatedly talk about how this impacts other parts of rapid seven's portfolio.
Like Sim and application security.
And I was wondering question and so we've been spending a lot of time as you can imagine I'm trying to understand how our customers see the world.
Post the breaches that happened at the end of last year and even <unk>.
Key observations, the first and probably the most important.
Is that security and back in the forefront of boards and management teams marks.
Which actually I think bodes well for sort of long term demand and long term focus.
The second thing as you can imagine directly to your question around vulnerability management is that most of it and we're talking to see vulnerability management and the visibility around it and strategic the thing that they are also very aware of though is that it's not just identify and having the visibility into the vulnerability. You also have to remediate and that's a long term task and.
So their focus on that and then looking at how they do that and relationship to the other part of your question and what we're seeing very very clearly and just as people see visibility and vulnerability management and strategic they are seen and detection and response and a hot urgent need right now because the question is do I actually have attackers and my environment right now and so what we see.
And acceleration in that sense of urgency around detection and response. So when you think about a broader portfolio is digital transformation is clearly driving both cloud and frankly, all spec ops.
The recent attacks has dropped and high urgency, especially and the top here and then we're now around do I have a track of things my environment and detection and response and then people are thinking about the fundamentals and hobby management, cyber security, which bodes well for the long term health and vulnerability management overall.
Got it got it that's helpful.
And Jeff maybe from my follow up for you maybe just from a cost and margin side can you just talk about how youre thinking about travel and office related costs coming back in 2021, you talked about and just sort of balancing some views.
Including kind of the pandemic through the year and maybe as part of that just just broadly remind us how you think about that growth and margin formula.
Long term does that all make sense.
Sure sure. Good question, so look and the first half.
We're not expecting any significant increase and our travel.
Very much wait and see attitude to see how the pandemic plays out.
And we would expect that and the second half those costs will gradually increase but look it's.
We're really.
And really dependent on what we see with Covid so to the extent that it's there.
And a favorable then will increased travel and increase those expenses and I would expect most companies are looking at it the same way with respect to our growth and profitability framework.
<unk>.
I want to reiterate a framework that we've been talking about so.
And our growth range as we do expect modest leverage if we're in 20% to 25%. We would expect that we would increase leverage and the 2% to 3% range. If it's 25 to 31 to two and its over 30% would be less.
And I will point out that as Corey mentioned, we are planning an analyst day on March 10, and we will do a much deeper dive and to our long term margins at that point.
Look forward to it thanks guys.
Thanks, Thank you.
Thank you. Our next question comes from Matt Hedberg with RBC capital markets. Your question. Please.
Sure Hey, Thanks for taking my question guys.
Jeff two.
2020.
Jack you talked about 28% <unk> growth was really a combination of 8% growth and customers and 18% <unk> expansion as you look to the 'twenty 'twenty One guide at a starting point of around 20%. How do you think of the components of those I guess, both on the new customer side. They are our expansion and maybe.
A little bit more on the churn aspect of the story as well.
Yes so.
With respect to the.
<unk> per customer we have multiple levers I mean, it's really.
Growth in customers and growth and the IRR per customer so we have.
We have IRR from brand new customers, we have up sells and cross sells and this year all three elements grew and contributed to that growth.
New and upsell.
Upsell and cross sell.
With cash is a healthy balance historically, it's been sort of a 50 50 mix from ore from brand new customers and from and from the base.
With the pandemic, it's probably leaned a little bit more towards the base.
This year was 18% I'm, sorry, 8% customer growth and 80% are on per customer.
Those two levers drove about a 28% overall AOR growth. So with respect to 2021, we would expect the same healthy mix, it's difficult to predict exactly those percentages, but I think you can look at and the customer growth you can look at sort of those.
Those levels those levels to continue.
With respect to churn and I think our churn rates are healthy our retention rates are healthy. So we don't see any.
Any trend there that would alter that.
Right now all the trends are positive.
And just to follow and Jeff.
We expect to see balance what I would say is that with the momentum that we're seeing overall and the platform side I would expect.
<unk> shifts to potentially and the <unk> per customer on the balance out of the equation, just because we're really build and our customer brand and we're seeing good response from customers.
Well, that's great quite actually dovetails to my second question and it was great to hear you talk about divi cloud this quarter, obviously, that's it could be a material driver of <unk> per customer.
How do you think about where are we at right now in sort of the messaging.
Obviously, you've called out, though and the nice win but just is there other things that you guys can do to draw.
Broader adoption of that because it seems like that's a obviously a material driver.
And that could represent some upside here at some point.
Yes, so just from where we are as you think about as we exited last year. We have really started the process of having divi cloud accessible to the broad rapid seven sales force. This year you can expect it to be more fully into especially our enterprise sales force because.
So you could think about a larger team selling debit cloud and also reflected and our partner organizations, because they've acquired business that actually a very healthy one and partners and so that's a big focus area.
One way to think about it is the divi cloud has gotten great customer feedback great adoption, and we're steadily increasing the distribution, but in a way and and our pace and make sure that we're onboarding customers and successful way.
Thanks, a lot congrats on a strong close to the year. Thank.
Thank you very much.
And our next question comes from Brian Essex, with Goldman Sachs and alignment.
Pulp and.
Yeah.
Great. Thank you very much and thank you for taking the question.
Maybe maybe Corey you mentioned in your prepared remarks, you talked about enterprises looking beyond work from home and toward cloud security and and then.
Our response to sockets question, you mentioned and I think Thats true VM was becoming strategic where do you feel as though VM is with regard to spending priorities within your customers budgets and any.
Can you put some context around.
And how this kind of shift in mindset would affect the priorities.
Yes.
And we could be.
Yes, we will be <unk>, and then maybe touch.
Platform as well yes.
Yeah, no absolutely. So I think one way to think about it is VM and strategic but the benefits of and our long term oriented and.
So what you're seeing is that people planning around here you see some uptake, but it doesn't have the same urgency as we actually see and areas like detection and response and cloud and even some of the automation stuff. When we saw higher degrees of urgency as people are building out their socks that said, we expect continued healthy growth and volume.
Believe me, it's a business.
We're continuing to see growth and expansion and vulnerability management.
And in general it does not have the same level of urgency and some other parts of our security.
Operations solutions.
Understood. That's helpful. Maybe to follow up you also referenced and new manufacturing customer looking to scale their security operations and management of disparate tools as a pain point for them could you provide a little bit more detail around what they were using and what the opportunity was it you addressed and who you might've displaced there.
Yeah, and so we don't typically comment on competitors.
And now.
I would say what they were trying to really do was to think about how the upscale and your entire security operations infrastructure and what we're finding more broadly is more and more book.
Both our customers and even new customers, which are a little bit of a surprise to me or start to big and no more holistically about how they build out a more robust security program and practice.
Got it and maybe it was this win because you had a broader platform or was it the quality of the technology.
How would you kind of frame that.
All of the above I mean, first and foremost we believe deeply that the only way for us to win is to actually be best in class and when we do so we have a strategy of best in class technology and solutions on a common platform that provides accessibility and ease of use and we find that that's the winning solution. If you give customers a best in class technology.
That's one of the top to top two and its field and you actually say you have it on a common platform that focuses on your productivity and ease of use and that's a consistent winner and wasted that message resonate more and more.
Super helpful. Thank you so much and congrats on the results.
Thank you.
Our next question comes from Jonathan Ho with William Blair. Your question. Please.
Hi, Good afternoon, I, just wanted to maybe start out with what Youre seeing and the Dev ops environment and also particularly around cloud container, yes, what kind of I guess, the I'll tell you that acquisition and add to your portfolio and how quickly is that market growing now like have you have you seen some sort of inflection or some sort of increased investment over the past year.
Thanks.
Yes.
Question, because cloud is moving fast as you can well imagine and so if you think about our platform our focus on holistic cloud security and we want to be handled the same thing that we do per security operations and how about people have visibility, helping people analyze their risk and pressure and helping people automate the containment and the security of the infrastructure.
It is our goal for the cloud environment now cloud has a slightly higher focused on both automation and because that fits more with the depth approach to dwindle, Inc. And then frankly and slightly higher hopes to protection because that's more consistent with what you actually need and our cloud environment and and so that's our focus as we actually think about the evolution the big change and the law.
Last year and you think about why <unk> was so relevant as we have seen a shift and containers, where you see a bigger pick up around and momentum around kubernetes, specifically and so we believe that general container security is absolutely essential and important but we are seeing lots of people with a really think about scaling into the cloud and frankly scaling their cloud.
And container investment take a kubernetes centric approach and we're seeing that book and our customers and and the broader overall market as far as what al seats, specifically does it actually gives us a couple of different capabilities is one it gives us book enhanced visibility you can think about that aligning tightly around.
<unk>.
Our overall cloud security posture management, but think about doing that for kubernetes, but it also provides both great analytics capabilities and protection and capabilities that really helps us think about how do we secure the kubernetes environment and the battle.
Got it and then you talked about making it easier for customers to buy multiple products and what are the some of the initiatives that you're targeting that could maybe reduce some of the friction and argue to recognize that opportunity. Thanks.
Yeah.
Yes, it's great.
Great question, and so it's a big area of focus force.
So there is a couple of different ways, and we're actually approaching sort of reducing friction and overall the first thing and as you can imagine just making the packaging and pricing simple about how you actually wound and Barry that you came from pricing and packaging and you saw some of my commentary and some of the prepared remarks about how some of those approaches even though their earlier paying early dividends and so.
And we're quite optimistic about going all along that path, but the second aspect, which is frankly more important and how do we actually instantiate that and product offerings and so we're really making heavy investments and the platform team that allow people to actually pivot from one solution to another solution and context of what Theyre doing and.
And I'd be able to select the ability to be mobile and that appropriate overtime that is at and investing not just in the technology itself, but also and the infrastructure that support the dynamic usage.
And the building of that over time those are two things that we're really focused on heavily that allows our customers to get the value that they need when they need it without having to make lots of decisions upfront about what solution theyre going to face and the future. If you think about security. It's a problem that you don't necessarily know what you started the year.
What's your problem is going to be and so what we want customers to be able to do is to as they actually either have changed their priorities all have to tackle different problems, we want to be fast and dynamics ax and deploy rapid rapid seven technologies and solve those problems.
Great. Thank you.
Thank you.
Our next question comes from Adam Tindle with Raymond James Your question. Please.
Okay. Thanks, good afternoon, and I just wanted to ask I think you mentioned that security transformation solutions, where 50% of new <unk> I'm wondering if you could help us with what percent of total a are they are at this point and secondly, if you could touch on the profitability metrics for that portion of the business I am wondering are they hitting S curves and driving the <unk>.
The ability that's implied in 2021, because youre going to add a similar amount of new <unk> next year, but much healthier profitability profile to wondering if theyre hitting some S curves on profitability.
Yes.
I'll take the initial non main tackling and when to Jeff about so I'd like to total one way to think about security and transformation.
We see it and providing durable growth and so our expectation and internally is that it's going to provide us our focus is sustained growth of over 40% we saw that last year.
Our hope and our expectation and see that continue over the course of this year and and of course, we actually expect the margins to improve on that as it continues to scale.
We tend to manage things and it pretty as you would expect operationally efficient way I think we're happy to make investments early one for high dividends and the future, but as things scale. We expect the margins to improve now I know, it's a little bit trickier, because we have different things at different stages of evolution, but what I would say in general is security transformation solutions is.
The good growth profile.
A reasonable share of both new and total AOR and it actually continues to high growth pilot and we actually laid out and over 40% last year and 40% this year and the margins on that continued improvement as we scale, which by the way is reflected in our broader margins continuing with actually scaling over time.
And I think your question was what percent of the total <unk> security transmission products.
Over a third and growing rapidly still over a third becoming a greater percentage of the mix each quarter.
Okay. That's helpful and maybe just a quick clarification on the back of it Jeff.
Had mentioned just mechanically that and the back half of 2021 that costs are going to increase because T and he comes back which is understandable, but if I look at the Inc.
Income from operations guidance, it looks second half weighted or at least Q2 Q3 Q4 based on Q1 guidance what am I missing there and the costs are coming back, but the EBIT is going to expand what are the offsets for when costs come back.
Well excuse me, we have higher revenues and.
Over the course over the course of the remainder of the year higher margin that's offsetting the opex.
Opex increase over the course of the year. So Q1, we have some.
Frontloaded marketing expenses, and then we get more profitable as the.
Our year progresses, that's pretty much consistent with prior years.
Got it that's helpful. Congrats from 2020.
Thank you.
Thank you. Our next question comes from Rob Owens with Piper Sandler Your line is open.
Great. Thanks for taking my question, Corey you mentioned and I think and the Q&A around <unk>.
Strategic prioritization and VM and how would you say.
And I'm actually historically, but when you when you do see opportunities on that side of the business is this a function of the formalization of VM programs.
Placement opportunities and expansions with existing income all the above and you can walk us through.
And where you're seeing traction on that front.
I think it's a great question about I think it's been pretty consistent so we still see the maturing of the international market and we still see opportunities here and there.
That's also true arguably the mid market and where we see insurance. When you think about the large enterprises I would think about that is upgraded and the program and the capabilities by and large you will cases and weight build but it's a heavy focus on upgrading the capabilities and.
And maturing what they actually have in place from a vulnerability management.
And these will run and too much income source is youre upgrading those capabilities or is it from the vendors, we all know that you'd be competing against.
And I would say, it's primarily and vendors that we all know and.
And some cases, you do see things like Netflix.
Out there and people look and people are thinking about sort of like how to upgrade and sort of provide a more enterprise wide vulnerability management solution.
And there's still lots of the leg secondly, I would say there is still some legacy vulnerability management solutions out there and the subtraction and enterprise.
Page and steadily.
Elizabeth.
Sure and then just on the retention rates.
And we've seen that trend down and when should that start to move the other way, especially given some of it hasnt commentary around the expansion sales and cross selling.
And.
Yes.
Rob Your question is on the 103% is that is that what youre asking about.
Q3, and when we should start to see that movie and other ways and I know there's.
A lot of different puts and takes to net number.
Yeah. So.
Couple of points on that first off as you know, we don't manage to that metric the 103%.
And with our mix shift towards more security transformation products versus VM.
Less up sell but we get higher IRR, because they're buying more of their environment upfront if things change with with the cloud and there's more.
Upsells over the course of the year that that number could tick up but right now we're not managing it to it.
And not managing managing to it our key metric and say, our RNA or per customer and Thats really what we're managing to.
Great. Thank you guys.
Thank you.
Our next question comes from Gregg Moskowitz of and zero.
Question from.
Okay. Thank you and thanks for taking the question.
Corey It doesn't sound as though you're embedding anything in your guidance and just curious how youre thinking about the potential of the pillar with breach to influence your product offerings as well as your services business in 2020.
Yes.
I'll repeat the question because I think the question is do I anticipate the solar and wind reads changing our product strategy and.
And 2021, and I would say no because we were heavily focused on moving some of the areas that is most relevant and service.
And the wins.
Breach, if you think about tone and a big part of that I talked about before and is detection and response portability management and automation helps people actually get more debt faster.
We happened to have been and a good spot where lots of this strategy and the solutions that we deliver our highly resonate with what people need to mature their solutions overall.
Okay. Thanks, Corey and then just as a follow up so you've announced to cloud security acquisitions over the past nine months covering PSTN and workload protection you bought from introduce and infrastructure entitlement solution. So how would you would know assess your cloud security product portfolio. And then also are you still looking to to add cloud security capabilities.
M&A.
So what is the backdrop and cloud security and it's both a rapidly evolving market and it's also a market and it's actually getting lots of attention and it's a.
A big priority for customers and they think about their digital transformation efforts overall.
And that's it I think we have one of the most complete robust cloud solutions and the market.
Non stop and we're continuing to invest and that organically and house.
As the market changes and evolves. So typical to anybody else, we don't have plans or needs to actually go out and acquire stuff, but that said, we have a very robust cloud security roadmap to tackle all the challenges that we see customers, having and cloud journey and what's wonderful and our customers keep giving us feedback about the challenges, they're facing which is an opportunity for us.
To extend and what I think is a KOL and leadership position. There now there are occasions, where we will see something strategic and it's a reasonable acceleration and it has a reasonable return and a reasonable timeframe and we may make a strategic acquisition similar to what we get with Debbie or I'll cede.
But right now I think we have one of the leading overall cloud security solutions and the market.
Very helpful. Thank you.
Thank you.
Thank you. Our next question comes sell Hamzah well there were a lot with Morgan Stanley. Your question. Please.
Hey, guys. Thank you for taking my question.
And.
And that jump and the results so just.
A question around sort of guidance I know you are focused on selling the broader.
Portfolio solutions, but to the extent that you could maybe give any color around.
What's embedded in terms of VM versus security transformation growth I mean, this year, we saw the security transformation bundle and grow.
The growth rate.
And right should we expect that sort of.
<unk> mix to continue in 'twenty and 'twenty one.
And we don't think based on current again.
We are playing a very you know we're taking a very long term approach. So we think our entire portfolio is relevant and we need to be relevant that fit based on current market demand is that we expect higher growth and return and transformation solutions and we will still be growing vulnerability management.
And a good position that we're in is that because we have multiple offerings and solutions on a common platform, we get to move where the customers needs, our highest and any moment in time and sometimes it's going to be cloud, sometimes it's gonna be detection and response about yourself and vulnerability management.
Right now you see a higher urgency around both incident detection and response and cloud security and so relatively youll see higher growth in security and transformation solutions versus B, but we still expect healthy growth and began this year and we expect that to move forward.
And then just on the.
The DLT and acquisition and any color you can give us on sort of what the revenue run rate on that was prior to acquisition I know it's not.
Known material assumption better and your guidance, but any color you can give us there.
It wasn't material and as we see.
And overall and so it allows us to actually accelerate our cloud security initiatives.
But the revenue was immaterial.
Okay. Thank you.
Thank you.
Thank you. Our next question comes from Alex Henderson with Needham Your question. Please.
Thank you.
Just a couple of clarifications, if we could.
Could you talk about whether your ALR per new customer is higher than the average of 44 K.
Is that I mean it.
Sounds like you're getting more upfront.
And that ultimately would.
And the driver.
A higher number on the a and b customers right up right off the bat and does that is that right.
Yes, we don't disclose the specific AOR per new customer Alex but.
Hi, Jeff.
Generally brand new customer historically has been lower than the overall, but.
With the mix shift and.
It is increasing asps have gone up across the board, but we don't disclose the specifics.
And I was just and more.
And more broadly Alex and that we don't really focus on the timing of the customer journey.
No.
We may have some customers that are starting to actually cover more of their environment on Friday, with Wal Mart and things, but I'll say, that's not our strategy. What we're really focused on is how do we actually grow the relationship and the impact of rapid on behalf of the customer over time, but we're indifferent, whether they start big and sustain or whether they start small and grow over time, we're just looking at how do we become the <unk>.
Place for them to manage their security operations.
Thanks, Mike Youre seeing larger deal sizes upfront and.
And more upsell upfront.
Can you talk about whether you're you've seen and expansion and acceleration in your pipeline. It sounds like your pipelines and accelerated and if theres any change and the amount of time it takes to close the deal.
And just a couple of the key metrics around that would be really helpful.
And so.
And so there's several different things that you will drive and some of the transit Youre alluding to there is one is keep in mind as things like <unk>.
Have to cover your retirement environment upfront versus B M, where you may have started with 20, 30% of your apartment and being with available cash. So just the shift and detection and response and the growth of that business and secured and preservation solutions causes a higher amount of the environment to actually be covered upfront. The second and you also alluded to is we're in the very early stages.
Starting to see customers, who really think about buying.
The teachers and their car T program that says I'm not quite sure. If that's a trend that we need to continue because it is however, they get there and we want the customers to actually get there at the pace.
That theyre looking and then they'll look at the evolve and move their security program over time and so those are two element and then you have one more Alex what was the last question.
And any change and the amount of time it takes to from.
And you start to close on the deal transaction.
No deal timelines.
Holding steady.
Yeah, I would say on average, it's probably holding I would say, it's a little bit tricky because last year. There was just lots of starts and stops.
And that or more to do with Covid. So it might take us I'm not extrapolating any of the sort of like nine months of last year.
And as permanent trends because there was just a huge COVID-19 effect.
And also the solid wins effect.
And that you actually have there the underlying helper and so I would say that it's fairly consistent but there's no trends that I can extrapolate right now.
Okay. Thank you very much for appearances.
Thank you very much.
Per our net.
Next question is from Joshua Tilton with Bamberg Your question Paul.
Yeah, Hi, guys. Thanks for taking my questions.
Just first could you guys talk about the pace of net customer additions going into next year, maybe what's baked in today are our guide that you gave today do you expect that number to continue to improve in 'twenty and 'twenty, one and you guys kind of expecting it to stay flat.
Yeah, So Jeff and I can tag team. It I would say in general when you think about our guidance.
There is a mix of <unk> for our customer and sort of like net customer expansion. We expect both of them to actually be positive. We do think on balance. This year, we'll see a slightly higher contribution and the <unk> per customer and that's just the growth of the platform and the demand and some of the other trends that we're actually seeing.
And that's not necessarily a permanent thing this is from the assessment today and it's not something that we're actually managing too.
Yeah.
And we're not going to give a specific growth rate on the new customer growth. What we what we said earlier is that you can look at the trends and.
And in that ZIP code of where we are now and it is a balance of ore per customer and the customer growth.
Yeah, and you want to know how we manage our sales force. We just right now we're just saying go where the customer demand is.
And without adding any specific restrictions on it and this environment, we're saying like golar and customers and.
And where we can be helpful.
Got it and then I know you've got a lot of questions Tonight about the VM business.
Maybe one more from me is there any way you could just kind of ballpark what do you expect that business to grow and 21, and then maybe how does that compare to what you guys are seeing the overall via market grow out from 'twenty one.
So I commented earlier that we.
We're seeing and B M part of strategic conversations and.
And we're continuing to see growth and me.
Just not at the same pace of the much higher growth and security transformation solutions that said, if I had the ballpark and I would put it in the plus or minus 10% range and.
And the way to think about that is last year. We gave some estimates about what we saw and the overall economy was better and it performed slightly better than expected, but that's what we see right now in terms of customer prioritization and urgency more than anything else again, our view is that <unk>.
Right now customers are looking at <unk> as a strategic long term objective of higher urgency around some of the efforts around security transformation, and specifically detection and response and cloud, but we expect that to continue to be a long term driver of growth.
Thanks, and just if I could sneak one more and I know, it's early for outside but any expectation of what the uplift and customer ASP would be if they went and bought this product.
No it's too early to comment on that right now.
Alright, Thanks, Ed.
Thank you very much.
Thank you and I'm not showing any further question from Nokia and I would like to turn the call back to Corey Thomas for his final remarks.
Well I just want to thank all of you for joining us This evening and our earnings call and I would like to reiterate that we would love to see you at our Investor and Analyst day, and we look forward to talk to you then.
Ladies and gentlemen, and thank you for your participation in today's program.
And.
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