Q2 2021 Rapid7 Inc Earnings Call
Good day, and thank you for standing by and welcome to the rapid 7 SEC.
Second quarter 2021 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 this session you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded.
And if you require any further assistance. Please press star zero and I would now like to hand, the conference over to Neal Shah Vice President of Investor Relations. Thank you. Please go ahead.
Thank you operator, and good afternoon, everyone. We appreciate you joining us today does and to discuss rapid and 7 second quarter, 2021 and financial and operating results and addition to our financial outlook and the third quarter and full fiscal year 2012.
With me on the call today are Corey Thomas our CEO and Jeff <unk> our CFO.
We've distributed our earnings press release over the wire and it is now posted on our website and investors don't rapid test.
And along with the FDA from any presentation and financial metrics file.
This call is being broadcast live via webcast and following the call and audio replay will be available and investors don't rapid.
August 11th.
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 90 to 95.
And I and include statements related to the company's positioning our future goals and financial guidance for the third quarter and full year 2021 and the assumptions underlying such force.
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 and our most recent quarterly report on form 10-Q, and subsequent reports that'd be followed.
The information provided on this conference call should be considered and lot of such price.
Actual results and the timing of certain events may differ materially from the results from timing.
And my sense.
Statements and reported results should not be considered as medications and future.
Yes.
Rapid 7 does not assume any obligation to update the information presented on this conference call except to the extent required by applicable law.
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 comments and response to your questions and may offer incremental metrics to provide greater insight and the dynamics business or Corey.
And the results. Please be advised that this additional detail maybe 1 time nature, and we may or may not provide and update in the future.
With that I'd like to turn the call over to our CEO Corey Thomas Corey.
Thank you for Neil and good afternoon, everyone. Thank you all for joining us for our second quarter 2021 earnings results call and I'm pleased to once again reported sustained outperformance and our business is rapid and 7 delivered strong second quarter results exceeding both our growth and per.
<unk> for the quarter.
Strong demand across our insight platform.
And year over year.
29% in.
And linked quarter and approximately $489 million and.
And we share a few weeks ago. This.
This strong organic growth as a validation of both our strategy and our execution and to continue our journey to make the best security operations accessible and achievable for all.
And our ability to meet customers, where they are and your second cerny with leading capabilities across portability and risk management detection and response and cloud security as revenue and.
As evidenced by 2 consecutive quarters and accelerating customer growth to start 2021, and I'll share more on this momentum and our customer growth engine, shortly but I'd like to start today with some perspective on the security landscape and what we're hearing from our customers.
And you think back to our Investor day in March I share with you, how we are and a fundamentally new day right now when it comes and the pace of technology adoption.
As of all sizes across industries and regions are dramatically quickly and are focused on delivering world class digital and mobile experiences for their customers and employees as they look to keep up with the pace of innovation.
However, alongside this rapid expansion of the technology footprint customers.
Customers are experiencing and evolving threat landscape.
And we aren't in an environment, where the salary and investment in digital and transformation is try and every company and to a technology company from.
And an explosion and the surface area and customers must monitor and protect.
This is being met by shift and the attack landscape over the past year with escalating with driven by a clear increase and both the scope and impact of a type of activity.
Against this backdrop are strong and 2021performance to date is a clear indication that customers are recognizing our rapid 7 integrated insight.
Volume is designed to address the challenges of today's threat landscape.
Let me take a moment to level set you and why we believe our strategy to build a unified platform experience and the Carlyle is well positioned to address multiple aspects of this shifting threat landscape.
Rapid Seven's vulnerability management solution remains a critical component of our customer security hygiene and.
Salary and technology adoption is opening even more vectors of attack managing with visibility is more important than ever for our customers.
Many of today's threats continue to leverage no vulnerability, so having a best in class B and program remain foundational to protecting against pervasive threats such as ransomware.
This is demonstrated by the durable growth, we continue to deliver and be with Sonic celebration and here are during the second quarter.
However, a strongly and program is just a part of the equation.
Mediating vulnerabilities takes time and an increasing trend with recent attacks that people don't know about them until the after the attack occurs.
This is where customers increasingly need best in class detection response capabilities to alert them to suspicious activity.
Yes.
For the second year in a row rapid seventh.
And its been recognized and the leader and the Gartner Magic quadrant for sale, but we believe this is just 1 component of the IR story.
And we reflect back on the booths and by Dr..60 years ago with a strong point of view, they're driving alerts all traditional malls and most films DSP and many continue to do today was insufficient.
This robust to build a differentiated capability per sale.
And that began with behavioral analytics and has been expanded to include law.
And point telemetry.
Network traffic visibility.
Analytics and cloud visibility and.
Among other market leading capabilities.
The best validation of our winning formula with IR beyond and sustained high growth and scale has been the emergence of the extended detection and response market. What's your spouse's. This view of comprehensive detection and response the spans across Sam Edr Soar and now threat intelligence.
Our recent addition of insides positions back and 7 the leaf Exterran movement, and enabling our customers to drive comprehensive security transformation alongside their digital investments.
But as these digital transformation initiatives and celebrate.
Businesses are increasingly leveraging the cloud to drive more innovation and.
And so cloud infrastructure usages, skyrocketing, and so to lose and need for security teams to gain visibility and understand with all of these environments.
Rapid services newly released insight cloud thing is leading the charge to provide customers a single cloud security solution that natively integrated and how posture management cloud identity management infrastructure of code and Kubernetes workload protection.
This fully integrated cloud native security platform enables broad visibility across multiple cloud environments and.
Enhancing cloud security programs and by automating payable security and compliance.
We remain focused on innovating to help security and Dev ops teams shifted to the left reducing noise and complexity and protecting their container environments and automating workflows to drive better security outcomes as customers scale.
Each 1 of these mandates to provide foundational VR and visibility to deliver comprehensive extended detection and response and to enable continuous protection complex counterbalance is top of mind for our team here at rapid zone.
And in fact rapid 7 is 1 of the only vendors and the market's day. They can offer best in class products across each of these 3 critical security vendors.
And the attack surface expands and rapid service platform is increasingly relevant because security teams are struggling to manage and near your heart of independent security tools.
Resource constraints and vendors fall or and critical concern and today's fast moving threat problem. It as customers are tasked with minimizing visibility gap that exists between interest bearing products.
Rapid 7 and addressing this challenge by investing not just build and market leading products and their respective categories.
And natively integrating these solutions into our insight platform and delivering them via a single unified experience and the comp.
This is why our strategy to build a unified accounts platform and the cloud that reduces these gaps through and integrated automation, Jim and experience is resonating with customers today.
Customers are increasingly looking to consolidate down to a smaller number and critical security partners without sacrificing best in class security capabilities.
And security teams with the minimized coverage gaps and respond faster to emerging threats rapid seventh and integrated platform experience is increasingly more relevant.
And you'll see this reflected and our business momentum to date 'twenty 'twenty 1.
We continue to deliver strong are our growth our business driven in part are celebrating customer growth engine with solid 13% year over year growth and customers during the second quarter.
This is day by 2 fundamental drivers.
First we continue to add more new customers more efficiently lab, and our ability to meet customers, where there are and they're sequestering bile landed across any of our core platform pillars, while demonstrating ease of expansion over time.
Second aggressive investments and technology innovation are driving compelling customer value realization, enabling us to live and ongoing strong and improving gross retention and our business of our platform scales.
This is coupled with a compelling cross and upsell opportunities and our existing installed base, which has been core driver of our sustained mid teens growth and here our per customer during the quarter.
As our platform story and increasingly resonates with customers, we have expanded the ability for more of our sales team to sell more of our products, which should support global growth and are our per customer as we look ahead.
A great example of this platform value realization or the competitive 6 figure inside 1 deal during the quarter with a new international customer.
And a brief reminder, insight 1 as an example of how we are looking to lower the barriers to platform adoption and make it easier for customers to purchase multiple insight products. In this case, it's IBM and SAP IV or insight apps and if I can.
To deliver a unified set of optics hearings.
And this particular case and fight 1 unit pilot groups, not only separated and rapid 7 competitively versus other point products, but our platform value proposition accelerated and customers' future projects to leverage this broad set of insight capabilities are.
Our single agent and 1 platform story resonated with the customer was looking for a leading security partner within their business.
We're excited about the opportunity to continue partnering with customers like this to minimize their security coverage gaps as we further and enable these platform centric go to market motion during the second half of the year.
Turning now to a brief update on the recent progress towards our enduring goals.
First we remain focused on leading the charge for enable customers to transform their security operations practices allow and cloud.
Clearly demonstrated by our investments in addition to accelerate and our Xdr vision and capability and the addition of insight while delivering differentiated optics free and the cloud by elevating the capabilities across our entire platform.
Already begun to see strong customer interest and momentum and this capability.
Second we continue to work on accelerating our platform distribution gains.
The recent launch of insight cloud sync, which brings together the cloud and workload security capabilities.
And I'll see it was seamless and integrated cloud and security experience and insight platform is a key milestone.
This further accelerates our ability to drive sales leverage across our portfolio, particularly as we enable more of ourselves team to sell the platform value proposition.
We will continue to deliver on this both from a product innovation standpoint, as well as from a commercialization and Gore.
Customer perspective.
And third we are committed to driving long term operating leverage in our business while investing for growth.
A great validation point is it during the first half of 'twenty 'twenty..1 we have delivered over 300 basis points from non-GAAP operating margin expansion over the first half of 2020 alongside improving free cash flow.
This strong year to date operating profit performance are solid growth execution, and our disciplined investment approach position us well to absorb incremental expenses of the insight acquisition, while delivering on our prior operating profit expectations.
Notwithstanding the insights deferred revenue right now.
And we'll share more details on this in his remarks.
So in summary.
We're trying to and the challenges of today's escalating threat landscape by delivering a unified and Scott's experience and the cloud and that helps to minimize visibility gaps detect threats faster and the liberal automated responses.
I could not be more proud of our team for their ongoing commitment to our customers as we work to deliver on our goals are making the best and security and festival and Shippable total.
And finally.
And I'm sure. Many of you saw from our press release.
CFO, Jeff Colosky hasn't now and attempt to retire and 'twenty 'twenty 2 once a successor is appointed.
On behalf of the entire team I want to thank Jeff for his outstanding leadership, and helping us scale rapid 7 and for the past 5 years.
Jeff and instrumental and our effort to transition and scale, our recurring revenue business. While also building a world class culture and finance wins.
And he has served as a true partners and myself and the entire leadership team here at rapid zone and I look forward to that continued partnership into the next year.
With that thank you, Jeff and I will turn the call over to you.
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.
Turning to ourselves rapid 7 strong momentum continued during the second quarter of 2021, driven by sustained high growth of over 40% and our security transformation solutions and acceleration and vulnerability management.
Second quarter, ending <unk> of $488.9 million grew 29% over the prior year, reflecting strong overall demand for our insight platform as customers look to transform their security operations around.
As a result of this ongoing momentum second quarter revenue of $126.4 million exceeded the high end of our guidance accelerating to 28% year over year growth.
Products revenue and $119.1 million exceeded our expectations and accelerated to 29% growth as our integrated platform opportunity is increasingly resonating with customers.
We continue to execute well geographically driving durable growth across our regions during the second quarter North.
North America revenue grew by 25 per cent year over year and comprised 82% of total revenue and a quarter, while rest of world grew by 40% representing 18% of total revenue.
As I've shared with you on recent calls we see a huge and growing market opportunity ahead, and so we are continuing to invest and our business as we execute against our global growth goals, all while continuing to drive ongoing margin improvements as we scale.
I will share more detail on this shortly including how we intend to leverage our strong year to date growth operating profit performance to fund the incremental expenses from our recent acquisition.
During the second quarter, we demonstrated ongoing progress towards the fundamentals financial goals, we laid out at our Investor day in March.
In addition to strong are our growth customer centric innovation focus is paying off as we saw a second consecutive quarter of accelerating customer growth led by our ability to meet customers, where they are and are set cost journey.
As a result, we ended the quarter with over 9300 customers globally growth of 13% over the prior year.
This sustained strength and our customer growth engine seats ongoing long term opportunity for our land to expand engine, which saw continued strong performance and the quarter with cross and upsell execution, driving 14% year over year growth in air or per customer to end of period and approximately 52005 hundred.
And $1.
These results demonstrate that our focus on delivering an integrated platform experience across our best in class detection and response vulnerability risk management, and cloud security pillars, and delivering a differentiated value proposition for customers.
Turning now to some details and our operating results from the second quarter.
Total gross margin from the quarter was 73%.
And with the first quarter and down modestly compared to the year ago period, driven by faster than expected growth and our cloud based products versus a year ago. As we continue to see strong demand for our insight platform.
Sales and marketing expenses grew 24% year over year, reflecting growth and head count and improved to 40 per cent of revenue compared to 41% in Q2.2020, as we see ongoing productivity improvements and the business.
R&D expenses grew 31% over the prior year and represented approximately 20% of revenue consistent with the prior year as we continue to invest in products and technology innovation.
G&A expenses grew 14% and were 8% of revenue down slightly from 9% and the prior year period as we continue to scale our business.
Our strong revenue over achievement and the quarter enabled us to continue investing and our business, while still delivering record quarterly operating profit of $6.1 million above the high end of our guidance range.
Adjusted EBITDA for the second quarter was $10 million and net income per share was 7 cents also ahead of guidance.
Moving to our balance sheet and cash flows. We ended Q2 with cash cash equivalents and investments of $613.2 million compared to $669 million at the end of Q1, 2020.1.
This is before the net cash impact of approximately $308 million paid at closing for the insights acquisition in July.
Our strong <unk> growth and the associated strong beliefs, and the quarter drove better than anticipated second quarter free cash flow of approximately $5 billion.
Yeah.
Shifting now to our updated guidance for the full year.
Our strong year to date AOR growth reflects the success of our ongoing efforts to invest and driving durable growth and our business.
These investments have positioned us to help customers meet the challenge of and ever expanding attack surface with an integrated platform experience across our best in class extended detection and response.
And 1 billion mismanagement and cloud security solutions.
We believe the acquisition of insights only amplifies this value proposition and further expands the opportunity for rapid 7.
The combination of these drivers and our team's strong execution to date fuel our confidence and once again, raising our full year, Eric or our expectations for 2020.1.
We now expect to deliver full year <unk> of approximately $576 million or growth of 33 per sample and the prior year.
This accounts for bolt and improved organic outlook of now over 25% are our growth for 2021.
A strong improvement over our prior outlook of 22% growth plus the addition of the insight acquisition.
As a reminder, insights and in the second quarter was approximately $27 million from Iraq.
Okay.
Given the strong momentum and our business, we're raising full year revenue guidance once again to account for and improved organic outlook. In addition to the contribution of insights and now anticipate revenue to be and a range of 520 million to $524 million or growth of 26% to 27% after taking into accounts.
And the insights purchase accounting deferred revenue adjustment.
Turning to operating profit.
And as Corey shared we've delivered strong execution and the first half of 2021 with over 300 basis points and margin improvement compared to the first half of 2020.
This puts us and a great position to continue reinvesting to drive durable growth, enabling us to leverage our revenue and operating profit over performance to absorb insights operating expenses.
As a result, we're adjusting our full year operating profit guidance strictly to account for the insights purchase accounting deferred revenue adjustment of approximately $5 million and.
And now anticipate full year operating profit of approximately $70 million.
I will reiterate if we were able to recognize insight school deferred revenue balance we would anticipate delivering full year operating profit in line with the low end of our prior operating income guidance from approximately $12 million consistent with our growth and profitability framework.
We believe these investments position us well to drive ongoing durable growth and our business as we look to accelerate our path to become a $1 billion business with the acquisition of bids.
Factoring all the Sim, we now anticipate non-GAAP loss per share from the full year to be a loss of approximately 9 cents per share.
This is based on and anticipated $55.3 million basic weighted average shares outstanding.
Turning to cash flow, we remain focused on investing for growth, while scaling free cash flow generation over time.
I'm pleased to report that Cuba, and a strong year, our performance to date, coupled with our updated guidance and even after accounting for the insights acquisition, we are raising our full year free cash flow expectations, and now anticipate delivering free cash flow from approximately $20 million this year.
This is a great validation of the long term free cash flow and potential of our business.
Moving now to quarterly guidance.
Note that our third quarter guidance also includes the impact of the insights acquisition.
From the third quarter of 2021, we anticipate total revenue to be and the range of $133.4 million to $135 million growth of 27% to 28%.
We anticipate non-GAAP operating income third quarter to be a loss of approximately $5 million as we invest and a business and absorbed a partial quarter of insights expenses.
We anticipate non-GAAP net loss per share to be a loss of approximately 7 cents per share, which is based on an anticipated $56.1 million basic weighted average citizens.
So in summary, first half of 2021 is a great validation of our ability to execute against our goal of driving durable growth, while scaling profitability and free cash flow as we continue to invest close to close the security achievement gap on behalf of our customers.
And finally, I'd like to express my gratitude and appreciation to the entire rapid 17.
And it's been a privilege to work with Corey and a talented leadership team here for the past 5 years and I am extremely proud of everything we've accomplished.
And I look forward to ensuring a smooth transition when the time comes in the meantime, I look forward to continuing to work with all of you until day.
With that we appreciate your time and support and we'll now open the call for any questions operator.
To ask a question. Please press Star then 1 if your question has been answered and you'd like to remove yourself from the queue press the pound key.
Last question comes from Robert Ellen.
Piper Sandler your line is open.
Great and thank you guys for taking my question.
Corey I wanted to touch a little bit on the acceleration of new logos and I know you've been adding additional capacity and lean against and part of the story, but what are you seeing in terms of sales productivity as well with the pre existing sales force and if you can kind of characterize where the environment is right now relative to these additions that'd be great. Thanks.
Thanks, Rob its a good question and so there's really 2 make back it was 1 and it's what I've talked about earlier.
And environment, a healthy demand environment for subsea.
Cyber security, but especially for the security operations.
Innovation that we're offering to the market. So that's always helpful for sales productivity.
And 1 is you know we have a very disciplined model that as we actually when we introduce new products or do acquisitions as we actually prove out and hold the sales process. We start off with specialized and then we add more of those offerings to our sales teams over time that is a positive tailwind to sales productivity.
And then and the last thing as you all noted.
Is that we're also investing and optimizing our profit back we're very very early and the journey here, but that's also been a positive tailwind to sales productivity. So all those things are coming together, allowing us to actually grow our E. R. R and I'll walk those through.
Activity and that's been reflected both and the new customer.
And the growth.
But it's also be reflected in that yard per customer.
Great and then a second question for Jeff I guess, if I look at your days billings outstanding and so.
Was far less and we had expected and obviously helps cash flow does that reflect the linearity of the quarter or was there something unique relative to collections this quarter versus historic thanks.
Yeah, we had we.
And had favorable linearity and a quarter, but I think.
We've had we've seen dramatic.
Dramatic improvement over the last couple of quarters, and and really due to our internal efforts and improving our days billings outstanding, but I wouldn't say that it's.
It's really dramatically different and Larry linearity, and we did see some improvement I think it's more just alright. Thank you both.
Yep.
Yeah.
Our next question comes from Matt Hedberg with RBC capital markets. Your line is open.
Oh, Hey, guys. Thanks for taking my question dwell down and the quarter and also Jeff Congratulations on your retirement, we certainly it feels like you're not leaving any time soon.
But we will certainly we've enjoyed the ride here with you so best of luck.
The next chapter of your career.
Yeah.
And that.
Yeah, it's been a it's been a fun and I think what you said 5 years. So it's been a bunch from me here for a bit longer.
We will enjoy that.
Corey I wanted to follow up on Rob's question, you know it and.
Analysts day, you talked about 5% to 10% with sort of a target level for new logo adds obviously you added 13. This court 13% growth this quarter.
Is that I, just wanted to sort of frame that with your analyst day. This is a sort of a new normal was there was there anything unique with the customer adds this quarter.
And a 5 to 10 kind of where you kind of continue to expect that there's obviously a lot better and then you talked about previously.
So I think there's a couple of 1 day, there's 1 keep in mind that analytics and what the CAGR over 5 years and so.
And so you can imagine that and and.
In fact earlier this year, we thought we saw a little bit above that.
So you can expect it sounded like at the average over a sustained period.
Keep in mind that we're doing and expense.
And migration and more strategic customers and we've talked about that before and I think that's continuing a pace and so what I would actually say is we have very good confidence and the near term that we see true.
And the <unk>.
Double digits.
And to your momentum there and the very near term, but I would say I don't think our long term CAGR change material.
Got it Okay. That's helpful. And then in your prepared remarks, you talked a little bit about insight cloud and.
Which is I think Debbie cloud now and Hell.
It's still early for that and and the carriers.
<unk> higher.
ACB dollar values and kind of your base, but can you talk about kind of the level of penetration in your base and you know.
How are you successful when you sort of the recipe when you're able to cross sell that back into your existing customer base.
I mean keep in mind and like all of our solutions, especially our big main pillars around detection and response and cloud security and Barbara I imagine, they're all animal solutions.
That's it we're seeing increasing growth and traction.
On the cross sales.
Specific question.
And the catalyst and cross sell a bit of a transformation.
And so it is when we talk to a customer that is looking to actually rollout of baked goods and transformation initiative and the cross sell through and critical threshold, where they are and.
Changes enough of their IP infrastructure from a digital perspective.
Security is a priority and they need to execute the visibility to ex U.
And the management to stay abreast of the automation and stay current with that that's the catalyst for those things and our sales team is quiet place and so we're seeing good growth and good momentum and good excitement there, but we like having that tie the digital transformation and we need to sort of it puts it and it but this and worst nights of the current growth driver, but that actually goes up a lot.
Long term growth dynamic because as you look at any industry reports both.
Both cloud security, but especially the drop of a digital transformation is expected to grow over the long term horizon.
Got it Super helpful guys. Thanks again.
Our next question comes from second Korea with Barclays. Your line is open.
Okay, Great Hey, guys. Thanks for taking my questions here and Jeff I'll Echo my congrats on retirement very well deserved.
And a second.
Corey maybe just to start with you.
There was an interesting example of insight 1 that bundle that bundle example, you talked about during the prepared remarks I was just wondering if you could just talk a little bit about how bundles are working sort of what some of the the the data points are and that that you'd be able to share and and.
And without pre announcing anything are there any other bundles that might make sense to explore.
So it's a good growth so I won't go into the numbers on it because it's too premature to actually drove the number but I will talk about train 1.
We have a number of pilots out there I've talked before about some of the stock.
Thokk automation, where you actually have a I D R.
Networks Africa analysis.
Enhanced and point telemetry and Thor together, and that's sort of like quite quite positive. We have several other things that we're actually our pilots.
And that are out there and most importantly were moving forward with thinking about is a 2 pronged strategy is 1 it is a strategy that allows us to do bundle and think about.
And it is primarily deal at the time of sale when people are willing to look looking to upgrade their overall security program. Now subsequently I'm sure we're going to do upgrades to bundling programs.
You know 1 focus and button and they said I feel that the Thomas L. The example that I gave here, while the customer does it a little and I'm looking to do a significant upgrade and marketing program and so they want to actually look at the economics and the investment and the results across multiple categories and may complete fits there.
Only that I would say just to be clear that.
I am not concerned and our team is not concerned with how customers buy they buy upfront because they actually are looking to actually do a big shot and the arm and improve their security quickly that's great and I think you are slowly overtime. That's great also now on this folds overtime and think it's the third point that I'd emphasize is that we're also are.
And in our pricing and packaging solutions that make it both predictable and predictable and economical for customers to actually plan for and build out and upgrade their security operations overtime. So the ultimate 3 areas our strategy I would say that they are having traction we're getting validation study.
Before we accelerating I would not call that massively material to their success.
The day from the new packaging perspective, and I would say very very positive momentum.
And our sales people coming back to us and the things are working and it's resonating well with customers and therefore, we're actually continuing to actually roll out further.
Got it.
Jeff maybe from my follow up for you.
Can you just remind us how fast that newly acquired insight business is growing I think we said it was about $27 million and <unk>, how fast is that growing and and maybe as part of that question just zooming out a little bit when you look at that base at the end of this year or do you think the guidance for about $576 million, how do you sort of rough.
Think about the mix of our VM versus kind of that broader sort of security transformation bucket does that makes sense.
Yeah. So first off it is it is $27 million that we acquired as of the acquisition.
And at Analyst Day, excuse me, we said that.
And VM was a bit over 40, and 50% and security transformation was about 40% so.
No security transformation, we're saying, it's going to grow over 40%. This year. So it will become a bigger piece of the pie by the end of the year, we're not going to pick a specific percentage, but you know P. M. Since its growing slower we will have a will become less of the total pie and I think we said at our call is that insight.
Insights was growing over 40% and that'll be included in our security transformation products, which even without insights will still grow over 40%. This year is what we're projecting.
Got it very helpful. Congrats again, Jeff.
Yes.
And next question comes from Brian Essex with Goldman Sachs. Your line is open.
Hi, good afternoon, and thank you for taking the question and Jeff Congrats from me and as well well done.
Thanks, Brian.
Perhaps Corey what day, neither wanted to touch on is.
With the acquisitions that you've done over the past several years and if we think about things and these 3 pillars.
How is your sales force aligned with regard to maturity and weight, where youre incentivizing them in terms of.
Which which ones of these buckets are.
I guess more accretive to the bottom line versus.
Others might have better unit economics, and then do you have are you just looking for a sales force that has a maturity across the platform to kind of put.
All the arrows in our quiver so to speak.
It's a good question and so I think there's 2 distinct parts of it. So the first thing is how do we when we acquire we bill and how do we actually think about Walnut sales force.
And in general what we do as we always start with a dedicated team.
To make sure we have mastery of selling because what we really wanted to make sure that we understand what the sales motion is.
Sales for Amy.
As we get the mastery of fell in that and we actually brought and the number of sales team that can sell that and that's not a 1 shot where you're just sort of like W. And the sales force that is the steady expansion of himself and so our costs expanding.
The belly capacity of our sellers and what they can actually sell but want to join and a way that we actually moving a master of the sales, which allows us to actually steadily drive total sales productivity over time, and that's actually worked out quite well.
The second part that I think that your.
I'm, referring to is how do we actually incentivize a focus our sales teams on which product knowledge and while we actually track and manage that spell.
We do not target and our sales team either from a existing customer versus net new customer or for my part product perspective to say you should sell at this price of that that's the case or if that happened more and gaming with something with a particular partner and at some point in time, but by and large we don't do it and the reason for that we have 2 levers it's wanted.
F L, but because we are such an innovation engine, we're constantly updating the profitability from him into the air perspective of the things that we actually felt too and so both of those are changed at all and Todd We want our sales team. This is the focus.
And it out and meeting customers, where they are you hear us say that term a lot meeting the customer where they are.
Because we don't want them introduce inflection that actually said that I want to scare you and this way and that ecolab and customer credibility for our sales team the day.
I can take the customer's pain points, and then actually both of the audit and aluminum and solution for that pain point and so that's the strategy that we have and then when we look at our customers. We are focused about like all right. How do we actually do think more and more profit overtime, which is why we've been able to do the margin expansion.
Got it that's super helpful. I appreciate it and maybe just to follow up.
Could you maybe reconcile the adjustment to free cash flow guide for US I mean, it seems like you're bumping it up by about $5 million, but you've already got the deferred revenue write off and the cash from the insights acquisition, so and the cost associated with that business. So what are the puts and takes that gets you more confident and bring and free cash flow guide up.
Yeah. The biggest driver is the.
Increased <unk> performance, but I believe from the first half and about $23 million and we are projecting a.
Net income loss from the second half and so which is around $75 million the implied loss.
If you deduct that from the 23.
Really the balance is really what we can realize and cash flow from the incremental <unk> with a raise from.
And from the previous guidance.
Got it Super Super helpful. Thank you.
Our next question comes from Michael <unk> with Keybanc. Your line is open.
Hey, guys. This is Eric Heath on for Michael Thanks for taking the cue and Jeff Congratulations as well.
Corey you shown good progress and crews that are per customer metric as you do larger lands, but could you talk more about how you're progressing and educating customers and the sales force on the power of the combined unified platform to really drive expansion among those customers and increased attach rates.
Yes, I mean, I would say that we're taking it up steadily and that and 1 may go I mean, my take at Bircher, who live and customers don't exist.
Sell it to them and so what we're looking forward as we expand and we think about our expansion and engine.
And is taking customer pain points and show them, why we actually extended or leverage their existing investments and so if you know no matter, where we start.
And I haven't RDR customer.
And they have and incremental pain point on cloud or on behalf of mobile applications, we're able to say like okay listen here's how your existing investment.
Scales up and so claim it as a scale up but again, it's not a big a goal by more it's more about like you've made and investment and we can actually scale that adversity, more efficiently and more effectively and anyone else and.
And again, we're still in the early innings here, but there's lots of engineering work.
Right now and lots of our products and packaging work is about making it much easier for customers to recognize incremental pain points and scale up much more nationally and plan for that and scale much more national.
Got it that's helpful. And then I just wanted to touch upon VM, you mentioned and accelerated this quarter. So would you attribute that to some of the breaches. We've seen this year, obviously, it's kind of top of mind right now and do you think this is a sustained elevated level of demand that you could kind of seek and continue to accelerate from the rest of the year.
Our outlook.
Outlook.
We've always thought and it's actually a sustainable market and market advantage and if we continue to see vulnerability management.
And the favorable it did accelerate and that's a positive thing, but we feel pretty confident that it's going to have the long term market demand that we saw and what aspect of that acceleration is that we continue to overall it couldnt be happy customers.
Day, with us and have higher levels of commitments. So we talked before about the law and the lower churn and a higher retention of customers and that's also a factor.
Growth.
Corey.
Could you hear me.
Yep, great. Thank you.
Okay. Thank you.
Our next question comes from Jonathan Why KBR, Inc.
Baird Your line is open.
Yeah, Hi.
And again.
I just have 1 question.
Obviously, you've made a pretty market share from talking about it.
And talking about them about.
About it is ex D are just not for the last several months and so Corey I I know you've touched on and evolution in your opening comments, but I'm wondering if you could just dig deeper into those capabilities that you believe are critical to fitness.
Category.
And some of those that you have today and that you might not have today and might need and in the future or for competitive positioning.
Well when you think about extended detection and response, which is what xdr is it's really about reducing the gaps that you actually have and the security operations environment. If you think about why so many companies and organizations and the best and security, but still are so it wouldn't be compromised and attacked and because there's just lots of blind spots.
And that environment, So no matter, where you start the idea of xdr is actually minimizing those gaps and the overall security operations environment. So for us very specifically exactly and start with gaps and data and so the ability to actually see that there's a logging and traditional with them.
But also to actually CV endpoint data.
Given even though the network data.
And now to be able to see the external data and the.
The environment that should be buyers and so I'll start with data, but the second thing is that when you actually have the data you actually have to be able to process and so unique about the digital innovation that we deal with.
And user behavioral analytics it was about a different way of actually processing data to look for the tax and the environment on this day.
And would you use a context.
And attack a behavior analytics and again with another way to actually make sure we minimize any gaps and the overall environment and.
And then the last area that you really have to talk about is I have the information I don't want and make sure that all have gaps and my work flow and whether that's my investigation and workflows My forensics workflows or my remediation workflows, and that's where the support technology company and with the automation and so when we think about extended detection and response, it's about minimize any GAAP.
Isn't there and the data and the analytics, but also and the workflows and.
And the automation around that and that's why I play.
And our vision of IV ARD has always been about minimizing those gaps I just think that the ex garden market rent is recognized and today the value of that strategy and we're being recognized along with that which is a big part of continued success.
It quite 1 last items that I think some important I'd love to hear your thoughts and just that you know the ability to leverage intelligence, how do you view that and where does that and the private portfolio today.
It tells you say intelligence, so yes, yes.
I think about that and sort of like part of 2 day daily contacts with.
And what's happening and the external environment, but I also think about it is the analytic pockets you know 1 of the strength that you actually have an EBITDA.
And you do digital transformation, you just have not just and expanding attack surface.
So much more data, which has the potential to create a lot more noise.
And so what we're doing with predominantly like we have a massive amount of engineers and just have to figure out how do you actually continuously obligate or pull it out the signal from the noise and.
And the threat intelligence is another key tool and another key technology and other key strategy that allows us to actually pull out the pickup on the noise.
Those are the 2 places where it actually shows up.
Okay. That's helpful. Thank you.
Thank you.
Our next question comes from Gregg Moskowitz with Mizuho. Your line is open.
Okay. Thank you, Jeff I know youre, not going anywhere just yet, but you've done a terrific job and we will most certainly be missed.
I appreciate that thanks, Greg.
Of course.
Corey I guess I had a follow up to that last question in light of all of the increased customer awareness of ex D. R. Do you believe that most customers today are looking at the xdr and same areas as and or or as and and when it comes to tear and deployment of these technologies.
I think what's so wanted.
The market Tech economy, and sort of developing most customers are looking at how do they actually reduced the gaps in their operations and so and that's really clear that stands out more than heating now I think it's part of that what you have as a company that I've actually had an extra our bias, which is like we said earlier is.
We haven't used the term xdr before but we're clearly getting massive customer adoption there why because customers were focused on that so it really you can go out ex Jonathan.
Before Doug will allow me to actually consolidate and improve my security operations with less GAAP and my ability to manage my security operations.
Customers are definitely shifting now.
We believe because of that is that.
Xdr, Citrix and are operating and security, which means I'm able to consolidate.
Actually minimized gaps and my ability to be able to manage from a security infrastructure I think people that do that are more likely to win in the future. So yes, I think xdr citric films are much more likely to take share and the overall security analytics and fair market as you actually move forward, but that's because they actually provide a real business value.
Proposition, which is taking things that are highly manual have lots of GAAP to the environment and simplify and if our customers even if it becomes more complex as the scale and volume increase.
Alright, that's very helpful. Thanks, Corey and then just for Geoff are you able to say roughly how much revenue from insights you're expecting for Q3, and Q4, obviously Ara and the most important metric, but just trying to get a sense of how much of the revenue guide increase is organic versus acquired.
Yes.
High single digits upper single digits for the half second half the second half okay. Perfect. Thank you guys.
Our next question comes from Brad Reback with Stifel. Your line is open.
Great. Thanks, very much Corey over the last few calls you've called out retention gains broadly just wondering where you are in that process. If you. Thank you.
<unk> gotten most of that and its incremental isn't from here or if there is still meaningful gains to be had.
I mean, we have steady improvements.
And all of our different customer.
Hudson metrics and.
And I would say as we execute on our strategy, although we have upside and opportunity and we actually go forward I think that you'll see that most reflected in EBITDA per customer metric, which is against that and customer and debt and net customer adds and the primary metrics and we've made clear commitments and expectations that we expect our EUR per customer to go steadily up.
Over time, you can expect that that have either stable or increasing retention and the fundamental underlying.
That's great. Thank you very much.
Our next question comes from Alex Henderson with Needham Your line is open.
Thanks and.
I just wanted to follow up from that last question a little bit.
<unk>.
Our per customer statistics is great statistic, but I was wondering if you could update us relative to EBITDA.
New customers, whether theyre coming in.
Near the average and.
That's helping.
That.
And so that ratio or.
And theyre coming and well below and still have a lot of room to move to the upside can you. Just can you just give it that piece of the puzzle.
Yes, Alex.
They come in below the average of 52.5.
And they start smaller and then they.
Growth grow with us but.
And there hasn't been.
A big change and net new it's going up a little bit with the more platform products with additional platform products and higher asps.
But it still is.
Still less than the 52.5.
Yes, and I would say, that's especially true.
Like for like basis, when you compare company sizes, the winning I would say that.
And upfront and over time, we are happy.
We've always had strength in the <unk>.
Mid market, but we have and additional.
And you have strong spread and our enterprise expansion and that's what I continue and trends like the last 4.5 years.
And so what the strength of cost that segmentation.
And so.
And the environment clearly has changed quite significantly over the course of the last 6 to 9 maybe call. It 12 months.
As a result of and incredible a number of attacks and the breadth of those attacks as well as presidential edict and things of that sort.
They've really moved to the perception of.
Perimeter defense down multiple notches and the need for defense and depth.
A lot of notches.
How has that been impacting your business is that part of the acceleration and customer.
Wins is that.
Something that is accelerating.
Static.
In terms of impact can you can you give us some sense of what the environment looks like as a result of all of these facts.
Yes.
It's tough to do specific attributes into different levels, but I would say is and you started we actually gave commentary coming out of and the second half of last year. It was very clear that the demand environment and.
Improving.
And I would say that the focus and discussion just curious.
Fact that this is a topic at the board levels and.
The executive levels.
Companies is clearly because of demand.
And men environment more favorable I think you see that most and.
Security transformation solutions categories.
And where you actually if you look back 2 years ago I would say security was not a must have and the default digital transformation discussion I would say today, you said security much more as a default and the digital transformation and discussion.
And I can't say, what that's the government whether that's the price whether it's the breaches, but I would say that Thomas Wei digital transformation and the security saturation of Great has gone up materially over the course of the last year and I think that's it.
I think theres some correlation there it's just tough to do direct distribution.
Thank you very much.
Okay.
Our next question comes from Hamzah firewall with Morgan Stanley. Your line is open.
Hey, guys. Thank you for taking my question and Jeff Congrats again on the retirement.
So just a 1 quick question from my and just.
On gross margin.
You mentioned that Youre down slightly year on year, when could we expect that to.
You don't start to normal.
What range should that sort of normalize that sort of mid seventy's is is that something that we should expect over the next few quarters.
Yeah.
I just want to remind you that because of the deferred revenue haircut, we may have a little bit of headwinds.
And the second half because we have the costs, but we can't recognize all the revenue, but we would expect to still be in that mid 70% range.
Is that and your longer term.
Product from product margins.
Got it and overall and that 73 per cent range. So no no significant change.
Okay. Thank you.
And no further questions and turn the call back over to Corey Thomas for any closing remarks.
Well. Thank you all for joining us today on our call.
And the fact that many of you share the sentiments how great.
We are free.
Yep.
But you will still be hearing from him.
Thank you and we look forward to chatting with you over time, Thank you very much.
This concludes the program you may now disconnect everyone have a great day.
And then.
[music].