Q1 2022 Rapid7 Inc Earnings Call
Okay.
Okay.
Today's conference is scheduled to begin shortly please continue to standby and thank you for your patience.
[music].
Okay.
Good day, and thank you for standing by and welcome to the first quarter 2022 rabbits Seven earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session.
This session. If you would like to ask a question press star one on your telephone.
Please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today, So Neal Shah Vice President of Investor Relations. Please go ahead.
Thank you operator, and good afternoon, everyone. We appreciate you joining us today to discuss rapid Seven's first quarter 2022 financial and operating results.
To our financial outlook for the second quarter and full fiscal year 2022.
With me on the call today are Corey Thomas our CEO and Tim Adams, our CFO .
We've distributed our earnings press release over the wire and it's now posted on our website at investors that Robert seven Dot com, along with the updated company presentation and financial metrics file.
This call is being broadcast live via webcast and following the call an audio replay will be available in investors that rapid second dot com until May 11 2022.
During this call we may make statements related to our business that are forward looking under federal Securities laws.
Statements are made pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 90 95 and include statements related to the company's positioning our future goals and financial guidance for the second quarter and full year 2022, and the assumptions underlying such goals and guidance. These forward looking statements are based on 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 annual report on Form 10-K filed on February 24, 2022 and in the subsequent reports we filed with the SEC. The information provided on this conference call should be considered in light of 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 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 in 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 on our website at investors I'll wrap it up.
At times in our prepared comments 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 in the future on these metrics.
With that I'd like to turn the call over to our CEO Corey Thomas Corey.
Thank you Sunil and Hello to everyone on the call today. Thank you for joining us for our first quarter 2022 earnings call.
Rapid seven kicked off the year with another strong quarter of results.
<unk> year over year <unk>, 38%.
We ended the period with $227 million in here are while delivering positive free cash flow to start the year.
This ongoing momentum in our business was driven by strength across both our security transformation and 1 billion EMEA towards solutions.
Our insight platform is resonating with customers.
Beth to deliver an integrated experience that enables better security outcomes.
In today's elevated threat environment.
We saw strong upsell and cross sell engagement within our base of customers expanding usage drive and accelerate growth in our production with eclipse $50000 in the quarter.
Steady growth in this key metric validates the continued strength and leverage from our customer expansion engine as we remain obsessed.
And helping customers drive productivity and scale in an increasingly challenging environment.
We see a long runway for sustained customer experiences across our best in Sweden insight platform.
Supporting line of sight to $80000 on a per customer over the immediate term.
And the other two huge recent milestones around concern with the announcement of our 2020 to those who didn't report, which we published in Raleigh.
In March the first comprehensive look at our value focused mindset around ESG.
Our investments aimed at creating each year in the future where everyone is empowered to announce positive change and highlights rapid does focus on going beyond the foundational work of traditional diversity equity and inclusion requirement.
ESG frameworks to work towards realizing our vision of a secure and prosperous digital future for all.
Publishing our first collective annual report these topics opens the next chapter and building trust transparency and dialogue with all of our stakeholders.
Before I share additional comments on our business I want to briefly address our response to the situation in Ukraine and associated threat dynamics.
Alongside many other businesses and consistent with our values as an organization. We took action in the first quarter of suspending new business and renewals with 100 patients primarily located in Russia.
At the same time, we continue to provide ongoing support to our customers located in Ukraine.
Sure.
The conflict in this region is another unwelcome reminder of the intensifying threat landscape based on organization and we've done that.
We can executive orders and regulations, both in the U S and Europe , highlighting the persistent nature of these threats and the critical need for our customers to for our traffic.
Within their R&D budgets.
The fiber risk dynamics are evident in rapid Seven's recently published 2021, one ability intelligence report, which examined the 50, most notable security vulnerabilities and high impact cyber attacks from the last year, it's clear that the attack landscape has shifted dramatically our research.
<unk> founded cyber risk continues to accelerate with the widespread direct increasing by over 130% compared to 2020.
And more than half of those threats beginning with the Bureau data.
Companies increasingly need to detect and respond to direct more quickly as the average time for exportation dropped to just 12 days in 2021 from 42 days in 2001.
And that the business the financial implications that we reach a real at one third of the vulnerability.
<unk>.
Altogether.
Weighted rent landscape increases the probability of an average business being targeted by <unk>.
And the security environment with limited noise, and direct and amidst evolving geopolitical and macroeconomic dynamics, we remain focused on what we do benchmark.
Delivering best in class security visibility analytics and automation are collecting massive volumes of the right data.
Analyzing this data for risk threatening compromised security projects and automating threat response to drive increasing productivity and efficacy security outcomes.
We expect this focus on securing our customers digital experiences coupled with evolving industry dynamics will continue to support global demand for our differentiated and best in Sweden, <unk> platform, which is reflected in our sustained strong full year growth applications.
Now I'd like to give a brief update on the progress towards our three enduring goals before turning the call over to Tim for more detail on our financial results and outlook.
First.
We continue to enable customers to transition to the cloud to Jeremy.
We began our cloud maturity journey 2020 via both organic and inorganic investments with the intent of building a leadership position.
We've consistently shared our strategy to be a market leader across each of our core pillars as part of our goal to deliver an integrated platform.
Our customers have.
Best in class security capability with a lower total cost of ownership.
Two years later rapid seventh cloud security offerings was recently validated by Forrester wave for cloud security workload at the highest ranking current offering on the market.
Validating our leadership teams across all three of our four pillars of the <unk>.
Bob.
VRM and now cloud security insight Comtech received the highest possible scores for ESPN.
Paint on workload protection identity, and access management, Infrastructure's code and data integration.
This is a remarkable accomplishment by our team I am extremely proud of what we've achieved in cloud security in a relatively short timeframe.
Our leadership in cloud security and generated strong traction with customers. Yes. There is another important distinction to make here.
And that is rapid seven's ability helps ensure customers modern cloud environments with capabilities across our entire platform.
As customers increasingly innovate in the cloud they can leverage our broad platform capabilities to <unk>.
Paul The cloud Security Challenge. This includes our industry, leading vulnerability assessment technology, which now powers native assessment for container and kubernetes environment.
And our best in class attached to every product offering to help identify and mitigate threats for both cloud and hybrid environments.
The productivity of our platform across both traditional and cloud environments is an increasingly important competitive differentiator as customers look to secure their fragmented technology ecosystem.
This brings us to our second overarching goal to meet customers, where they are and they're sick I'm sure.
We ended the capabilities and value proposition of our natively integrated into that platform.
Our results speak to our momentum here.
Seeing strong growth in <unk> per customer as customers consolidate fragmented security tools on our platform drive and expanding customer usage and adoption of our solutions.
And then the first quarter over 50% of our new <unk> came from existing customers and security team increasingly look to natively integrated solutions to mitigate the challenge in front of the multiple disparate products.
This platform trade and have supported strong demand for our security transformation solutions as we shared last quarter now represent over 50% of total EMR as customers look to leverage more of our solutions to minimize beans and gaps.
And their technology and Brian .
A core part of the insight platform value proposition and competitive advantage is our focus on customer outcomes and our ability to driving productivity and scale with quick time to balance for Securities Limited resources.
As more companies become resource constraint.
Hi, Securities scrutiny, and a tightening hiring environment. It means that customers of all sizes and level of sophistication are seeking access to our security expertise deliberate effort by analysts.
And to our clients.
Turning to our third enduring goal, we remain focused on expanding profitability and free cash flow, while investing for durable growth.
Our first quarter investments position us well to drive strong growth, while scaling profitability through the balance of the year.
We saw strong traction on our full year hiring plans in the first quarter, even amidst a competitive talent landscape confirming rapid seven standing as an employer of choice and provide a solid foundation for this year's growth.
We have also been able to absorb the associated wage inflation, which speaks to the efficiency of our business model and our commitment to prioritizing strategic initiatives we continue.
To invest in our highest return opportunities, including platform growth and delivering holistic cloud security as we balance our dual mandate of scaling profitability, while investing for durable growth.
In short we started 2022 with strong results and we are well on track to meet our goals for this year.
Our top ranked technology and our ability to benefit from multiple areas of security spending give us conviction in our outlook for 2022 and beyond as we expect to continue delivering strong topline growth, while expanding margins on an annual basis.
With that thank you all and I will now turn the call over to our CFO , Tim Adams to share additional detail on our financial results.
Thank you Corey and good afternoon to everyone and thank you for joining us on the call today.
Before I turn to the results just a quick reminder, that except for revenue all.
Our financial results, we discuss today are non-GAAP financial measures unless otherwise stated.
Reconciliations between our GAAP and non-GAAP results can be found in our earnings press release.
Rapid <unk> had an excellent start to the year ending the first quarter with six.
$627 million, which represents 38% year over year growth.
Our sustained growth highlights the strong momentum we are seeing as customers transform their security operations programs around the cloud.
In particular customers are expanding their usage of our platform to more effectively analyze risk across both traditional and modern it environments and improved security outcomes.
The compelling value proposition of our insight platform is driving robust cross sell and upsell activity.
With first quarter <unk> per customer growing 18% year over year to $60000.
At the same time, we continue to see a healthy balance of all of our growth from new customers. As we ended the quarter with over 10400 customers globally, which represents 16% growth from the prior year.
Security transformation solutions made up over 60% of new <unk> in the quarter and continued to grow at a strong pace.
This speaks to the success of our land motion across multiple products as well as our commitment to providing a best in suite experience across our insight platform.
First quarter revenue of $157 million grew 34% over the prior year and exceeded the high end of our guidance range.
The outperformance was driven by broad based demand for both our security transformation and vulnerability management solutions, which drove product revenue of $149 million representing.
Representing 36% year over year growth and acceleration over the prior quarter.
We continued to execute well on our international growth strategy with international revenue growing 54% year over year to 21% of total revenue, while North America grew 30% year over year.
Turning to our operating and profitability measures for the quarter.
Gross margin was 75% in the first quarter, while total gross margin was approximately 72%.
Both within our range of expectations.
Given the strong momentum we see in the business, we continue to invest in driving durable growth, while remaining focused on delivering full year operating margin expansion consistent with our growth and profitability framework.
Our Q1 investments position us to execute against the strong demand backdrop, we see and despite competitive talent environment. We are seeing strong success expanding our workforce.
During the first quarter sales and marketing expenses represented 43% of revenue compared to 42% in the prior year and R&D and G&A expenses were 23% and 9% of revenue, respectively, compared to 22% and 8% in Q1 of last year.
First quarter operating loss of $5 $6 million was consistent with our guidance range and net loss per share was <unk> 16.
Also consistent with our expectations.
Now moving to our balance sheet and cash flow statement, we ended the quarter with cash cash equivalents and investments of $263 million.
Our strong first quarter <unk> growth and collection efforts drove Q1 operating cash flow of $10 million and free cash flow of $4 million.
This brings us to our guidance for the remainder of the year.
We delivered strong first quarter results and see a durable demand backdrop ahead of cyber risk continues to escalate driving increased prioritization of security spending for organizations of all sizes.
Our expanded market leadership across our insight platform positions us to help many of these organizations as they look to consolidate to fewer strategic security vendors in search of better outcomes.
As a result, we remain confident in our ability to execute against the strong year over year AOR growth guidance of 24% to 25% that we shared at the beginning of this year.
As we noted during our last call, we will share any relevant updates to this guidance in the second half of the year.
Given our Q1 revenue outperformance, we now expect full year revenue to be in the range of $686 million to $692 million growth of approximately 28% year over year.
For our profitability measures, we remain on track to deliver non-GAAP operating income in the range of $17 million to $24 million for the full year with net income per share in the range of five to 16.
This was based on an estimated $60 9 million diluted weighted average shares outstanding.
For the full year, we continue to expect free cash flow in the range of $40 million to $45 million.
Now turning to quarterly guidance for the second quarter of 2022, we expect revenue within the range of $163 million to $165 million, which represents growth of 29% to 31% over the prior year.
We expect operating income to be in the range of zero to $2 million and non-GAAP loss of 7% to <unk> <unk> per share, which is based on an estimated $58 8 million basic weighted average shares.
We continue to focus on delivering strong growth with consistent annual improvement in operating margin and free cash flow and alignment with our growth and profitability framework.
As we look at the profitability dynamics for this year and we continue to expect the majority of our operating income and free cash flow to be driven in the second half of the year.
This reflects first half investments and durable growth and underscores our strong confidence in the underlying demand trends and outlook for the year.
In summary, we are pleased with our first quarter results and believe they give us a solid foundation for achieving our goals in 2022 as.
As the threat landscape intensifies, we are committed to delivering market, leading security operations technology to enable better security outcomes for our customers.
Thank you for joining us on the call today, and we will now open the line for questions operator.
Thank you as a reminder to ask a question Youll need to press star one on your telephone to withdraw your question press the pound key and the interest of time. Please limit yourself to one question. So that we can get to everyone in the queue.
Our first question comes from Matt Hedberg with RBC capital markets. Your line is open.
Great guys. Thanks for taking my questions and congrats on a great start to the year here Corey.
I think both you and Tim mentioned sort of the strong cyber backdrop here I think we all see in the headlines every day I'm just curious.
Could you talk about the durability of the spend I think that's a good questions about like is there a bit of pull forward spending or something of that nature. As a result of COVID-19 just kind of curious if you could give us some additional data points on the durability of the spend that we've seen.
Especially when we see these increased cyber breaches feels like daily in the headlines.
Yes. So one thank you and that's a great question and there's two dynamics that you're seeing the one big big extraordinarily soft demand environment.
It's driven by two factors one we actually start talking about last year and we saw the second half of last year.
We were seeing in planning point of executing towards.
<unk> sustained durable growth in the environment. In fact, we've seen that play out quite well and that was driven by maturity repowering any inventory or digital transformation and so on.
The pregnancy at the table.
That.
Boris Thank you.
And that makes it durable.
That's an additional one that we're actually starting to speak early parts of the the only strengthen that momentum and thats what the current state of global conflict around fiber standards are also having to raise any and.
So not only do you have and if its something thats on the board and maintenance for incentives.
Second with regard to deal with time Warner cable.
Parts of the market is that companies are going to have to increase their standards.
All across the board cyber security and that creates another driver globally. So again, we tend to all the data that indicates that this is going to be a sustained focus for businesses at higher levels of standards for the foreseeable future.
Thanks Corey.
Thank you Ken.
Yes.
Thank you. Our next question comes from Matt Sussman with Morgan Stanley . Your line is open.
Hey, Tim This is Matt Saltzman on for Hamzah firewall, thanks for taking the question.
So you have had insights for a few quarters now.
So just would love to get a sense on how the integration is going as your sales force fully ramp there and if youre seeing any incremental customer interests.
Yes, great question.
The integration of voice ordinarily well.
Teams are working well together.
And then it gets a little easier to actually get to an environment.
James Moore.
The second thing is the xdr storage.
Yes.
And we're seeing that be checking card customers, who are looking to improve their operations and lower their total cost of operation and the rapid <unk> sorted a powerful store that delivers on productivity.
Productivity and that resonates extraordinarily well and customers and there is also about the incremental land most of the opportunities.
And so when you look at it all up I would say that we are seeing the ability to not just linear not just call sales, but really it's been a catalyst for customers continuing with the leadership of our external growth story.
Okay.
Thank you.
Okay.
Thank you. Our next question comes from Alex Henderson with Needham Your line is open.
Great. Thanks.
I was looking at the net new IRR and the quarter to quarter increase in the.
Customers and.
<unk>.
Results. There obviously are substantially lower in the March quarter then.
In other quarters, Yes, you are up 18%.
Yes.
Yes.
Year over year, but.
In terms of customers, but if you look at it quarter to quarter, it's actually kind of an underwhelming number.
Pretty sure that it's just strictly the mechanics of the seasonality because I think it did something similar in the first quarter of last year can you just talk about the seasonality of that net new <unk> and the seasonality of the new customer additions.
That is typical in the March quarter.
It's a great question, we can hit seasonality bigger issue is the core driver.
I'll remind you that when we do our analyst day, we talked about mid teens growth.
And the 5% to 10% growth.
I'll call it Bob.
Question.
Was that while that was 5% to 10% in aggregate, we always want an aggressive mixed shift to customers that were more strategic one.
At much higher lifetime value.
And we were looking to take share and drive share and what we consider.
Hi, strategic buying customer.
Goodbye.
Looked at through the lens of customers that are likely to adopt.
And so when you think about that Bob to timber sales.
We are executing that metric.
And this quarter, while we don't report the breakdown consistently if you look at our platform and the real delta over 25% will be between 10% and the.
Quarter. So when we think about this is that from a long term perspective.
1% to 10% is healthy, but the most important part is actually that we do the mix shifts so that we actually have a higher propensity and our higher volume customers that have high lifetime value and also high profitability correspondingly, we're actually be focusing on customers that actually have lower lifetime value and lower profitability and thats been a multi year.
So that's the driver and the balance I would say that the quality of the customers is actually volume and Thats part of what we actually are so it's not just on the growth, but also the <unk> per customer potential because we're seeing our strategic execution play out really well and then to see that this quarter with 25% growth.
And the platform customers.
Let me check can you.
Can you just clarify what you mean by 25% growth in platform customers. Please.
Yes that'll eventually.
Yes, I'm wondering measuring that.
Yes, the platform customers as those customers that are adopting.
Adopting the insight platform and so you can think about all of our major so when we think about what we want to sell team.
Past, we've had a mix of things that included.
It's transactional.
<unk> was a big part of that and so you've got high volume, but it was much more transactional in nature and had lower lifetime value. When we define strategic customers. This is customers that are buying the platform and have the capacity to buy into.
Higher platform suite over time, which is a high lifetime value and also generates higher.
Long term profitability.
This is our overall focus and so we've continued to make steady shifts in that direction over time, but that's how we define it platform customers are customers that are buying on the insight platform.
Inside classic Andy inside RBR portfolios, Yes, Cory I would just add the seasonality first off I thought we had a very strong quarter. When you look at the revenue growth.
Our growth and we do expect a similar pattern this year quarter over quarter that we saw last year, where you do see a step up in the net.
In Q2, Q3 looks a lot like Q2, and then it steps up again in Q4. So we expect a similar pattern this year to what we saw last year.
That's what I thought was sort of the case. Thank you very much great great answers.
Thank you very much.
Thank you. Our next question comes from Rob Owens with Piper Sandler Your line is open.
Great. Good afternoon. Thanks for taking my question I apologize if I missed it but could you unpack the Russia impact because you talked about suspending activities with both Russia and Belarus.
Whether it's even significant to revenue or percent of revenue in error.
Yes, Hey, Robyn its Tim Corey did mention that.
We are not taking any new business in Russia, and Belarus and were not renewing any of those customers. It was very immaterial. So it had no impact on the results.
Any impact on that <unk> question.
Can you repeat the question again.
Any impact on the forward Arrow guide from suspending activities or.
No.
Rob it's really immaterial in again.
The $740 717 full year guidance.
Guide that we gave you three months ago, we feel very confident in that showing a very nice growth on a year over year basis, but no impact from those two geographies.
Great. Thanks.
Thank you.
We have a question from Jonathan Ho with William Blair. Your line is open.
Hi, Good afternoon, and let me Echo my congratulations as well.
In terms of international growth, what seems to be making the most difference there in terms of the strong performance over multiple quarters and are you, making more of your investments sort of outside the U S to take advantage of the opportunities there. Thank you.
Great question Jonathan.
Investment strategy has remained consistent.
Our job one continuing to mature and the execution by executing.
Executing quite well, but the second part of it is the international and.
We'll benefit of being able to sell the full platform.
And keep in mind in a world, where you actually have more and more data privacy governance.
It actually expanded the platform around the world. This has been a driver of shipping the international in traditional more transactional businesses like <unk> to those higher ASP higher subscription businesses stickier businesses on our platform.
And the international team as the primary beneficiary.
Good execution against that opportunity more than anything else.
Okay.
Thank you.
<unk>.
Thank you Ken.
Again as a reminder, if you would like to ask a question press star one on your telephone.
We have a question from Joshua Tilton with Wolfe Research Your line is open.
Hey, guys. Thanks for taking my question.
I just wanted to confirm that you said, 50% of new IRR in the quarter came from existing customers and if thats. The case I think it implies that your NR are pretty strong I know you guys don't disclose it anymore, but is there any additional color you can give us on where the IRR stands today.
Yeah, Hey, Jonathan it's Tim what I can tell you is that we've seen some very nice steady increases in both good net retention and the growth retention as you know we don't disclose what those numbers are but.
But we saw a very nice improvement last year and that continues into this year as well.
And I can confirm that you saw strength.
Yes.
Can I just confirm that you said, 50% of new IRR came from existing customers.
Yes, correct.
Thank you.
Our next question comes from Shelby, Seth Ravi with SPN Securities. Your line is open.
Yes. Thank you very much. So there was a tick down in your professional services gross margin sequentially can.
Can you talk to what drove that and also your product gross margin.
Has been declining on a year over year basis, do you think thats going to stabilize.
Yes. This is Tim let me start with the professional services.
So we know that.
The revenue can vary from quarter to quarter, we think about it on a full year basis.
What we did see in Q1 is some experience with the scheduling challenges, which was really driven by some of the attrition in our team so that put a little more pressure on gross margin because you have to ramp up hiring some new staff and then we do try to supplement that with some third party labor as well.
So that gave us a little pressure on the gross margin that we see in Q1 on an overall basis, but we still feel very confident with the total gross margin being in the low 70 for the year in the product gross margin being in that mid seventies. We commented similarly last quarter, where it really comes back.
Down to product mix that can drive that gross margin and as we've talked about the <unk>.
Some of these newer services that we have in the marketplace and security transformation solutions are very high growth and they are changing the mix dynamic and theres still earlier on in that lifecycle on scaling inefficiency in driving their own gross margin, but overall, we feel very confident with the total gross margin being in the range.
We've laid out and with product gross margins staying in that mid <unk> range, yes. The only thing I would add to that is that one okay.
The team has done a great job of bringing in some excellent talent.
A year.
And so that's a positive benefit whenever it services and then the second thing when you look at the product mix of drops but what we.
Is that each of our teams are also opus is they actually do that aggressive scale with more customers that they are actually making a more pushed over time. So we're seeing each product also improve its own gross margin characteristics.
So again, it's something that we have lots of visibility into that.
Wilder expectations.
Okay. Thanks.
Thank you we have a question from Brad Reback with Stifel. Your line is open.
That's great. Thanks, very much Perry just as you look higher level, how is the appetite for M&A this year.
So one I'll remind everyone that tend to be early.
Helpful.
And strategic around our if you think about it has both strategic value.
It'd be accretive in the near term.
Hey, good talent and cultural fit and then whats little bit unique about us. It has to have the capacity to procure products, but also fit into our portfolio.
So that's a pretty high bar that we actually say that.
The only thing I would say in this environment that we're actually Washington.
Not all private market prices have actually adjusted.
So I would say the ultimate over two weeks.
But that's something that we're paying a lot of attention to is just sort of like how private markets are.
The pricing of trading in general, but we're not moving away from our long term strategic plans about how we actually think about it.
Great. Thank you very much.
Thank you.
Thank you and I'm showing no other questions in the queue I'd like to turn the call back to Corey Thomas for closing remarks.
Thank you all so much for joining us.
Turning to the next quarter.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
[music].
Sure.
Yes.
Hum.
Okay.
[music].
Yes.
Sure.
Okay.
Okay.
Okay.
Okay.
[music].
[music].
Yes.