Q2 2022 Rapid7 Inc Earnings Call
Good afternoon, My name is Chris and I'll be your conference operator today.
At this time I would like to welcome everyone to the rapid seven Q2, 2022 earnings call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there'll be a question and answer session.
If you'd like to ask a question. During this time simply press Star then the number one on your telephone keypad.
To withdraw your question. Please press star one again.
And also please limit yourself to one question.
Thank you Sunil Shah VP of Investor Relations.
May begin.
Thank you operator, and good afternoon, everyone. We appreciate you joining us today to discuss rapid sort of second quarter 2020 financial and operating results. In addition to our financial outlook for the third quarter and full fiscal year.
With me on the call today are Thomas our CEO and Tim Adams, our CFO .
We distributed our earnings press release over the wire and is now posted on our website.
Okay.
Along with the updated company presentation.
This call is being broadcast live via webcast and following the call an audio replay will be available.
Right.
During this call we may make statements related to our business that are forward looking under federal Securities law.
Statements are made pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act.
Statements related.
<unk> our future goals.
The third quarter.
And the assumptions underlying these forward looking statements are based on our current expectations beliefs and information.
Yes.
Actual outcomes and results may differ materially from the future results expressed or implied in these statements due to a number of risks and uncertainties, including those contained in our most recent quarterly report on Form 10-Q filed on May five 2022.
And the subsequent reports we file with the SEC.
The information provided on this conference call should be considered such risks actual results and the timing of Australia.
Really from the results or timing predicted or high touch.
Such forward looking statements and reported results should not be considered an indication of future performance.
Perhaps seven does not assume any obligation to update the information.
This conference call, except as required by law.
Our commentary today will be primarily in non-GAAP terms and reconciliations between our historical GAAP to non-GAAP results and.
And guidance.
Today's earnings press release and on our website.
Sure.
In times during the prepared remarks or in responses to your questions may offer incremental metrics to provide greater insight.
Org results.
Please be advised that this additional detail maybe nature may or may not provide an update in the future.
With that I'd like to turn the call over to our CEO Brighthouse Corey.
Thank you Danielle and good afternoon to everyone on the call today. Thank you for joining us for our second quarter 2022 earnings call.
<unk> ended the second quarter with $658 million representing.
Representing 35% year over year growth, while exceeding both our revenue and operating income guidance by quarter.
Our team is executing well EBIT macroeconomic pressures begin to surface for some customers and corporate budgets come under greater scrutiny.
Despite Brian pressure hockey budgets. It is clear from discussions with our customers and prospects that security remains a critical focus and priority.
As a result during the second quarter, we continued to see robust customer demand for our best in class insight platform driving strong are our growth as security transformation solutions as customers look for a cloud native approach to securing a shifting environment.
However, despite ongoing momentum for our security transformation solutions during Q2.
Total <unk> was impacted by falling macroeconomic uncertainty affecting customers internationally, particularly in Europe , where the majority of our international business is concentrated.
We progressed in the second quarter, we began to see increased level.
As customers and prospects in the region managed record inflation softening demand and FX pressures.
As we navigate an evolving macro backdrop there are a few key dynamic that I'll highlight that give us confidence in our near and long term outlook.
Starting with our security transformation solutions, even as customer budgets come under greater stress. This area of our business has proven more durable as we focus on solving customers' most urgent security challenges.
Customers seek better efficacy of security outcomes and lower total cost of ownership, we're helping them automate their security programs, while leveraging our insight platform to minimize risk across the expanded attack and.
In the tech and respond to threats across traditional and cloud environments.
Our market, leading security and transformation solutions are resonating with customers continued.
Shortages and back.
On an escalating threat landscape.
Due to our quick time to value and compelling ROI.
We saw the clear benefit a bit in our second quarter security transformation.
With continued to grow well over 40% organically year over year.
This platform traction is illustrated by our recent six figure deal with a financial services customer, whose current vendor was unable to scale to meet their detection and response.
At the same time, the customers actively shifting towards the cloud and need to expand their security infrastructure. Despite a heartland budget.
<unk> 70 ability to consolidate enterprise great detection response cloud security vulnerability management and automation on a single platform with a huge differentiator. We won on the strength of our best and keep platform, while enabling this customer to effectively manage and budgetary constraints, while creating seamless.
Efficient process for Onboarding new solutions.
The visibility of our platform with key Differentiators and winning this deal and it speaks to the sustained high growth, we see our security transformation solutions.
Given the consistent performance and momentum of our security transformation solutions, we continue to maintain a strong outlook for their quote as we look ahead.
Turning to <unk>.
Liability management remains a foundational priority for customers to trade programs.
And as customers apply greater scrutiny to budgets increasingly shift their technology to cloud, we saw lower relative urgency for b.
In the second quarter.
It was affected and our beyond air are which decelerated from high teens growth to mid teens growth during the quarter with the most notable deceleration in our international region, we saw higher levels of appeal inspection and delays driven by heightened macro sensitivity.
However, as customers increasingly look to rationalize spin we believe rapid seven did.
We are incredibly well positioned to accelerate customers' path to consolidate security spin and increase the efficacy by utilizing our insight platform help solve their most urgent security needs at the highest ROI.
It fuels, our optimism for delivering sustained long term growth in our business.
Amidst a quickly shifted ikea environment customers want to spend their budgets and time around the most strategic areas of their security programs increasingly their focus is on detecting and responding to threats across their expanding digital footprint imagine security of their growing cloud environments.
We continue to see great traction with our insight platform vision customers prioritize areas like xdr in cloud security, which is reflected in our security transformation solution now approaching 70% of our new E. R. R.
We see a compelling opportunity to build on this momentum entering the second half of the year, we plan to optimize our customer engagement strategy.
Celebrate consolidation by attaching critical but lower or just the areas like our ability to manage it to high growth security transformation solutions.
This will enable customers to more efficiently bridge, the security needs across modern and traditional environments, while focusing their security budgets around the highest strategic areas like the cloud.
A great example of how customers are leveraging our platform to consolidate around strategic expand focus areas with a $200000.
Deal with a high profile retail company during the second quarter.
The newly hired CTO tasked with building out a security program, we had a competitive process where are in fact sit out with best in class capabilities and strong value proposition.
Our detection and response offering one and later in the process as the customer chose Appian to the deal are catching full coverage of their environment and they justify increasing their budget to gain additional coverage. This enabled the customer to consolidate their security operations back a little cost while enabling.
Rapid seven to accelerate its sphere of gain critical market.
A core part of Africa value proposition is driving productivity and scale for resource constrained customers of all sizes.
And today's environment, most customers have some form of security centric resource constraints. We believe were strongly positioned to win with these customers and the time to value of our advanced analytics and automation capability, our meaningful competitive differentiators.
<unk> forward, we expect to increasingly anchor our go to market motions in areas of high customer urgency, while it's robbing simple and accretive a patch for products like <unk>.
We continued to invest in our platform of carriers, while building on our product and packaging work our teams have been doing during the second quarter.
Returning to the current environment.
As we look out through the rest of the year, we have factored in the current macroeconomic climate into our second half expectations.
While we do not see customers, removing or reducing their budgets, we have observed the slowing or delayed.
And the current budgetary environment.
While this does not change the critical need for these customers to secure increasingly complex and modern it environments. We do anticipate the implementation timeline, we continue to be affected by a bunch of timing and visibility.
Despite the evolving economic backdrop, we expect the rapid sort of the ability to close the gap in customer security environments with comprehensive best in class solutions will remain strategic and continued to drive solid underlying demand.
The net result of these dynamics.
Expectation for sustained high growth in our secured debt from a submission balanced against the impact of macro induced by the student.
Reiterating our original guidance range for the year.
While the environment has changed from our expectations at the beginning of the year, our ability to sustain durable you our growth while executing against our profitability outlook for the year speaks to our strong value proposition for our customers.
Leveraging our model and our commitment to our growth and profitability framework Tim.
Tim will share more details on our guidance in his remarks.
Looking at the security landscape today <unk>.
And just a vast amounts of data analyzing it and security packets and responding to that information a productive and efficient way is more valuable than ever as we lean into the consolidation of spin around extended detection response cloud security and be in a comprehensive way.
The team went to meet customers' operational challenges in both traditional and cloud environments and we're doing this with a focus on productivity and time to value.
Lastly, we continue to execute on our evergreen goals.
Many of our customers to securely transition to the cloud to expand the capabilities and value proposition best in class insight platform and to balance our dual mandate of gallium profitably, while strategically investing to drive durable growth.
Our strategy to better align our BMS executed transformational solutions value proposition will help customers transition more securely and efficiently to the cloud the holistic way, while enabling them to consolidate spending and gain greater leverage from the insight platform, we continue to pursue balanced global growth and.
Committed to our profitability framework with that thank you all and I will now turn the call over to our CFO , Tim Adams to share additional details on our financial results Tim.
Thank you Corey good afternoon, everyone and thank you for joining us on the call today.
Before I turn to the results a quick reminder, that except for revenue all financial results. We will discuss today are non-GAAP financial measures unless otherwise stated.
Additionally, reconciliations between our GAAP and non-GAAP results can be found in our earnings press release.
Rapid seven ended the second quarter with <unk>.
$658 million.
Getting 35% year over year growth.
This reflects continued momentum in our high growth security transformation solutions as customers prioritize areas like detection and response and cloud security coupled with durable double digit VM growth.
The breadth of our insight platform continues to resonate with customers, who are increasingly tasked with detecting in assessing risk across both the traditional and cloud environments.
Many of the customers, we engage with are looking to consolidate our fragmented set of security tools.
And our value proposition stands out and uncertain macro economic environment, given our time to value and ease of use admits persistent resource constraints on the security teams.
These dynamics drove healthy growth in both new customer Asps and.
And expansion business during the second quarter as.
As we saw our per customer grow 18% year over year to $62000.
Our customer count grew 14% year over year as we ended the quarter with over 10600 customers globally.
This was driven by strong growth of over 20% and higher value platform customers, which now represent over 80% of our customer base.
While we continue to be focused on lower value legacy transactional customers, who represent a small minority of our <unk>.
Second quarter revenue of $167 million grew 32% over the prior year and exceeded the high end of our guidance range on the strength of our security transformation solutions.
Revenue out performance was driven by product revenue of $159 million.
<unk> revenue saw a growth of 72% year over year and now represents 21% of total revenue driven by continued strong momentum in security transformation.
North America revenue grew 28% over the prior year and comprised 79% of total revenue in the quarter.
Turning to operating and profitability measures for the second quarter.
Gross margin was 75% and total gross margin was 72% both in line with our range of expectations.
And marketing expenses represented 41% of revenue compared to 40% in the prior year period.
While R&D and G&A expenses were 21% and 8% of revenue, respectively, compared to 20% and 8% in the second quarter of last year.
We generated over $3 million of operating income in Q2 coming in ahead of our guidance range due largely to revenue over performance.
This underscores both the natural leverage in our business model and our ongoing commitment to balancing growth and profitability within our stated framework.
Our second quarter, adjusted EBITDA was $8 million net.
Net loss per share was one.
And better than our guidance range on higher operating income.
Moving to the balance sheet and cash flow statements.
We ended the quarter with cash cash equivalents and investments of $274 million.
Operating cash flow was $7 million.
And free cash flow was just under breakeven.
This brings us to our guidance.
As Cory detailed earlier, we saw robust growth in our security transformation business, driven by the scope and quality of our insight platform and our ability to enable better outcomes for customers on their most urgent security challenges.
This is being counterbalanced by macroeconomic uncertainty and the associated impact of increased budget scrutiny from customers, which mitigates upside potential to our prior expectations.
Given these dynamics, we are reiterating our full year 2022, <unk> guidance of $740 to $750 million.
Year over year growth of 24% to 25%.
Our IRR outlook now in debt approximately $5 million.
FX translation headwinds for the full year, given recent foreign exchange volatility.
We anticipate sustained but moderate <unk> growth in the current macroeconomic clients.
We are optimistic about our unique opportunity to increasingly attach VM alongside higher priority security transformation solutions, while helping customers consolidate their security budgets to drive better efficiency of their spectrum.
In terms of linearity.
Linearity in the back half of the year, we now anticipate third quarter net new <unk> dollars to be down modestly over the prior year period on an organic basis.
Returning to net new <unk> growth in the fourth quarter.
Turning to revenue we are narrowing our full year revenue outlook to a range of 686 and $690 million driven predominantly by a decline of approximately $3 million and our services revenue outlook.
We now expect our full year operating income to be 20% to $24 million.
In the upper end of our prior guidance range as we remain committed to executing against our growth and profitability framework.
We expect net income per share to be in the range of <unk> to.
15.
Based on an estimated $60 2 million diluted weighted average shares outstanding.
Our free cash flow outlook is maintained at 40% to $45 billion and we remain confident in our ability to ramp free cash flow in the second half of the year.
Turning to quarterly guidance for the third quarter of 2022, we expect revenue in the range of $175 million to $177 million.
This represents growth of 25% to 27% over the prior year.
We expect operating income to be in the range of 6% to $8 million and non-GAAP net income of three to six <unk> per share, which is based on an estimated 66 2 million diluted weighted average shares outstanding.
We expect the new convertible debt accounting rules, which require use of the if converted accounting method to impact EPS for the first time in the third quarter, adding roughly 6 million shares to our share count while also adding back cash interest expense associated with the debt in order to calculate <unk>.
Earnings per share.
In closing, we started 2022 with a strong outlook and maintain confidence in our ability to deliver within our guidance ranges as we navigate the evolving macroeconomic climate we can.
Continue to balance high return investments in growth with our focus on delivering consistent annual improvement in operating margin and free cash flow.
And we remain committed to our profitability frameworks and medium to long term financial targets.
Thank you for joining us on the call today, we will now open the line for questions operator.
Thank you if you'd like to ask a question. Please press Star then one on your telephone keypad as a reminder, please limit yourself to one question.
The first question is from Rob Owens with Piper Sandler Your line is open.
Great. Good afternoon, and thanks for taking my question, maybe you can unpack a little bit just that.
Net new era of growth that you saw during the quarter here and.
You talked about some of the challenges you're seeing in EMEA, but North America did slow a couple of points quarter over quarter relative to growth. So maybe you can just help us understand what you're seeing domestically what youre seeing internationally right now thanks.
Hey, Rob Thanks for the question, so Tim and I May tag team it so.
So the first point is that we saw the highest in fact in EMEA.
From a from an overall perspective in terms of the pressure on the net ADR growth.
The flipside of it is we started with incredibly strong performance and security transformation solutions.
And that was across the globe, but also specifically in.
In North America, now part of what Youre seeing there in North America and around the world is sort of like the B M, where it's incredibly healthy, but you did see that deceleration from the high teens to the mid teens. The way that we think about this is the fundamental demand driver you know that we've therefore, while there is.
Environment priority shifts that people move to the cloud more we expected to be up to decelerate over time.
Down to the cases per cent range, yes that happened faster than we expected this year, but the good news is that we're well positioned for that could we make about the priority for visibility and risk analytics.
We can address those critical areas of highest priority, which is the cloud right now and so the dominant dynamic that we actually saw was that shift accelerating and.
And we think that we're set up well with our strategy to address that in the mid to long term.
Corey I would add to that just for Q2.
Look I think we're seeing this across all the industries. The macroeconomic pressures that are happening predominantly over in Europe , and that certainly did impact us in the quarter and as we lay out the outlook for the full year.
We also saw about $1 million of the $5 million FX that I referenced earlier hitting in Q2 against <unk>. If it were not for this economic impact and the FX than our IRR would have been up on a year over year basis.
Great. Thank you guys for the color.
Thanks, Rob.
The next question is from Jonathan Ho with William Blair. Your line is open.
Hi, Good afternoon, I, just wanted to dig a little bit into your comments around the bundling and packaging of the high customer urgency sales.
With me.
Can you talk a little bit about how that changes from your prior sales motion and what that could mean for something like net retention or maybe some larger lands here. Thank you.
Yes, it's a great question and so when you think about we've had a steady evolution over time, how we actually introduce new capabilities to the market.
When you look at.
Our security transformation, which is technology that we really delivered to the market in the last five years.
Over 50% of total IRR and approaching 70% of new <unk> now as part of that we tend to start with a focused sales effort and expand that effort out overtime.
Now along the way we've actually added.
We've added focus and sales reps that actually focus on security transformation and then we slowly extend there our sales team where they can sell all the capabilities that's been going well really the delta here is that we want to focus our sales efforts, but the most efficiency on the things that our highest customer priority and so when you think about whether it's sort of the texstar spots, which is clear.
A big priority when you think about visibility people want visibility and they won't risk analytics and the most mission critical parts of their business and organization.
Now that said towards the pounds now the good news is that people still absolutely need visibility into their traditionally their on premise environment and that's why our vulnerability management really shines. The challenge that customers have right now is that they want to be the most efficient as possible with their overall spend and I don't want to get the highest level of results.
Or frankly, the best economic leverage for the investment now what that means is they won't end to end visibility they won't be able to understand the visibility and the lift in the cloud they want to do that but the traditional environment. Our strategy enables us to do that because our proposition is relatively simple is that you can actually get the best visibility in the cloud with our highly rated and highly ranked.
Cloud security solution.
And you can actually have the best visibility in your traditional environment with vulnerability management and you can actually do that economically. This is a perfect place for consolidation to actually play out and meet customers' needs and the moment, where they are now when you say high we actually think about this luckily we actually have good experience a bit if you look at what we did in the <unk>.
Turning to Xdr, we did this in the store with the sore technology.
There are always technology that was important but not urgent and so as we actually attach that to <unk> and are basically attached that into the xdr motion, we saw massive acceleration and larger asce's overtime.
Our sales team knows how to do this playbook, so thats, a playbook, where clients would say listen we just got calculator overall risk and analytics and visibility at the lowest possible cost and the best economics with the best possible technology and that's the playbook that our sales team, though I do but most importantly, it's something that customers are looking for right now.
Great. Thank you.
John .
The next question is from Matt Hedberg with RBC capital markets. Your line is open.
Hey, great guys. Thanks for taking my question I guess.
For either of you regarding increased budget scrutiny that you talked about I'm curious when did that start to happen in the quarter and I guess Im just curious is it kind of stayed stable through July and then maybe around reiterated our guidance for the year, how should we think about I guess second half conservatism.
Within that framework.
Yes, Tim and I were talking about so we actually did start to see that in Q2, especially in Europe , where we actually saw this scrutiny.
We dug into it.
I was wondering if you are concerned at the scrutiny. If you want to make sure you have it there is two things actually Richard has won every company we talk to say that security was a major priority.
And every company that we actually talked to said that they were actually prioritizing security budgets and that the detection response capability and cloud security. We are actually top of the list of priorities that made us actually feel good.
Also gave us context into its customers are trying to prioritize.
Overall, while we saw deltas between the urgency around security transformation solutions.
And viability management, we processed that any Q2, our leadership team actually said listen let's make this a really simple proposition customers. Let's go ahead and actually do the work, let's start with the packaging. So that we can actually take this artificial choice away from customers <unk> customers to packaging and the solution that they actually need and so we saw it in Q2, we started planning and execution.
And we have sort of introduced it to our team now is we're actually entering Q3.
Yes, Matt let me just address the second part of your question when we think about our guide.
For the full year.
We're really in a difficult macroeconomic environment certainly predominant over in Europe , and we think that will continue to persist for the foreseeable future I mean, no. One has a crystal ball on how this is going to play out.
If it were not for that environment that we're in.
That really would give us an opportunity to think differently about guidance, but we don't see the same upside opportunity that we had in prior years given the environment that we're in the FX is very real that's another $5 million, that's hitting us pretty hard and to the earlier point that he.
Made is just the timing of customer budgets and when they will release those dollars to deploy new products and services, which is out of our control so that becomes somewhat unpredictable.
Thanks for that thanks for the color.
The next question.
<unk> is from Joel Fishbein with Travis Your line is open.
Thank you one for Korean hopefully just a quick follow up as well so great love to just get a little deeper into the managed detection and response business, obviously big priority with.
Security personnel turnover et cetera, lack of people and also I just wanted to follow up and see what are your hiring plans going into the back half of the year and if you did does.
As well.
So great question. So in regards to mass detection response, I'll remind folks that we have some new plays we do some of that directly tie Martin picked our spots and we're increasingly doing a lot more with partners overtime with several focus area. As you say look this is a big demand area for customers, we Luckily have a massive.
<unk> from our partners to deliver the technology, we have a high focus on quality, because that's incredibly important to us.
But we see this as an ongoing area of customer focus.
It is definitely a contributor to the.
Strength in serious hazard ratios.
Also just point out that when you think about what customers are looking for customers.
Customers are happy and fast and also need the highest levels of productivity, which is a core part of rapid seven value proposition. So again, we do.
Our partners do some and we're really focused on building a high quality partner ecosystem.
And I would say were well oversubscribed for the parts that we can actually onboard today.
Our focus on building the capacity to actually add more and more partners over time, that's going to be your priority.
The next question that you asked is just around the staffing to how we should think about that.
I'll remind you that we actually did it started the year that we were pre loading lots of our staffing for the year. So even before we saw some of the pressure in the environment, we actually plan to actually really step up in the first half of the year, especially from a year over year comparable perspective, and then ramp that staffing down we are still hiring I just wanted to be clear about that.
We're starting we're hiring of quality, we're focused on our profitability in both higher it works, but we are still hiring but we had already planned to actually have more of a hybrid finally for the first half of the year.
Yes, and Joe we just wanted to give you the comfort and all of our investors as well that we are very mindful of the economic times that we're in in this.
Pendulum moving more towards profitability that goes along with the growth and I can assure you between Korea, and our COO, Andrew Burton and myself, we spend a lot of time really looking at all the investments we made across the business head count being one of the larger ones and we think we are appropriately invested but we're very mindful of profitability.
Goals that we've set.
With our shareholders.
Thank you.
The next question is from Fatima Fulani with Citigroup. Your line is open.
Hi, This is Joe on for <unk>. Thank you for taking the question. So just wondering if you could give us some detail on your <unk> side.
Given its come in to those street more so margins, that's our debt to EBITDA and EPS. So is this entirely macro and can we perhaps get a breakdown of some specific sources of margin pressure. Thank you.
Yes, Tim and I will tag team I May ask you play a clarification about the margin question.
But.
There's a couple of different things that I would actually sort of like pointed out topline is one we havent linearity and we think it will be fairly consistent with our approach to linearity overall. The second thing is that we are.
Really focused on simplifying things for customers I think customers and the early discussion that we've actually had with customers about what they are actually looking for is they are looking to actually figure out how to get the most leverage from security expand in this environment, we think that our approach of attach and being able to securely transformation solutions to give customers the leverage that they want we're rolling that.
Out to our teams and so when you think about the linearity for the year. There is two things one is consistent with our plan as we actually started the overall year.
But it also allows us to have the ability to actually adapt to what we're seeing in the environment and make sure customers that gave the solutions they.
And the way they want them.
And just to the to the margin point, we really do focus.
The operating income and margin on a full year basis and as you can tell from the prepared remarks that we've increased the low end of that range and we feel very confident with that but we do take a look at this on a full year basis.
It's still a bit earlier.
The expense management, and our profitability growth framework.
As a significant area of focus and it hasnt, yet and I think the team is very good control and visibility into this.
Okay. Thank you.
Thank you very much.
The next question is from Michael tourists with Keybanc capital markets. Your line is open.
Hey, This is Eric Heath on for Michael headquarter in Hey, Tim.
Just first just wanted to ask a product question on insight cloud.
Can you just talk more specifically about this product I mean in terms of traction you're seeing.
So our largest deal tend to be in really how you're differentiating in cloud security with your kind of heritage in VM versus several of the other vendors that are out there kind of tack on this market from a lot of different approaches.
Yeah, absolutely so what I would say that we have one of the more comprehensive security solutions on the market today.
That includes.
Cloud security posture management cloud workload protection cloud identity analytics, we also complemented that using some of our market leading technology from BMS to add to it with lots of the other newer players any entrants don't have and we're going to be accelerating that over time leveraging technology from our detection response, if you look at the setup. If you think about cloud.
Security is in general just a another form of security operations for the quarter up what you have to have visibility you have to have automation and you have to be able to detect respond and assess analyzed.
We are well suited.
Actually continue to be a leader in that overall market and so we look at the entire spectrum of that we think about cloud security and we think about all of our technologies actually delivering capabilities to the cloud that should allow us to have both the breadth and the depth, which is incredibly hard to do from about straight effective that's why we're so confident lena.
In this overall strategic priority. So when we think about the setup, we think about what we can be best in both the breadth and depth on the cloud security and it is about data analytics and automation, which are our core sweet spots, we're not loading the new domain here.
We're accelerating our current capabilities that we've been building over the last few years.
Great.
One in on the VM side. So I appreciate the color on the dynamics for the quarter, but just wanted to clarify this is Jim.
Purely kind of an issue with tighter budgets and people trying to be more efficient with their budgets and their security spend or just wanted to make sure. It's not necessarily a change in the competitive landscape in any regard no. We see no change in the competitive landscape it and frankly, we still see them as a high priority for customers as well.
One way to think about it it's part of what's happened is our customers are actually celebrated their transition to the cloud.
And so when you think about VM, primarily been focused on visibility and risk analytics.
Some of your most valuable assets the company or in the cloud you start to ask yourself, Okay, where do I actually really prioritizing what order do I do things in.
We think this is a large opportunity for us but people are still going to do vulnerability management. It's just that people accelerated their focus areas into the cloud and they have to actually make sure that they are actually doing everything they need to do and if that environment. We have more of the companys crown jewels in the cloud, yes be uptick a slight back seat, but the overall need for it is not decrease.
Okay. Thanks, Greg Thank you very much.
The next question is from Brian Essex with Goldman Sachs. Your line is open.
Okay.
Hi, good afternoon, and thank you for taking the question I guess, maybe Corey if we could if we could.
Peel back another layer on the on the on.
On the demand side.
What are you seeing I guess, we're talking about FX.
As an issue.
Talking about lengthening sales cycles.
What are you what are you seeing if we if we unpack that and think about the impact to the results and guidance.
Is one more material than the other or are these just pushed deals our customer's downsizing.
Get deals done or maybe reducing attach rates and is this maybe on the in.
In the mid market as opposed to large enterprise and if we just get a little more color there to better understand the dynamics will be great.
And that's a good question so I'll just do it.
Cover a couple of months because as I understand the question.
What's the big drivers that we think about your guide.
So I'll just cover one is good FX, that's a $5 million impact that's actually very clear.
The second one.
They look at is Europe has been our biggest growth region, and we still are underway to Europe versus.
Potential opportunities for a company of our size and.
And so we've been investing heavily over the last few years.
We grow.
The percentage of the business that actually comes from global customers and the percentage of the business come from Europe , and we set up this year to actually continue to make that investment.
It just turns out that.
The higher rotation of investment that workforce, so well before having a higher allocation of resources to Europe .
I'll have to start the year not to be where the demand wells could you see more of the challenges in Europe . So Europe itself youre seeing as a priority, but theres a lot of effects on in Europe , I am not breaking new ground I think you've heard from lots of companies about the broader market commentary there.
But we.
We were over weighted our folks in Europe , because it's still a great long term growth opportunity. So that's the next thing I point to the third thing that I would point to I look at it as a long term opportunity and we're going to ramp into the opportunity is that in an environment. Like this security is going to be top spin every company, we talk to says.
Security is a top priority. We're also tell you that their budgets are pressured and are trying to find ways to actually get leverage and trying to find ways to get efficacy now that does tend to not all security area is going to be treated the same we see a big divergence in terms of the priority that we see from our customers in terms of security transformation.
First of all our ability management in terms of what the urgency is and how they prioritize that.
Our belief is that we actually ramp up our sales and our channels around our attach strategy in some of our new offerings that can become a competitive advantage for rapid seven but when you play that out and the guy $5 million.
Europe under some pressure.
And then sort of the speed that we can actually get the updated packaging outdoor channel.
And we exited our guidance range is actually pretty good, especially in this economic environment and yes, you know without those changes, yes, we would have had a lot more bullish this error, but we think that with those changes. We think we have the right response, we think is going to be great in the near term and we baked that it sets us up well as we actually go forward.
Got it that's real helpful and maybe just a quick follow up on the cloud side.
Who are you seeing competitively are you seeing some of the larger platform vendors, who have acquired our way into this space or are you seeing some of the kind of cloud native.
Emerging vendors.
That are that are coming out kind of in the best of breed.
Or maybe neither of those and that you have a different approach in go to market strategy with a foot in the door with the customers that are adopting.
Yes, I think you see but I think there is definitely a customer that we're actually seeing where we can actually leverage our existing relationships and.
And that's definitely a core focus area.
For US you can think about that.
Our first priority obligate as you, we actually sort of respond.
Yes, Dan you actually see a mix you see the U C.
Like the Palo Altos, which are actually made lots of investments for acquisitions and you feel a lot of niche players and I would say that we there's only a couple of players that have the breadth and quality of capabilities that we actually have I'll say, probably only one other company that has the breadth and the quality of the capabilities that we accept that.
We have been ramping.
Our sales and marketing focus on the cloud we have not made it we've been steadily expanding but it has not been to date available to our entire sales force and not our entire partner ecosystem.
We're actually shifting that rapidly.
We are increasing their priority both on the marketing and on the <unk>.
Number of salespeople that are actually selling it around it and those are decisions that were actually made in the last quarter that were actually map it into right now as we actually try to meet customers' priorities where they are.
As you know we've been fairly disciplined about how we introduce new technologies.
Our customers' priorities are shifting and moving fast we did.
That's an advantage and an opportunity for rapid evidenced mark to market.
Okay.
Great very helpful. Thank you thanks, Brian .
The next question is from <unk>.
<unk> with Morgan Stanley Your line is open.
Hey, Tim This is Matt is also an offer.
I appreciate you taking the question Corey just a quick one for you.
Theres, obviously, theres, obviously been a ton of growth in MTR market in recent years with that you've had a ton of new entrants into the space. So I'm just curious from your perspective today, how you see the competitive environment trending on a go forward basis are you expecting.
Further bifurcation for the new entrants.
To go after the opportunity or are you expecting to see some more consolidation to a few key players. Thanks.
Yes.
It's an interesting dynamic.
You have lots of new entrants I would say they have very variable levels of quality.
Associated with it I think you've always gained us.
We are really focused on high quality high margin and services I would say that we don't even consider all of the margin although market, Jeff we're not interested in doing a low margin low quality.
All of the managed detection and response side and we're interested in doing it primarily in partnership also with I would say very strategic very high quality partners. So that's just a point of like where we're focused.
We think that's a massive opportunity so yes, absolutely it got more competitive the odd thing is because of the labor force tightening the market demand is probably still moved up.
In pace with or ahead of the number of interests and the capacity of the quality players in the market. So the way we think about the market is sort of what's the overall market demand. So and then whats the market demand for the segment of the market that we're focused on in the segment of the market that we're focused on is again things that we can do a high quality and high margin the demand for that has it.
Loaded over the last couple of years. So our outlook remains very positive EBIT in a you could say a more competitive environment, where part of that is that there is much more intense competition at the lower margin.
Lower quality end of the spectrum until we see a much tighter band of competition and then to answer your last question. Yes, we actually do think that that consolidates over time, what you see is like lots of these players start off with BC capital funding.
On the lower margin and lower quality side.
Really hard to scale that business.
And so you see so many of these companies get sub scale, which is why we have the strategy of yeah, we'll do a little bit of ourselves, especially the higher margin stuff, but its really a high quality partnership ecosystem focusing on partners that can actually deliver this and the way that we want and our customers along.
Got it thanks, so much thank you very much.
The next question is from Chablis sit Rafi with SPN Securities. Your line is open.
Yes. Thank you very much. So you said the net new <unk> is expected to be negative in Q3 and they go positive in Q4 can you Sir.
<unk> that out between.
VM in STS and.
It looks to me in my model that Europe .
Sure.
Growth might decelerate like flattish I'd like to hear your thoughts on that in Q3 and then.
Do you expect it to accelerate after Q3 and why would it do so.
Yes, So let me answer that Tim and I May tag team. It. So you got a bunch of question that was just unpack as we actually go along there. So one on the litter as I said is what I do think we have our regular.
I would say our typical Canada calendar linearization. Most importantly, the other part of the equation is that part of why.
We have more confidence in Q4 is that we're actually ramping up our sales force on what we think is more customer appealing packaging with the VM attached.
And so there is an element of actually made the decision last quarter and we've got the infrastructure in place last quarter. We're rolling out this quarter you don't see the full benefits of that 54, the other thing that we actually do it.
The middle of the year as expected like lots of companies, we actually get a price increase.
That again, we honor existing closer out you'd see more of that benefit that actually happened in the Q4 timeframe. So those are two things that actually give us sort of like visibility and confidence, but the pipe in Q4.
The second question that you actually asked was around <unk> time, the timing with Tim, but just to be clear I'll be a BMS still a priority and the demand area.
He said earlier that we actually saw.
And it moving from the high teens to the mid teens.
Our outlook overall, if you actually say midterm and long term, we still expect to be where we've actually held our long term outlook in the past, which is to be contributing roughly 10 ish percent overall to growth.
We don't see a change in that outlook.
People still have complex and diverse environments, they need visibility into that they need to understand the risk MRI vulnerability prioritization, that's still going to be a demand driver, but it is more of that demand shifts to the cloud you just got to be a bit more balanced about where that's been passed and frankly, the cloud spend to start from a lower base, but actually has more growth potential ahead of it.
Yes.
Go ahead.
It's Tim I would just add to that I think Cory brought it up in his prepared comments.
T S.
Security transformation solutions has continued to perform very well for us.
Overall growth rate and as a percentage of the new and Thats the high value strategic element of the product set P. M is still critically important many of our customers, but as you see this shifting to the cloud security transformation solutions continues to grow at a very nice rate.
Right and on the price increase what was the percent increase and when did that happen.
I don't know if I.
I dunno, how would I would communicate the percent increase.
But it actually we did in the middle of the year Tim Yes.
It's going to be effective this quarter, we have not disclosed it publicly yet, but it'll be a modest price increase that we think is roughly in line with what's happening in the market with inflation.
Okay. Thank you.
Thank you.
The next question is from Joshua Tilton with Wolfe Research Your line is open.
Hey, guys. Thanks for taking my question.
Does the does the BEC guidance assume that the environment gets worse.
Or that it kind of stays the same as what youre seeing in <unk>.
And how does what you're seeing now kind of compare to what you saw during the first months of Covid.
That's a great question, so I would say.
Our guidance assumes that.
It stays consistent with the Q2 exit rate is kind of the way I would actually like climate, because we did see that dynamic shift over the course of Q2 consolidated stays consistent.
With the Q2 exit rate.
It's a great question, because we saw very similar dynamics.
Now with those of you that May remember is that at that time, we came out and said beyond what accelerates.
And it did decelerate, but it actually bounce back much faster than we expect within like a year or so.
But when people are forced to make prioritization decisions, we found in that environment to people actually had a.
They were security was a priority, but it was not the same priority for everyone I.
I would say that part of our adjusted materials. We've learned some of those so we've got a what we think the pandemic is that like when people have to make hard decisions you make the decision easier for them and so we're applying the lessons that we exited nine with the packaging. We're fine lessons that we actually started with the attach it really doesn't mean focused on how you reduce the complex zebra customers.
When customers themselves under not just budget pressure, but also staffing brush our goal is to make it as easy and as simple as possible to the customers and we think great financial results followed that.
And just a quick follow up I'd have to imagine that the full year guide the mix between.
We haven't been security transformation, it's probably a little different now than what it was at the end of <unk>.
If you lean more towards the security transformation IRR, let's call. It over the next 12 months because people don't prioritize them as much as that.
Change how does that change your profitability profile over those same 12 months as well.
Yes, so I will give an extended view versus a precise to you about the next three to four months.
Just because this will be a continuing trend of Oklahoma.
Couple of concepts to separate I'm going to separate out sort of like revenue and attribution from customer usage. We think this is going to accelerate customer usage.
Because what the a cat strategy what it really allows us to do was we get a larger AAR for customer faster.
And so would accelerate the consolidation of the share of wallet rapid seven has the customer gets a better deal.
Because theyre spending a larger amount of money with us and therefore, they get more capability more coverage faster and broader it's a win for rapid seven as part of the consolidation and its a great win for the customer overall.
That means from a revenue perspective and from an <unk> perspective, the attribution that goes to BM continues to shrink and shrink better faster rate, but the opposite is true from a usage perspective, we expect that the usage of our overall technologies to accelerate.
And we expect more people actually using more BMS and I get the case study on the call that the customer that actually attached now they've decided to attach themselves and that was that from one of our programs, but as they attached they actually covered 100% of their environment and.
And as you know we have typically still starts off with a smaller percentage of the environment and grows over time, but rarely gets to 100% of the environment and so part of what we actually get as customers get the visibility at the right price for the entire environment. So you wanted to net it out is that our customer acreage should increase over the medium term.
And long term at a faster rate our share wallet should actually increase that should drive customer economics would be a positive trend on profitability.
Because our customer economics improve for customers that allows them to actually get better efficacy and get a better deal because they consolidated their spend overall.
So give me better efficacy excited they're spin they are actually using the product higher so our UCITS share the market should actually increase.
Josh I've been Super helpful. Thank you.
All of that fits inside the profitability framework and guidance that we've shared where we said product gross margins are in the mid Seventy's range and Thats, what we expect.
Okay.
Thank you very much.
The next question is from Alex Henderson with Needham Your line is open.
Great. Thanks.
So.
I understand.
The environment in Europe has gotten more difficult.
But I was hoping you could give us a little bit more clarity on how they're thinking about transactions.
And what percentage of your sales in Europe are intact.
Dollars versus local currency.
But let's.
Let's see so our CFO and in the European environment I'm looking at.
And 18% to 20% currency translation plus price increases on a wide variety of goods and im looking at.
Pressures on my own.
My budget so.
How am I exactly approaching that what are they telling you they're going to do is it they're spending the budgets that are already committed to this year and then.
They expect to Taylor Hill in the budget next year are these.
Downsizing the spend to get better quality product.
But in smaller volumes.
And how are you handling that 20% currency translation.
That experience was a price increase in the U S. Dollar purchases as a result of the exchange rate swings are you, giving them more breaks more discount say anything to offset that.
Yeah, Alex it's a great question. So you've got a couple of components, there and I'll tack thing with Timmy determined yet so the first thing I'll start with sort of like the customer you actually pretty much nailed complex conversations that we're having with customers about the pressure that they are on that.
Yeah, Here's what I will say if you do a generic survey everyone's got a security is top of the list.
And that can be taken to be like there's no issues. There are pressures on security, it's actually fine when we did what we actually find is that what it means is that security is a top of the priority only likely shrinking it budget and.
It is the top priority, but on a especially if you are a European customer a shrink IP budget for all of the factors that you did and so what customers are trying to figure out is how do I get more bang for Buck so to speak how do I get more leverage.
Out of my investments and this is where.
We were paying attention and we are actually listening and what they're saying is like listen I need to find a way to get the maximum amount of security and frankly, a better economic value I mean customers are very clear about that around the world, but especially in Europe , where they actually have lots of the pressure and thats part of the reason that we've actually taken the APA.
Coach that we've actually taken it as how do we make it first and win for the customer and then secondarily a win.
For rapid seven now I think the next part of your question I'm going to actually tag team to bring Tim into it.
Yes Alan.
I think it's a great question. So we've said 20% of our revenue is outside the U S.
Let's just say bookings follows that general 20% half of that is denominated in U S dollars and half of that is denominated in local currency.
To your point it is the contracts that are in local currency.
When that when we the customer because it comes up for renewal, they're going to look to the price they paid last year and our local currency and see that you've got a strengthening dollar. So that number is going to move up on them and yes, we do entertain those conversations on discounting with customers because we believe the retention value of that customer is highly.
Critical to us. So there is some pressure from the customer point of view because of currency.
So part of that question was are you adjusting pricing.
To reflect.
What is obviously a price increase from their perspective, because of the exchange rate and given them more discounts.
I mean, Alex we do have those kind of I mean, you can imagine if you were the customer put yourself in their shoes, they're going to feel that with the because of FX. This feels like a price increase but in fact, that's not it's due to currency, but they think in local currency. So we do entertain and have those conversations on discounting, but I think.
It's critical that we stay valuable customers, yes, as Tim said, our focus is we're not going to take something that is a market.
Effective and in fact on our customers and not be responsive to Williams.
This is not consistent with our ethos. So yes, we actually do response that we actually do look at it. It is a driver we think it's the right thing.
Yeah, we take a short term hit.
In the near term for that but it's the right thing to do for our customers and keep them long term exactly and that's critical.
Okay. Thank you very much thank you.
We have no further questions at this time I'll turn it over to Corey Thomas for any closing remarks.
Well, thank you all for joining us.
On the call this quarter, we appreciate the time.
And have a good day.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
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Yes.