Q4 2022 Rapid7 Inc Earnings Call
Yeah.
Good afternoon, My name is David and I'll be your conference operator today.
At this time I'd like to welcome everyone to the rapid seven Q4 2022 earnings call. Today's conference is being recorded all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you'd like to ask a question. During this time simply press the star key followed by the number one on your Touchtone keypad, if you'd like to withdraw your question press.
Star one once again.
So Neal Shah Vice President Investor Relations you May begin your conference.
Thank you operator, and good afternoon, everyone. We appreciate you joining us today to discuss rapid seven's fourth quarter and full year 2022 financial and operating results. In addition to our financial outlook for the first quarter and full fiscal year 2023.
With me on the call today are Corey Thomas our CEO and Tim Adams, our CFO .
We distributed our earnings press release over the wire and is now posted on our website at investors not rapid 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 at investors not rapid seven dot com.
During this call we may make statements related to our business that are considered forward looking under federal Securities laws. These statements are made pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 1995 and include statements related to the company's positioning strategy business plans and financial guidance for the first quarter and full year 2023, and the assumptions underlie.
Such goals and guidance. 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 future results expressed or implied in these statements due to a number of risks and uncertainties, including those contained in our most recent quarterly reports on Form 10-Q filed on November three 2022 and in subsequent reports that we filed with the SEC the.
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 be primarily 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 don't rapid seven dotcom.
At times in our prepared remarks or in response to your questions. We may offer incremental metrics to provide greater insight into the dynamics of our business or our quarterly results.
Please be advised that this additional detail maybe onetime in nature, and we may or may not update these metrics in the future.
With that I'd like to turn the call over to our CEO Corey Thomas Cory.
Thank you Sunil and good afternoon, everyone on today's call. Thank you for joining us.
Rapid seven finished 2022 with $714 million and they are consistent with our expectations when 19% over the prior year revenue exceeded our expectations and we delivered better than expected operating profit and free cash flow as we continued to drive operational efficiencies in our business.
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And Ah per customer continued to rise during Q4 as customers are using more of the insight platform, reflecting rapid acceptance growing value as a platform consolidator and while it's still early days for our new platform consolidation offerings. The early results are positive over 10% of new air or in the fourth quarter was generated either.
By direct complete or cloud risk complete consolidation offering.
We are pleased with the early traction we're seeing in key areas of our business as we look to improve execution, even as certain economic headwinds escalated during the fourth quarter.
Consistent with the range of scenarios embedded in our outlook, we saw greater economic pressure during the fourth quarter in our mid market segment, which represents roughly half of our total <unk> the <unk>.
Net result was that positive traction in key parts of our business was offset by macro dynamics, bringing it up to the mid point of our air our outlook to end the year.
If you comment on the current spending environment.
Customers continue to face an evolving and complex threat landscape and there remains broad based executive and board level support for cyber security projects.
Despite this fundamental demand the ability to obtain incremental budgets for these projects has gotten more difficult in the current environment.
As a result, sito's are being forced to scrutinize and prioritize their budgets driving longer deal cycles, and more uncertainty around deal timing as contracts take longer to push through procurement.
This dynamic is exacerbated by the increasing size of our deal opportunities as we gain traction at the platform consolidator.
Despite a challenging budget environment, we're seeing certain tailwind gain traction.
Constrained security budgets are accelerating customers focus on security vendor consolidation with greater value being placed on the efficiency and impact of integrated platform technology in a fragmented landscape.
We're seeing solid engagement with enterprise customers as they look to consolidate vendors and gained better security outcomes from their budget dollars.
Our insight platform is positioned to benefit from this shift firepower security teams to more effectively and efficiently manage the expanded scope of their security operations.
Rapid Stephan is resonating with security teams look at them manage and consolidate their vendors as T cells and security practitioners to evaluate their setup stack <unk>.
<unk> seventh platform stands out for a few important reasons.
We have built the breath of critical capabilities on our platform that customers required to run a best in class security operations program.
In the fourth quarter with a high growth software company.
This existing customer at a small footprint and was going through an RFP to replace their existing detection in response solution with a mandate to gain visibility into their expansive cloud environment rap.
Rapid seven stood out during the technical evaluation is one of a few partners who can address their comprehensive set of use cases.
As part of the deal the customer standardized and rapid seventh checkup platform by consolidated B M. N. D. N are you ride threat complete offering while that in cloud security automation and threaten intelligence.
In addition to offering a compelling platform technology rapid <unk>, new threat complete and clout with complete consolidation offerings are refining her salesforce goes to market.
<unk> solutions lean into vendor consolidation as well as the prioritization of security budgets around critical spending areas that include protection in response and cloud security.
As a reminder.
<unk> complete enables customers to consolidate our best of breed expert driven threat detection in response solution, along with unlimited coverage of our market, leading <unk> through a single subscription offering.
And cloud with complete as our cloud centered with visibility offering, which consolidates unlimited visibility across customers <unk> cloud and external environments at various stages of transition to the cloud.
Enables use a cloud applications security with unlimited <unk> coverage together and one platform subscription fee.
The solutions are part of the realignment of our sales strategy and an important step in advancing our platform sell emotion.
The strong value proposition, a rapid seven's, leading platform technology and compelling new go to market offering are evident in a multi year seven figure deal with a fortune 500 manufacturing company in the fourth quarter.
As an existing vulnerability manto customer we knew their security team was looking for a better way to manage detect and respond to threats across the organization.
After a robust and competitive process or manage the rat complete offering was chosen to replace their existing stem solution and made it service provider based on the quality of both of our technology and the support that we can offer around it.
Their decision was reinforced by the compelling economic value of consolidating multiple features across our platform and speaks to the early traction we're seeing in the market for a new consolidation offers.
As we look to build upon this early traction we're cognizant of the need to balance our execution optimism with the current macroeconomic and budgetary headwinds as we frame our four at outlook for 2023.
Tim will discuss these dynamics in greater detail, but a high level I will point to three critical areas of focus that I expect will have the largest impact on our performance this year.
The first two are under our control and related to the X usual challenges we spoke about on the last call.
Introduction of our risks and dry complete consolidation offerings and the training enablement of our sales force is a master a platform sell emotion.
We see positive early tracks in these areas <unk> 2022, and we believe we remain on track to see improvements support growth in the second half of 2023.
The third key area is a broader macroeconomic environment.
Looking ahead, we expect a continuation of the customer budget pressure, we saw on the fourth quarter.
Incrementally more cautious in the near term on the mid market customer segment, which slowed as we exited twenty-twenty too.
We assume moderate ongoing deterioration in this segment as we enter the year and have a candidate for a longer itself cycles.
And large deal timing uncertainty, particularly as we begin to drop more growth from our platform for <unk>.
All in all we're taking a puente view of our full year outlook to account for more uncertain economic backdrop with that said we remain confident in the mid to long term sustainable growth profile of our business, while acknowledging the timeline for Reacceleration will depend on the severity and duration of the macro economic pressure. We're currently.
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And lastly, I want to reinforce our commitment to scale improperly by executed against our margin expansion targets for this year.
This is a dedicated focus area for me as we look to drive continued operational efficiency and increase rigor around how we invest for growth.
The work, we're doing it to make our business more efficient with support our commitment to profitability both in the current environment and as the economy recovers or.
A strong focus on cost optimization across the business gives us confidence and meeting 300 basis point operating margin expansion target dumpling free cash flow this year.
With that thank you for joining us on the call today I will now turn the call over to our CFO Tim Adams.
Digital detail on our financial results and outlook Tim.
Tim.
Thank you Cory and good afternoon, everyone and thank you for joining us on the call today.
Before I turn to the result, a quick reminder, that except for revenue all financial results, we will discuss today or non-GAAP financial measures unless otherwise stated. Additionally, reconciliations between our gap in non-GAAP results can be found in our earnings press release.
Rapid seven ended the year with a R R of $714 million growing 19% year over year.
<unk> was led by our detection in response and clouds security solutions.
Areas, where customers continued to prioritize projects, despite navigating a more difficult budget environment.
As Cory mentioned earlier, we saw growth moderate within our mid market customer segment in the fourth quarter as these customers navigate more uncertain macro economic picture.
This drove a moderation in new a R. R bookings in this segment alongside a modest headwind to retention rates in international markets.
We continue to see a mix of growth coming from both new and existing customers with a growing bias towards existing customers in this environment.
Our customer base grew 6% year over year to end 2022 with over 10900 customers globally.
A R R per customer group, 12% over the prior year to $65400 at year end as customers continued to expand and use more of our insight platform.
For your revenue of $685 million grew 28% over the prior year and exceeded the high end of our guidance range <unk>.
Product revenue grew 29% over the prior year two $648 million.
Our commitment to profitable growth was evident in our results, which exceeded our outlook on all of our profitability metrics.
And 20 twenty-two we made a number of critical company wide improvements on how we manage spending decisions, including more robust R. O Y analysis and shared financial accountability throughout the organization.
These actions and process improvements for priorities when I joined the company a year ago.
And we increase this focus as the macro economic environment shifted in the second half of the year.
All in all we drove $30 million of operating income in 2022.
Which represents margin expansion of 300 basis points and is consistent with our state at profitability framework, and we generate at $41 million of free cash flow.
Now turning to our fourth quarter results.
Total queue for revenue of $184 million was up 22% over the prior year and above the high end of our guidance.
Product revenue grew 22% year over year to $173 million or international revenue grew 25 per cent and represented 21% of total revenue for the fourth quarter, while North America revenue grew 21% over the prior year and represented 79 per cent of total revenue.
Product gross margin was 77% in the corner higher than the prior year as we continued to drive scale efficiencies.
Gross margin for the quarter was 74% near the high end of our range of expectations.
We continue to expect product gross margin to trend in the mid seventies and overall gross margin to be in the low seventies.
We manage operating expenses closely in the fourth corner as we executed against our profitability framework.
Sales and marketing expense grew 4% year over year and represented 38% of revenue down from 44% in the prior year.
R&D expense was slightly lower than the prior year and represented 18% of revenue down from 22%, while G&A represented 8% of revenue roughly in line with the prior year.
Fourth quarter operating income of $19 million was better than our guidance.
Justin EBITDA was $25 million in the quarter and net income per share was 35 cents.
Moving to our balance sheet and cash flow.
We ended the year with cash cash equivalents and investments of $301 million compared to $268 million at the end of two 320 22.
We delivered better than expected fourthquarter cash from operations on higher operating profitability, which drove $28 million a free cash flow for the quarter.
This brings us to our guidance for this year.
Is cory shared the three largest drivers of R. A R. R growth performance. This year will be related to traction on Executional improvement both in terms of better sales enablement and success around consolidation offerings as.
As well as how the broader macro economic environment impacts customer buying behavior.
Our guidance range reflects a modest level of deterioration from current levels, particularly in the mid market and we are not assuming any macro economic improvement in the back half of this year. Although we do expect to see continued executional improvements by then.
The dynamic macro economic backdrop. This year, we don't anticipate updating R. A R. R outlook until we see stabilizing trends in the spending environment with that in mind for the full year 2023, we expect ending total a R. R of 815 million to 825 million.
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Which represents growth of 14% to 16%.
This range implies a net new a R. R declined for the year, which we believe is appropriately cautious given the current macro economic trends and the limited visibility into 20 twenty-three customer budget dynamics at this stage in the year.
As part of the macro economic deterioration embedded in our full year a R. R outlook we.
Continue to see customers going through a Q1 budget setting process that is more tentative than in prior years.
As such while we do not typically guide to quarterly a R. R targets in this unique environment. We believe is appropriate to share directional context for Q1.
Specifically is customers reconcile their spending plans, we anticipate a more muted net new a R. R and Q1 driving a our our growth in the range of approximately 16% year over year with the expectation that we will begin to see stabilization in our net new a R. R performance.
<unk> in queue to his customer budget settle with steady improvement through the second half of the year as our execution improvements take hold.
We expect total revenue for the full year to be in the range of $771 million to $778 million representing growth of 13% to 14% with high single digit growth contribution from professional services revenue.
Unprofitability measures, we anticipate operating income to be in the range of 57 million to $62 million for the full year, which implies operating margin expansion of 300 basis points or greater we.
We expect net income per share in the range of 81 to 88 cents based on an estimated 67.4 million diluted weighted average shares outstanding.
For full year 2023, we expect a double free cashflow generating approximately $80 million from expanding operating cash flow as well as lower capital expenditures.
This represents at least 400 basis points of free cash flow margin expansion.
Terms of free cash flow seasonality, we expect negative cash flow in the first quarter is a number of cash expenses are concentrated early in the year, including F Y 2022 bonus payments and timing of tax payments and capital expenditures.
We would then anticipate a notable ramp and free cash flow in the second quarter with continued improvement through the balance of the year.
Moving to quarterly guidance.
For the first quarter of 2023, we expect total revenue in the range of $180 million to $182 million representing year over year growth of 14% to 16%.
We expect non-GAAP operating income in the first quarter in the range of $5 million to $7 million and non-GAAP net income per share of seven to 10 cents, which is based on 66.4 million diluted weighted average shares outstanding.
We are firmly focused on driving growth as the vendor of choice for security operations and enterprise wide risk visibility and analytics supporting both on Prem and cloud environment as we navigate uncertainty around the current spending environment. Our strategy is supported by our commitment to.
Providing a strong value proposition for customers as a platform consolidator.
Refining our go to market motion and improving sales productivity and driving durable growth and margin expansion consistent with our profitability framework.
Thank you for taking the time to join us on the call today and with that we will open the call for questions operator.
Thank you at this time I'd like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad. We also you. Please limit yourself to one question to allow everyone. An opportunity. If you have a follow up question you may requeue, well pause for just a moment to compile the Q&A roster will.
Take our first question from <unk> call you with Barclays Your lines open.
Okay, Great Hey, guys. Thanks for taking my question here Uhm, Cory maybe maybe just to get a housekeeping question out of the way just given given it's topical and I expect it's a tough question to answer but I want to make sure. It's it's asking them to open forum is there any comment that you'd like to make just in the reports the rapid seven is hard.
Visors to to explore sort of options down the road.
Oh, Thanks, <unk>, well first and foremost we have a pretty massive opportunity in front of us and we're executing well again you know in that context is not a shocker that people will talk about us because we are both a good opportunity and we're well positioned to actually capture that opportunity in the broader market. That's it we just have a policy of not comedy or a moment.
<unk>.
Absolutely.
If if you if you allow me a a business question I hear Corey Cory for you Uhm I'd Love if you could talk about the the the couple of bundles that you mentioned the call threat complain and and threat risk complain, particularly how the pricing there for for the vulnerability management part works and and how that might be a differentiator.
Yeah, but what what we found is especially in this environment customers. It really look into how to actually do two things what are they improve their security is secure not just the past environment, but they are increasingly strategic cloud effort.
And that's two core components why did they have to manage the risk profile and the ability of that environment.
And they actually have to be able to monitor and stop into tech attacks in that environment, Australia is pretty straightforward is we're taking a clout first because that's what strategic assets are as we go forward in a holistic rescue in a holistic view of the environment in that context vulnerability strategic where people work on that we are paying.
We're dedicated to it but it is a feature a component of our platform, where a SEC cloud first company that actually offers about ability management as a part of our platform that allows people to have the visibility that they need to manage the overall security <unk>.
As part of that overall strategy. It is just a part of our offers is included in the price point by the way as you saw from the early build momentum the price points are larger the deals are larger and we're succeeded in Arkansas They should strategy.
Next we'll go to Rob a Owens with Piper Sandler you're letting me know open.
Sockets at all pro they're sneaking two questions and so I'll see what I can do to ask one but really us to what it wanted to touch on chern and the the current environment. So I guess, what you guys are are seeing from both the the customer perspective, when you're talking about some some weakness in the mid market, but I guess also within your own employee base if.
You will kind of where you're at what's your thought processes moving forward in terms of hiring thanks.
Yeah, I'll I'll I'll take that personally employees were actually seem very good you know after a couple of years of a very tight labor market. The labor market is still tight, but we're seeing our employees W out of folks that are customer Dorothy I'm very healthy employee retention rate.
Relates to broader other customers sort of like we're catch it overall Tim commented on his script, what I would say is that if you look North America, we see very consistent retention of customers and the performance is actually quite healthy and quite good we are seeing some incremental pressure in Europe , and we're focus on that and that's primarily.
The budget pressures and we think we're addressing that by being proactive and going out to those international specifically midmarket customers with consolidation offers that allow them to save money. So again overall North America fairly healthy internationally at market with it a little bit of incremental pressure there.
Next we'll go to Hamzah fought Rawleigh with Morgan Stanley Your lines open.
Thanks for taking my question.
On the <unk> the.
The more clear sales motion, though you guys have around the around the two product categories. I'm curious have you seen any improvements around.
<unk> to enable yourselves for us to solve that brought our platform.
And are you assuming any improvement in sales productivity throughout the year and your guidance.
Oh, that's a that's a great question and so what we are seeing improvements are over ourselves forces efforts. There. That's part of it actually gave US a confidence were just rolling it out more broadly. So you know the way to think about it is that when you have to do something new which were introduced exiting the year you actually wrote it out sort of like in ways that you would expect.
And as we start rolling it out we actually kicked off we actually felt good momentum on both the pikeville spot and just all sorts of a <unk> with a <unk> you know part of what you actually just get used to go anything like what's the feedback you get from yourself pain, and I feel things have incredible confidence and the consolidation offers that were actually rolling out excuse me now as far as our assumptions actually.
Consistent with the feedback that we actually gave you last time, we expect it sort of productivity to improve over the course of the year and we're seeing those fucking well what's that progress now the productivity goals are not sort of like aspirational. It's actually studied productivity increases in line with what we think about it the more pressure economic.
Yeah, <unk> I would just look when when we we had many discussions about the guidance for this year and there certainly is this macro economic environment that is challenging for everyone and you clearly see that in the mid market. So we're not assuming that that really improves for us and.
Cory talked a lot into prepared comments and just now about the consolidation packages that we are bringing to market.
Very optimistic about we think it solves a lot of challenges for customers for budget constrained who have too many vendors and our sales team is really getting behind this with a lot of enthusiasm. So we think that coupled is going to help us in the second half of the year.
Okay next we'll go to <unk> with see your line is now open.
Good afternoon. Thank you for taking my questions. Cory this one's for you just going back to the pricing and packaging reconstitution Matthew Uhm now formally undertaken now completed in the form of I'm Gonna make you more digestible and more intuitive bundles at <unk>.
Can you talk to us about what type of <unk> predecessor configurations of the solutions that you're not nearly bundling I'd have to get a better sense and you know that you're seeing better heeled, whether it's in terms of price or being able to cover a large or environment.
<unk>, which means it would give you a higher T C D or a C. D. And then just start that sneaky follow up for if you can just on the guidance where should receive no stuffed up <unk> from a long item basis kind of next year, just kind of give them the strength of the operating profit that ready.
And that's it for me thank you.
Yeah, I'll I'll start off in in Tim will pick up on the only goes as far as the pricing strategy in one way or theme for both large with U O. Five is I think I talked about sort of like for the 10%, which was actually exceed our expectations of the momentum that we saw in the over 10% nuclear that we've got a quarter of our.
Foundation offerings the size of the deal is is actually much larger I think I represent my script up it before that.
<unk> is an average because again, we did see a little bit more tracks in those areas in our enterprise space.
But what I would say, it's we're seeing uplift on Isps, we're seeing more coverage in general I would say more sheer a wallet I think that the specific sort of like multiple it'd be uplift will actually come in a little bit later as we continue to get for our adoption, but we're training quite well.
Yep the team on the the leverage we're really looking at everything you know when you look across the piano, it's everything that we're investing our dollars and and our focus has been in this started early and 22 and it really continues and the team is really engaged to you know a cyst on this journey that we just want to be more efficient at everything.
We do we look at the cost of sale, we look at cost to serve you look gross margins all the E. R ratios and it is across the board that we're just trying to really optimize our cost structure and drive more efficiencies. So I think you'll see pretty broad strokes of leverage.
Thank you.
Okay next we'll go to Joel a fish being with Truest Securities Your lines open.
Thanks for taking the question I'm Gonna ask a follow up to 15 minutes question about the the goal surround free cash flow and margin expansion, which are pretty impressive. So thanks for that just in terms of how you're gonna continue to hire or what's the hiring plans in that environment or what does that contemplate so as you come.
Out and get more traction from the sales force thing you can re accelerate the growth when the macro improves just to understand how that is connect well. Thanks <unk>.
Yeah, Joe one of the opportunities we have as you know we have locations across the globe and we do have some lower cost locations and we're seeing that particularly in the R&D area, where we saw a little leverage recently, where you can still attract the right type of talent that you want and you can find some of these lower costs locations.
So that's gonna be one piece of how we tried to drive more of the leverage.
In the plans regarding hiring if you could just in terms of sales capacity.
Yeah. We we are hiring this year you know we don't disclose the exact numbers, but we are still focused on driving you know growth overall with the company and we are going to add to the head count overall this year it'll be more modest, but we are still hiring <unk>. That's why it's a more modest it now.
But because we actually have a pretty strong employee base coming into the year with a good setup in terms of their ability to contribute we felt strongly that with a target Harry model, we can actually cheaper one sir.
Next we'll go to Adam <unk> with Raymond James Your lines now open.
Okay. Thank you Tim I Wanna <unk> continue the conversation on operational improvement just ask if there's any way we can think about a ceiling on that and I I ask it in light of I've got a <unk>.
Competitor in the <unk> <unk> V M space that has profitability margins on EBITDA line, you know 30, 40% I know they do a lot more outsourcing to <unk> or to lower cost countries that sounds like you're starting to do that as well. So maybe you could just tackled how you think about the ceiling longer term any structural differences between you and that <unk>.
Editor, how we can think about this runway to profitability a longer term. Thanks.
Yeah, Adam we we feel very confident as you can see in the guidance for this year and the improvements we made in 22 that we can continue to drive attractive profitability.
And you have to look at everything across the board. It is the type of labor the sourcing of labor, we use a W. S. As part of the platform. We've renegotiated that ton track, we have a team that really focuses on how we optimize the.
The efficiency of utilizing that platform. So it really is very broad across the company. We have an opportunity to continue to focus and drive gross margins. We've made some improvement there and we will continue on that effort uhm, but it really does go I think it's very broad across the company, where our focus is there anything.
I would just reiterate is that one we had had a plan would start at last your own really driving efficiencies. We you know the customer feedback that we've gotten it that we brought in the platform in a way that we think is relevant to customers over the next five years. So we're sitting in that'd be a pretty good situation, where we're into I also say the early days of our efficiency.
So we actually have games to do a profitability, but we actually have a platform that actually have strategic relevant for a modern clout world. That's actually focused on all the aspects of security operations and that allows us to actually <unk>. So that's a little bit more pressure this year, but what it allows us to do is to.
I have an increasing profit profile, even as we have sort of like mid longterm global growth outside of the economics, but my pressure in the global economy right now.
Next we'll go to a Greg Moscowitz Mizzou Ho Your line is now open.
Thank you for taking that question. Good afternoon, guys at Cory It may just be too early and obviously sales cycles are longer for pretty much everyone. These days, but have you seen any progress with regard to the frequency with which you are getting in front of C level executives and then it'd be equivalent for Kim in the last quarter I think the comment was that the a P.
Coach behind the initial preliminary guidance of slightly below 20 per cent a R. R. A R. R growth for 2000 twenty-three, whereas two derisked. The macro you know today. They are a guy that is obviously quite a bit lower than that and so I'm wondering if you could speak to the latest assumptions and specifically that's solely due to a tougher than expected mid market.
In terms of that the delta at or if you're assuming a weaker enterprise digits as well. Thank you.
Yeah. The amount of your quick as yes, we actually do fee again, if we look at more than saw this offers we see for both larger deal with her for the <unk>, especially this budgetary environment at part of that is just the <unk> are having to do more work with their procurement financed partners, but yes, we're actually are selling more to see so because now where.
A strategic partner for that yeah.
And Greg I would just reiterate some of the comments at both Cory and I made earlier, we are seeing a challenging environment out there certainly in the mid market and we do not expect that that is going to improve through the course of 2023. In fact, we think it probably gets modestly a little bit worse than where we are today.
So that is really the driver of you know what we said three months ago to where we are right now and again I think we're taking an appropriately cautious view to the year when we give guidance, but we are seeing economic challenges that are out there in the customer base in that mid market segment.
Next we'll go to Jonathan Ho with William Blair. Your line is now open.
Hi, Good afternoon, I just want a quick one for me Yeah, I guess relative to your 2023 a R archive how should we made me think about the breakdown between new customer acquisition and they are are per customer or the ratio is gonna remain somewhat consistent with prior periods or any sort of shift here in terms of the make up of that.
Incrementally R. R. Thank you.
<unk> <unk> <unk> <unk>, we have an increased focus with our consolidation offers on our install base.
Across the company. One is you can actually imagine I would also think that we would expect when we do aspect internally to see a much heavier weighting towards <unk> customer versus new customer adds because we have a pretty good install base is actually looking to actually consolidated we have a great relationship with and it looks.
To be oriented towards the future that's actually more power base. So that's our focus for this year, it's not necessarily a private or focus all are covered in the future, but right now we're heavily vote somebody off a customer.
Next we'll go to Brian ethics, with a J P. Morgan Your line is now open.
Yeah. Thank you good afternoon, and thank you for taking my question I guess, you know more of a topic, but but my one question kind of around Cory what you're seeing from the spending side within your customers and specifically in regards to you know how how do you see them kind of pivoting spend I think I saw one survey that indicated with 39% our security budgets are.
Uhm staff and compensation. So it gets on that side, you know vendor consolidation, obviously makes a lotta sense anything on the automation front are you starting to see a any kind of draw in from budgets outside the C. I O C subtle level of <unk> kind of maybe a little color <unk>.
What you're seeing in there could there'll be levers with the way your portfolio is position to kind of gain some incremental upside when when those or if those budgets Tibet.
Yeah. So so one yes, I do think that there's a site again, we have to actually just respond and make our thoughts about what we see today and communicate.
Communicate with them and Mark others were a bit more thoughtful about how we approach it but let me just give us a breakdown of what it might be how we see the over all of them are you know the first thing is I think we're in a short time period, where people are trying to figure out what the right budget star and that was actually a a year and I didn't go into a little bit of 211 of the dominant themes that we hear from lots of our customers is secure especially in the midst of market.
Even a little bit in in a private person to be a market is that security is a big priority, but they're trying to figure out the overall health of your business what their budgets are and what's the shape of their budgets. So you see not a budget freeze. So I would just say a budget rationalization, where people are trying to determine what the budgets are we expected curie projects to be green like coming out of them, which is why we're not person.
But we are cautious it actually talking about so that's just one overall dynamic.
That we just see lots of security teams and their finance counterparts actually just go onto our budget planning process, that's a little bit more interesting because I tried to figure out their own assumptions for their own business.
The second thing that I would say that we actually see it every organization is trying to figure out how to get a handle spreading it really comes down to sort of like two big things as you say it.
Security is one of the bigger wage inflationary areas. So they actually tried to figure out how to actually think about managing the fact that they got a lot of overheads and inexpensive talent market. So how to manage that and there's lots of extra security tools that require a lot of manual intervention, we actually have tackled both of those which is why we believe.
That we actually have lots of leverage over the mirror and the long term is from our core platform perspective, we built the bra platform, but we have the core capabilities that most of that we have a heavy automation focus that's really focused on driving the productivity of our customers of security operations across mobility management, Costco out security and of course the tech.
<unk> response.
Second thing is that we actually focus heavily on expertise both directly and through our partners to actually help customers manage their security cost more lately and what I mean by that is customers can actually deploy the resource they need us in our part of the ecosystem connect you to provide for security customer resource of them cost effective.
<unk> those two things together, the automation focus consolidation enabled budget and pricing.
The expertise by us at our ecosystem are things that we actually they give us both your ability and give us up there.
Okay next we'll go to Mike work late with Canaccord Junior T. Your line is now open.
Good afternoon <unk>, Thanks for taking my question.
So you spoke about some of the <unk> I'm just curious if you could just provide some color on have attraction has been within your larger enterprise accounts are the macro headwinds throw impacting prescribed any of your business as well or has it been a bit more study.
Yeah, the large enterprise in bed a bit more study we have better visibility we have healthy pipeline. There we are seeing some of the other ladies but they're episodic.
I'll take the impact with large in the mid size enterprise.
Lots of the consolidation stuff that we actually talked about and the momentum was happening in the larger accounts I think they'll apply for the <unk>, we're very optimistic about the <unk>. It's just that the economy focus has an impact those organisations differently and we anticipate longterm that there'll be a core strategic copy part of the business, but right now you see actually more budget.
More spin and the large enterprise space, we take our team to execute William.
Next we'll go to Gray Powell with B T. I G. Your line is now open.
Great. Thank thanks for taking the question Yeah, I I may have missed it in the prepared remarks, but did you guys call out gross and the security transformation line and is that something you still got a disclose and then just how should we think about the split their the sheer uhm between transformation and that D.
M and other category that you used to get.
Yeah.
We actually execute our our platform consolidation offers it just doesn't make sense to break it out mostly because it would just be a allocation of some sort of like backroom allocation because yeah b M. As part of the core offerings of all the risks complete and direct complete.
Going forward and is that it's gotten more momentum than we figured out of the gate, we're not gonna be breaking that outgoing four and again b M will be a core capability of all of our solutions, but it's actually sold on our left Standalone basis, Yeah. Cory the metric I think that you know we pay attention to it I think investors will as well as the E R or per customer.
Cause these packages are driving more wallet share from customers and you'll see it in the E R or per customer.
But we just won't have that exact break out.
Next we'll go to Rudy Kissinger with D. A Davidson your line is now open.
Great. Thanks for taking my question Skies Uhm.
Get some of your competitors of caught out pricing pressure in the space recently I guess I'm. Just curious you know in this product package. It's good to see 10 per cent of new air or come from those two packages, but just what's the level of discounting you're throwing in there versus list price for the products individually and then is there anything more tangible you know you could share around the improvement.
You've seen thus far and Salesforce productivity.
You know I don't know if you track that percentage of rep, selling the full portfolio or or those packages in the quarter, but anything more tangible there would be great too.
Yeah, well, we'll talk about that later right now within enrolled in and out. So we have good momentum, but it's a week by week increase and I'd say our goal is sort of by the end of Q1 all of our reps are actually selling and proficient in I think we're tracking quite well towards that and so as far the rep Onboarding part of while we're excited for the momentum.
Is it one we actually at higher stay off the payment of the packages and the platform. It's all based on offer somebody's record into both the Rep Feedbacking and wrappings actually go on ahead of schedule Oh. So that's what we can actually say say there. The other part of the question what was the other part of the question on pricing.
I'll, probably look it's too pretty much very compelling in general, but it's too premature to do it because again it would only 10% of the failed and a quarter what I would say from a poor pricing strategy is that you know where you know over 60 K a R. R for customer, but our total potential sort of like 520 case, roughly and the way.
I look at it is that <unk>, what's the velocity that we actually get to 120, K a harper customer that 100 <unk> per customer and then yeah, I'll I'll share that upset with the customer. So if it turns out that actually change. Our total are all potential on average 528 at 350, K, but we <unk>.
The radar velocity to getting 180, K for customer I would actually make that trade all day long and consolidated cause we have lots of them to <unk>, there and get what we're focused on his share of wallet a customer economics with stripes or profitability is how do we actually have more profitable customers that are building their security operations with help us and we think we have momentum and a strat.
To do that and that's what we're focused on.
Next we'll go to Robert Galvin with Stifel. Your line is now open.
This is Rob galvanometer, Brad read that thanks for taking the question a couple of quarters ago, you'd mentioned that you were over subscribed for the backlog of partners to get on board. It on rapid seven for M. D. R. I Wanna know, how rapid 700 works through the backlog of partners nephews had seen an infection an M D or growth or if there's been some delays in customer department. Thank you.
That's a good question I would say, we're still working through that I mean lots of it has to do with as you can imagine we both are very good brand around our detection with spots in our security operations offerings instill departments, what to use our brand and so we have to put some will continue until the infrastructure in place to make sure that those partners are certified.
And available and they have the right quality level and so we're continuing that effort so it'll be a.
A steadily expanding number of partners and our ecosystem and we think that that is a midterm sort of like <unk>.
Next we'll go to a Mac hedberg with RBC capital markets your lines open.
Great. Thanks for taking my questions guys I'll I'll just bundled two together your first of all Cory can you talk.
<unk> you mentioned some of the mid market weakness, but but you know.
How did the quarter progressed interested like linearity to things.
<unk> did you see maybe a little bit of budget Flushing, and maybe how does that turn it into one Q and then maybe secondarily any thoughts on your <unk> physician.
Yeah, great questions. So at the quarter progressed things did actually yeah, why not allow budget plus I think what I put on my fault, we didn't anticipate lots of it what else to ask what has progressed and especially in the meat market people hurt more economically department you just have the economic bus economic pessimism, but.
There were also concerns about their own business you saw they start to slow down as we exited the quarter, which is why it looked in that within our wage of outcomes I would say that basically that got progressively more challenging over the course of the quarter and that was factored into our assumptions about 23 that that continues to possibly get a little bit more.
Deteriorating from that perspective, yeah, I do think that customers are going to come to some conclusions about what the overall budget profile is a little bit of that will lighten, but we are expecting a more pressured environment, especially in the mid market inner this year based on the exit right.
Last year.
And then just on the C. R. O C are all sorts of if it were seen great candidates, what a good platform for folks and I'm very optimistic about it I will update you when it started up at Ya.
And our final question comes from Joshua Tilson with Wolf Research your lines now open.
Hey, guys. Thanks for sneaking me in here just just a simple one for me it sounds like the guidance assumes that things get worse for your mid market customers is there any reason why you guys would it assume that it gets worse for the enterprise customers as well.
Yeah. So it's a great point. So yes, we actually are presuming that the macroeconomic environment is slightly worse, it's affected the grief.
Aw impact are just different between them. So it's not that we're actually paying that like enterprises completely unaffected. It's just that it's not impacting the same degree as the mid size enterprise. So I just wanted to clear about that we did become presumptions there and when we did our outlook, we factor and frankly higher coverage ratios across.
The board and so that's just one of our outlets. This is like a the pipeline with very healthy, but we have to actually look at heart coverage ratios because you have things like your pushes delays and other things. So that's yeah, we'd get back today.
And that does conclude today's question and answer session on that turn the call back over to Cory Thomas C. L for any additional or closing remarks.
Well I Wanna, Thank everyone for joining us this evening.
And we appreciate it have a good night.
This concludes today's conference call you may now disconnect.
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