Q2 2023 Rapid7 Inc Earnings Call

Thank you for standing by my name is Jessica and I will be your conference operator today.

At this time I would like to welcome everyone to be.

Got the seven second quarter earnings call.

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 would like to ask a question. During this time simply press star followed by the number one on your telephone keypad if.

If you would like to withdraw your question Press Star one again, thank you.

I would now like to turn the call over to Houston, Neal Shah VP of Investor Relations. Please go ahead.

Thank you operator, and good afternoon, everyone. We appreciate you joining us today to discuss rapid seven second quarter 2023 financial and operating results. In addition to our financial outlook for the third quarter and full fiscal year 2023 with me on the call today are Corey Thomas our CEO and Tim Adams our CFO .

We have distributed our earnings press release over the wire and it is now posted on our website at investors Dot 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 darn 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 restructuring plan financial guidance for the third quarter and full year 2023 financial goals for full year, 2024, and the assumptions underlying 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 report on Form 10-Q filed on May 10, 2023 and in our subsequent reports that we filed with the SEC.

The information provided on this conference call should be considered in light of such risks.

Actual results and the timing of certain events may differ materially from the results or timing predicted or implied by such forward looking statements and reported results should not be considered as an indication of future performance.

Rapid seven does not assume any obligation to update the information presented on this conference call except to the extent required by applicable law.

Our commentary today will primarily be in non-GAAP terms and reconciliations between our historical GAAP and non-GAAP results can be found in today's earnings press release and on our website at investors that rapid seven dot com.

At times in our prepared remarks from a 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 Corey.

Thank you Sunil and welcome to everyone joining us on today's second quarter 2023 earnings call.

I would like to start by acknowledging the plan, we announced today to restructure and optimize our organization by reducing rapid severance employee base by roughly 18%.

While it was an extremely difficult decision. We believe this step is critical to build on the momentum we're seeing in security operations and to position us to be more profitable growth company in 2024 and beyond.

I will discuss more details about the strategic rationale behind this decision and the associated financial impacts later on today's call.

Let's start with our second quarter results.

I'm pleased to report that rapid seven ended the second quarter with $751 million and a R. R.

14% over the prior year and deliberate revenue and operating income above our guidance ranges.

Longtime better than expected free cash flow.

During the second quarter, we continued to see strong and improving traction with Arkansas Asian offerings custom.

Customers are gravitating towards a holistic security operation staff, particularly threat complete, which unifies, our risk and threat management into a single integrated offering.

The performance of our packages once again exceeded our expectations. It's over one third of new way or in the second quarter was driven by either a threat or cloud with complete deal as customers look to increase the effectiveness and efficiency of their security programs by consolidating their video footprint.

A great example of this consolidation, but a six figure <unk> deal in the second quarter with an existing insight VM customer that was looking to replace a legacy Sim solution managed by an MSP.

Building on our established B M relationship rapid seven was uniquely able to provide the customer a comprehensive security solution and.

And our best in class technology, coupled with the expertise of our stock analysts was amplified by the value proposition from our maintenance at threat complete offering.

We competed against many large players in the extended detection response space and the customer chose rapid seven based on the strength of our automation capabilities, our security and incident response expertise and a predictable pricing model.

This customer is indicative of the current environment, where customers are upgrading and consolidated providers, while looking for better quality services and experiences.

Customer spending dynamics in the second quarter were broadly in line with our expectations with ongoing macro sensitivity influencing customer budgets we.

We've optimized ourselves efforts around this new normal by leaning into customers' need for more cohesive efficient solutions that are aligned with their resource constraints.

Our strategic focus around tech ops consolidation continues to gain momentum and we are driving focused innovation across our core products and capabilities to accelerate customer value.

We're particularly focused on integrating a frictionless cloud security experience into risk management programs for mainstream buyers.

A great proof point is our recently introduced executive rescue a new capability, they get security practitioners unified visibility to risk across all combinations of on premise.

Loud and hybrid environments.

Executive risked use ability to holistically assess risks and track security program effectiveness is a complete differentiator for us across VM and cloud security.

It is also an example of our unique ability to add value for customers by leveraging the breadth of our insight platform.

Our expertise in helping customers secure their cloud and hybrid environment is illustrated by six figure competitive win in the second quarter with an enterprise manufacturing company.

As an existing customer they had built out a strong risk management program, where their traditional environment with rapid seven's vulnerability management and <unk> solutions.

Despite a flat budget this year, the seesaw security teams needed to extend risk visibility and management into their growing cloud footprint.

After an extensive POC rapid seven's cloud security capabilities set us apart from other well known players for multiple reasons.

Our ability to provide unified visibility to risk across a pool environment, the integration and ease of use of our platform and our ability to offer extensive automation, including automated remediation.

Ultimately these product differentiators combined with the bunch of predictability and value proposition from a client risk complete offering led the customer to consolidate this part of their second BOP stack on the rapid seventh insight platform.

Turning now to our strategic areas of focus as we enter the second half of 2023 and look forward.

We remain anchored on our core customer our mission to make the best security operations technologies accessible to all.

Let me share with you our optimizing to execute against this mission through our focus on the modern Sox.

With the industry undergoing a customer driven shifts to consolidated security platforms. Their early success around our integrated stack op strategy is evident.

As our consolidation offerings track ahead of expectations. Looking ahead, we see an evolving set of critical customer dynamics in this space.

We have noticed a customer shift from cloud security is a specialized function to cloud security as an integrated capability within security and SEC ops teams.

We view this as a massive demand driver for integrated SEC ops and think that we have a significant opportunity to be the leader in delivering integrated risk and threat management across on Prem cloud and external attack surfaces.

Second as the threat landscape continues to grow in complexity customers are showing more demand than ever for integrated expertise to support them and effectively managing their security technologies.

The convergence of these key trends security consolidation integrated.

Integrated cloud security and expertise driven outcomes are the foundation of what we view as the new modern Sox.

Rapid seven's focus is to be a leading provider of integrated security solutions for the modern sox by providing risk and threat management within the context of overall security delivered as a service alongside expertise tailored to the needs of each customer.

Let me walk you through three distinct opportunities for rapid seven to support demand and Sox and while we believe that we are optimally positioned to win.

One <unk>.

Customers continue to upgrade from legacy log centric detection to cloud native detection and response programs.

With over $300 million of our a R and detection response with growth at over 25%. It is clear that customer demand is strong and we have to establish both the scale and product leadership to win this opportunity.

Two <unk>.

Customers can no longer treat their risk and threat functions as distinct.

The modern stockman's as threats as a function of risk and vice versa with our integrated best of breed capabilities across risk management and threat detection in both cloud and traditional environments. We are uniquely positioned to deliver this integrated experience to mainstream buyers.

And three.

Customers are increasingly rely upon both greater levels of automation and integrated expertise alongside their technology.

Having built best in class service augmentation with our global stock presence, we see massive potential to drive high margin managed services, both to existing offerings and investing in and accelerating our strategic managed service partnerships.

With that context, let's talk about the strategic decision, we announced today to restructure our organization and reorient, our cost structure and how that positions us to better execute against our strategy.

We recently completed a deep analysis of our cost structure did Atlanta accelerating our investments to deliver the most comprehensive modern stock offering for our customers.

Earlier today, we announced plans to reduce our global workforce by approximately 18%.

Solid eight our global facility footprint.

There are two clear outcomes from this re orientation.

First.

It is clear that we have an opportunity to run leaner as a business.

Half of our planned changes are efficiency related cuts that we expect to flow directly to the bottom line.

These include streamlining management layers reduction of roll overlap and optimizing our own an offshore talent mix.

Second.

We have a compelling opportunity to strategically reallocate investment to key areas that we believe will drive the most long term value for customers.

With a vast amount of our product expansion now behind us, we can reallocate and accelerate the investment in capabilities and services that customers are purchasing around the modern sox, including our managed service partnerships.

We expect these changes will meaningfully optimize our cost structure, while enhancing future product capabilities and delivering a higher quality customer experience.

Ultimately these changes position us to drive strong and more profitable growth over time by aligning our investments with our customers long term setup needs. While at the same time, establishing a strong free cash flow support for our business.

Tim will guide you through more specific financial details later on the call.

But at a high level net of the investments, we're making in strategic focus areas. We expect these measures to substantially expand our profitability profile, while driving significant progress towards our midterm will have 40 objective.

Looking ahead to 'twenty 'twenty four we believe these actions position us to deliver at least $160 million and free cash flow in 'twenty 'twenty four doubling from our current 2023 guidance of $80 million.

Given the investment leverage in our business, we have confidence in our ability to scale free cash flow in 2024, while it's premature to set any revenue or a or our growth targets for 'twenty 'twenty. Four this free cash flow expectation does not assume improvement in the macroeconomic environment and we're confident we can execute to this target even if our.

Top line growth, where it should be sustained at this year's levels.

Shifting our focus back to 2023.

I am pleased with the progress our team has made during the first half of 2023.

Laying the groundwork for us to drive ongoing customer impact with our integrated setup strategy, including executing through our first half growth targets.

Looking to the back half of 2023 we continue to see line of sight to our original full year air our guidance range with that said, we believe it is prudent to establish a high confidence expectation range that accounts for a modest degree of disruption over the next three to six months as we implement the strategic realignment.

As a result, we're reducing our full year guidance by approximately 2% at the midpoint to account for potential disruption.

This is coupled with a significant ramp in our operating margin expectations, which we will now expect to improve by approximately 700 basis points over the prior year.

Jim will share more specifics on this in his comments.

In summary, we continue to focus on the highest value most impactful areas of our business on behalf of customers.

While the changes we announced today are difficult, we have a compelling opportunity to position ourselves to deliver stronger more profitable growth and we remain committed as ever to our enduring goals hub.

Have customers securely transition to the cloud expand the capabilities and value of our insight platform and balance strategic investments in durable growth with expanding profitability.

Thank you all for joining us today I'll now turn the call over to our CFO , Tim Adams to share additional detail on our financial results and outlook.

Tim.

Thank you Corey and good afternoon to everyone on today's call. Thank you for joining us.

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 second quarter of 2023 with $751 million in a or are consistent with our expectations and growing 14% over the prior year.

Reflecting continued demand for our insight platform with the strongest growth contribution coming from the high priority areas of detection and response in cloud security.

We continue to see threat and cloud risk complete offerings tracking ahead of our expectations at over one third of new a or are in the second quarter.

With the benefit coming from both landing new customers and driving upgrades and expansion within our base.

We also saw balanced contributions from new and existing customers and our overall business during the quarter with a R. R per customer that grew 7% year over year to $66500 as existing customers leverage more capabilities on our platform.

We saw nice improvement in total net customer ads.

Ending the second quarter with nearly 11300 customers.

Representing growth of 6% year over year.

Second quarter revenue of $190 million grew 14% over the prior year and exceeded the high end of our guidance range.

Product revenue grew 14% year over year to $182 million and was better than expected on favorable linearity in the quarter.

International revenue grew 17% over the prior year and represented 21% of total revenue, while North America revenue grew 13% year over year.

Now turning to our operating and profitability measures for the quarter.

Product gross margin was 76% in the second quarter and overall gross margin was 74% both in line with our expectations.

Sales and marketing expenses represented 39% of revenue in the quarter down from 41% in the prior year.

R&D expenses were 21% of revenue unchanged from the prior year.

And G&A expenses were 7% of revenue compared to 8% in the prior year.

Higher revenue combined with slower hiring in the quarter drove stronger than anticipated operating income of $13 million in the second quarter.

Our adjusted EBITDA was $19 million in the quarter and diluted net income per share was <unk> 18 cents better than our guided range on higher operating income.

There are two additional items from the second quarter I want to mention that are noncash and do not affect our non-GAAP results.

First our GAAP net income reflects a $13 million noncash charge related to a capped call transaction from our 2023 convertible bonds.

These bonds were retired as part of a refinancing nearly two years ago.

But the associated capped calls require us to record a mark to market adjustment at the end of the second quarter.

This capped call transaction was settled in early August , resulting in a cash receipt of slightly over $17 million.

Second as part of the restructuring plan.

We will be consolidating our global real estate footprint as a result, we incurred a noncash charge of $27 million in the second quarter related to real estate assets that we determine are not necessary to support our strategic growth objectives.

Moving to the balance sheet and cash flow statement.

We ended the second quarter with cash cash equivalents and investments of $296 million.

This is before the $17 million, we collected in August related to the cap call transaction on our 2023 convertible bonds.

Operating cash flow was $31 million and we generated $26 million of free cash flow in the second quarter, driven by stronger profitability and more favorable collection trends.

Now turning to our outlook for the remainder of the year.

The restructuring plan, we announced today is a focused effort to align our organization and our investments around the areas of business that are driving the most value for our customers.

This was not a decision we made lightly and we believe these actions will enable stronger and more profitable growth as we invest to meet customer demand for consolidated SEC ops solutions.

We expect to incur charges of approximately $24 million to $32 million related to the restructuring plan throughout the third and fourth quarters of 2023.

Of which the majority are expected to be cash expenditures and weighted towards the third quarter.

We also expect to incur $3 million to $4 million in noncash impairment charges from the consolidation of our real estate footprint throughout the second half of 2023.

These restructuring charges will be excluded from our non-GAAP operating income and non-GAAP net income results.

So the cash expenditures will be reflected in our operating cash flow and free cash flow.

As such the cash benefit of reduced head count will be offset by the associated severance related cash charges.

As a result, we are maintaining our expectation of approximately $80 million and free cash flow for the full year.

As Corey mentioned, we are updating our full year <unk> outlook range to $800 million to $805 million.

Or approximately 12% to 13% in growth over the prior year.

This is roughly a 2% reduction in year over year growth at the midpoint.

Which despite healthy year to date momentum in our business. We believe is appropriate to account for a modest disruption risk in the business as we make these important strategic changes.

We are adjusting our total revenue guidance for the full year to $771 million to $775 million or roughly 13% growth.

The 3 million dollar reduction at the midpoint is wholly driven by lower professional services revenue tied.

<unk> tied specifically to our restructuring cost actions.

We now expect should be approximately flat compared to last year.

We are raising our full year operating income guidance to a range of $86 million to $90 million.

Which represents approximately 700 basis points of operating margin expansion over the prior year.

We expect full year net income per share to be in the range of $1 23 to $1.29 based on an estimated 67.5 million diluted weighted average shares outstanding.

Turning to quarterly guidance for the third quarter of 2023 we expect revenue in the range of $196 million to $198 million.

Which represents growth of roughly 12% year over year.

We expect operating income for the third quarter in the range of $29 million to $31 million and non-GAAP net income per share of 41 cents to <unk> 44 cents.

Is based on 71 7 million diluted weighted average shares outstanding.

As we look out at next year, we expect to generate at least $160 million in free cash flow in 2024.

Doubling from our current 2023 guidance of $80 million.

We feel good about our results year to date and about our ability to pursue the strategic opportunities ahead of us as a leaner more agile company.

Thank you for taking the time to join us on the call today and with that we will now open the call for questions operator.

At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.

We'll pause for just a moment to compile the Q&A roster. Please note we will limit each caller to one question. If you would like to ask an additional question. Please press star one again to rejoin the queue.

Our first question comes from the line of Matt Hedberg with RBC.

Matt go ahead, great great guys. Thanks for taking my question.

So just one let's see so.

I just wanted to maybe get a better perspective on the full year guide I mean, obviously.

Results were good.

I just want to be clear is the full year reduction just a function of the restructuring or is it that youre seeing macro youre, assuming macro trends deteriorate, just maybe a little finer point on sort of the assumptions on the 2% reduction would be super helpful. Thank you.

So a very reasonable question, Matt. So the first thing is that we were really focused on looking at our cost structure. Both this year, but more importantly, as we went into 'twenty four and we decided that we were going to have the right cost structure going into 'twenty forward. This was the right time to actually make these changes secondary impact is we have to really assess is what's the risk of these.

Changes in the business as you know we had a backend loaded year, what I would say, it's all basically we were trending well with what we had set out.

But when we think about the amount of change that we're doing with the 18% reduction in.

In a backend loaded year, we want to make sure that we actually gave a guidance range that was a very high confidence guidance range, but that was the primary driver of the change in the guidance.

Great. Thank you and our next question comes from the line of Socket Korea with Barclays.

Second go ahead.

Okay, Great Hey, guys. Thanks for taking my question here I'll keep it to one as well Corey maybe maybe for you.

Yeah.

You talked about about using this restructuring as as a way to also reallocate resources I mean, clearly if there's a profitability.

Benefit, but but also as a way to reallocate resources to the areas, where our customers are seeing the most value I was wondering if you could just go one level deeper into that what product areas do you think or maybe you're going to get a little bit of a you know of.

Increased investment where do you think you can get a little more profitability tell us how you thought about that.

That's a good question and in fact, one of the things that we actually thought we were seeing extraordinarily strong healthy performance conversion rates in certain parts of our business aligns with what we actually saw with the packet strategy that works laid out we have to make sure that our entire organization was aligned around there and frankly it just wasn't.

That gave us this gives us the opportunity to actually get the alignment right. The areas specifically talking to your very good question. It's really I think about three core areas that we really got cocoa. One is what we think about the modern Sox is customers are looking to upgrade their thoughts.

Your leader in mainstream security operations, where people are able to actually both monitor risks and threats across the traditional environment and their current environment and that'd be a seamless experience we have great traction great progress, but looked at the competitive market, we're not restaurant laurels and we actually have reallocated and refocusing our best in the area.

And then the last area I would just say it's more than anything a realignment focus area is it is we've actually execute a strategy quite well on brought in in our product portfolio. We've just actually had different experiences for different buyers of different products and services and so we're streamlining and lining that that frankly.

And efficiency benefit, but it's a better customer experience for our customers. So those are the areas of major focus that we have.

And then you have other questions.

Thank you. Your next question comes from the line is anarchy, what Keybanc capital market.

<unk> go ahead.

Okay, great. Thank you I'll I'll ask two questions. If I may just just first I mean, Corey can you help us just give us an understanding on kind of the type of growth profile, you're setting yourself up for in 24. Following this restructuring planning on follow up on that.

Yeah, I know so I can answer that one pretty quickly it's way too premature to actually talk about the glucose <unk>, mostly because I am not at all qualified to talk about with the economy is going to be like in 24, and so will update you on that later I think the important thing to think about <unk> about is we knew we wanted to actually strengthen our free cash so we want to establish.

A strong foundation there. So what we did was really pressure tested the growth profile to make sure that it was gonna be resilient I mean, the free cash flow that it would actually hit our free cash flow aspiration targets and a range of different scenario. So we have a lot of confidence that we gotcha.

I will tell you too is that we're making investments instead of the business as the economy normalizes whenever that happens we should actually see grow up accelerate from where we expected to be this year, but again, it's too early to actually talk about what's going to happen to the economy, but we're definitely making the investments to actually yes get more free cash when efficiency, but we plan to be a competitive grower in the market.

And as the economy normalizes are absolute focus is making sure that we're actually growing.

Stronger than what we're seeing that is all for today.

Okay. Thanks, and then just on your common stock cloud could you just have you be a little bit more specific on where you'd like to invest in cloud security does this mean more kind of aggressively and synapses does that how I should think about it and then just have you had any color on kind of picked up cause security businesses at the moment that'd be great color as well.

Yeah. It was so we can attraction and cloud we didn't release the specific numbers on it what I want to say is a high level for cloud is we're actually seeing great tracks and in fact attraction has accelerated which is part of our confidence and investigate there's two different areas that I think we actually have core capabilities and shrimp and cloud portability management.

<unk> assessment.

And C. S P M and cloud automation today, and we have a good position in other areas. There's two things with this one it's a continuing investment in overall class security to make sure that we have the leadership position there until there's some advocacy nap absolutely will be invest in it but the other one is a cloud of so early stages. It's not <unk> you know like how do you think about the chairman AI and.

Cloud it. So it's also a non static is a highly dynamic market and we also want to make sure. We have the best of the capacity to make sure that we actually are leaning into the investment uhm, because you actually have to be leaning into the investment stay relevant cause the last thing I'd say is that we do see we do see big advantage and attraction that we've seen is customers are looking to <unk>.

Managed clout in the context of other things that they're doing in their environment.

We see a major differentiator and integrated security operations management that includes clout in the context of the traditional environment allows people to manage the overall security equipment cost effectively and we think that the market goes mainstream that's a massive opportunity and that will be one of our drivers to your previous question that actually helps us continue to actually.

Celebrate coke is the paranormal.

Thank you.

Thank you. Your next question comes from the line <unk> like Morgan Stanley .

Go ahead.

Hey, Thanks for taking the question <unk> just to start quick one for you.

When you think about the competitive landscape rapid seven I I would assume things are certainly shifted particularly as he brought in the product portfolio and really honed in on these on these bundled go to market motion. So I'm curious and the RFP process, if you're seeing a broadening of the vendors that you're competing with and just kind of any kind.

And tell you that you can get around when rates I know, it's it's still relatively early in terms of you know the bottles being in the market, but anything that you can give us around when rates against kind of new competitors would be really helpful.

Yeah. So.

Oh look I I think the biggest new where we have the most at-bats is going to be clearly the modern Sox space. That's the evolution of the same market.

Some consolidation place.

And you would see a range of different competitors you see the traditional sale players you see some of the empty. Our players you have a range of competitors what I would say is that we're actually having a lot of attraction of momentum. That's part of why we're continuing to double down in that business in that space. The conversion rates are high growth rates are good it's ethical business is extraordinarily healthy.

We're seeing lots of ability to attach around their business. It's all part of what we're doing is rarely oriented around their modern sir and how we can be encouraged so that's that's the first thing and so our when rates are actually consistent and growling at high we feel very good we're actually having with me is that I can plead out to sea record conversion rates and.

Offering it was the property.

Four when we saw that we haven't publicly close the women's the second thing I would just highlight is.

There's two ways to think about the cloud place is the integrated with our strategy right now because it's false Facebook competitive inexpensive.

Is we knock it off the ballpark, we actually do an effective job.

Upgrading our vulnerability to install base.

Alrighty and sticky that's emotion that we really got focus on this year. That's the purpose of CRC and we're doing an extraordinary job right now with a very recent start and actually starting to upgrade that CRC basically it's early we have that vulnerability manage the base.

But we are not going out specifically trying to actually land lots of net new cloud customers. Because this is not the most efficient motion for US right now we see our early momentum over the next couple of years is really upselling in upgrading accountability management service with.

With complete you start to see evidence of that I think about talked about one story the pipeline guilty. There. The conversion rates are there were me and to do that but that's the strategy and focus areas that we actually have there now inevitably I think you alluded to as we continued to actually build on that combo meal will absolutely see more of our competitors and it's a hypothetical market and will tackled.

That comes but to be clear is that you talk about accelerated growth we knock it off the ballpark by just upgraded our vulnerability management install base and that's what we currently the focus.

Thank you yeah. Another question comes.

It comes from the line of Bradley back with Paypal.

Go ahead.

Great. Thanks, very much Corey, 18% really large number so as you manage the business going forward, how do you prevent.

Account morale breakage, and then how do we think about how long it'll take to reinvest the savings back into the business. Thanks.

Alright, you want you're quite right 18 per cent large of course, we don't do this lightly.

Talk about how we actually thought about this so called the first thing is that from our employees I think that we are able to say you were unemployed today is why we don't control. It uhm Incrementalism does not help anyone there's lots of companies that I have to do this multiple times and so we actually just had a bias about hey, let's go deeper and actually do this one if we're gonna have to do it. So that's the one thing that.

We actually focus on.

The second thing is that we definitely like all companies had inefficiencies we start about definitely inefficiencies. The inefficiencies are absolutely a smaller number.

What part of what we actually saw a little bit perhaps some parts of our business.

The coin quite healthy have incredible stickiness.

Showing great sides of the expansion and <unk> ability and we did not have all of our team and resources lying around that for obvious reasons. If you think about the will be linked to the business.

So when you think about you going to do something like a <unk> or restructuring you can just have all the efficiencies.

You can go shallow uhm, which actually causes more pain to employees over the longer timeframe.

You could actually go a little bit different in an effort to actually doing what we.

That's the best one employee so they actually have some visibility accomplish before.

That gives me the most confidence anything that I've heard from most of our employees that they're excited about is that second part of actually make it a hard decision to do some of the re alignment that allows us to focus on the areas that people see the new minimum because our employees see where we actually have momentum and <unk> a line in the sand and say, we will actually be investing.

Hi, these opportunities is a confidence builder.

For lots of our employees are actually looking at the opportunity in the market. So that sounds good make sure their phone employees, we actually do this once with everything that we actually no problem, making sure that the ordeal invested in tackling the big opportunities that were already any progress one and that's the type of thing that we think actually motivates me and excites the employees that are actually.

<unk> on the second part of the branch question about the timeliness of the reinvestment, we're going to be very thoughtful very deliberate in terms of what we do but spread you would expect to see some of that happening in the back half of this year and certainly carrying into next year, but again, we're very confident but that improvement in free cash flow doubling year over year.

$160 million net Corey mentioned earlier for next year.

[noise]. Thank you for the call.

Alright. Thank you. So much. Your next question comes from the line at Josh Fishbein with <unk> Securities <unk> go ahead.

Just a quick follow up on <unk> question, and then one about acquisition state.

Do you guys are reaching a point, where you know you have easier comps going forward and I just if you've thought about how this may impact you you know in terms of go to market or talk about any impact it you'll go to market you'll see it on the street salespeople restructuring might have I noticed that focus there and then I'll.

So just as a follow up to that how the restructuring or focus on free cash flow might impact your acquisition strategy going forward. Thanks.

Yeah no.

Good question. So the first is that we make every effort to make sure that we actually minimize customer you're packing the short term and the <unk>.

Midterm with it it's it's very positive to actually customer impact, we're actually rotating more people to be frontline customer facing and engaged yeah. One way the subway to think about the restructuring is that it's very mild impact on our hold up carrying people are frontline.

Support people attempt to the number of people in the organizations that are Duane customer facing stuff. There is a lot of impact and some of the overhead just woke up and lies the management layers efficiency. So that has an impact to your to your point I think part of what we actually had to look at it we have a lot of positive we have a lot of houses singles.

The momentum and the <unk> will take you to you broke up high sync rate conversion rates.

But what we really wanted to balance that with is making sure that we actually take proper care. It's actually manage the risks that comes from a change of this order of magnitude in size. So part of that is making sure that we're deeply focus on making sure we try to minimize customer.

Any customer friction that can come along with it have good communication or this is also why we actually reduce the guidance range to actually make sure that our team is focused on building a longterm health your business, but again, there's somebody knows in there do you actually go through a change in a relatively tight one so that's the setup that we actually have around that I think.

We're quite set up well actually manage our customers engaged in a limited short term, but in the immediate term, we actually think it'll be quite successful.

And you've got a second question. He was on the M&a's site, Oh, Oh, it's free cash flow <unk> too obvious point is that one uhm generating more free cash flow gives us a more range of possibilities of options about how to do that of course will actually look at what's the best benefit.

Four longterm shareholders. So that's gonna be <unk>. It just gives us a lot more flexibility and a lot more options selling at the business, which is why I had a really really big focus with him and the rest of our leadership team on establishing a much stronger foundation of free cashless it going forward because it allows us a lot more options when we do M&A.

I can never say, we'd never do anything we have a significant bias for tech and team things that are strategically alive and oriented that tends to be where we actually like to play and when we actually like to focus on and M&A, but I would think about the free cash flow is just give it up a lot more capacity and options about how do we actually generate diamond.

Thank you.

Thank you. Your next question comes from the line at <unk>, <unk> <unk> <unk> <unk> <unk>.

Go ahead.

Hey, Thanks for taking my question. So yeah <unk>, it's good to see that you're you're trapped in a cloud risk complete offerings are cracking ahead of expectations and it hit or one third of your new a R R and or a better than expected.

A favorable linearity and <unk> from from International revenue standpoint, it seems like it again could you quite strongly about <unk> can you provide some you can provide some charter pickle color around both the favorable linearity as well as the overall retention rates are sequential.

From from last quarter I really appreciate it.

Yeah, I'll talk to him that with him. So you know the first thing I would just say we're seeing you know last year was pressure in the international, especially immediate Tim talked about retention last year I would say, we've seen a very unhealthy stabilization and a good place to actually continue growth and help them here and it's also very.

Good about what type of international teams Uhm, we feel very good about the execution leadership and we think we're set up well if we actually go forward, but a lot of that is just it's improvements over last year, which we had a rough 20, we had a rough 22 uhm when it came to international until he saw stabilization and now you're starting to see some improvement are the fundamental.

Okay now I would just stay at Torrey certainly a big opportunity still internationally. The growth rate has been you know better higher than what we've seen in North America still a huge T M over there a big opportunity into your point just on retention rates something we pay a lot of attention to <unk>.

Team does a lot of work there and they have remained stable.

Thanks for the question.

Thank you. Your next question comes from the line as Jonathan how with William Blair. Jonathan Go ahead.

Hi, there good afternoon and wanted to see if I could get a little bit of additional detail on the M. S. P opportunity that you referenced and you're just like why is the M. S. P a opportunity a little bit more attractive than than prior periods. You know how does the restructuring maybe impact that as well. Thank you.

Yeah. That's a great question. So we've been talking a little bit for awhile about partnership with a bunch of focus but also the big afternoon right. Mr. <unk> look the way that we see.

Customers are overwhelmingly knievel technology and services if people try to tackle favorite complex security environment, There's just not enough talent and expertise we have the scale with a strategy about technology, that's great well integrated service experience rapid 70, some of that but we have no <unk>.

<unk> actually you wanted us to we actually think M. S. P. A great partners.

Part of what we're doing any efficiency streamlining is not just entirely line and our team we're actually leaning heavily into a partner strategy that actually for part of that supervise valued customers to be investing more of those partners cold selling more with those partners and best and integrate technology solutions and support services without partners, but we are <unk>.

Hitting orientation needs to be look apartments are actually phone well, we have to keep our interactions quite well, but you will see even more of that in the future. We have some great demand with some very chia strategic partners that we've already so a moment and with this year and we see a lot of opportunity to actually partner with keep hoping that you.

Focus on one board and so that's a big focus but at the end of the day customers need great technology, yes, it needs to be integrated but he also needs service documentation in our strategy is to actually do that not just ourselves, but hopefully I can talk to their partners.

Thank you gentlemen.

Thank you and your next question comes from the line upgrade mascot.

<unk> go ahead.

Yeah, Hey, guys. This is Mike on for for Greg Here I'll, just do a quick one so firstly I'm, just wondering where there any changes as corner in average sales cycles average deal sizes are duration as compared with the key one in just a second uhm, what sort of ASP uplift did you see for threat complete and cloud risk complete this corner.

Thanks.

Yeah, I would say no change since you want you know if you think about 242122, it's been what we're seeing is a pressure economic environment things take a little bit longer, but it's a stable trains without actually see <unk>.

I just wanna be clear.

Demand outlook is healthy and stable. It's just you have the you have a environment or customers are the little bit of pressure and we have to be thoughtful about how that pressure manifested, but we're also see a late convert we can offer help so we feel very good about the stable and it's up to demand environment. So far they said I would say that we feel very good about what we actually so much you too.

And what that pertains, whereas we actually move forward Oh. Your second question is that the upload that we saw on the packages was still double it's roughly two X. We feel good about that we do have to get we have to do a job of managing you know more deals that could happen to have higher I S. P.

In there and that's also a balance of consideration will guide you to the other things this roughly two X and that's been a positive trend.

Thank you. Your next question comes from the line at Crane Powell with E T I T.

Go ahead.

Okay, great. Thanks for taking the question Yeah, maybe just maybe just one on my site I want to make sure I had a stack right I think he pulled out the catching a response I over $300 million in a R. R. With 25 per cent growth. That's that's great to hear I know, you're not disclosing vulnerability management revenue anymore.

Safe to say that that's still growing you know in line or or maybe better in the overall VM market. Just just how should we think about that next next.

Yeah, So what if you Oh.

Two questions one at the heart of it when you think about competitiveness from a youth as an adoption, we believe and we're seeing healthy traction and usage and a Dr vulnerability management and new customer adoption won't really managed solutions.

Gets a bit apples and oranges because this is the challenge when you actually have applications as you do more platform sales more salute yourself more packages, it's something you're actually attributing and what I would just sit there does it really does it makes sense to actually.

The allocation basis, because again, it's just more of an allocation based on revenue perfect. So the way that we actually are rarely measuring this this year, which again is sort of start off a bit more channels, but within the right lamp and the right training right trajectory, but as we actually go forward is that we expect us to grow better than the overall management marketing to be the long term because we actually have.

Have a better overall gross profile and opportunity, yes, we have to actually get to be near term changes. Yes. The economy is in some ways, but we think we have a very healthy set up for that and that's the main thing versus actually talking about like how do you actually allocate dollars per line items.

Thanks for the question.

Thank you. Your next question comes from the line of Roger <unk> with you B S. Magenta ahead.

Great. Thanks for taking the question Corey I Love to go back on M. S. P's for a second a lot of your competitors and VM clouds and et cetera are also emphasising that the growth opportunities a C. In in this channel I'm wondering if you could just talk about the competitive environment, they're with M. S P's and what makes rabbits, having a better partner versus some of your competitors.

Nope that'd be great. Thanks.

Yeah, I think there's while I appreciate the afternoon to answer the questions. So the first thing is when you think about <unk> pieces to talk about what they need is is that the one.

Not all people will be successful emphases, you're seeing a lot of movement in the market, where almost every I would say channel partner Tech.

Tech company Invar, even lots of tech companies are doing more muted services just to be clear that this customer's needed. So let's just understand that like this is an area of core customer knee.

Now, let's talk about why rapid seven is is I feel the position and while we're having lost momentum and in fact, while we're putting even more investment in this area.

We're not interested in commodity low value meal and services that do a poor job of security for customers. We won't have world class services that are good. We're also not interested in no margin businesses and so what we've actually had to really focus on overtime and rapid seven is how do you actually build an integrated platform. So the first thing I'll see.

Differentiation is very few people in the market actually offer integrated solution the fans all security operations.

Which is what lots of these partners are looking for so if you think about our solution. It gives them a compelling solution that allows them to compete in the text on the spot your account security space additional or believe me I have to face the risk and compliance space.

And even now with some of our partnerships with some of our hamster for whenever the important space.

It gives them the ability to go the customers with a holistic solution that's critical and that's what actually part of the <unk>. The second thing the partners knee, though is they don't know they don't want poor margins and so what we've actually built it is heavy automation for ourselves we looked at ourselves a lighthouse customer we have highly competitive.

Highly attractive uhm in servicing MBR solutions that have a high wind right, but also want it very very high gross margins and so when you think about competitive positions. We have a comprehensive solution with a lot of automation intelligence that can be running high gross margins and we set ourselves up to actually partner well with those service providers.

This is why we actually have lots of the van which is why we actually have kind of a <unk>. That's also why we're accelerating our investments in those partnerships because yes, it's a little bit disruptive in the short term, but it gives us longterm scale in the business and that's incredibly important to us.

Thank you. Your next question comes from the line of Alex Henderson with medium.

Extra line account.

Just start off with a clarification your tenure.

Demand trends are stable.

And you were comfortable but I was hoping you could just tell US is your pipeline as robust coming out of the June quarter as it was shake coming out of the first quarter or out of the end of the year.

I'm sure that there's no change in that trajectory as we go into the restructuring should they change in revenue was.

Only a function of the destabilization not a pipeline issue and could you talk a little bit about the linearity during the quarter was there any falloff in orders or closure H lane in the corner that that we should be aware of.

The superbowl and questions Alex considering the amount of things that we announced today. So the first thing I would just say is our overall pipeline is actually stable to and our conversion rates are improved come out in order. So we actually feel very good about the conversion rates, we feel good about the pipeline coming out.

Again, the transit in the business are healthy from that perspective, just to put a fine point on cause I think the first question you're asking is like a how much of the guy down is the structural changes in risk management and how much of the guy down is sort of like just trends that you actually saw it does.

Just to be very specific about that is that it is about the structure with management and here's what it comes out it is.

We actually have a good opportunity to year was already backing loading we saw get trains.

We actually don't we don't want to be overly precise about an 18% cut and what the implications of that are and so the question that we actually exited after we decided it's sort of like how to set up for 2024 house up a free cash flow is western appropriate form of guidance perspective, knowing that we're actually gonna be going through changes I would say Alex is there's no precision that you can.

Actually do to say like Oh, I'll take a million all taken way too all we said listen we want to actually give a number that even with the changes within minutes of outcomes and knowing by the way and every quarter I'll answer your other questions. Those patriotic like your other other question was totally or we felt great and consistent commercialized throughout the court nothing fell off in the last week in fact, we have had another consistent.

Period of very strong closest something that said, if something's actually closed something push and that's what we expected but in a year. That's already backing loaded where you can actually have things push and still close well we didn't want to do was be over precise about what the impact of a change of this magnitude was and so we actually have to ask the question.

Alright.

What's the range of outcomes, if actually some things go well somethings don't somethings take longer something push and we actually wanted to have a high confidence guidance range that was the primary driver of guidance that we actually saw.

That's great.

Just one last thing if I could stick stick it in the timing of these restructurings given the announcement tears in August .

Most of the cost.

Improvement then go to start kicking in in the fourth quarter and into 24.

Do you get some of it in the current quarter.

Thanks, Yeah, Alex you'll get a little bit in the.

The third quarter the majority of the team the 18% is happening right. Now this week, you'll have some folks that are transitioning through the balance of the year, but then you get the full quarter impact in Q4 and of course for next year as well, which you see in the free cash flow guide for next year.

Thank you out.

Thank you. Your next question comes from the <unk> lineup rap Owens with paper Sandler five go ahead.

Hey, Thanks for taking my question is is Ethan Allen for Rob and I wanted to ask about your customer additions they looked pretty shocked <unk>, what kind of sequential patience and a year over year basis. So I was kinda, hoping you could add some more color there where did you see strengths with it you know with the new packages with with with empty our services.

If there's anything to call out there and wipe out there's such as that can prevent thank you.

Yeah. You you you know if it was a little bit surprising probably from what we have commented on her out really rotating our focus on expanded in the customer service when I would say an hour just remind you is that we started with the focus first on the packages.

And with the follow on motion and training, enabling with about how do we actually engage deeper and sell more into our install base. So that motion really got started in Q2. So I would expect the transit changed over time, but I'll, probably with a little bit and precise and the timing on the last call Uhm because that motion was started so I still expect your apathy.

In fact, we saw a little bit more but I would expect to see a skew towards expansion in the installed base over the next year, but we did actually that was a follow on emotion from the package motion that we actually get to start the year and then to ask you. A quick question. It was pretty broad base across regions product and territory. So I can't really localized to one thing what I'll just say it is.

That the our sales team has a lot of confidence in the amount of momentum I would say, we're focusing heavy on expansion, we'd actually go forward, but that may rotate over at a slower pace.

That I will take away the decor.

Thank you for the question Alright. Thank you. Your final question comes from the line and Bryan Essex with J P. Morgan Fine go ahead.

Okay, great. Thanks for taking my question and Corey I, just wanted to fall into that actually last topic.

You know echo my like congrats on unhealthy new ads here from a customer perspective.

Just want to get it sent to any anything you can provide us for you know a tax rates within the installed base how much running room do you have to go to kind of you know.

Upgrade existing customers with with adoption of packages and.

Are you seeing anything in your pipeline next yielding greater confidence in sales productivity from our selling the platform perspective.

Yeah, So what actually I think we have a massive amount of money part of what we actually.

<unk> and sometimes you know use words like restructuring you Miss for like the realignment and optimization pieces, but a big opportunity that we actually see is that look.

For better or for worse, it actually work, but we actually fit the last couple of years, both doing <unk> innovation Tomatoes irrelevant, we have relevant offerings today areas, yes, there's continuing to work to do but we actually set ourselves up irrelevant to make sure that we're in growth markets as we actually go forward and we have to actually do that.

By selling into areas that frankly vulnerability management did not bias lots of tailwind and when you think about the the market. When you think about sex or thoughts you think about <unk> automation. We knew about clout is you know there's a set up there, but we have to get traction we have traction and we actually have momentum a part of what we're doing it this restructuring.

A lot of the alignment we have not hold on engine to actually really focus on expansion Indian installed base and that's an opportunity. This in front of a so a big part of what we actually get our baseline with your Ah Research will look at best practices and benchmarks is we actually have.

Round that we can actually gain is relatively straightforward for a company of our size when it come from the internal operationalization of how we actually expand and operationalized in our install base real time, then it's not rocket science, but it's applicable but now is the right time to actually do that because we actually have established <unk> keep in mind most companies only at new product extension.

Never get critical mass, we actually have critical mass in both areas and this is a good place to really focus about how do we expand any of service and most of the opportunities in front of us again and over half a million dollars are are per customer is still being several hundred K a R. R for customer and having historically frankly immature processes around experiencing a lot of focus.

Focus mature in our processes focusing on alignment our pricing and packaging those are the areas that we're focusing on the drive that expansion in the install base and that is a big part of the restructuring line yeah. According to your point you see it in that a R. R per customer continues to grow which has been very healthy, but there's so much room to grow from the mid sixties.

To the hundred thousand numbers absolute letterhead room to go but thank you for the question.

Alright, I think that that is all the questions that we actually have a day, but I noticed was a lot to cover.

Definitely appreciate it of everyone's time and attention and have all you have a great evening.

Ladies and gentlemen that concludes today's call. Thank you all for joining you may now disconnect.

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