Q3 2023 Rapid7 Inc Earnings Call

Good afternoon, My name is Rob and I'll be your conference operator today at this time I would like to welcome everyone to the rapid seven third quarter 2023 earnings conference call.

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 star followed by the number one on your telephone keypad. If you would like to withdraw your question again prestige Star one. Thank you Elizabeth Schwartz director of Investor Relations.

You may begin your conference.

Thank you operator, and good afternoon, everyone. We appreciate you joining us today to discuss rapid seven.

Third quarter 2023 financial and operating results. In addition to our financial outlook for the fourth 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 it is now posted on our website at investors <unk> 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 that rapid southern dot com.

During this call we may make statements related to our business that are considered forward looking under federal Securities law.

Statements are made pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 1995.

Include statements related to the company's positioning strategy business plan restructuring plan financial guidance for the fourth quarter and full year 2023.

Our financial goals for the full year 2024, and the assumptions underlying such calls 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.

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In our most recent quarterly report on Form 10-Q filed on August nine 2023.

And then the subsequent reports that we file 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.

Quarter results should not be considered as an indication of future performance.

<unk> 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 southern Dot com.

At times in our prepared remarks or in responses 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.

Good afternoon, everyone and thank you for joining us today on our third quarter 2023 earnings call.

Rapid seven ended third quarter with $777 million and there are.

14% over the prior year, while delivering revenue and operating income above our guided ranges.

During the third quarter, we continued to see strong demand for integrated security operation solutions across our insight platform or.

Our value proposition is resonating with mainstream enterprise customers, particularly with our consolidated offerings.

Over 40% of new way or in the third quarter was for either a threat or cloud risk complete deal validating our strategic focus around supporting the moderate or extended stock with integrated best of breed capabilities across risk management and threat detection.

As we sell more of our platform together, we see deal sizes getting larger as asps have steadily increased all year.

Overall, we saw a customer spending environment that was in line with our expectations remained stable during the third quarter and into October.

Amid the worsening consequences for cyber security incidents and the persistent challenge of proactively secured IC environment in an efficient manner, we consistently hear a set of beans from conversations with customers.

There is need for integrated cloud security offerings with insect ops as well as a desire to upgrade to cloud native detection response programs and automation and integrated expertise are critical differentiators and choosing technology partners.

While security team leaders are prioritizing spending around these areas.

Legit environment remains complex.

With the last 12 months, we continue to see higher levels of approval during extended procurement cycles.

The good news is that our sellers have become more depth in navigating this environment and there is steel urgency from customers on projects around cloud security and detection response, the acres of our successful risk and threat management offerings.

Our critical role as a strategic partner to SEC ops teams is reflected in the growing number of long term commitments, we're seeing from customers. Our total weighted average contract lives in the quarter was up 20% over the prior year, which speaks to the value and confidence our customers have and rapid seven as the long term.

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Turning now to the restructure we announced alongside our Q2 earnings results in August.

Our efforts to streamline the business are mostly complete and we're progressing on our areas of strategic reinvestment.

I am proud of how well our rapid 17 has responded to the changes as we work to optimize our organization and underlying cost structure over the past few months.

Collectively our strategic alignment is benefiting profitability as we expected and we continue to expect the full year 2023 operating margin to expand over 750 basis points from the prior year and to generate free cash flows of approximately $80 million.

Regarding our customers we have an intentional focus during the latter half of the third quarter on ensuring continuity and strong overall customer experience as we execute our transition plan.

Our customer facing teams, we're heavily focused on spending more time, engaging with and messaging to existing customers and prospects with less relative focus on scaling incremental pipeline.

The result is there are changes were wildly well received by customers driving strong conversion rates that fueled solid overall AOR growth in the quarter.

Now that we are largely through these changes our teams are incrementally more focus on engaging broadly to drive strong and improving pipeline momentum as we exit the year.

And we believe we remain well positioned to achieve our fourth quarter objectives.

Regarding reinvestment into our strategic areas of focus.

We're accelerating our leadership in the extended Socs as well as further scale and our ability to offer expertise alongside our technology.

While it's still early we are progressing well in both areas and I'll give you tangible examples of the positive traction were seeing in the business.

We continue to see strong demand for our integrated consolidation solutions to support the extended stock and we continue to innovate by adding <unk> capabilities to expand our value proposition to mainstream in a process in October we announced the general availability of multilayered endpoint protection for our maintenance.

Detection and response customers.

By offering integrated next Gen antivirus alongside digital forensics and incident response capabilities onto our insight agent, we are elevating the breath and holistic visibility of our extended detection and response.

We saw a meaningful gap in the market for customers with legacy and point solutions that are focused on affordable highly effective solutions. Our expanded offerings will now enable these MTR customers to benefit from reduced important security cost and complexity within their socks, while freeing up additional budget dollars by consolidating onto our insight.

Platform.

We also continue to see traction cross selling across our integrated platform of solutions.

Example of this is in the third quarter was a deal with a midsized Fintech company owned by a large private equity firm <unk>.

This customer became a rapid separate vulnerability management customer in 2022.

And earlier this year extended their enterprise risk visibility with our cloud security offerings.

They reached out again in the third quarter to explore our managed through a complete offering after facing additional resource constraints and regulatory requirements.

With transfer dollars that werent part of their initial budget and.

And after a competitive process the customer chose rapid seven for our ability to detect and respond to threats across their entire security environment.

Each phase of the DNR lifecycle.

With our insight agent already deployed the customer was able to implement a robust monitoring capabilities within days of their purchase, allowing a quick return on their security budget dollars.

<unk> with the customer more than tripled to the high six figures over the course of 18 months highlighting the urgency.

And the value resource constrained enterprises place on best of suite solutions with in strategic areas of security operations.

We're also scaling our ability to offer integrated expertise alongside our sick op solutions by accelerating our strategic managed services partnerships.

I am pleased to announce that we signed a partnership deal in the third quarter with a nationwide leader in communications services, who chose rapid separate technology as the foundation for their managed detection and response offering.

It was a highly competitive process and our new partner needed a single provider to help their customers manage security across their entire network endpoint server and cloud infrastructure, while helping to contain and disrupt ongoing security breaches.

This partnership will combine our best in class threat detection and response platform and global stock presence to help small medium and large enterprise customers better manage and ever evolving and challenging cyber threat landscape.

Over time, we will have the opportunity to expand our partnership to sell other rapid <unk> solutions to their substantial customer base.

We're excited about this partnership and our ability to leverage similar partnerships in the future as we scale our ability to offer integrated expertise to more customers.

Rapid separate remains focused on being the leading provider of integrated security solutions for the extended socs by providing risk and threat management within the context of overall security.

Langsat expertise tailored to the needs of each customer we are pleased with our third quarter results and continued to March forward towards our goals.

When we updated our guidance in August alongside the announcement of our restructuring and strategic realignment, we established a high confidence range to account for modest degrees of disruption in the business.

We made progress we see performance track within our range of expectations.

Given a larger deal cycles as well as the heavy concentration of large deals in the fourth quarter. We believe it is prudent to reiterate our full year <unk> guidance of $800 million to $805 million.

All in all we're pleased with our third quarter results and the early progress, we're making as we work to re accelerate growth by reinvesting into strategic areas of strong customer demand within our business.

We were able to outperform on our operating income targets in the third quarter and flowed through that upside to our full year guidance range. This speaks to the benefit of our new streamlined cost structure, which will allow us to become a more profitable growth company.

We expect to generate approximately $80 million of free cash flow. This year, and then double that figure to at least $160 million next year in 2024 with that thank you for joining us on the call today I will now turn the call over to our CFO, Tim Adams to share additional detail on our financial results and outlook Tim.

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

Rob: Good afternoon. My name is Rob and I will be your conference operator today. At this time, I would like to welcome everyone to the Rapid7 Third Quarter 2023 earnings conference call.

Unless otherwise stated.

Additionally, reconciliations between our GAAP and non-GAAP results can be found in our earnings press release.

Rob: 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 you would like to withdraw your question, again press the star one.

Rapid seven ended the third quarter of 2023 with $777 million in growing.

Growing 14% over the prior year on solid demand for our consolidated offerings across risk management and threat complaints.

Customers continue to gravitate towards our integrated solutions anchored in detection and response and cloud security, which made up over 40% of new <unk> in the third quarter.

Rob: Thank you.

Elizabeth Schwach: So, Elizabeth Schwach, Director of Investor Relations, you may begin your conference. Thank you operator. Good afternoon, everyone.

Our value proposition is resonating with customers as we see Asp's continued decline in our average contracts get longer.

Elizabeth Schwach: We appreciate you joining us today to discuss Rapid7's third quarter 2023 financial and operating results in addition to our financial outlook for the fourth 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 is now posted on our website. It is investors.rapid7.com along with the updated company presentation and financial metrics file.

We saw relatively balanced contributions from new and existing customers in the third quarter.

Elizabeth Schwach: This call is being broadcast live via webcast and following the call an audio replay will be available at investors.rapid7.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 includes statements related to the company's positioning strategy, business plans, restructuring plan, financial guidance for the fourth quarter and full year 2023 financial goals for the full year 2024 and the assumptions underlying such goals and guidance.

Elizabeth Schwach: These forward looking statements are based on our current expectations and beliefs and on information currently available to us. Actual outcomes and results made differ materially from the future results expressed are implied in these statements to do a number of risks and uncertainties, including those contained in our most recent quarterly report on form 10 to filed on August 9, 2023 and in the subsequent reports that we file with the SEC. The information provided on this conference call should be considered in light of such risks.

Sales and marketing represented 34% of revenue in the quarter down from 38% in the prior year.

Elizabeth Schwach: 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 7 does not assume any obligation to update the information presented on this conference call, except to the extent required by applicable law. A commentary today will primarily be in non-gap terms and reconciliation between our historical gaps and non-gap results can be found in today's earnings press release and on our website at investors.rapid7.com.

R&D and G&A expenses were 16, and 6% of revenue, respectively, compared to 20% and 8% in the third quarter of last year.

Overall higher revenue in a leaner cost structure drove higher than expected operating income of $37 million in the quarter.

Or just an EBITDA was $43 million in the third quarter and diluted net income per share was 50 cents.

Before we turn to the balance sheet and cash flow statement I want to mention certain items from the third quarter income statement that do not affect our non-GAAP results.

Elizabeth Schwach: At times and 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 may be one time in nature and we may or may not update these metrics in the future.

We incurred a total of $24 million and restructuring and real estate impairment charges in the corner in line with our expectations.

We also booked a non-cash induce conversion expense.

Corey Thomas: If that I'd like to turn the call over to our CEO, Corey Thomas. Corey. Good afternoon everyone and thank you for joining us today on our third quarter 2023 earnings call. Rappet7 into the dirt quarter with $777 million in ARR, going 14% over the prior year, while delivering revenue and operating income above our guided ranges. During the dirt quarter, we continue to see strong demand for integrated security operations solutions across our insight platform.

$54 million in the quarter as a result of the required accounting treatment relate it to the pile repurchased of our 2025 convertible notes.

We ended the third quarter with cash cash equivalents in investments of $373 million, we took proactive steps during the quarter to strengthen our balance sheet and to take advantage of favourable market conditions.

The increase in cash and equivalents from the second quarter reflects the proceeds from our convertible notes offering in September.

Corey Thomas: Our value proposition is resonating with mainstream enterprise customers, particularly with our consolidated offerings. Over 40% of new ARR in the dirt quarter was from either a threat or cloud risk-complete deal, validating our strategic focus around supporting the modern or extended stock with integrated best-to-breed capabilities across risk management and threat detection. As we sell more of our platform together, we see deal sizes getting larger as ASPs have steadily increased all year. Overall, we saw a customer spending environment that was in line with our expectations and remained stable during the dirt quarter and into October.

Partially offset by the previously mentioned partial repurchase of our 2025 notes.

This was primarily a liability management effort, allowing us to enter into a new convert with more favorable terms and extended the maturity date of a portion of our debt structure.

Operating cash flow was $4 million and reflects timing of the restructuring payments, which were concentrated in the third quarter is expected.

It also reflects a working up it'll headwind related to the timing of cash collections.

We have already seen strong collections early in the fourth quarter and will continue to manage these working capital dynamics closely.

Corey Thomas: Amid the worsening consequences for cybersecurity incidents and the persistent challenge of proactively secure IT environment in an efficient manner, we consistently hear a set of themes from conversations with customers. There is need for integrated cloud security offerings with insect ops as well as a desire to upgrade to cloud-native detection response programs and automation and integrated expertise are often critical differentiators in choosing technology partners. While security team leaders are prioritizing spending around these areas, the budget environment remains complex.

Moving onto our outlook for the remainder of 2023.

Is Cory mentioned, we are maintaining our full year a R. R outlook range of $800 million to $805 million or approximately 12 to 13 per cent growth over the prior year.

As our strategic realignment is tracking in line with our range of expectations, we feel confident about maintaining the existing range for the full year.

We are raising our full year revenue guidance to $773 million to $775 million, representing 13 per cent growth.

Corey Thomas: Consistent with the last 12 months, we continue to see higher levels of approval during extended procurement cycles. The good news is that our sellers have become more depth in navigating this environment and there is still urgency from customers on projects around cloud security and detection response, the anchors of our successful risk and threat management offerings. Our critical role as a strategic partner to set ops teams is reflected in the growing number of long-term commitments we're seeing from customers. Our total weighted average contract length in the quarter was up 20% over the prior year, which speaks to the value and confidence our customers have in Rapid 7 as a long-term technology partner.

This reflects product revenue outperformance in the third quarter, partially offset by slightly lower services revenue forecast for the full year.

As we actively deemphasize some lower value professional services coming out of our restructuring.

We are also raising the mid point of our full year operating income guidance by $7 million to reflect our strong third quarter performance.

The springs are full you're operating income guidance to $94 million to $96 million <unk>.

Representing roughly 12% for your operating margin.

And over 750 basis points of improvement from the prior year.

non-GAAP net income per share is expected to be $1.26 to one dollar and 29 cents based on an anticipated 72.1 million diluted weighted average shares outstanding.

Corey Thomas: Turning now to the restructuring we announced alongside our Q2 earnings results in August. Our efforts to streamline the business are mostly complete and we are progressing on our areas of strategic reinvestment. I am proud of how well our Rapid 17 has responded to the changes as we have worked to optimize our organization and underlying cost structure over the past few months.

We are reiterating our free cash flow guidance of approximately $80 million for the full year.

As implied by our full year guidance for the fourth quarter of 2023, we expect revenue in the range of $200 million to $202 million in operating income between 33 and $35 million, which represents an operating margin of approximately 17%.

Corey Thomas: Collectively, our strategic alignment is benefiting profitability as we expect it and we continue to expect the full year 2023 operating margin to expand over 750 basis points from the prior year and to generate free cash flows of approximately $80 million. Regarding our customers, we have an intentional focus during the latter half of the third quarter on ensuring continuity in strong overall customer experience as we execute our transition Ann, our customer facing teams were heavily focused on spending more time engaging with and messaging to existing customers and prospects, with less relative focus on scaling incremental pipeline.

non-GAAP net income per share for the fourth quarter is expected to be 47 to 49 cents based on an anticipated 73.8 million diluted weighted average shares outstanding.

With that thank you for joining us on the call today, and 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.

And your first question comes from the line of Mad Hedberg from RBC capital markets.

Okay.

Corey Thomas: The result is that our changes were widely well received by customers, driving strong conversion rates that fueled solid overall AR growth in the quarter. Now that we are largely through these changes, our teams are incrementally more focused on engaging broadly to drive strong and improving pipeline momentum as we exit the year.

Great. Thanks for taking my questions Corey great to see the results in the demand commentary and the benefits of the restructuring going on here. Yeah. I'm curious you noted in your prepared remarks that you're working to re accelerate growth I guess I'm wondering do we think about sales and marketing or products or whatever it might be what are what do you think of some of the most important aspect.

<unk>, but what you guys are doing it to control some of that reacceleration, even despite the ongoing economic uncertainty.

Corey Thomas: And we believe we remain well positioned to achieve our first quarter objectives. Regarding reinvestment into our strategic areas of focus, we're accelerating our leadership in the extended stock, as well as further scaling our ability to offer expertise alongside our technology, while it's still early, we are progressing well in both areas and I'll give you tangible examples of the positive traction we're seeing in the business. We continue to see strong demand for our integrated consolidation solutions to support the extended stock, and we continue to innovate by adding end-to-end capabilities to expand our value proposition to mainstream inner process.

Yeah Big Red that's a good question. So I think there's two fundamentals with one you have to be in the right market February demand drivers that'd be great. There. If you think about what we're doing and the extended sock customers are struggling with the cost of complexity of managing their tech service business environment, and so we are leaning into that and continue with the reallocate investment into.

That area of focus got the longterm investment area that about about Liberty expertise, but of course, we were actually focus on that we have been we think we have got make up we think we're competitively differentiate it but it's a longterm investment area and again, we're rotating more of our investment to those areas.

Corey Thomas: In October, we announced the general availability of multi-layered endpoint protection for our managed detection and response customers by offering integrated next-gen antivirus alongside digital forensics and infinite response capabilities. On to our insight agent, we are elevating the breadth and holistic visibility of our extended detection and response. We saw a meaningful gap in the market for customers with legacy endpoint solutions that are focused on affordable, highly effective solutions. Our expanded offerings will now enable these MGR customers to benefit from reduced endpoint security costs and complexity within their stock, while freeing up additional budget dollars by consolidating onto our insight platform.

Overtime, Yeah, I'll take the point on that what he's gotta be also the one that goes to go to market. It but we can actually grow faster our big focus right now is growing efficiently, though and so this is a focus on making sure we have durable growth and efficient growth because we actually look forward. We know that we could ask you in the right areas right spaces, we know we.

<unk> set it up for the right products and services, we have to make sure that we actually have the efficient growth that we're actually looking for and that's been is gonna come over time. So we are I would say being methodical being very thoughtful we are going to be spending the reimbursement, but it's gotta be to extend it into the cloud continue it to actually work with departments Illiberal augmented services.

As I talked about what the large national provider wanted to deal with that we actually just yet you'll see more of that but it's also a big focus on extending our sales and marketing engine, but actually doing that both through partners, but doing that efficiently ourselves and that's what you'll see is making reference over the course of about this year, but more importantly will make an investment over the course of 2024.

Corey Thomas: We also continue to see traction cross-selling across our integrated platform of solutions. A good example of this is in the third quarter was a deal with a midsize FinTech company owned by a large private equity firm. This customer became a rapid seven vulnerability management customer in 2022. In early this year, extended their enterprise risk visibility with our cloud security offering. They would shout again in the third quarter to explore our managed direct complete offering after facing additional resource constraints and regulatory requirements.

But that's not how we think about growth we're focused on efficiency now and then adding growth that actually give longterm growth potential, but actually doing it in a way that make sure that we actually stayed very difficult very lean and very efficient.

Super helpful. Thanks Court.

Corey Thomas: With transferred dollars that weren't part of their initial budget, and after a competitive process, the customer chose rapid seven for our ability to detect and respond to threats across their entire security environment and throughout each phase of the DNR lifecycle. With our insight agent already deployed, the customer was able to implement our robust monitoring capabilities within days of their purchase, allowing a quick return on their security budget dollars. Our ARR with the customer more than tripled to the high six figures over the course of 18 months highlighting the urgency and the value resource constrained enterprises place on best and sweet solutions within strategic areas of security operations. We're also scaling our ability to offer integrated expertise alongside our tech solutions by accelerating a strategic managed services partner.

Thank you.

Your next question comes from a line of Adam to know from Raymond James Your line is open.

Okay. Thanks, Good afternoon, Corey I just wanted to start you mentioned, how the pipeline with impacted from Q3 from making sure existing customers were okay, which makes total sense and probably a good move I guess the question would be how do you shift the sales force to focus you know how did you ship them to focus on existing and how do you pivot them to focus on new.

Corey Thomas: Partnerships.

Pipeline. Some other things you can do from incentives and Tim If you wanted a maybe as a follow up to this I know that that can have a lag impact on revenue growth that deceleration pipeline wondering how we should think about that in light of you know moving forward in 2024 growth were exiting I can get single digit growth in queue for wondering.

That's maybe an indicator of what to expect in 2024, why or why not thank you.

Yeah, <unk> <unk> I'll I'll I'll try Clifford the one on the as we actually think about so regarding proud to say look in the biggest factor. There was as you said, we're very focused on executing the cost structure alignment and make sure we take care of customers.

Corey Thomas: I am pleased to announce that we signed a partnership deal in the third quarter with a nationwide leader in communication services who chose Rapid7 technology as the foundation for their managed detection and response offer. It was a highly competitive process, and our new partner needed a single provider to help their customers manage security across their entire network, endpoint server and cloud infrastructure, while helping to contain and disrupt ongoing security briefings. This partnership will combine our best in class threat detection and response platform and global stock presence to help small, medium and large enterprise customers better manage and ever evolving and challenging cyber threat landscape.

We actually just got very direct discussions of our team about what the priorities were they <unk> to make sure we're servicing our customers well make sure that we will confirm your existing deals with talks continue.

Very strong conversion rates overall, and we continue to see that we were actually adding more consolidation five minutes. So we had a pipe is more consolidation part those are bigger deal if they actually up longer sell cycles. So yes, while the short term effect was theoretically less pipe for two for it that's something we're very comfortable with again are big near term.

Corey Thomas: Over time, we'll have the opportunity to expand our partnership to sell other Rapid7 solutions to their substantial customer base. We're excited about this partnership and our ability to leverage similar partnerships in the future as we scale our ability to offer integrated expertise to more customers. Rapid7 remains focused on being the leading provider of integrated security solutions for the extended stock by providing risk and threat management within the context of overall security alongside expertise tailored to the needs of each customer.

<unk>, what the cost structure.

Longer term, we're very focused on continuing to be all strategic pipe, which were seen in the consolidation efforts.

We're doing two things around that we're making sure that our sales team is well equipped to sell it and I would just say we're seeing the benefits of that now yes. It actually I've submitted fit in 2024, but the other part of it is is is I talked about last call. We did drop lots of efficiency not into our our direct sellers, but in our overall go to market engine and we <unk>.

<unk> to actually add more of the more of the pipe and demand generation capabilities over time, <unk> very very disciplined about added that in a way <unk> and that is efficient addict that set up for a good long term dynamic, but that's the focus that we actually have right now.

Corey Thomas: We are pleased with our third quarter results and continue to march forward towards our goals. When we updated our AR guidance in August alongside the announcement of our restructuring and strategic realignment, we established a high confidence range to account for modest degrees of disruption in the business. As we may progress, we've seen performance track within our range of expectations, given larger deals cycles as well as a heavy concentration of large deals in the fourth quarter.

Yeah, and then Adam is 10 to the second part of your question regarding 2024 Uhm, we are right in the middle of our budgeting process for next year. So it would be premature for us to make any comments about growth for next year, but I'll reemphasize with Cory said, we're very focused on efficient growth and generating strong free cash.

Corey Thomas: We believe it is prudent to reiterate our full-year AR guidance of $800 to $805 million. All in all, we are pleased with our third quarter results and in early progress we are making as we work to re-accelerate growth by reinvesting into strategic areas of strong customer demand within our business. We were able to offer form on our operating income targets in the third quarter and to flow through that upside to our full-year guidance range.

Close so we've shared with it you know you guys last quarter, we anticipate roughly 160 million a free cashflow next year and we still feel very good about that number.

And look we we had some hard actions that we had to take back in August with the restructuring in the realignment of the company, but I do think that sets us up very well for next year that we've rationalize the cost structure. So very focused on efficient growth and we'll have more to say about next year on the queue for a call.

Corey Thomas: This speaks to the benefit of our new streamlined cost structure which will allow us to become a more profitable growth company. We expect to generate approximately $80 million of pre-catchable this year and then double that figure to at least $160 million next year in 2024.

Makes sense. Thank you very much.

Your next question comes from the line of Matt Saltzman from Morgan Stanley. Your line is open.

Great. Thanks for taking the question. So just looking at total customer <unk>, it's kind of trend. It in this mid single digit range for several quarters now I. Appreciate you guys don't specifically guy too or or disclose gross logar attention, but I'm. Just curious you can speak qualitatively about the.

Corey Thomas: With that, thank you for joining us on the call today.

Tim Adams: I will now turn the call over to our CFO, Tim Adams to share additional detail on our financial results and outlook. Thank you, Cory. Good afternoon to everyone on today's call and thank you for joining us.

Tim Adams: Before I turn to the results, a quick reminder that except for revenue, all financial results we will discuss today are non-gap financial measures unless otherwise stated. Additionally, reconciliations between our gap and non-gap results can be found in our earnings press release. Rapid 7 ended the third quarter of 2023 with $777 million in ARR growing 14% over the prior year on solid demand for our consolidated offerings across risk management and threat complete.

<unk> on gross logar attached over the last 12 months, maybe the last six months.

Yeah, <unk> I will talk about <unk> I should say, we don't move closer I think last year, we talk to who were actually laugh you're seeing some pressure in that area in Europe, and what I what to say is that this year. We've seen the improvement that we actually are expected to see what we feel good about our retention overall, it's all just stay on <unk>.

If you look at last year compared to this year, we felt that Australia, possibly that we feel good about the direction to set up for it and in fact, we think about so deficient growth a big part of that is really <unk> to make sure you're taking care of your customers first that's the amount for the customer value of the amount of Prof. We feel good about the trade. It that was the end of business.

Tim Adams: Customers continue to gravitate towards our integrated solutions anchored in detection and response and cloud security, which made up over 40% of new ARR in the third quarter. Our value proposition is resonating with customers as we see ASPs continue to climb and our average contracts get longer. We saw relatively balanced contributions from new and existing customers in the third quarter. ARR per customer grew 7% over the prior year to $68,100 and we ended the quarter with over 11,400 total customers reflecting 6% growth over the prior year.

Great. Thank you.

Thank you.

Your next question comes from a line of <unk> from City. Your line is open.

Good afternoon. Thank you for taking my questions I'm, calling I wanted to.

Research Center that the pipeline commentary you talked about it very clear that the focus is very very intentional on keeping your existing customers happy and growing the wallet share their but it sounds like there are going to be some headaches in K building, new new pipe and ma'am incremental demand generation on the new loan.

Frank and I, just wanted to make sure I understood or or picked up on that information correctly and so.

Tim Adams: Third quarter revenue of $199 million, represented growth of 13% year over year, exceeding the high end of our guidance range. Product revenue grew 14% year over year to $190 million as customers continue to prioritize budget dollars around projects in our areas of strategic focus, both around the extended SOC and the ability to offer integrated expertise. International revenue made up 22% of total revenue while North American represented 78%.

What are some of the things that you're going to be putting in place to be able to maybe reaccelerate some of that new new customer and new logo acquisition.

<unk> those initiatives.

Great question about the way you're welcome back <unk> I think that there.

On the on.

On the question of pipe overall is that there's too goddamn, we've got a really easy to focus on one we actually do a great job with all the strategic.

And I've talked about this before one of the interesting things is we actually build as we build more consolidation pipe those things are bigger deal and they follow the Fayetteville cycled through the bigger deal. That's a positive things were converting those things well that's more of a time at a bank. So I think that you know we have more visibility into the outlook of you actually go for it.

Tim Adams: Moving on to operating and profitability measures for the quarter. Product growth margin was 77% in line with the prior year and total growth margin was 75%. Operating expenses reflect the changes to our cost structure that we implemented in August. Sales and marketing represented 34% of revenue in the quarter down from 38% in the prior year. R&D and G&A expenses were 16 and 6% of revenue respectively compared to 20% and 8% in the third quarter of last year.

The second thing that I think you're alluding to and hitting on which is actually also important is we're focused not just on how do we actually both high but we're focusing on what's the efficiency and what the cost of building right. So we're not treated all thanks for thanks I'll give you a perfect example of that is we have a beer. It says your focus about how do we actually built type department and ecosystem into M. S. P's you sorry.

Tim Adams: Overall higher revenue and a leaner cost structure drove higher than expected operating income of $37 million in the quarter. Our adjusted EBITDA was $43 million in the third quarter and diluted net income per share was 50 cents.

On that on one of the marquee deal with actually name on the call.

Through partners, and especially M. S P partners, but more broadly the channel we have a very very tight focus on that and we think we can do that efficiently three targeted setup partners. That's one example, but again if you're in the right demand areas that you could actually sort of like find ways to actually build pipe and we are focused I would say more now on the cost of the.

Tim Adams: Before we turn to the balance sheet and cash flow statement, I want to mention certain items from the third quarter income statement that do not affect our non-gap results. We incurred a total of $24 million in restructuring and real estate impairment charges in the quarter in line with our expectations. We also booked a non-cash-induced conversion expense of $54 million in the quarter as a result of the required accounting treatment related to the partial repurchase of our 2025 convertible notes.

Efficiency of the fact that we feel that the overall <unk>. They just actually just driving growth as fast as possible. We will grow again or pie focus is a longterm growth, but is not on trying to get the fastest time to actually that growth is actually making sure I suppose adorable sustainable, but also actually at the right cost structure around it.

The only thing I would add is you know I think we both coming in and are prepared remarks, just on the strength of the package is a threat complete cloud.

Tim Adams: We ended the third quarter with cash, cash equivalents and investments of $373 million. We took proactive steps during the quarter to strengthen our balance sheet and to take advantage of favorable market conditions. The increase in cash in equivalents from the second quarter reflects the proceeds from our convertible notes offering in September. Partially offset by the previously mentioned partial repurchase of our 2025 notes. This was primarily a liability management effort allowing us to enter into a new convert with more favorable terms and extend it the maturity date of a portion of our debt structure.

Now over 40 per cent of new way around we don't need that grow nicely order. So that's another tailwind up momentum I think we have with our sellers, both new and existing customers.

Thank you again great question.

Your next question comes from the line Jonathan hold from William Blair. Your line is open.

Hi, This is general why did Mister Johnson, thanks for taking our questions. So your solutions are targeting a modern sock efforts.

In terms of sock spending are you seeing customers start to shift and how they approach traditional apps apps like a sin and other solutions to save or improve security and how much relate to rapid <unk> a value proposition.

Tim Adams: Operating cash flow was $4 million and reflects timing of the restructuring payments which were concentrated in the third quarter as expected. It also reflects a working capital headwind related to the timing of cash collections. We have already seen strong collections early in the fourth quarter and will continue to manage these working capital dynamics closely.

Yeah. So we're gonna <unk>, if if you think about the traditional soccer was primarily focused on collecting log files and the on premise environment in monitoring the album's environment. You know what we're doing <unk> is actually focusing on the overall attack surface, which is not just out there with environment. If the cloud is the.

Tim Adams: Moving on to our outlook for the remainder of 2023. As Corey mentioned, we are maintaining our full year ARR Outlook range of $800 to $805 million or approximately 12 to 13% growth over the prior years. As our strategic realignment is tracking in line with our range of expectations, we feel confident about maintaining the existing range for the full year. We are raising our full year revenue guidance to $773 to $775 million representing 13% growth.

<unk>, so what we're helping customers do with one collect all the data come out to the full attack surface, but that also as a mask the volume of data and so we're focused on both the productivity, but also augmented either with ourselves or with partners the expertise and the talent to actually manage the volume of data from that larger attack surface customers are absolutely.

Shifting their focus from traditional films that focus in malls on premise cause they how do I cover my full attack surface, but they're also looking at how do I do that efficiently because if you look at the trains that would happen to right now customers are not able to add as many security professionals that they would like and therefore, they're really really focused on the efficiency and partners that can deliver efficiency and their age.

Tim Adams: This reflects product revenue outperformance in the third quarter partially offset by slightly lower services revenue forecasts for the full year. As we actively de-emphasize some lower value professional services coming out of our restructuring. We are also raising the midpoint of our full year operating income guidance by $7 million to reflect our strong third quarter performance. This brings our full year operating income guidance to $94 to $96 million representing roughly 12% full year operating margin and over 750 basis points of improvement from the prior year.

And that's our focus on our extend the sauce.

Bedroom.

Your next question comes from the liner Bryan Netflix from J P. Morgan Your line is open.

Hi, This is Sharon repeat a concubine Essex. Thank you for taking my question is great to hear it definitely at free cash filing 2024.

Let us know like what level of coverage you have and what are the primary library, so you're looking to deliver.

And how much control again.

Okay ma'am thanks.

Tim Adams: Non-gap net income per share is expected to be $1.26 to $1.29 based on an anticipated 72.1 million diluted weighted average shares outstanding. We are reiterating our free cash flow guidance of approximately $80 million for the full year. As implied by our full year guidance for the fourth quarter of 2023, we expect revenue in the range of $200 to $202 million and operating income between $33 and $35 million which represents an operating margin of approximately 17%. Non-gap net income per share for the fourth quarter is expected to be $47 to $0.49 based on an anticipated 73.8 million diluted weighted average shares outstanding.

Yeah, we have very high confidence on the $6 million in free cash flow.

What I would say is that we have a lot of control the levers and the overall business. We've <unk>, we've taken a very thoughtful approach to planning that looked at growth rates plus or minus the gridspace of this year and so we're very thoughtful about like what how do we actually deliver that free cash flow across a wide range of scenarios, we have the levers and the business that's.

Also a big part of why we're actually <unk> with all the weird reference steadily not all in one go because that also gives us leverage to actually make sure that our reinvestments are timed up well to the performance that we expect to see that we have a lot of visibility we have a lot of control, but most importantly, our company is fairly committed we have a good structure from today to deliver on that.

Okay. Thank you.

Thank you.

Your next question comes from the line I'm, Eric Keith from Keybanc capital markets. Your line is open.

Rob: With that, thank you for joining us on the call today and 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.

Alright, Thanks for taking my question and according to him good good execution.

So just to follow up on some other kind of macro kind of guidance questions.

Just curious what kind of a bed and your guidance report you in terms of conversion range because it seems like maybe add some relatively high conversion rates of course I'm. Just curious if you are traveling that out and also any any car on the macro or expectations budget question have you had any commentary on on one you're already so far this card that'd be great too.

Corey Thomas: And your first question comes from a line of Matt Hedberg from RBC Capital Markets. Great, thanks for taking my question. Cory, great to see the results and the demand commentary and the benefits of the restructuring going on here. I'm curious, you noted in your prepare remarks that you're working to re-accelerate growth. I guess I'm wondering, do you think about sales and marketing or products or whatever it might be? What do you think are some of the most important aspects?

Yeah, I may Miss something covered though the table cover for me Foxy My stomach. So you know what I was saying we've seen I would say improved conversion rates. This year not just across from one quarter, but it's been a consistent theme. That's actually picked up so we expect consistency more than anything else and I would just stay on that one I think the early start to the quarter indicates.

Corey Thomas: But what you guys are doing to control some of that re-acceleration even despite ongoing economic concerns? Yeah, thanks Matt. It's a good question. So I think there's two fundamentals. There's one you have to be in the right markets, the right demand drivers. I think we're there. If you think about what we're doing and the extended stock, customers are struggling with the cost of complexity of managing their tax service in this environment.

Consistency and inconsistency do we expect.

And the overall conversion right. The other piece of it is no we're not out over our ski from my perspective on expecting a budget flush we did not factor a bunch of puss in for this quarter I don't see any indicators that would indicate a bunch of flesh right now if we do that's great, but there was no reason to actually.

Corey Thomas: And so we are leaning into that and continuing to reallocate investment into that area of focus that the long term investment area that involves Kyle, the most living expertise. But of course we're actually focused on that we happen. We think we have a good leg up. We think we're competitively differentiated. But it's a long-term investment area. And again, we're rotating more of our investment to those areas over time. Now, I would say the point on that one is going to be also the one that goes to go to market is that we can actually grow faster.

<unk>, a budget flush into our expectations and how we think about the overall guidance.

Alright.

Thank you.

And your next question comes from the line of my <unk> from Canada, Virginia. Your line is open.

Corey Thomas: Our big focus right now is growing efficiently though. And so this is a focus of making sure we have durable growth and efficient growth because we actually look forward. We know that we can actually in the right areas, right spaces. We know we actually are set it up for the right products and services. We have to make sure that we actually have the efficient growth that we're actually looking for and that spins going to come over time.

Good afternoon, Sandra on for months and she throws into question.

So could you just provided maybe some color on how the productivity of your sales Rep search engine now that the.

Few quarters worth of experience really exclusively showing into your consolidated offerings also just giving your focus on improving profitability cashflows.

Corey Thomas: So we are, I would say, being methodical, being very thoughtful. We are going to be spending the reinvestment, but it's going to be too extended into the cloud. Continuing to actually work with partners to deliver augmented services as I talked about with the large national provider and one of the deals that we actually just did, you'll see more of that. But it's also a big focus on extending ourselves and marketing engines, but actually doing that both through partners, but doing that efficiently ourselves.

The level of investments is sufficient to continue to grow longer term branch.

Yeah, two two great questions. So on productivity, what I would say is that through two three.

There, where we expected the productivity to actually be for our direct sellers. We are building larger deals in the pipe, which has some time it impact on the cell cycle. So you have a mix shift and the size of the deals and pipe I provided a little bit of qualitative data on that in my prepared remarks. So that's more of a time issue.

Corey Thomas: And that's what you'll see us make investments over the course of both this year, but more importantly, we'll make investments over the course of 2024. But that's how we think about growth. We're focused on efficiency now, and then adding growth that actually gives long term growth potential, but actually doing it in a way that makes sure that we actually stay very disciplined, very lean and very efficient. Super helpful. Thanks, Corey. I do.

But we think that washes out the way I would say, we see very healthy productivity trends and we expect I would say weezer will consist at levels of productivity to actually come up next year. So we're happy with the trades in the outlook on the productivity.

Adam Tindall: Your next question comes from a line of Adam Tindall from Raymond James. Your line is open. Okay, thanks.

Your second question was I forget second with with our focus on profitability or are we still investing at the right level.

Corey Thomas: Good afternoon. Corey, I just wanted to start the image and have a pipeline with impacted from Q3 from making sure existing customers were okay, which makes total sense and probably a good move. I guess the question would be how do you shift the Salesforce to focus, you know, how did you shift them to focus on existing and how do you pivot them to focus on new pipeline, some of the things you can do from incentives.

Yeah, So yeah, I think but just to be clear.

Is I take it very focus view on I'd say mid longterm growth I'm not super I'm not tried to actually really drives short term acceleration instead I'm going to think about that is that we're doing heavy investments and practice services, what I'm talking about services I'm talking about like us on our ecosystem and making sure. We can <unk> our customers. We are investing heavily there I'm gonna keep it.

Corey Thomas: And Tim, if you wanted to maybe as a follow up to this, I know that that can have a lag impact on revenue growth that the celebration in pipeline, wondering how we should think about that in light of moving forward in 2024 growth. We're exiting, I think, at single digit growth in Q4, wondering if that's maybe an indicator of what to expect in 2024. Why are why not. Thank you. Yeah, so I'll tackle that.

Asking heavily there because if you think about withdrawals longterm growth is we have to beat the preferred provider for the extended <unk>. We're committed to doing that we're putting lots of resources and the product and services and we're very intentional about that and those are investments that we're making now but it's also the bathrooms that were gonna be steadily onboard and increasing over the course of the next year and so that's on my plan.

Corey Thomas: I'll tackle it first. So one on the, as we actually think about some regards, I would just say, listen, the biggest factor there was, as you said, we were very focused on executing the cost structure alignment and make sure we take care of customers. We actually just have very direct discussions with our team about what the priorities were. The priorities are make sure we're servicing our customers well, make sure that we were converting existing deals.

The second part of that is the investments and sales and marketing and while we're very focused we're really looking at our engine and we will be adding resources are we gonna be adding capacity, but we're making sure. The engine is a fish in this environment.

Taking up more partner focused approach it aligns approach in this environment and so again, if you look out we think in the midterm, we actually have a very very good growth engine, but it's not something that we're rushing only sell their market investments to actually try to hit a quarter by quarter target.

Corey Thomas: We thought it's continued to be very, very strong conversion rates. Overall, and we continue to see that we were actually adding more consolidation pipeline. So we had to fight those more consolidation pipe. Those are bigger deals. They actually have longer sell cycles. So yes, while the short term effect was theoretically less pipe for Q4, that's something we're very comfortable with because you and our big near term focus was the cost structure.

Yeah for a night and I think is Los Angeles pencil out with numbers for the full year may look like for sales and marketing. It is we think it's the right amount, but it's still a healthy investment.

Carries in the next year with reference that we've made this you're actually help set up set up for next year, but he got it is a we are taking a more botanical approach on how we actually allocate <unk>.

Corey Thomas: Now, longer term, we're very focused on continuing to build strategic pipe, which we're seeing in the consolidation efforts. We're doing two things around that we're making sure that our sales team is well equipped and selling it. And I would just say we're seeing the benefits of that now. Yes, that actually has benefits in 2024. But the other part of it is, as I talked about last call, we did drop lots of efficiency, not under our direct sellers, but in our overall go to market engines.

Great. Thank you so much for the color.

And again, if you would like to ask a question press star one on your telephone keypad.

Next question comes from the line Trevor Rambo from B G. I G. Your line is open.

Hi, Thanks for taking the question. This is travel around for grape how I was just I just want to ask are you seeing a customer's reactive latest breach an increase in breach headlines and do you expect it to drive an increase in activity for the company and then lastly, do you see any Friday categories, a benefit more than one another.

Corey Thomas: And we expect to actually add more of the more of the pipe and demand generation capabilities over time, but we are being very, very disciplined about adding that in a way that is lean and that is efficient. I think that sets up for a good long term dynamic, but that's the focus that we actually have. Yeah, and then Adam and Tim, the second part of your question regarding 2024, we are right in the middle of our budgeting process for next year.

Thanks.

Yeah. So so first we we tend to be pretty focus I'm not trying not to fail into news headlines just because that creates some weird as soon as it also hurts customers trust over time.

Corey Thomas: So it would be premature for us to make any comments about growth for next year. But I'll reemphasize what Corey said. We're very focused on efficient growth and generating strong free cash flow. So we've shared with you guys last quarter that we anticipate roughly 160 million of free cash flow next year. And we still feel very good about that number. And look, we we had some hard actions that we had to take back in office with the restructuring and the realignment of the company. But I do think that sets us up very well for next year that we've rationalized the cost structure. So very focused on efficient growth.

It is a backdrop is happening so it looks <unk> describe the backdrop at the most fundamental level.

Tim Adams: And we'll have more to say about next year on the Q4 call.

Tim Adams: Makes sense.

Is that T. So, especially with some of the Sec's recent accident as it relates to sell the way to the other things are clearly very focused on security in their personal accountability and so they have security is a top priority and I still think we have a significant backlog of security projects.

Tim Adams: Thank you very much.

And resources that are needed.

The funding environment How's it going into his tight and so the reconciliation of that demand backlog the pressures details space.

And the speed of the velocity of the budgets are gettin' is an underlying tension that that underplays all the stuff that we actually see what the deal cycles and all the other things I think if you actually assume out.

Corey Thomas: Your next question comes from a line of Matt Saltzman from Morgan Stanley. Your line is open. Great. Thanks for taking the question. So just looking at total customer growth. It's kind of trended in this mid single digit range for several quarters now. I appreciate you guys don't specifically guide to or disclose gross loader retention. But I'm just curious if you can speak qualitatively about the trends on gross loader retention over the last 12 months, maybe the last six months.

Backlog of projects absolutely has to get resolved over time. So I think we actually have a healthy demand driveway hope to demand market again, I love the place that reference in fifth with the extended sock with the focus on the attack surface looking across the entire environment you know from the old Pram, an airport to the cloud I think we're set up well but.

I would just say the budget environment for C. So it's gonna play out of the budget environment place, where seashells. Our goal is to set ourselves up to be a great partner antibiotic great ecosystem as they have money as they have funds to steadily only abdomen and this is why I think our methodical longterm approach will pay dividends.

Corey Thomas: Yeah, I will talk at a high level as you say we don't disclose it. I think last year, we talked to actually last year seeing some pressure in that area in Europe. And what I would just say is that this year, we've seen the improvement that we actually have expected to see so we feel good about our retention overall. It's not just say on balance. If you look at last year compared to this year, we feel that it's trending possibly.

Where there was maybe one last piece of that question just does it benefit any products in particular are not just.

Go back to the packages the way we consolidate it actually absolutely can that's a great point is it provides leverage and scale being able to actually say that I can actually manage my attack surface from the airports and <unk> to the clout it actually provide the economic value, which helps the seashells do their job. It allows them if they choose to do it with us or a partner.

Corey Thomas: And we feel good about the direction and the set up going forward. And in fact, as we think about some efficient growth, a big part of that is really focused in to make sure you're taking care of your customers first. That's the alignment for the customer value that for us. And we feel good about the trends that we're seeing the business.

Corey Thomas: Great.

Corey Thomas: Thank you.

But with extra cheese, it's so it provides an economic value at the same time it addresses core security concerns.

Fatima Belani: Your next question comes from a line of Fatima Belani from city. Your line is open. Good afternoon. Thank you for taking my questions. Cory, I wanted to revisit some of the pipeline commentary you talked about very clear that the focus was very, very intentional on keeping your existing customers happy and growing the wallet share there. But it sounds like there are going to be some pivots in cab building new new pipe and incremental demand generation on the new logo front.

Great. Thanks for the color.

Thank you. Thank you.

Your next question comes from the line of Rob Calvin from Stifel. Your line is open.

Hi, This is Rob on for Brad. Thanks for taking my question the international growth and 16 per cent and 22% of revenues appears to be trending wall and I'm wondering if the off your account next shift from the restructuring discuss last quarter had any impact on the screen.

Offshore talent make shift was more focused on operating cost efficiencies.

Fatima Belani: And I just wanted to make sure I understood or picked up on that information correctly. And so really what are some of the things that you're going to be putting in place to be able to maybe re accelerate some of that new new customer and new logo acquisition. And a momentum and those initiatives.

Yeah. So I think that's a great question you know I would not say, it's a primary driver of growth exactly two earlier when I would say that we did have some ketchup work to do to make sure that the distribution of our global services support ecosystem with properly allocated around the world to make sure that the workload better now the other thing is.

Just the reality of fiber tax is more of the attackers operate in time zone better not the time zones of the U S.

Corey Thomas: Great question. And by the way, welcome back. Thank you. So I think that there's on the on the on the question of pipe overall is that there's two dynamics that are really key to focus on one. We actually do a great job of building strategic pipe. And so, you know, and I talked about this before, one of the interesting things is as we actually build. As we feel the more consolidation pipe, those things are bigger deals, and they follow the same self cycle to the bigger deal.

And so as we actually make sure that our teams are operating around the clock. It's important to actually have people that are operating in the same time zones. That's it's our customers, but also the time zones. The attackers actually operating in I think we will see more benefits and confidence because our our teams both in Europe and in Asia are now able to actually talk.

Corey Thomas: That's the positive things we're converting those things well. And that's more of a time and things. So I think that, you know, we have more visibility into the outlook that we actually go forward. The second thing that I think you're alluding to and hitting on which is actually also important is where focus not just on how do we actually build pipe, but we're focusing on what's the efficiency and what's the cost of building pipe.

<unk> more aggressively indirectly about the ability to actually get local resources and commitment and availability. So we think that that'll that'll be a positive cause we actually go forward, but I would just say it's too early for that actually have shown up in the two three specific results.

Great. Thank you.

Corey Thomas: So we're not treating all things the same. So I give you a perfect example of that is we have a very intention of focus about how do we actually build pipe through partners in the ecosystem and do MSP. You saw an example of that on one of the marquee deals that actually named on the call. Going through partners and especially MSP partners, but more broadly the channel. We have a very, very tight focus on that.

Corey Thomas: And we think we can do that efficiently through a targeted set of partners. That's one example. But again, if you're in the right demand areas, then you can actually sort of like crime ways to actually build pipe. And we are focused. I would say more now on the cost and the efficiency of the pipe that we build and the overall engine, then just actually just driving growth as fast as possible. We will grow.

Thank you.

Your next question comes from the line of Alex Henderson from NATO. Your line is open.

Alright. Thanks, so much I was hoping you could talk a little bit about the partnership.

<unk> programs and particularly the M. S. P that you noted in your your call how material do you think that will be.

2024, and 2025 cut it at you know.

345 per cent to your top line growth right and.

While you're at it would you mind.

Looking at the Splunk acquisition by Cisco does that have any positive impact on you as a result of.

Corey Thomas: Again, our pipe focus is on long term growth, but it's not on trying to get the fastest time to actually that growth. It's actually making sure it's also durable, sustainable, but also actually has the right cost structure.

That consolidation.

Yeah, I'll Sue very questions. So so so on the first one.

You know what I would say is that it'll it'll be incrementally positive I bake in 24, we did one big one I think we'll do some more we've had some smaller ones actually prior to this so I think it will be incrementally positive 24. The bigger they are I would just say I was at the bar with a <unk> I just want to be clear as just like your <unk>.

Corey Thomas: Robert, Corey, the only thing I would add is, you know, I think we both commented in our prepared remarks, just on the strength of the packages, the threat-complete, cloud-represently, now over 40% of new ARR, and we've seen that grow nicely every quarter, so that's another tailwind of momentum I think we have with our sellers, both new and existing customers. Thank you again, great question.

<unk> and you actually have to you know you'd turn the gears of the organizations, Okay, Sir incremental movement 24, but I think it really picks up in 25 or 26.

Corey Thomas: Your next question comes from a line of Jonathan Ho from William Blair, your line is open. Hi, this is General Weidemoyer for Jonathan, thanks for taking our question. So your solutions are targeting modern SOC efforts in terms of SOC spending. Are you seeing customers start to shift how they approach traditional apps like SIM and other solutions to save money or improve security, and how might that relate to Rapid7's value proposition? Thanks.

We liked this consolidated focus on one partner, yes, with a breath partners are very clear about what part of the opposite but having a few bigger very focused partners that really move the dial ethics important but these are big sophisticate organizations with lots of customer so the effort and investment is well worth it and we're gonna be in best in <unk>.

Heavily with our partner, but it is also lots of sort of like investment about it at work that they do to actually make it broadly available. So we expect to see the benefits over multiple years, but we do expect this up it out the incremental positively it 24, but I'll say really pick it up and twenty-five when you start looking at some of these larger organizations and how they actually operate.

Corey Thomas: Yes, we're seeing a big shift. One, if you think about the traditional SOC, it was primarily focused on collecting law files in the own premise environment, and monitoring the own premise environment. You know, what we're doing when we think about the extent of SOC is actually focusing on the overall attack surface, which is not just onto the environment, it's the cloud, it's the applications, and so what we're helping customers do is, one, collect all the data to monitor the full attack surface, but that also adds a massive volume of data.

Corey Thomas: And so we're focused on both the productivity, but also augmenting, either with our sales or with partners, the expertise and the talent to actually manage the volume of data from that larger attack surface. Customers are absolutely shifting their focus from traditional Sims that focus in law on premise to say how do I cover my full attack surface, but they're also looking at how do I do that efficiently, because if you look at the trends that are happening right now, customers are not able to add as many security professionals as they would like. And therefore, they're really, really focused on the efficiency and partners that can deliver efficiency in their engine, and that's our focus on our extended stock.

Alright. Thank.

And then on the spot that's a good question.

I have a lot of respect Francisco for <unk> you know, it's it's so there's nothing specific about that or those team to those organizations. What I would say is that when you actually have changes or disruptions in the market and you have that's always an opportunity and I would say, especially in this environment, where people are bunch of concern.

Whether our talent concern I think it's an opportunity that I was prescribed a lot of things do they have a probably a great consolidations story, but I'd be very <unk> of the <unk> and the extended attack surface I think we're fairly unique and what we can actually offer here and so I think the anytime any competitor in the market has things that actually caused him to focus.

What's your focus that's an opportunity for us and so I think from that perspective, yes, it's an opportunity, but that's what I have a lot of respect for the competitors in the market.

Great. Thanks.

Corey Thomas: Thank you. Your next question comes from a line of Brian Essex from JP Morgan. Your line is open. Hi, this is Charlotte Beatick on for Brian Essex. Thank you for taking the question. It was great to see you, Reader, it's a doubling of free cash flow in 2024 season. Let us know what level of confidence you have in it and what are the primary levers you're looking to deliver that cash flow and how much control do you have over them?

Note that they both for downsizing so that helps too thanks.

Thank you.

And we have reached the end of our question and answer period I will now turn the call back over to our CEO Corey Thomas for some final closing remarks.

Thank you all for joining us today or a call and I wish you all a good rest of the year.

This concludes today's conference call. Thank you for your participation you may now disconnect.

Corey Thomas: Thanks. Yeah, we have very high confidence on the hundreds of million dollars of free cash flow. You know, what I would say is that we have a lot of controls and levers in the overall business. We've talked, we've taken a very thoughtful approach to planning that looked at growth rates plus or minus the growth rates of this year. And so we're very thoughtful about like what, how do we actually deliver that free cash flow across a wide range of scenarios.

Please wait the conference will begin shortly.

[music].

Corey Thomas: We have the levers and the business. That's also a big part of why we're actually is we're doing reinvestments, we're doing the reinvestments steadily, not all in one go. Because that also gives us levers to actually make sure that our reinvestments are timed up well for the performance that we expect to see. So we have a lot of visibility, we have a lot of controls, but most importantly, our entire company is fairly committed. We have a good structure from today to deliver on that.

Tim Adams: Thank you.

Eric Heath: You're next question comes from a line of Eric Heath from Keybank Capital Markets. Your line is open. Hey, thank you for taking the question and core into him. Good execution and top environment. So just to follow up on some of the kind of macro kind of guidance questions. Just curious what's kind of embedding your guides for 4Q in terms of conversion rates because it seems like maybe you have some relatively high conversion rates.

Eric Heath: This course is curious if you're extrapolating that out and also any any call on them. Macro or expectations on both budget flush and if you had any commentary on linearity so far this quarter, that'd be great to. Yeah, I may miss something. So I'll come over though the table, cover for me if I actually miss something. So, you know, what I would say is we've seen, I would say improves conversion rates this year, not just across one quarter, but it's been a consistent Dean that's actually picked up.

Eric Heath: So we expect consistency more than anything else. And I would just say on that one, I think the early start to the quarter indicates consistency and the consistency that we expect. In the overall conversion rates. The other piece of it is no, we're not out over our skis from our perspective on expecting a budget flush. We did not factor a budget flush in for this quarter. I don't see any indicators that would indicate a budget flush right now. If we do, that's great, but there was no reason to actually factor a budget flush into our expectations and how we think about the overall guidance.

Corey Thomas: Thank you.

Daniel Park: And your next question comes from a line of Mike Walkley from Canada, cord genuity. Your line is open. Hey guys, good afternoon. It's Daniel on from my thanks to the question. So could you just provide some color on how the productivity of your sales reps are changing now that they have a few quarters worth of experience, really exclusively selling via consolidated offerings. Also, you know, just giving your focus on improving profitability and cash flows. You can see level investments is sufficient to continue to grow longer term. Thanks.

Corey Thomas: Yeah, two great questions. So on productivity, what I would say is that through Q3. The where we expected the productivity to actually be for our direct sellers. We are building larger deals in the pipe, which has some time and impact on the sales cycle. So you have a mix shift in the size of the deals and pipe. I provided a little bit of qualitative data on that in my prepared remarks. So that's more of a timing issue, but we think that washes out.

Corey Thomas: So what I would say is we see very healthy productivity trends. And we expect I would say we will consistent level the productivity to actually come up next year. So we're happy with the trends and outlook on the productivity.

Corey Thomas: Your second question was with our focus on profitability. Are we still investing at the right level to continue? Oh, yeah. So yeah, look, I think, but just to be clear is I take a very focused view on how it's a mid long term growth. I'm not super. I'm not trying to actually really drives short term acceleration. And so the way to think about that is that we're doing heavy investments in product and services.

Corey Thomas: When I talk about services, I'm talking about like us in our ecosystem and making sure we can augment our customers. We're investing heavily there. We're going to keep investing heavily there because if you think about what drives long term growth is we have to be the preferred provider for the extent of stock. We're committed to doing that. We're putting lots of resources in the product and services. And we're very intentional about that and those investors that we're making now, but it's also investments that we're going to be steadily onboarding and increasing over the course of the next year. And so that's the ongoing plan.

Tim Adams: You know, the second part of that is the investments and incentives and marketing. And while it says we're very focused, we're really looking at our engine and we will be adding resources. We're going to be adding capacity, but we're making sure the engine is efficient in this environment. We are taking a more partner focused approach and aligned approach in this environment. And so again, if you look out, we think in the mid term, we actually going to have a very, very good growth engine. But it's not something that we're rushing on these sales and market investments to actually try to hit a quarter by quarter target.

Tim Adams: Yeah, Corey, and I think his look analyst pencil out what numbers for the four-year may look like for sales and marketing. It is, we think it's the right amount, but it's still a healthy investment that carries in the next year. Yeah, investment that we've made this year actually helps set up for next year. But again, it is a, we are taking a more botanical approach on how we actually allocate net investment in the Southern market.

Rob: Right, thank you so much for the color. And again, if you would like to ask a question, press star one on your telephone keypad.

Trevor Rambo: Your next question comes from the line of Trevor Rambo from BTIG. Your line is open. Hi, thanks for taking the question. This is Trevor Rambo for Gray Powell. I was just just want to ask, how are you seeing customers react to the latest breach or an increase in breach headlines? And do you expect it to drive an increase in activity for the company? And then lastly, do you see any Friday categories that benefit more than one another?

Corey Thomas: Thanks.

Corey Thomas: Yeah, so, so first, we tend to be pretty focused on not trying out the sales into news headlines just because that creates some weird incentives that also hurts customers trust over time. That said, it is a backdrop that's happening. So look, here's how I described the backdrop at a most fundamental level. Is that TSOs, especially with some of the SEC's recent actions as it relates to solar winds and other things are clearly very focused on security and their personal accountability.

Corey Thomas: And so they have secured as a top priority. And I still think we have a significant backlog of security projects. And resources that are needed. The funding environment that TSOs are going into is tight. And so the reconciliation of that demand backlog, the pressure, TSOs face and the speed and the velocity of the budget they're getting is an underlying tension that underplays all the stuff that we actually see with the deals, cycles and all the other things.

Corey Thomas: I think if you actually zoom out that backlog of projects absolutely has to get resolved over time. So I think we actually have a healthy demand drop, a healthy demand market. Again, I love the place that rappers have been with the extended stock, with the focus on the attack surface, looking across the entire environment, you know, from the own plan and end point to the cloud. I think we're set up well.

Corey Thomas: But I would just say the budget environment for TSOs is going to play out as a budget environment place for TSOs. Our goal is to set ourselves up to be a great partner and to provide a great ecosystem as they have money, as they have funds to steadily only have them. And this is why I think our methodical long term approach will be driven in. Further is maybe one last piece of that question, just does it benefit any products in particular or not?

Corey Thomas: I'm just going back to the packages the way we fund the consolidation. It actually absolutely can. That's a great point is it provides leverage and scale, being able to actually say that I can actually manage my attack surface from the end points and on prem for the cloud. It actually provides an economic value, which helps TSOs do their job. It allows them if they choose to do it with us or a partner, augment with expertise. It so provides an economic value at the same time that addresses core security concerns.

Corey Thomas: Great.

Corey Thomas: Thanks for the color.

Rob Galvin: Thank you.

Rob Long: Your next question comes from the line of Rob Galvin from Schiefel. Your line is open.

Tim Adams: This is Rob Long from Brad, thanks for taking a question. The International Growth is 16% and 22% of revenues appears to be trending well. And I'm wondering if the offshore talent mixed shift from the restructuring discussed last quarter had any impact on this growth or if the offshore talent mixed shift was more focused on operating cost efficiencies. Thanks. Yeah, so I think it's a great question. You know, I would not face a primary draw from growth.

Tim Adams: This is actually too earlier. Well, I would say that we did have some ketchup work to do. To make sure that the distribution of our global service and support ecosystem was properly allocated around the world to make sure that the workloads matter. The other thing is the reality of fiber attacks is more of the attackers operate in time zones that are not the time zones of the US. And so as we actually make sure that our teams are operating around the clock, it's important to actually have people that are operating in the same time zones not just our customers, but also the time zones that attackers are actually operating in.

Tim Adams: I think we will see more benefits and confidence because our teams both in Europe and in Asia are now able to actually talk more aggressively and directly about the ability to actually get local resources and commitment and availability. So we think that that will be a positive thing if we actually go forward, but I would just say it's too early for that to actually have shown up in these two reasons of results. Great.

Tim Adams: Thank you.

Corey Thomas: Your next question comes from line of Alexanderson from Needham. Your line is open. Great. Thanks so much. I was hoping you could talk a little bit about the partnership expansion programs and particularly the MSP that you noted in your call. How material do you think that will be as we look out into 2024 and 2025? Can it add three, four, five percent to your top line growth rate and while you're at it, would you mind just looking at the Splunk acquisition by Cisco?

Corey Thomas: Does that have any positive impact on you as a result of that consolidation? Thanks. Yeah, that's a great question. So only first one, you know, what I would say is that it'll be incrementally positive, I think in 24. We did one big one. I think we'll do some more. We've got some smaller ones actually prior to this. So I think it will be incrementally positive in 24.

Corey Thomas: The bigger they are, I would just say as the longer the ramp cycle is, I just want to be clear is just like you are these are big organizations and you actually have to, you know, you turn the gears of the organizations. So I would say some incremental movement in 24. I think it really picked up in 25 and 26. We like this consolidated focus on on partner. Yes, with the breath partners are really clear.

Corey Thomas: We have a wild partner, but having a few bigger, very focused partners that really move the dial. I think it's important, but these are big sophisticated organizations allow the customer. So the effort and investment is well worth it. And we're going to be investing heavily with our partner, but it is also lots of sort of like investment and lots and some work that they do is actually make this broadly available. So we expect to see the benefits over most of the years, but we do expect to have is out the incremental positivity in 24, but I would say really picking up in 25 when you start looking at some of these larger organizations and how they actually Oh, yeah, thank you guys.

Corey Thomas: And then on the spike, it's a good question. Look, I have a lot of respect for Cisco, for Splunk. You know, it's so, there's nothing specific about that or those teams or those organizations. What I would say is that when you actually have changes or disruptions in the market and you have, that's always an opportunity. And I would say especially in this environment where people are budget concerned, where there are talent concerns, I think it's an opportunity.

Corey Thomas: Now Cisco has a lot of veins and they have probably a great consolidation story. But I think it's just the extended stock and the extended tax surplus. I think we're fairly unique in what we can actually offer here. And so, I think at any time any competitor in the market has things that actually cause them to focus or shift focus, that's an opportunity for us. And so I think from that perspective, yes, it's an opportunity. But that's that I have a lot of respect for the competitors in the market. Great, thanks. And I would note that they both are downsizing, so that helps too. Thanks.

Corey Thomas: And we have reached the end of our question and answer period.

Corey Thomas: I will now turn the call back over to our CEO, Corey Thomas, for some final closing remarks. Thank you all for joining us today on our call.

Corey Thomas: And I wish you all a good rest of the year.

Rob: This concludes today's conference call. Thank you for your participation.

Rob: You may now disconnect. Please wait.

Rob: The conference will begin shortly.