Q4 2023 Rapid7 Inc Earnings Call
Operator: Please wait. The conference will begin shortly. Good afternoon. My name is Krista, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Rapid7 fourth quarter earnings conference call. All lines have been placed on mute to prevent any background noise.
Please wait the conference will begin shortly.
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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 that time simply press star followed by the number one on your telephone keypad and if you would like to withdraw your question again press Star one.
Operator: After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press star followed by the number one on your telephone keypad. And if you would like to withdraw your question, again, press star one. Thank you. I would now like to turn the conference over to Elizabeth Chwalk, Director of Investor Relations. Elizabeth, you may begin.
Thank you I would now like to turn the conference over to Elizabeth Chihuahua to arrest or director of Investor Relations you may begin.
Elizabeth Chwalk: Thank you, Operator, and good afternoon, everyone. We appreciate you joining us today to discuss Rapid7's fourth quarter and full year 2023 financial and operating results, in addition to our financial outlook for the first quarter and full fiscal year 2024. 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.rapid7.com along with the updated company presentation and financial metrics file.
Elizabeth Chihuahua: Thank you operator, and good afternoon, everyone. We appreciate you joining us today to discuss rapid seven's fourth quarter and full year 2023 financial and operating results. In addition to our financial outlook for the first quarter and full fiscal year 2024.
Elizabeth Chihuahua: With me on the call today are Corey Thomas our CEO and Tim Adams, our CFO.
Elizabeth Chihuahua: We have 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.
Elizabeth Chwalk: 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 include statements related to the company's positioning, strategy, business plans, restructuring plan, and financial guidance for the first quarter and full year 2024, as well as 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 November 6, 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. The 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.
Elizabeth Chihuahua: This call is being broadcast live via webcast and following the call an audio replay will be available at investors Dot rapid seven dot com.
Elizabeth Chihuahua: During this call we may make statements related to our business that are considered forward looking under federal securities laws.
Elizabeth Chihuahua: 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 and financial guidance for the first quarter and full year 2024, and the assumptions underlying such goals and guidance.
Elizabeth Chihuahua: These forward looking statements are based on our current expectations and beliefs and on information currently available to us.
Elizabeth Chihuahua: 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 November six 2023, and then the subsequent reports that we file with the SEC.
Elizabeth Chihuahua: The information provided on this conference call should be considered in light of such risks.
Elizabeth Chihuahua: <unk> 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.
Elizabeth Chwalk: Rapid7 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.rapid7.com. At times, in our prepared remarks or in response to your questions, we may offer incremental metrics to provide greater insight into the dynamics of our business or our quarterly results. Please be advised that this additional detail may be one-time 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.
Elizabeth Chihuahua: Seven does not assume any obligation to update the information presented on this conference call except to the extent required by applicable law.
Elizabeth Chihuahua: 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 not rapid seven dot com.
Elizabeth Chihuahua: 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.
Elizabeth Chihuahua: Please be advised that this additional detail maybe onetime in nature, and we may or may not update these metrics in the future.
Elizabeth Chihuahua: With that I'd like to turn the call over to our CEO Corey Thomas Corey.
Corey Eugene Thomas: Good afternoon, and thank you to everyone joining us on today's call. Rapid7 had a strong close to 2023. Ended the year with $806 million in ARR, growing 13% over the prior year while delivering revenue, operating income, and free cash flow above our guided rate. Sustained customer demand for our platform, anchored by our detection and response in cloud security, and improvements in execution supported a strong top-line finish to the year. At the same time, our focus on operating efficiency and streamlining our cost structure drove $84 million of free cash flow in the year, exceeding our target and reflecting nearly 500 basis points of free cash flow margin expansion over the prior year. As we look back at the last year, there are a few highlights that stand out.
Corey Eugene Thomas: Good afternoon, and thank you to everyone joining us on today's call.
Corey Eugene Thomas: Rapid seven had a strong close to 2023.
Corey Eugene Thomas: Ended the year with $806 million and <unk>.
Corey Eugene Thomas: 13% over the prior year, while delivering revenue operating income and free cash flow above our guided ranges.
Corey Eugene Thomas: Sustained customer demand for our platform offerings.
Corey Eugene Thomas: But our detection and response.
Corey Eugene Thomas: Security solutions and improvements in execution supported a strong top line finished the year.
Corey Eugene Thomas: At the same time, our focus on operating efficiency and streamlining our cost structure drove $84 million of free cash flow in the year.
Corey Eugene Thomas: Feeding our target, reflecting nearly 500 basis points of free cash flow margin expansion over the prior year.
Corey Eugene Thomas: As we look back at the last year there are a few highlights stand out.
Corey Eugene Thomas: First, we continue to drive product innovation across our Insight platform. We've further elevated our market-leading capabilities and our compelling customer value proposition with advancements in areas like AI-driven cloud-anomaly detection. We exited the year with a scaled security operations platform that extends over fragmented attacks, covering strategic workloads across detection and response. Cloud Native Security, or CNAP, and Vulnerability Management.
Corey Eugene Thomas: First we continue to drive product innovation across our insight platform.
Corey Eugene Thomas: We further elevated our market, leading capabilities and our compelling customer value proposition with advancements in areas like AI driven cloud anomaly detection.
Corey Eugene Thomas: We exited the year with a scale security operations platform that extends over their fragmented attack surface covering strategic workloads across detection response.
Corey Eugene Thomas: Native security or see Knapp and vulnerability management.
Corey Eugene Thomas: Secondly, our sales force successfully reoriented itself towards our platform consolidation solutions to meet customers' most pressing needs while navigating larger and longer deal cycles with conversion rates that improved as the year went on. Our package offerings gained steady traction throughout 2023 and now constitute roughly $100 million in ARR driven by a healthy contribution from both landing new customers and upgrading existing customers. We have reflected the deal size and conversion dynamics of our growing package mix into our forward expectations for seasonality, given the ongoing success of our consolidation value proposition. And lastly, we right-size our cost structure to build a foundation for efficient growth. This was a critical initial step that positioned us to be able to drive efficient growth in our business over time.
Corey Eugene Thomas: Secondly, our sales force successfully re oriented towards our platform consolidation solutions to meet customers' most pressing needs, while navigating larger and longer deal cycles with conversion rates that improved as the year went on.
Corey Eugene Thomas: Our package offerings gained steady traction throughout 2023, and now constitute roughly $100 million in <unk> driven by a healthy contribution for both landing new customers and upgrading existing customers.
Corey Eugene Thomas: We have reflected the deal size and conversion dynamics of our growing package mix into our forward expectations for seasonality given the ongoing success of our consolidation value proposition.
Corey Eugene Thomas: And lastly, we rightsize our cost structure to build a foundation for efficient growth.
Corey Eugene Thomas: This was a critical initial step that positions us to be able to drive efficient growth in our business over time.
Corey Eugene Thomas: A great example of our progress in 2023 is illustrated by a new customer win in the fourth quarter. A publicly traded media company with a maturing security program was extensively evaluating new solutions and looking to consolidate multiple vendors across their security operations center or SOC. The large and complex nature of the company's digital footprint and their lean team, combined with Rapid7's ability to work better together with their endpoint provider made us stand out against legacy STEM competitors. This customer chose Rapid7 for three main reasons.
Corey Eugene Thomas: A great example of our progress in 2023 as illustrated by a new customer win in the fourth quarter.
Corey Eugene Thomas: A publicly traded media company with a maturing security program was essentially evaluating new solutions and looking to consolidate multiple vendors across their security operation center or stock.
Corey Eugene Thomas: The large and complex nature of the company's digital footprint and their lean team combined with rapid susceptibility to work better together with their endpoint provider made a stand out against legacy competitors.
Corey Eugene Thomas: This customer chose rapid seven for three main reasons, the breadth of our cloud native platform, our ability to consolidate critical capabilities across multiple SEC ops categories, including Sem or E. R. N P M and lastly, our ease of adoption and integrations with other security vendors, we displaced a competitor.
Corey Eugene Thomas: The breadth of our cloud-native platform, our ability to consolidate critical capabilities across multiple SecOps categories, including SIEM or XDR and VM, and lastly, our ease of adoption and integration with other security vendors. We displaced a competitor with our Managed Direct Complete consolidated offering, securing a multi-year deal worth over half a million dollars in ARR. We believe the progress we made in 2023 sets us up well to win market share, accelerate growth, and be a leading security platform consolidator in the next few years. Looking forward, we see 2024 as a critical year to accelerate our platform differentiation by driving focused investments to lead mainstream cloud security adoption. Drive security productivity with AI
Corey Eugene Thomas: With our managed direct complete consolidated offering securing a multiyear deal with over half a million dollars and a R.
Corey Eugene Thomas: We believe the progress we made in 2023 sets us up well to win market share accelerate growth and be a leading security platform consolidator in the next few years.
Corey Eugene Thomas: Looking forward, we see 2024 is a critical year to accelerate our platform differentiation by driving focus investments to lead in mainstream cloud security adoption drive security productivity with AI extend our service and partner ecosystem to deliver sustainable and efficient growth going forward.
Corey Eugene Thomas: We are expanding our service and partner ecosystem to deliver sustainable and efficient growth going forward. We are delivering this strategic execution against a backdrop of a stable, yet noisy, demand environment. Amidst this backdrop, we are leaning into our areas of strategic focus and building our security operations platform for acceleration. We're investing and innovating in areas where we see substantial demand over a multi-year horizon and where there's a clear opportunity to elevate our customer value proposition and the services ecosystem that supports it. We're making deliberate investments to build the strongest managed stock ecosystem and deliver a leading data platform that contextualizes risk across a fragmented, complex environment. Here are the four key areas where we are focused on and invested in as we build our leadership position in the extended SOC. The first is integrating and contextualizing more data across a digital attack, particularly as security teams are managing data across traditional and cloud environments.
Corey Eugene Thomas: We are delivering this strategic execution against a backdrop of stable get noisy demand environment.
Corey Eugene Thomas: Amidst this backdrop, we are leaning into our areas of strategic focus and building our security operations platform for acceleration.
Corey Eugene Thomas: We're investing and innovating in areas, where we see substantial demand over a multiyear horizon and where there is a clear opportunity to elevate our customer value proposition and the services ecosystem that supports it.
Corey Eugene Thomas: We're making deliberate investments to build the strongest man its stock ecosystem and deliver a leading data platform that contextualized as risks across the fragmented complex environment.
Corey Eugene Thomas: Here are the four key areas, where we are focused on and investing in as we build our leadership position and the extent of the stock.
Corey Eugene Thomas: The first is on integrating and contextualize a more data across the digital attack surface, particularly the security teams are managing data across traditional and cloud environments.
Corey Eugene Thomas: Easier consolidation of data on our Insight platform allows customers to apply the best operational context to their security program. The breadth and quality of our platform features are strong, and our internal staff has years of expertise and data to better understand the attacker. In 2024, we're focused on elevating the customer experience with a better, more integrated Rapid7 technology platform to support fragmented IT environments. The second area of investment will be around driving cloud security adoption in mainstream enterprises. As security programs mature, lean teams with significant resource constraints increasingly need to secure their cloud environment.
Corey Eugene Thomas: He's a consolidation of data on our insight platform allows customers to apply the best operational context, so their security programs, the breadth and quality of our platform features are strong and our internal stock has years of expertise and data to better understand the attacker in 'twenty 'twenty four we're focus on elevating the core.
Corey Eugene Thomas: Customer experience with a better more integrated rapid separate technology platform to support fragmented it environments.
Corey Eugene Thomas: The second area of investment will be around driving cloud security adoption and mainstream enterprises.
Corey Eugene Thomas: Our security programs mature.
Corey Eugene Thomas: Lean teams with significant resource constraints increasingly need to secure their cloud environments. We believe the majority of cloud security buyers in the coming years will look different from the typical bar, we've historically seen.
Corey Eugene Thomas: We believe the majority of cloud security buyers in the coming years will look different from the typical buyer we've historically seen. Therefore, we are focused on delivering CNAP solutions that are simple to use, affordable, and integrated into our broader security operations platform. And our packaging and distribution is being fine-tuned for our mainstream enterprise customers. We're also extending our capabilities, building on the solid traction in cloud security posture management to be a leader in cloud detection and response. The third area of focus is the use of AI for improving security operations. Our AI-powered spot continues to drive our leadership and manage detection response, one of the areas of highest growth in customer demand within security operations. We are focused on using machine learning and large language models, or LLMs, to improve our SecOps coverage and detections in multiple areas, including anomalous activity monitoring, analyst workflows, and quality assurance.
Corey Eugene Thomas: We are focused on delivering <unk> solutions that are simple to use affordable and integrated into a broader security operations platform.
Corey Eugene Thomas: And our packaging and distribution has been fine tune, where a mainstream enterprise customers.
Corey Eugene Thomas: We're also extending our capabilities building on the solid traction in cloud security posture management to be a leader in cloud detection and response.
Corey Eugene Thomas: The third area of focus is the use of AI for improving security operations.
Corey Eugene Thomas: Our AI powered sought continues to drive our leadership in managed detection response, one of the areas of highest growth and customer demand within security operations.
Corey Eugene Thomas: We are focused on using machine learning and large language models or <unk> to improve our SEC ops coverage of detections in multiple areas, including anomalous activity monitoring analysts workflows and quality assurance. In addition, we are working on leveraging <unk> to drive efficiency and accelerate response times.
Corey Eugene Thomas: In addition, we're working on leveraging Learning Management Systems to drive efficiency and accelerate response time. We're building and refining these capabilities inside our SOC and managed delivery ecosystem to help get product innovations to market faster. And we'll continue to expand on these AI capabilities with a focus on productivity and efficiency, all while safeguarding our customers' data. Lastly, we will be investing in our services and partner ecosystem with an emphasis on growing key channel relationships, accelerating our MSSP partnerships, and increasingly engaging with customers and marketplaces like AWS. As we look out at the rest of the year, Rapid7 has a compelling opportunity to build better, more connected customer experiences across our platform. We believe that the foundational work we're doing will position us to drive market-share gains and higher doable growth over the medium to long term. At the same time, we're focused on optimizing for efficient growth and remain laser focused on scaling free cash flow. Consistent with our previous commentary, we expect to generate at least $160 million in free cash flow in 2024.
Corey Eugene Thomas: We are building and refining these capabilities inside our socks and manage delivery ecosystem to help get product innovations to market faster and we will continue to expand on these AI capabilities with a focus on productivity and efficiency all while safeguarding our customers' data.
Corey Eugene Thomas: Lastly.
Corey Eugene Thomas: We will be investing in our services partner ecosystem with an emphasis ongoing key channel relationships accelerating our MSP partnerships and increasingly engaging with customers at market places like AWS.
Corey Eugene Thomas: As we look out at the rest of the year rapid seven has a compelling opportunity to build better more connected customer experiences across our platform.
Corey Eugene Thomas: We believe that the foundational work, we're doing will position us to drive market share gains and higher durable growth over the medium to long term.
Corey Eugene Thomas: At the same time, we're focused on optimizing for efficient growth and remain laser focused on scaling free cash flow.
Corey Eugene Thomas: Consistent with our previous commentary, we expect to generate at least $160 million and free cash flow in 'twenty 'twenty four.
Corey Eugene Thomas: Looking towards our overall financial outlook for the year, as we process a healthy finish to 2023, balanced with our expectation for a continuation of the recent stable demand backdrop, we remain focused on providing a high confidence range for our 2024 financial outlook, which Tim will detail in his remarks. We're focused on making deliberate platform and services investments to re-accelerate and drive durable, long-term growth. We're optimizing around our technology and distribution channels, which we believe will position us for the best multi-year growth outlook. With that, thank you for joining us on the call. I'll now turn the call over to our CFO, Tim Adams, to share additional detail on our financial results and outlook. Thank you, Corey.
Corey Eugene Thomas: Looking towards our overall financial outlook for the year as we processed a healthy finished at 2023 balanced with our expectation for a continuation of the recent stable demand backdrop, we remain focused on providing a high confidence range for our 2024 financial outlook, which Tim will detail in his remarks, we are.
Corey Eugene Thomas: Our focus on making deliberate platform and services investments to Reaccelerate and drive durable long term growth.
Corey Eugene Thomas: We're optimizing around our technology and distribution channels, which we believe will position us for the best multi year growth outlook with that thank you for joining us on the call today.
Now I'll turn the call over to our CFO, Tim Adams to share additional detail on our financial results and outlook.
Tim Adams: Good afternoon, everyone, and thank you for joining us on the call today. Before I turn to the results, a quick reminder that, except for revenue, all financial results we will discuss today are non-GAAP financial measures unless otherwise stated. Additionally, reconciliations between our GAAP and non-GAAP results can be found in our earnings press release.
Tim Adams: Thank you Corey good afternoon, everyone and thank you for joining us on the call today.
Tim Adams: Before I turn to the results a quick reminder, that except for revenue all.
Tim Adams: All financial results, we will discuss today are non-GAAP financial measures unless otherwise stated. Additionally.
Tim Adams: Additionally, reconciliations between our GAAP and non-GAAP results can be found in our earnings press release.
Tim Adams: Rapid7 ended the year with $806 million in ARR, growing 13% over the prior year. Growth was led by healthy customer demand for our integrated security operations platform, and it was supported by expansion and innovation and our detection and response, and cloud security capability. We saw strong traction as our consolidated offerings ramped throughout the year, with an improving sales conversion rate as the combined value and efficacy of our solutions increasingly resonated with mainstream enterprise customers. ASP's increased as we benefited from larger deals tied to our package offer. And we saw roughly balanced contributions from new and existing customers throughout the year, with particular strength in cross-selling to our existing base.
Tim Adams: Rapid seven ended the year with $806 million and a RR growing 13% over the prior year.
Tim Adams: Growth was led by healthy customer demand for our integrated security operations platform and.
Tim Adams: And supported by expansion in innovation in our detection and response and cloud security capabilities.
Tim Adams: We saw strong traction is our consolidated offerings ramp throughout the year with.
Tim Adams: With improving sales conversion rates as the combined value and efficacy of our solutions increasingly resonate with mainstream enterprise customers.
Asp's increase as we benefited from larger deals tied to our package offerings.
Tim Adams: We saw roughly balanced contributions from new and existing customers throughout the year with particular.
Tim Adams: <unk> strength in cross selling to our existing base.
Tim Adams: These dynamics speak to the effectiveness of our technology and our strong value proposition as customers consolidate across our insight platform. Our customer base grew 5% year over year to end 2023 with over 11,500 customers globally. ARR per customer grew 7% over the prior year to approximately $70,000 at year-end. Full-year revenue of $778 million grew 14% over the prior year and exceeded the high end of our guidance range. Product revenue also grew 14% over the prior year to a full year total of $740 million.
Tim Adams: These dynamics speak to the effectiveness of our technology and our strong value proposition as customers consolidate across our insight platform.
Tim Adams: Our customer base grew 5% year over year to end 2023 with over 11500 customers globally.
Tim Adams: Our our per customer grew 7% over the prior year to approximately $70000 at year end.
Tim Adams: Full year revenue of $778 million grew 14% over the prior year and exceeded the high end of our guidance range.
Tim Adams: <unk> revenue also grew 14% over the prior year to a full year total of $740 million.
Tim Adams: Our commitment to profitable growth, including the changes we made to our cost structure in August, drove meaningful expansion in operating income and free cash flow, and we exceeded our guided ranges on both metrics for the year. We delivered $102 million of operating income, which represents a four-year margin expansion of over 800 bases. And we generated $84 million of free cash flow, which reflects an 11% free cash flow margin for the year.
Tim Adams: Our commitment to profitable growth, including the changes we made to our cost structure in August drove meaningful expansion in operating income and free cash flow and we exceeded our guidance ranges on both metrics for the year.
We delivered $102 million of operating income, which represents full year margin expansion of over 800 basis points.
Tim Adams: And we generated $84 million of free cash flow, which reflects an 11% free cash flow margin for the year.
Tim Adams: Now turning to our fourth-quarter results. Total Q4 revenue of $205 million was up 11% over the prior year and above the high end of our guidance. Product revenue grew 13% year over year to $195 million, while professional services declined 10% to $10 million as we actively deemphasize certain lower-value services. Our international revenue grew 21% over the prior year and represented 23% of total revenue for the fourth quarter. While North America revenue grew 9% and represented 77% of Total Revenue, product gross margin was 76% in the quarter, and total gross margin for the quarter was 74%, both in line with the prior year. Operating expenses in the fourth quarter reflect changes to the cost structure starting in the third quarter of 2023. Sales and marketing expense declined 5% year over year and represented 32% of revenue, down from 38% in the prior year.
Tim Adams: Now turning to our fourth quarter results.
Tim Adams: Total Q4 revenue of $205 million was up 11% over the prior year and above the high end of our guidance.
Tim Adams: Product revenue grew 13% year over year to $195 million, while professional services declined 10% to $10 million as we actively deemphasize certain lower value services.
Tim Adams: Our international revenue grew 21% over the prior year and represented 23% of total revenue for the fourth quarter.
Tim Adams: While North America revenue grew 9% and represented 77%.
Tim Adams: Of total revenue.
Tim Adams: Product gross margin was 76% in the quarter and total gross margin for the quarter was 74% both in line with the prior year.
Tim Adams: Operating expenses in the fourth quarter reflect changes to the cost structure, starting in the third quarter of 2023.
Tim Adams: Sales and marketing expense declined 5% year over year and represented 32% of revenue down from 38% in the prior year.
Tim Adams: R&D expense was slightly lower than the prior year and represented 16% of revenue, down from 18%, while GNA represented 6% of revenue, down from 8% in the prior year. All in all, fourth-quarter operating income of $41 million was better than our guidance and represented a 20% operating margin ending the year. Our adjusted EBITDA was $48 million in the quarter, and net income per share was $72,000.
Tim Adams: R&D expense was slightly lower than the prior year and represented 16% of revenue down from 18%.
Tim Adams: While G&A represented 6% of revenue down from 8% in the prior year.
Tim Adams: All in all fourth quarter operating income of $41 million was better than our guidance and represented a 20% operating margin exiting the year.
Tim Adams: Our adjusted EBITDA was $48 million in the quarter and net income per share was <unk> 72.
Tim Adams: Moving to our balance sheet and cash flow, we ended the year with cash, cash equivalents, and investments of $439 million compared to $373 million at the end of Q3 2023. We delivered better than expected fourth-quarter cash flow from operations on higher operating profitability, which helped drive over $60 million of free cash flow in the quarter. This brings us to our guidance for this year. As we enter 2024, we assume a relatively stable macroeconomic backdrop and customer spending environment, consistent with the back half of 2023. This assumption informs our high confidence growth outlook for ARR this year. For the full year 2024, we expect an ending total ARR of $885 million to $895 million, which represents growth of 10 to 11 percent.
Tim Adams: Moving to our balance sheet and cash flow.
Tim Adams: We ended the year with cash cash equivalents and investments of $439 million compared to $373 million at the end of Q3 2023.
Tim Adams: We delivered better than expected fourth quarter cash flow from operations on higher operating profitability.
Tim Adams: Which helped drive over $60 million of free cash flow in the quarter.
Tim Adams: This brings us to our guidance for this year.
Tim Adams: As we entered 2024, we assume a relatively stable macroeconomic backdrop and customer spending environment.
Tim Adams: Consistent with the back half of 2023.
Tim Adams: This assumption informs our high confidence growth outlook for a or are this year.
Tim Adams: For the full year 'twenty 'twenty four we expect ending total a R. R of 885 million to $895 million, which represents growth of 10% to 11%.
Tim Adams: As Corey shared earlier, this range reflects our strategy to focus this year on deliberate investments for more efficient, durable, medium to long-term growth. In terms of seasonality, as deal sizes get larger and reflect a scalating contribution from the success of our platform and package deals, our new ARR linearity assumptions for the full year reflect slightly stronger seasonality with a naturally lower contribution in the first quarter. Turning to the income statement, we expect total revenue for the full year to be in the range of $848 million to $856 million, representing growth of 9 to 10%.
Tim Adams: As Corey shared earlier this range reflects our strategy to focus this year on deliberate investments for more efficient durable medium to long term growth.
Tim Adams: In terms of seasonality as deal sizes get larger and reflect a scaling contribution from the success of our platform and package deals.
Tim Adams: Our new E. R. R linearity assumptions for their full year reflects slightly stronger seasonality with a naturally lower contribution in the first quarter.
Speaker Change: Turning to the income statement, we expect.
Speaker Change: Total revenue for the full year to be in the range of 848 million to $856 million representing growth of 9% to 10%.
Tim Adams: As we continue to focus on the strategic areas of our business, we expect product revenues to grow slightly faster than this range, offset in part by professional services revenue, which we expect to decline to approximately $30 million for the full year. On profitability measures, we anticipate strong growth in operating income, which we expect to be in the range of $150 million to $158 million for the full year, implying operating margin expansion of roughly 500 basis points. We expect net income per share to be in the range of $2.10 to $2.21 based on an estimated 75.1 million diluted weighted average shares outstanding.
Speaker Change: As we continue to focus on these strategic areas of our business, we expect product revenues to grow slightly faster than this range offset in part by professional services revenue, which we expect to decline to approximately $30 million for the full year.
Speaker Change: Unprofitability measures, we anticipate strong growth in operating income, which we expect to be in the range of $150 million to a $158 million for the full year.
Speaker Change: Implying operating margin expansion of roughly 500 basis points.
Speaker Change: We expect net income per share to be in the range of $2.10 to $2.21 based on an estimated 75 1 million diluted weighted average shares outstanding.
Tim Adams: For full year 2024, we expect to generate at least $160 million in free cash flow. This implies roughly 800 basis points of free cash flow margin expansion in terms of free cash flow seasonality. We expect a modest contribution in the first quarter, driven by a number of cash expenses that are concentrated early in the year, including the FY23 bonus payments and timing of tax payments.
Speaker Change: For full year 2024, we expect to generate at least $160 million in free cash flow.
Speaker Change: This implies roughly 800 basis points of free cash flow margin expansion.
Speaker Change: In terms of free cash flow seasonality, we expect a modest contribution in the first quarter driven by a number of cash expenses that are concentrated early in the year, including the FY2023 bonus payments and timing of tax payments.
Tim Adams: We would then anticipate a notable ramp-up in free cash flow in the second quarter. Moving to the quarterly guide. For the first quarter of 2024, we expect total revenue in the range of $203 million to $205 million, representing year over year growth of 11 to 12%. We expect non-GAAP operating income for the first quarter in the range of $37 to $39 million, and non-GAAP net income per share of 52 cents to 55 cents, which is based on 74.4 million diluted weighted average shares.
Speaker Change: We would then anticipate a notable ramp in free cash flow in the second quarter.
Speaker Change: Moving to quarterly guidance.
Speaker Change: For the first quarter of 'twenty 'twenty four we expect total revenue in the range of $203 million to $205 million representing year over year growth of 11% 12%.
Speaker Change: We expect non-GAAP operating income for the first quarter in the range of $37 million to $39 million and.
Speaker Change: And non-GAAP net income per share of 52 cents to 55.
Speaker Change: Which is based on 74.4 million diluted weighted average shares outstanding.
Operator: We made important progress in 2023 across product innovation, go-to-market improvements, and right-sizing our cost structure. This year, we have a compelling opportunity to build on that foundation to position ourselves for reacceleration and share gains in the next few years. Thank you for taking the time to join us on the call today. Operator?
Speaker Change: We made important progress in 2023 across product innovation go to market improvements and right sizing our cost structure.
Speaker Change: This year, we have a compelling opportunity to build on that foundation to position ourselves for reacceleration in share gains in the next few years.
Speaker Change: Thank you for taking the time to join US on the call today and now we will open the call for questions operator.
Hamza Fodderwala: As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad, and we ask that you limit yourself to one question and then re-queue. Your first question comes from the line of Hamza Fodderwala from Morgan Stanley. Please go ahead.
Speaker Change: As a reminder, if you would like to ask a question. Please press star one on your telephone keypad and we ask that you limit yourself to one question and then re queue. Your first question comes from the line of Josh.
Corey Eugene Thomas: Corey, it seems like a lot of opportunity for consolidation. The Bulletproof Executive 2013 Curious, can you talk a little bit more about how you're, www.rapid7inc.com? You know, it's a great point, Hamza. Most customers right now are trying to figure out how to deal with the twin factors of enhancing security programs that have to be improved. You know, we talked about the security backlog of demand, the need for talent, the need for projects, and the fact that they have to do it on a budget. And so one of the things that they're looking to do is to both consolidate their security programs but to do it in a way that drives more efficiency, and that requires partners and talent sometimes.
Josh: Motorola from Martin Stanley Yang. Please go ahead.
Josh: Thank you.
Josh: Okay.
Josh: It seems like a lot of opportunity for consolidation within within security operations. Among among your customer base I'm curious can you talk a little bit more about how you're working with some of your <unk>.
Josh: Strategic services partners to help drive some of that consolidation and how your offering perhaps some of your own services as well to augment.
Josh: And complement what your partners are offering too.
Speaker Change: Yes, it's a great point hamzah.
Speaker Change: Most customers right now I'm trying to figure out how to deal with the twin factors.
Speaker Change: Enhancing security programs that have to be improve we've talked about the security backlog.
Speaker Change: Demand need for talent need for project and in fact, they have to do all the budget.
Corey Eugene Thomas: We are actively building out our managed services partner ecosystem. The partner ecosystem, in general, which is sort of like a big area of focus, but also partners that can actually provide cost-effective services to our customers that allow them to upgrade their security programs along the way. We are incredibly attractive to partners because we allow them to actually look at the landscape across SIEM and XDR as well as cloud security and traditional vulnerability management, so they can look at both the overall attack surface and risk side of the equation as well as the detection response side of the equation. And so that's attractive to partners.
Speaker Change: So one of the things that they're looking to do is to both consolidate their security programs, but to do it in a way to drive more efficiency in that regards partners account for that.
Speaker Change: We are actively building out our managed services partner ecosystem partner.
Speaker Change: And ecosystem in general, which is sort of like a big area of focus but also part of that can actually provide cost effective services to our customers that allow them to upgrade their security programs along the way we are incredibly attractive to partners because we allow them to actually look at the landscape.
Speaker Change: The film and CR as well as the cough charity and additional vulnerability management. So they can look at both the overall attack surface and risk side of the equation as well as the detection response side of the equation and so that's attractive to partners. We're also working on something that's near and Dear to our partners' hard is the ability to process more and more of the alert.
Corey Eugene Thomas: We're also working on something that's near and dear to our partners' hearts, the ability to process more and more of the alerts that come in from other security products. And so I would just say it's a very big focus that we have both with our partners and with ourselves. We do have, you know, services offerings and MDR services internally inside of Rapid7, but our focus is an ecosystem approach to actually tackling this problem that customers are demanding, and thank you so much. Your next question comes from the line of Matt Hedberg from RBC Capital Markets. Please go ahead.
Speaker Change: Coming from other security products and.
Speaker Change: And so I would just say, it's a very big focus that we have both with our partners and with ourselves we do have.
Speaker Change: Services offering an MTR services internally, it's been about 7%.
Speaker Change: But our focus is an ecosystem approach actually tackling this problem that customers are demanding.
Speaker Change: And thank you so much.
Tim Adams: Hi, this is Anusha An from Matt Hedberg. Thanks for taking my questions. Can you just talk a little bit more about the assumptions embedded in the 2024 guidance, you know, as it relates to the conversion rates, the net new pipeline, as well as the macro environment? Yeah, so at a high level, I'd just say we think the macro environment is fairly stable. We're optimistic.
Speaker Change: Your next question comes from the line of Matt Hedberg from RBC capital markets. Please go ahead.
Speaker Change: Hi, This is Alicia on for Matt Hedberg, Thanks for taking my question.
Alicia: Just talk about a little can you talk a little bit more about the assumptions embedded in the 2020 for guidance.
Alicia: As it relates to the conversion rates and net new pipeline as well as the macro environment.
Speaker Change: Yes so.
Corey Eugene Thomas: What I'll remind you of is that as we did our restructuring last year, we really oriented around how we actually deliver the best long-term free cash flow growth, which is the intersection of ARR growth, which, again, we want to actually drive share and win share over the medium term and be a share leader in ARR growth, as well as margin expansion. Those are the two factors that we see as sort of driving the overall free cash flow growth strategy. As we actually think about that in response to your question about how we actually think about guidance and alignment, we're really on that strategy that we outlined in the second half of the year of saying, setting ourselves up to make sure that we have very, very high confidence and conviction that we can hit targets that are outlined but also have a setup so that we can actually exceed one or more of the targets.
Speaker Change: At a high level I can say, we think the macro environment is fairly stable, but we're optimistic but I'll remind you of is that as we did our restructuring last year. When you are really oriented around how do we actually deliver the best long term free cash flow growth, which is the intersection.
Speaker Change: Ergo, which again, we want to actually drive share and win share over the medium term and be a share leader in <unk>.
Speaker Change: As well as margin expansion in both of the two factors that we see are sort of driving the overall free cash flow growth strategy as we actually think about that to your question about how do we actually think about guidance and alignment were really on that strategy that we outlined in the second half of the year I would say setting ourselves up to make sure that we have very very high confidence and conviction that we can hit the targets that are outlined.
Speaker Change: Also have a setup so that we can actually exceed one or more of the targets.
Corey Eugene Thomas: In this market, where the market's a little bit noisy, of course, we would love to actually hit and focus on ARR as a dominant approach to growth, but we also don't want to be hamstrung by that. Our take is that if the market gets a little bit more incrementally noisy, then we can actually focus on margin expansion, and that's just a fine way to actually grow and drive free cash flow expansion. We really think about the guidance being a way to make sure that we can both hit and we actually have the setup to actually deliver better under different circumstances with the trade-off between margin expansion and free cash flow growth. We're always going to want to go and take share, but we don't control the market. Your next question comes from the line of Saket Kalia from Barclays. Please go ahead.
Speaker Change: In this market, where the market is a little bit noisy of course.
Speaker Change: Would love to actually hit and focus on <unk> is the dominant.
Speaker Change: Our approach to growth, but we also don't want me hamstrung by that our take is that if the market gets a little bit incrementally noisy than we can actually focus on margin expansion and Thats, just a fine way to actually go and drive free cash flow expansion. So we really think about the guidance being a set up to make sure that we can both hit and we actually have to setup actually.
Speaker Change: Deliver better under different circumstances with the tradeoff between margin expansion and free cash flow, we're always going to want to make sure we don't control the market.
Speaker Change: Your next question comes from the line of Gasket Telia from Barclays. Please go ahead.
Gasket Telia: Okay, Great Hey, guys. Thanks for taking my questions here.
Tim Adams: Tim, maybe my first one for you is great expense control for next year to drive that free cash flow guide. Maybe the question is, how are you thinking about billings growth as part of that free cash flow equation? I know ARR is the focus, and there seems to be a lot of confidence there, but any thoughts on how to model billings vis-a-vis that ARR guide as we think about those contributors to free cash flow? Yeah, hey, Saket, thanks for the question.
Gasket Telia: Tim maybe maybe my first one for you Greg.
Gasket Telia: Great Great expense control for next year to drive that that free cash flow guide. Maybe the question is how are you thinking about billings growth as part of that free cash flow equation. I know <unk> is the focus but and there seems to be a lot of confidence there, but any thoughts on how to model billings vis vis that <unk> got as we think about those contributor.
Gasket Telia: So it's a free cash flow.
Speaker Change: Yeah, Hey, thanks for the question.
Tim Adams: Generally, you would think of billings and ARR growth rates being very, very similar. A minor exception for 2024, which I mentioned in my prepared comments, our professional services revenue, we expect that to be down modestly in 2024 compared to 2023. So that gives you a minor headwind on billings relative to ARR growth, but they're pretty tightly aligned with that one. Okay. Okay.
Speaker Change: Generally you would think of billings and <unk> growth rates being very very similar a minor exception for 2024, which I've mentioned in my prepared comments, our professional services revenue, we expect that to be down modestly in 2004 compared to <unk> 23. So that gives you a minor headwind to billings relative.
Speaker Change: Our growth, but they are pretty tightly aligned with that one exception.
Corey Eugene Thomas: Corey, if I could squeeze in a follow-up for you, you know, really balanced growth in ARR here in 23 between customer growth and ARR per customer, but it's that latter one I want to focus on just the ARR per customer and just the success and scale that you're seeing with packages. Maybe the question is, what are some of the non-VM products that you're finding customers are using the most? Obviously, they get offered a lot of products as part of those packages. Which of the products do you find that they're using the most as they adopt those packages?
Speaker Change: Got it got it Corey if I could squeeze in a follow up for you.
Corey Eugene Thomas: You know really balanced growth on <unk> here in 'twenty, three between customer growth and <unk> per customer, but it's that latter one I want to focus on just the AOR for customer and just the success and scale that youre seeing with packages. Maybe the question is what are some of the non VM products.
Corey Eugene Thomas: That that Youre finding customers are using the most obviously they get offered a lot of the products as part of those packages, which is the product that you find that they're using the most as they adopt those packages.
Corey Eugene Thomas: You know, look, the big driver, and one of the biggest drivers, I would just say, is the textual response, which, you know, we shared last year. It is a mature business. It has very healthy growth rates, but it also has a lot of late customer demands. It is a must-have.
Corey Eugene Thomas: Yes.
Corey Eugene Thomas: The big driver and one of the biggest drivers I would just say is the detection response, which as we shared last year. It is a scale business and a very healthy growth rates, but it also has a lot of late customer demand. It is a must have and we've always said that's what we actually talked about that business. It's a must do must have business people have to be able to monitor attacks in their environments.
Corey Eugene Thomas: We've always said that's what we actually like about that business. It's a must-do, must-have business. People have to be able to monitor their taxes and their environments. It's not saying that the exposure or textual management is not valuable. We think it's incredibly valuable. In fact, we're continuing to focus on, like, growth. In some ways, though, our strategy is, frankly, to be a market adoption, a unit share leader in the vulnerability, exposure, and tax service management areas, because that really sets us up well to make sure that we're providing value on the textual response to our customers overall. But if you look at it from a raw dollars perspective, it's clear that the textual response is generating the dollars, even though we're focused on really having I got it.
Corey Eugene Thomas: Not saying that the exposure of textbooks and enhancements that we think it's incredibly valuable in fact will continue to focus on growth in some ways, though our strategy is frankly to be a market adoption of unit share leader and the vulnerability exposure tax from some management areas.
Corey Eugene Thomas: Because that really sets us up well to make sure that we're providing value on detection response to our customers' overall, but if you look at from a raw dollar perspective. It is clear the texoma sponsors generate the dollars in there we're focused on really having a broad distribution.
Corey Eugene Thomas: Our risk management exposure management solutions.
Speaker Change: Got it very helpful. Thanks, guys.
Corey Eugene Thomas: Very helpful. Thanks, guys. Thank you. Your next question comes from the line of Jonathan Ho from William Blair. Please go ahead.
Speaker Change: Thank you our next.
Speaker Change: Your next question comes from the line of Jonathan Ho from William Blair. Please go ahead.
Jonathan Ho: Hi, I just wanted to follow up on Saket's question and maybe delve a little bit deeper into your guidance for 2024. Is there a way for you to maybe break it out for us what you expect at a high level or just directionally in terms of the growth rates for traditional VM detection and response as well as the cloud side of things as well? Thank you.
Jonathan Ho: Hi, I just wanted to follow up on <unk> question, then maybe delve a little bit deeper into your guidance for 2024 is there a way for you to maybe break out for us.
Jonathan Ho: What you expect.
Jonathan Ho: At a high level or just directionally in terms of the growth rates for traditional VM detection and response.
Corey Eugene Thomas: I love it. So, thanks for the questions. It's not really a way to break that out because, again, as we do the platform consolidation offers, it's often multiple. Like, VM is a feature of every platform overall.
Jonathan Ho: Louis.
Speaker Change: Cloud side of things as well thank you.
Louis: So thanks for the question, it's not really a way to break that out because again as we do the platform consolidation offers its offer multi beam is a feature of every platform overall, what I would just say, it's one way maybe the easiest would actually think about it is that.
Corey Eugene Thomas: What I would just say is, you know, one way – maybe the easiest way to actually think about it is that we have, I would just say, very reasonable, very, very high-confidence growth in our guidance that's just anchored on, I would say, the trends that we're seeing continuing at very reasonable levels. I actually think we actually have upsides. We actually take our cloud security solutions more mainstream. That's not something that we're factoring in for this year.
Louis: We have I would just say very reasonable very very high confidence in our guidance. That's just acre at all I would say the trends that we're seeing continuing.
Louis: Continuing at very reasonable levels.
Louis: I think we actually have upside if you actually take ourselves security solutions more main stream, that's not something that we're factoring on for this year, it's something that we're looking at is a big growth driver over multiple years.
Corey Eugene Thomas: It's something we're looking at as a big growth driver over multiple years. We have pretty much seen the same type of progress that we actually saw, which was solid, over the course of the last year. We think our market in cloud security is a big one, but it's really sort of like it goes from niche specialists to mainstream cloud security providers, and I talked a little bit about that earlier. So, we see that as a big growth driver over multiple years. It can be an upside to this year, without a doubt.
Louis: We expect to see the same type of progress that we actually saw was a solid over the <unk>.
Louis: Course of the last year.
Louis: Our marketing cloud security is a big one, but it's really a sort of like it goes from niche specialist to mainstream cloud security providers and I'll talk a little bit about that earlier, but we see that as a big bookshop over multiple years it would be upside to this year.
Tim Adams: I would just say the core linchpin is the continued progress that we see in detection and response, and we expect that to be fairly consistent. And, you know, we see upside from some of the other emerging areas, but they're not factored into our baseline assumptions. When we think about your question about the given guidance, we actually just really center the guidance on what we actually have seen, have visibility, have high confidence in, and the stuff that we're working on delivering. That just flows into some of how we actually think about upside. Corey, the only thing I would add to what you mentioned in your prepared comments is that we're really seeing the market adopt these packages, and it's really responding with customers. It's over 100 million ARR, and they were introduced roughly about a year ago. So we're really starting to see the track.
Louis: Without a doubt I would just say the core let's face it the continued progress that we see in detection response.
Louis: And we expect that to be fairly consistent.
Louis: And we see upside from some of the other emerging areas, but they are not factored into our baseline assumptions. When we think about to your question now to give you guidance, we actually just really centered on the guidance on what we actually have seen have visibility have high confidence in and it is something we're working on delivering that disclose into sort of how we actually think about off site.
The only thing I would add which you mentioned in your prepared comments is we're really seeing the market adopt these packages and it's really resonating with customers.
Louis: Of our $100 million of <unk>. They were introduced roughly about a year ago. So we're really starting to see that traction.
Tim Adams: And that gives you a larger AR or ASP per customer. Thanks for the questions, John. Excellent. Your next question comes from the line of Rob Owens from Piper-Thanley. Please go ahead.
Louis: That gives you a large larger asps.
Louis: Asps per customer.
Speaker Change: Thanks for the questions excellent. Thank you.
Speaker Change: Your next question comes from the line of Rob Owens from Piper Sandler. Please go ahead.
Rob Owens: Good evening, and thanks for taking my question. Corey, I was hoping you could maybe drill down into that commentary about driving more cloud security in a mainstream environment and exactly what you're saying there. Number two for me is just around customer count and kind of looking at the 11,500, obviously have declining customer counts over the last The Bulletproof Executive 2013, What's really the catalyst to get that? What's the partner network? Is this the maturation of Salesforce in terms of selling the platform? Just what's going to get that moving?
Rob Owens: Good evening and thanks for taking my question.
Rob Owens: Corey I was hoping you could maybe drill down into that commentary about driving.
Rob Owens: More cloud security in a mainstream environment exactly what's your what youre, implying there and number two for me is just around customer count and kind of looking at the 11500, but obviously have seen declining customer counts over the last couple of years in terms of either net new where year over year growth. However, you want to look at it.
Rob Owens: What's really the catalysts to get that moving again, what's what's it going to take is it the is it the partner network as a maturation of the sales force in terms of selling the platform.
Corey Eugene Thomas: Because it's not that Yeah, I think both of those are very sort of fair. So, on the first question, Robbie, what was your first question before I added the second one? Mainstream cloud. Yeah, mainstream cloud. What does mainstream cloud mean?
Rob Owens: What's going to get that moving as it is not that big of number I guess in the relative scheme of things.
Yes.
Rob Owens: Both of those are very software so.
Rob Owens: On the first question, Rob what was your first question for a second one.
Rob Owens: Well, yes sure.
Rob Owens: What does that mean luxury cloud I mean exactly.
Corey Eugene Thomas: Yeah, so, the way that we've seen the market so far, keep in mind, when we were part of Dewey Cloud, we got direct access. And so we have a very healthy cloud business and a growing cloud business. We have not, I'll just be explicit, is that we are accelerating our investment in the cloud because what we've actually found is that the early adopters of cloud security technology were cloud security specialist teams. They were special teams that were not the main security teams that did nothing but cloud security, and they were very focused on that.
Speaker Change: Yes, so the way that the way that we've seen the market so far keep in mind, when we acquired <unk>.
Rob Owens: We got direct access and so we have a very healthy cloud business and our growing cloud business.
Rob Owens: We have not I'll just be explicit.
Rob Owens: Is that we are accelerating our investment in the cloud because what we've actually found is that the early adopters of cloud security technology, where cloud security specialist teams or special teams that were not demand security teams to get nothing by security.
Rob Owens: And they were very focused on that and we've been participating in that market and you see people like the wizards of the world doing quite well.
Corey Eugene Thomas: When we were participating in that market, and you see people like the wizards of the world doing quite well in some of that, what we actually see as we go out, though, if you think about mainstream enterprise, think about Russell 3000 and their private equivalent and all those other companies out there. Those are folks that are not going to have five to ten people just for cloud security. They actually have to have security as part of their core mandate.
Rob Owens: What we actually see as we go I don't know if you think about like the only think about the mainstream enterprise think about that Russell 3000, and their profit equivalent and all those other companies out there those are folks that are going to have like five to 10 people stuff just for passenger.
Rob Owens: Actually have to actually have security as part of their core mandate. It has to be integrated in it still has to be highly functional heads the accessible easy to use after the luminous team results.
Corey Eugene Thomas: It has to be integrated in. It still has to be highly functional. It has to be accessible, and easy to use.
Corey Eugene Thomas: It has to deliver the key results, but it has to be in the context of their overall security operations program. Lots of those customers have not yet adopted cloud security. We look at cloud security as a massively untouched market. In a similar way, Rob, the way to think about it is that when we went into the SEM market originally, people were just like, wow, that market's been around forever, and it's a little bit tapped. We said, "No, most SEMs are only designed for very complex, large, complex enterprises. Most mainstream enterprises don't have a functional SEM because it has not been designed for that ease of use, that mass market efficacy, and efficiency.
Rob Owens: But it has to be in the context of their overall security operations program lots of those customers have now adopted cloud security selection.
Rob Owens: Look at cloud security is in <unk>.
Rob Owens: So the Texas market similar way all the way to think about it is that.
Rob Owens: When they to the.
Rob Owens: Market originally and people just like Wow that market's been around forever and it's a little bit capped and we said no no. Most sims are only designed for very complex large complex enterprises. Most mainstream enterprises don't have functional said because there has not been designed so that ease of use.
Rob Owens: That mass market efficacy and efficiency.
Corey Eugene Thomas: We see the same dynamics in the cloud, and we view that as a largely untapped market. There are things that we are doing right now and investing in to actually allow very complicated things about how you assess risk environments, how you do detection and response in cloud environments to actually be part of a mainstream security operations and risk program. That's the core of what we're actually looking at when we talk about that mainstream enterprise. It's the large majority of companies that have not purchased cloud security and are not going to do it at the traditional price tags of a half-million-dollar plus for those types of solutions.
We see the same dynamics that we view that as a largely untapped market. There are things that we actually are doing right now and investing and actually.
Rob Owens: Very complicated things about how you assess risks environment, how do you do detection response and cloud environments to actually part of a mainstream security operations and risk program, but thats. The core of what we're actually looking at when we talk about sort of that mainstream enterprise. It's the SP.
Rob Owens: The large majority of the companies that have not purchased cloud security and are not going to do it at the traditional price tags of a half million dollars plus for those types of solutions.
Corey Eugene Thomas: That's where we see the big opportunity playing out over the next few years. We think we're well set up for that. Again, we're seeing early adoption of that.
Rob Owens: And so that's what we see the big opportunity playing out over the next few years and we think we're well set up for that again, we are seeing early adoption that we are well set up to that and again I think we have the opportunity to make progress. This year round. It to your other question, which I think should go into which is about the customer count what I would just say lots of the customer count I think we have plenty of space to grow.
Corey Eugene Thomas: Again, I think we have the opportunity to make progress this year on that. To your other question, which is a good one, too, which is about the customer count, what I would just say is lots about the customer count. I think we have plenty of space to grow the customer count, but I actually want to grow it. I think, you know, what I've shared before was that our customer account volume from years past had, you know, a lot of transactional sales in it. The thing I like about 11,000 customers is that we made it a much more strategic base that allows us to truly achieve our TAM and allows us to truly actually get material ARR per customer.
Rob Owens: Customer count, but I actually wanted to what strategically I think.
Rob Owens: I've shared before.
Rob Owens: Was that our customer count volume from years past.
Rob Owens: A lot of transactional sales and it may not look at all of them.
Rob Owens: Now the customers as we've made it a much more strategic base that allows us to truly achieve our Tam.
Rob Owens: It allows us it's truly actually get material <unk> per customer and we expect that to continue to increase.
Corey Eugene Thomas: And we expect that to continue to increase. We will grow our customer base. I'll just say, listen, sales is the fact that we're having a lot of success with the consolidation efforts. And so, what that just means is that your average sales rep needs fewer customers in order to actually hit ARR targets, even though the sales productivity and the ARR for sales reps, we expect to continue to improve this year. Part of how we actually do that, Rob, to your point, is that we have a big focus on that partner ecosystem that you and I have talked about in the past, how critical, you've asked a lot of questions about that. We think that we're ready and equipped.
Rob Owens: We will grow the customer base I'll just citizens sale to sales is the fact that we're having a lot of success with the consolidation efforts and so and that just means that your average sales rep needs fewer customers in order to actually hit our targets even though.
Rob Owens: The sales productivity in the AOR for sales reps.
Rob Owens: We expect to continue to improve this year.
Rob Owens: And part of how we actually do that Rob to your point is we have a deep focus on that partner ecosystem. I think you and I have talked about in the past our critical you've asked a question about that we think that we are ready at a clip. We are a compelling portfolio I would say that that is still be we're seeing lots of momentum I would say, it's still an upstart jamba for the year.
Corey Eugene Thomas: We have a compelling portfolio. I would say that that is still the, you know, we're seeing lots of momentum. I would say it's still an upside driver for the year as we're onboarding partners. We're focusing on a smaller set of partners that actually have massive distribution capabilities, and we're tuning that in. So I think I answered both of your questions. All right. Thanks for the call.
We are Onboarding partners, we're focusing on a smaller set of partners that actually have massive distribution capabilities.
Rob Owens: And we're tuning that here.
Speaker Change: So I think I got both of your questions there.
Speaker Change: Alright, thanks for the color.
Corey Eugene Thomas: Thank you. Your next question comes from the line of Gregg Moskowitz from Mizzou Health. Please go ahead.
Speaker Change: Thank you.
Speaker Change: Your next question comes from the line of Gregg Moskowitz from Mizuho. Please go ahead.
Corey Eugene Thomas: Yeah, hi, this is Mike on behalf of Gregg. Thanks for taking my question here. And perhaps a follow-up to Rob's, you mentioned last quarter that, you know, following the restructuring, you really zeroed in on your installed base, right? Did that focus continue with the same intensity this quarter?
Speaker Change: Yes, Hi, this is Mike on for Greg. Thanks for taking my question here and perhaps a follow up to Rob's.
Mike: You mentioned last quarter that following the restructuring.
Mike: You really zeroed in.
Mike: You really zeroed in on your installed base right did that focus continue with the same intensity this quarter.
Corey Eugene Thomas: Or have you recalibrated back to your sort of traditional approach with respect to the new logo and expansion? Well, I would just say, look, we are in noisy markets. It's actually just, I think, more straightforward to actually tighten and focus in on your installed base.
Mike: Or have you recalibrate it back to your sort of traditional approach with respect to new logo and expansion business.
Mike: Well how does that look we are in in noisy markets. It's actually just adding more straightforward to actually tightened in focusing on your installed base I would just say that's generally a good thing because you have existing relationships of existing contracts that are existing vehicles.
Corey Eugene Thomas: I would just say that's generally a true thing because you have existing relationships, you have existing contracts, you have existing vehicles. I don't think that bias has actually changed. What I would say to the question in the previous question that Rob had is that we are looking to expand the install base, but because our ASPs are growing and the package consolidation is successful, instead of trying to actually force it, we're actually being very thoughtful about our distribution and how we drive distribution and partnerships. And so we have a strategy in the medium term to actually, again, I want to be very explicit; our goal is to actually take share and drive growth and be a very strong grower in the medium term.
Mike: That bias is actually change what I would say to the question in the previous question that Rob had is we are looking to expand the installed base, but because our.
Mike: Asps are.
Mike: Our growing and the packaged consolidations successful.
Mike: Instead of trying to actually force that we're actually really being very thoughtful of our distribution and how we drive distribution and partnerships and so we have a strategy in the near term to actually again I want to be very explicitly that our goal is to actually take share and drive growth and be a very strong grower in the medium term our investments this year.
Corey Eugene Thomas: Our investments this year, if you ask where we're putting our investments this year, we're putting more investments into partnership and distribution and growing that investment at a higher rate than the growth in our direct sales force. And that's a very intentional thing because we actually think that that gives us scale of net new customer acquisition, but it also allows us to actually service more customers who actually need more care. Thank you. Your next question comes from the line of Adam Tindall from Raymond James. Please go ahead.
Mike: We're opening our investments this year, we're putting more investments into the partnership and distribution and growing that investment at a higher rate than the growth in our direct sales force and Thats, a very intentional being because we actually think that that gives us scale of net new customer adds.
Mike: But it also allows us to actually surface more customers actually need more tier.
Speaker Change: Thank you.
Speaker Change: Your next question comes from the line of Adam Tindle from Raymond James. Please go ahead.
Tim Adams: Okay, thank you. Tim, I just wanted to start out with the Fiscal 24 guidance, which is really impressive in terms of profitability. If I look at it, revenue is going to be increasing about $75 million year-over-year, and EBIT is up over $50 million year-over-year, so call it a 75% or so contribution margin on that. If you did that same analysis during Fiscal 23, I think you'd come up with a similar contribution margin or drop-through of revenue to EBIT. So I guess the question would be, because Fiscal 23 had RIF and cost control and stuff like that, how you thought about the build-up to drive similar operating leverage in Fiscal 24 as in Fiscal 23, and the logistics behind it. And I've got a follow-up for Corey.
Okay. Thank you Tim I, just wanted to start out with the fiscal 'twenty four guidance, which is really impressive unprofitability.
Adam Tindle: Look at it revenue is going to be increasing about $75 million.
Adam Tindle: Year over year, and EBIT up over $50 million year over year, so call. It a 75% or so contribution margin on that if you did that same analysis during fiscal 'twenty three I think you'd come up with a similar contribution margin or drop through of revenue to EBIT. So I guess the question would be because fiscal 'twenty three had risk and cost control.
Adam Tindle: And stuff like that how you thought about the buildup to drive similar leverage operating leverage in fiscal 'twenty for us fiscal 'twenty, three and the logistics behind it and I've got a follow up for Corey.
Tim Adams: Yeah, Adam, we try to be very thoughtful when we go into the planning session, you know, as we move into 2024. And a lot of that stems from the actions that we took six months ago with the restructuring. And we really tried to be very deliberate at a department level about where we're going to make our investments.
Adam Tindle: Yes.
Speaker Change: We try to be very thoughtful when we go into the planning session as we move into 2024.
Speaker Change: And a lot of that stems from the actions that we took six months ago with the restructuring and we really tried to be very deliberate at a department level, where we're going to make our investments Cory mentioned a little bit early in the prepared remarks about some of this investment and innovation. So I would expect R&D as we go into next year to tick.
Tim Adams: Corey mentioned a little bit early in the prepared remarks about some of this investment in innovation. So I would expect R&D, as we go into next year, to tick up a little bit as a percentage of revenue. But when we look across the board, I think we see nice leverage across the board in sales and marketing and G&A, and we want to make sure we're investing in the appropriate areas. And I think we can do all of that based on the way we built the plan for this year and still double that free cash flow to at least 160 million as we go into 2024.
Speaker Change: A little bit as a percentage of revenue.
Speaker Change: But when we look across the base I think we see nice leverage across the board in sales and marketing and G&A and we want to make sure we're investing in the appropriate areas.
Speaker Change: We can do all of that based on the way we built the plan for this year and still double that free cash flow.
Speaker Change: At least $160 million as we go into 2024.
Tim Adams: Okay, and quickly, Corey, you know, this obvious improved profitability is impressive, but I wonder how you would reflect on the impact on growth. You added 90 million of net new ARR this year, and it looks like guidance implies around 85 million net new ARR next year, so you know, flat to slightly down. What would it take to maybe push to a new level of net new ARR, a step function above this level of growth? And do you think you could do so while holding this level of profitability? So one, it's a very good question.
Speaker Change: Okay and quickly Corey.
Corey Eugene Thomas: Obvious improved profitability is impressive, but I wonder how you would reflect on the impact on growth.
Corey Eugene Thomas: You added $90 million of net new <unk>. This year it looks like guidance implies around 85 million net new <unk> next year, so flat to slightly down what would it take to maybe push to a new level of net new <unk> step function above this level on growth and do you think you could do so while holding this level of profitability.
Corey Eugene Thomas: <unk>.
Corey Eugene Thomas: So.
Corey Eugene Thomas: What I would say is that we have plenty of growth levers in the business, you know, whether you look at our distribution partners, whether you look at the new pricing capabilities that we actually plan to bring online, whether you look at the fact that we see the same market momentum and consistency that we saw in Q4, and that you see a healthier market, not just stable, but it gets even healthier. So we have, I would just say, growth drivers and catalysts in our own business. There's market ones too.
Speaker Change: So what is a very good question, what I would say is that we have plenty of growth levers in the business.
Speaker Change: Whether you looked at our distribution partners, whether you looked at the new pricing capabilities that we actually.
Speaker Change: Our plan to actually bring online.
Speaker Change: You look at the fact, what do we see the same market momentum and consistency that was our Q4.
Speaker Change: And you see a healthier market back to stable.
Speaker Change: So we have I would just say.
Speaker Change: Both drivers and catalysts in our own business.
Corey Eugene Thomas: There are things that we're doing in our partner distribution ecosystem. So we have a number of catalysts and growth drivers. What I'll just say is from a guidance perspective, we just don't think that's material to actually put into our baseline guidance assumptions. So, you know, we're always going to pursue and look at pursuing higher growth, but in our model, what we're committed to is actually delivering very strong fee cash flow growth, which I am thrilled about, and my focus is for that to come from higher ARR growth. But if the market's tighter or tougher, then that can just easily come from margin expansion, which Tim and our finance team have plenty of room to do. Your next question comes from Fatima Boolani from Citi. Please go ahead. Good afternoon.
Speaker Change: Theres market ones.
Speaker Change: Things that we're doing in our partner distribution ecosystem. So we have a number of catalysts and growth drivers.
Speaker Change: Our guidance perspective, we just don't think that's material to actually put into our baseline guidance assumptions.
Speaker Change: Always going to pursue and look at pursuing higher growth, but in our model. What we're committed to is actually delivering very strong free cash flow growth of which I am thrilled and my hope is for that to come from higher IRR growth.
Speaker Change: But if the market's tighter or tougher than that just need to come from margin expansion.
Speaker Change: Which Tim and our financing, let's say everyone today.
Speaker Change: Your next question comes from the line of Adam <unk> from Citi. Please go ahead.
Adam Tindle: Good afternoon. Thank you for taking my questions.
Fatima Aslam Boolani: Thank you for taking my questions. Corey, I wanted to revisit the ARR Outlook and maybe ask you this question from a different angle. So when I stack up all of the goodness that you're seeing with respect to the package momentum, the larger deal sizes, the ASP increases commensurate with that, you know, why would we see a deceleration and, frankly, a blackening out of your net new ARR? Can you give us sort of the flip side of the coin on what are some of the conservative elements that you're baking into your outlook here? You know, perhaps there is some cannibalization and maybe some compression of existing spend. I would really like to better understand the other side of the coin on that implied conservatism.
Adam Tindle: Accordingly.
Adam Tindle: I wanted to reinforce what can you are on the outlook and maybe asking the next question from a different angle. So when I stack up all of the goodness that you're seeing with respect to the package momentum the larger deal sizes, the AFP increases commensurate with that.
Adam Tindle: Why would we see a deceleration of them frankly.
Adam Tindle: If you can give us sort of the flip side of the coin on what are sort of sharpness elements, you're baking into your outlook here, perhaps there is some cannibalization.
Adam Tindle: Ladies and compression of existing spend I, just really like to better understand the other sides of the coin on that that imply can circuit tiguan.
Corey Eugene Thomas: Even though things are going well, and you're frankly entering year two of a much stronger, better equipped, and enabled sales force in selling these packages. Thank you. No, it's a very fair and good question.
Adam Tindle: Even though things are going well and you're entering year two of a much stronger or better.
Adam Tindle: <unk> enabled sales force and installing these pack okay. Thank you.
Speaker Change: Yes. It is.
Speaker Change: Very fair and good question today. So I think the first thing I would just say is that we do expect the market to be noisy.
Corey Eugene Thomas: So I think that the first thing I would just say is that we do expect the market to be noisy. And so overall, the first thing you should just say is that, look, while Q4 was, you know, consistent and stable, we saw upward momentum on deals getting funded, and that was very healthy.
Speaker Change: And so overall so the first thing you just say is that.
Speaker Change: Look if we actually.
Speaker Change: While Q4 was consistent and stable we saw upward momentum on deals getting funded.
Corey Eugene Thomas: Look, if the market stays very healthy, then we have room. That's a good thing. We actually have upside there. That's not a bad thing. That's not a problem.
Speaker Change: And that was very healthy look if the market stays very healthy.
Speaker Change: We have room, that's a good thing we actually have upside there that's not a problem it would be inappropriate for my perspective to actually assume that all market noise significant challenges are behind us. That's just not something that I am going to do what we're going to do from a fundamental planning perspective.
Corey Eugene Thomas: It would be inappropriate from my perspective to actually assume that all market noisiness and challenges are behind us. That's just not something that I'm going to do. What we're going to do from a fundamental planning perspective. But if it is, that's, like, very consistent. I would just say that's probably one of the biggest factors that I would consider.
Speaker Change: But if it is that's sort of like.
That's very.
Speaker Change: That's very consistent I would say, that's probably one of the biggest factors.
Corey Eugene Thomas: And, you know, to your other point, I would just say, like, if I look at the positive signals and they stay consistent, if, you know, our conversion rates are great, we're seeing some of the best conversion rates we've actually seen. But, I don't assume that record-high conversion rates stay record-high. I'll just be explicit about that.
Speaker Change: That I would consider and then to your other point if things stay I would just say like if I look at the positive signals.
Speaker Change: And that will stay consistent like our conversion rates are great. We are seeing some of the best conversion rates you are actually seeing.
Speaker Change: I don't assume that record high conversion rates stay record high I'll just be explicit about that even though they've been recognized for couple of quarters.
Corey Eugene Thomas: Even though they've been record highs for a couple quarters, that's great. If you look at what we're doing from a distribution and building pipeline perspective, as we've actually sort of come back from the RIF, we're really investing heavily in our partner ecosystem. I'll just say that our assumption is that it turns on later this year and into early next year, but that actually may turn on sooner. And that's actually a great sort of thing if that actually happens there.
Speaker Change: That's great.
Speaker Change: If you look at what we're doing.
Speaker Change: A distribution and building pipeline perspective as.
Speaker Change: As we've actually sort of like come back from the risks, we're really investing heavily in our partner ecosystem I would just say that our assumption is that turns out later this year and.
Speaker Change: And into early next year, but that actually may turn on sooner and thats actually a great sort of like being if that actually happens there and so if the positive things that we actually see in the business and outlook.
Corey Eugene Thomas: And so if the positive things that we actually see in the business outlook continue, then we'll definitely, to your point, sort of be able to perform above. But we do not factor that into sort of like the baseline assumptions to just say in a noisy market that things are going to actually be all good. I think that that's more of just the approach that we take. But what we are committed to on the flip side, and this is something that we actually instituted at the end of last year coming out of our restructuring, is we are committed to actually delivering strong street cash flow growth and setting ourselves up to actually exceed expectations somewhere along the line in the medium term. And that is sort of like a commitment that we make.
Speaker Change: Then we will definitely to your point sort of be able to perform above we.
Speaker Change: We do not factor that into sort of likely based on assumptions to just stay in a noisy market that things are going to actually be all good I think that's more of just the approach that we take we are committed to on the flip side of this.
Speaker Change: Is something that we actually instituted at the end of last year coming out of restructuring is we're committed to actually delivering strong free cash flow growth and setting ourselves up to actually exceed expectations somewhere along the line in the medium term setup and that is sort of like a commitment.
Corey Eugene Thomas: It's like, hey, if the market is noisy, then we actually have margin expansion. But if we see that health and consistency that we actually saw coming out of last year and that continues stably throughout this year and it goes up, then we'll feel very good about things, and we'll be going stronger. I would just add that we're seeing strong demand from CISOs because they have a backlog of projects. They do
Speaker Change: Hey, if the market is noisy and we expect margin expansion, but if we've seen their health and consistency that we actually saw coming out of last year that continue to stabilize throughout this year and it goes up and it will feel very good about <unk> and will be go on stronger.
Speaker Change: I would just add we're seeing strong demand from <unk>, because they have a backlog of projects and the cfos have gotten in the way a little bit to slow things down to really finally about the projects that are in the backlog.
Corey Eugene Thomas: And the CFOs have gotten in the way a little bit to slow things down to release. Funding of the projects that are in the backlog – CISOs have a lot of stuff that they want to do. We actually saw that those get funded nicely, sort of coming out of last year. And I would love to see, in our aspirations, those keep getting funded. We don't have a demand problem.
Speaker Change: T cells have a lot of stuff that they want to do we actually saw that those get funded nicely.
Speaker Change: Sort of like coming out of last year, and I would love to see our aspiration is to see those you can fund. It we don't have a demand problem and we do have like our customers have to continue to fund securities and the pace of that funding is something that we keep an eye on.
Gray Wilson Powell: We do have – our customers have to continue to fund security, and the pace of that funding is something that we keep an eye on. Your next question comes from Gray Powell from BTIG. Please go ahead. Okay, great, thanks for taking the question. Yeah, so that last answer was really thorough, but I did just have one follow-up question for Fatima.
Speaker Change: Your next question comes from the line of Gray Powell from BT I G. Please go ahead.
Gray Wilson Powell: Okay, great. Thanks for thanks for taking the question.
Gray Wilson Powell: Yes, So last answer was really thorough.
Gray Wilson Powell: I did just have one follow up to <unk> and to Adam's question.
Corey Eugene Thomas: So if I just look at, like, net new ARR trends, you bounce back to positive territory in Q3. But obviously, obviously, based on the Q4 results, the 2024 guidance implies that net new ARR additions are down. I'm just curious, like, in terms of linearity, at some point, do you think we will get back into positive net ad growth in 2024? Like, is that something that could happen in the second half of the year? Or is that really more of a 2025 thing?
Gray Wilson Powell: So if I just look at like net new trends.
Gray Wilson Powell: You bounce back to positive territory in Q3.
Gray Wilson Powell: Obviously at the Q4 results.
Gray Wilson Powell: 24 guidance implies that net new.
Gray Wilson Powell: Additions is down.
Gray Wilson Powell: Just curious like in terms of linearity at some point do you think we get back into positive.
Gray Wilson Powell: Net add growth in 2020 for like is that something that could happen in the second half of the year or is that really more of a 2025 of them.
Corey Eugene Thomas: Well, similar to the last question, I think you're asking, A, if you know more, and if the market's stable and good, do you have a chance to grow? I think, yes. Look, we have the capacity to actually grow faster. That is not a framework that we're going to start out with. The framework that we're starting out with is basically the free cash flow framework versus actually taking a definitive view that the market is completely stable. If that actually happens, then without a doubt, we'll actually grow, and we'll grow faster. Okay, really helpful. There is a lot of color there.
Speaker Change: Well I think.
Speaker Change: Similar to the last question I think youre asking a as you know more and if the market is stable and good you have the chance to go higher yes.
We have the capacity to actually grow faster that is.
Speaker Change: It's not a framework that we're going to start out with the framework that we're starting out with its basically the free cash flow framework versus actually taking a definitive view that the market is completely stable.
Speaker Change: If that actually happens and what that will actually grow.
Speaker Change: Go faster.
Okay really helpful color I appreciate that and then last one on my side just did the risk from August has any.
Corey Eugene Thomas: Appreciate that. And then, last one on my side, just did the rift from August have any, you know, outsized impact on productivity or conversion rates or anything in Q4? Or was Q4 pretty much, you know, exactly like you expected?
Speaker Change: Outsized impact on productivity your conversion rates or anything in Q4 was Q4 pretty much.
Speaker Change: Exactly like you expected it to be.
Corey Eugene Thomas: Q4 was pretty much exactly, I would say even Q4 was slightly better than we expected. I mean, like we saw again, we saw incredibly strong conversion rates. We saw customers funding projects. It was not a budget flush, to be clear.
Speaker Change: Q4 was pretty much exactly obviously Q4 is slightly better than we expected I mean like we saw again, we saw incredibly strong conversion rates you saw customers funding projects.
Corey Eugene Thomas: There was not like a lot of net new things, but projects that customers had been waiting to spend on, they actually funded those projects. Our sales team executed extraordinarily well. We liked a lot of what we saw in Q4, and we liked a lot of the momentum that we actually have here. Understandable. Okay. Thank you very much.
Speaker Change: It was not budget flush to be clear that was not like a lot of net new things that projects that customers have been waiting on spending on they actually funded those projects our sales team executed extraordinarily well.
Speaker Change: We liked a lot of what we saw in Q4, and we liked a lot of the momentum that we actually have here in this year.
Understood. Okay. Thank you very much.
Corey Eugene Thomas: Thank you. Your next question comes from the line of Ashenrik Kothari from Robert Baird: please go ahead. Yeah. Thanks for taking my question. So, Corey, you mentioned deepening investments in the partner ecosystem and you also highlighted leverage marketplaces like AWS. So, just as a follow-up to an earlier question about the new customer code, it looks like CSPM is, of course, central to your strategy. Can you talk about the traction with the AWS marketplace and how much potential you see for that as we already offer products that are integrated into the AWS ecosystem, kind of aimed at reducing the cloud attack surface and mitigating cloud risk? So, yeah, any color would be helpful here.
Speaker Change: Thank you.
Speaker Change: Your next question comes from the line of Rick <unk> from Robert Baird. Please go ahead.
Rick: Yes, thanks for taking my question.
Rick: Corey you mentioned above.
Rick: These new investments offer ecosystem.
You also highlighted.
Rick: Leverage market places like AWS.
Just as a follow up to an earlier question.
Rick: A new customer.
Rick: It looks like <unk> was a profile of our growth strategy.
Rick: Can you talk about the cross sell.
Rick: Looking at our growth marketplace.
Rick: How much potential do you see that.
Rick: We already offer products that are.
Rick: Thank you very little data revenue per system.
Rick: And by reducing the cloud box office is on mitigating cloud growth.
Speaker Change: So any color would be helpful.
Corey Eugene Thomas: Yeah, I don't have the numbers, but we probably wouldn't break them down. I would just say we saw good growth in AWS Marketplace traction and sales last year. We're expecting, I would just say, that growth to continue. This is part of our distribution strategy and engine.
Speaker Change: Yes, I don't have the numbers off, but we probably won't break them down, but I would just say we felt good growth in AWS marketplace traction in sales last year were expecting I would just say that growth to continue this as part of our distribution strategy in the engine.
Corey Eugene Thomas: And I would just say there's continued momentum, and we have upside there. But we've seen healthy growth and demand through that marketplace and through our AWS partnership. We're a strategic partner for AWS. They've been a good partner. It's been beneficial on the sales and go-to-customer side, and it's something that we and they are investing more in. Okay.
Speaker Change: And I would just say its continued momentum and we have upside there.
Speaker Change: But we've seen healthy growth in demand through that marketplace into our AWS partnership where strategic partner AWS.
Speaker Change: They've been a good partner.
Speaker Change: It's been beneficial.
Speaker Change: Sales and go to customer side is something that we and they are investing more into.
Alex Henderson: Thanks, Corey. Your next question comes from the line of Alex Henderson from Needham & Company. Please go ahead.
Speaker Change: Got it thanks Kurt.
Your next question comes from the line of Alex Henderson from Needham <unk> Company. Please go ahead.
Corey Eugene Thomas: Thanks, um, a couple of comments made on the call... It seemed a little..., to analyze. And you said you were planning to gain share. But I don't really know what you think the market growth rate is that you're gaining share against. So I was wondering if you could just give us some sort of a prediction about what the rate of market growth is in the near term. That's an intermediate time frame.
Speaker Change: Thanks.
Alex Henderson: Couple of.
Alex Henderson: Comments made on the call.
Alex Henderson: Just seemed a little.
Alex Henderson: Difficult to.
Alex Henderson: To analyze you said you plan to gain share.
Alex Henderson: But I don't really know what you think the market growth rate is.
Youre gaining share again, so I was wondering if you could just.
Alex Henderson: Give us some sort of person on what.
Alex Henderson: The rate of the market growth is.
Alex Henderson: Well, it's in the near term.
Alex Henderson: And say intermediate timeframe.
Corey Eugene Thomas: In that context, you do talk a lot about new customers. It seems to me that you're still shedding some of the smaller customers and shifting mix to the larger customers. Somewhat of a bimodal number, if you could give us... Quantification of what the larger customers are.
Alex Henderson: And.
Alex Henderson: In that context.
Alex Henderson: Can you just talk a lot about.
Alex Henderson: The new customer adds.
Alex Henderson: And it seems to me that you're still shedding some of the smaller customers and shifting mix to the larger customers. So it's somewhat of a bimodal number if you could give us a little bit more quantification on what the larger.
Corey Eugene Thomas: Customer Growth Rates Look Like, fallout at the bottom. The Bulletproof Executive 2013. Yeah, so good questions.
Alex Henderson: Customer growth rates look like versus the fallout at the bottom of the pie that would be great. Thanks.
Speaker Change: Yes so.
Corey Eugene Thomas: I'm not going to try to do the IDC Gartner thing of giving the overall market growth rates because I'll probably misremember the specificity of them. But what I would just say is that my comment, largely, Alex, is that our assumption or our plan is to see growth rate acceleration over the midterm. Think about that two to three year window.
Speaker Change: Good question I'm, not going to try to do the IDC Gartner they have given me.
Speaker Change: Overall market growth rate because.
Speaker Change: Cause I, probably like Misremember subsequence, we haven't but what I would just say this.
Speaker Change: My comment largely Alex is that our assumption in our plan is to see growth rate acceleration.
Speaker Change: Over the near term you're thinking about that two to three year window. So we do actually planned to see like growth acceleration.
Corey Eugene Thomas: So we do actually plan to see growth acceleration. And we plan for that to actually be ahead of where the analyst in the market is. And I think we can look at what they have with their growth rates. It's probably the best indicator.
Speaker Change: And we plan for that to actually be ahead of where the.
Speaker Change: The analysts and the market is and I think we can look at what they have is their growth rates.
Speaker Change: It's probably the best arbitrator.
Corey Eugene Thomas: It's certainly something to bet on, but we see the capacity, and our strategy for that, just to be very specific, is that this year, our investment is rotated to products and product differentiation, distribution, and market expansion. So we're very focused on what are the high growth areas, detection and response, taking cloud security mainstream, getting more leverage for us and our partners through our AI and SOC investments, and then extending our partnership ecosystem, especially in the managed service space. We think that those investments will allow us to both be differentiated to address more customer demand that we actually see in the overall market, and actually have a more cost-efficient go-to-market process and distribution process. That's where we're actually putting our dollars and our investments.
Speaker Change: Turning to something that actually fit, but we see the capacity and our strategy for that just to be very specific at that.
Speaker Change: This year.
Speaker Change: Our investment is rotated to products and product differentiation.
Speaker Change: And distribution and market expansion.
Speaker Change: Very focused about like what are the high growth areas detection response, taking cloud security mainstream getting more leverage for us and our partners through our AI and stock investments and then extending our partnership ecosystem, especially in the managed service space. We think that those investments will allow us to both be differentiated to address more customer demand that we actually seen.
Speaker Change: The overall market and actually have a more cost efficient.
Speaker Change: Go to market motion in distribution motion, that's where we're actually putting our dollars and our investments we think that over the next three years.
Corey Eugene Thomas: We think that over the next three years, we can be a very, very strong both free cash flow grower and a total top-line ARR grower with that actual setup and that investment. I won't comment more on the guide because I think I talked about the different structure we have on the guide that we instituted at the end of last year, so I think I've talked about that extensively, but that is just not the totality of how we actually see the mid-term and the long-term, or even fully this year. Your other question about customer counts: you're absolutely 100% right. What I would just say is that you can say it's smaller customers. That growth in customers, I think you nailed it, Alex, actually matched a shift from transactional sales, and yes, some smaller customers, to a higher mix of strategic sales, where Rapid7 is a dominant security provider, with all the opportunity for expansion and growth on that.
Speaker Change: We can be a very very strong both free cash flow grower, but also a total top line grower with the actual setup and with that investment and I won't comment more on the guy cause I think I talked about like the different structure, we have in the gathering it stood at the end of last year. So I think I've talked about that extensively.
Speaker Change: Yes.
Speaker Change: This is not sort of like the totality of how we actually see the midterm and the long term.
Speaker Change: Or even fully this year your other question about customer counts, you're absolutely 100% right.
Speaker Change: <unk>.
Speaker Change: I would just say as you can see a solid customer what I would just say it's.
Speaker Change: That's both in customers I think you know that Alex actually Max a shift from transactional sales and yes, some smaller customers to a higher mix.
Speaker Change: Strategic sales were rapid seven is a dominant security provider.
Speaker Change: With all of the opportunity for expansion and growth on that so youre seeing a real shift in mix as reflected by our IR for customer and so it is an intentional as you say shedding.
Corey Eugene Thomas: So, you're seeing a real shift and mix, as reflected by our AR for customers in there. So, it is an intentional, as you say, shedding of, I would say, lower, more transactional customers, transactional to focus, not really the dollar size, to actually being more strategic, and I think we're executing great on that strategic period. So, to that point, that's why I said we weren't focused. Your question on, like, what's the growth rate? I think a while ago we provided, like, the platform growth rate. I don't have that metric on hand and ready to go right now.
Speaker Change: I would say lower.
Speaker Change: Lower more transactional customers as transactional focus actually the dollar size to actually being more strategic and I think we're executing great on that sort of like strategic period, so to that point.
Speaker Change: We're not focused.
Speaker Change: Your question on like what's the book, but I think a while ago. We provided like the platform growth rate you don't have that metric on hand, and ready to go at it now that number is growing faster than the overall.
Corey Eugene Thomas: That number is growing faster than the overall number. It is. I just don't have it right.
Speaker Change: Just don't have it right.
Corey Eugene Thomas: We didn't break it out. I don't have a problem with that. It's a few points higher than what we disclosed. Exactly. Yeah, but thanks for the question. Thank you. Your next question comes from the line of Michael Turits from KeyBank Capital Markets. Please go ahead. Hey guys. Eric Heath here. Hey, Tim. Hey, Corey. Good to talk to you again. I mean, just along the same vein of the questions I've been asked, but I guess I'll just ask, too. Corey, I guess.
Speaker Change: Yes.
Speaker Change: It's a few points higher than what we disclosed.
Speaker Change: Okay.
Speaker Change: So my question. Thank.
Speaker Change: Thank you.
Speaker Change: Yes.
Speaker Change: Okay.
Speaker Change: Your next question comes from the line of Michael <unk> from Keybanc capital markets. Please go ahead.
Michael: Hey, guys sorry theater.
Hi, good to talk to you again.
Michael: Okay.
Speaker Change: Similar vein.
Speaker Change: Questions have been asked but.
Speaker Change: Yes, I'll just add too.
Michael Turits: What are the areas of the business where you can kind of best control your own destiny when it comes to that AR acceleration? That's number one. And then two, just curious, performance in the quarter. Just curious if there was anything called out.
Speaker Change: Alright, I guess.
Speaker Change: What are the areas of the business, where you can kind of best control your own destiny. When it comes to that acceleration of some alignment and then to just.
Speaker Change: Yes.
Speaker Change: Performance in the quarter just curious if there was anything to call out what demand trends are just execution from the team whether it's American diverse international and if there's anything to call out between us to Geos.
Corey Eugene Thomas: Demand trends or just execution from the team, whether it's America versus international, if there's anything to call out between those two geos. Thank you. Oh, that's a great question. I might tag-team that with Tim.
Speaker Change: That's a great question I might tag team dealt with here I.
Corey Eugene Thomas: I actually thought Q4 was fairly solid from my perspective. There's nothing that stands out, Tim. I don't know whether you think about anything that stands out. AMIA performed very strongly in Q4 in terms of new bookings. Yeah, which is an improvement over the prior year. Right. So that was healthy.
Speaker Change: I actually thought Q4 was fairly solid from our perspective, there's nothing that stands out terminal level do you think about anything that stands out.
Speaker Change: EMEA performed very strong in Q4 in terms of new bookings, which is which is an improvement over the prior year, Brian So no.
Tim Adams: But I would just say that Q4 was overall very healthy in general. I think on the stuff that we can control, I would just say we're taking, Eric, very disciplined midterm investments. Look, we can control our distribution ecosystem. As I've said before, we are invested in the partner. As we bring on new distribution, things were being quite successful at it. I just don't factor that in, and that's why I said you could figure out how you want to talk about them.
Speaker Change: But I have to say that Q4 was overall very very healthy in general.
Speaker Change: I think on the stuff that we can control I would just say, we're taking a very disciplined near term investment. So look we can control.
Speaker Change: Our distribution ecosystem.
Speaker Change: Before we are investing in the partner as we bring on new distribution things, we're being quite successful at it.
Speaker Change: Just don't factor and Thats why I can say it like you can figure out how you want to talk about those we don't factor in things that are in motion are in play even if there is sort of like optimistic and doing well and head into baseline assumptions. This is not the way we're going to approach. It we talked to you about things that are actually already done and completed.
Corey Eugene Thomas: We don't factor in things that are in motion or in play, even if they're optimistic and doing well in their heads, into baseline assumptions. That's just not the way we're ever going to approach it. We talk to you about things that are actually already done and completed. But we have a lot of control. Look, we're in the right markets. We're in sort of like the growth gear parts of security, detection, and response to anchor tenants. We have incredible conversion rates.
Speaker Change: But we have a lot of control look we're in the right markets, where in sort of like the growth of your parts of the security detection and response the anchor tenant we have incredible conversion rates.
Corey Eugene Thomas: We're set up well. We don't have to change our market position. So, what I would say is we have the capacity to actually do well in the market. But what we're communicating, I think overall, I'll reiterate, is that the market, I'll flip it around and just say, the setup that we've given you is actually one of control.
Speaker Change: We're set up well, we don't have to change our market position. So I would say is we have capacity to actually do well in the market.
Speaker Change: But what we're communicating I think overall I'll reiterate is that the market.
Speaker Change: I'll flip it around and just say.
Speaker Change: This setup that we gave you is actually went up control what we've actually said is that like we can actually grow.
Corey Eugene Thomas: What we've actually said is that we can actually grow well and generate free cash flow independent of what happens in the market. And we think that's a great setup in a market that's a little bit noisy. And I would just say if the market stays safe, if the market's stable, then we actually have plenty of capacity for top-line growth. Your next question comes from Joshua Tilton from Wolf Research. Please go ahead. Hey, this is Patrick on behalf of Josh.
Speaker Change: Well and drive free cash flow independent of what happened to the market and we think that's a great setup in a market that's a little bit noisy and I would just say if the market. If the market is stable then we actually have plenty of capacity for top line growth.
Speaker Change: Your next question comes from the line of Joshua Tilton from Wolfe Research. Please go ahead.
Speaker Change: Yeah.
Speaker Change: Hi, This is Patrick on for Josh.
Joshua Tilton: Corey, you mentioned that the environment was noisy a few times now. I was just wondering if you could unpack that a little bit further. And then also, one of your competitors mentioned that the mid market was strong in the fourth quarter. Curious if you saw any of that outsize strength in the mid market space or maybe increased competition. Thanks. Yeah, I'll do the second one first.
Patrick: You mentioned that the environment was noisy a few times now I'm just wondering if you could unpack that a little bit further and then also one of your competitors mentioned that the mid market was strong in the fourth quarter.
Patrick: Curious if you saw any of that outsized strength in the mid market space or maybe increased competition. Thanks.
Corey Eugene Thomas: The mint market was, I would just say, stable and consistent for us, and it was healthy. I think we made adjustments earlier, so I think it's different people processing their observations about the mint market. We processed ours at the start of last year, and I would say it was at or exceeded our expectations, and we think it's a healthy driver and contributor. And then, please remind me of your first question. I'm not good at multiple questions. You mentioned that the environment was noisy. Yeah, so here's what I mean by noisy.
Speaker Change: Yeah, I'll do the second one first.
Speaker Change: Market without as a stable and consistent for us and it was healthy I think we made adjustments earlier I think it's different people process and there are observations about the mid market, we process or the start of last year and I would say it was at or exceeded our expectations and we think it's a healthy.
Speaker Change: Driver and contributor and then remind me of your first question again.
Speaker Change: Just you've mentioned in the remarks that the environment was noisy.
Speaker Change: Yeah. So here is what I mean by noisy.
Corey Eugene Thomas: When we talk to C-cells and security teams, we see plenty of demand. Like, there is plenty of demand. What's been noisy is if you look over the course of last year, there were different points in time where people were having trouble getting those projects funded versus not. And so we don't see a problem with actual security demand. The question is, can those security teams get those projects funded? If they're getting those projects funded, we feel great, and things are great, but I'm not going to take a dependency that basically all the security projects that we actually see are actually going to get funded. That's what's been making the noise.
Speaker Change: With Facebook.
Speaker Change: When we talk to see sales and security teams, we see plenty of demand there.
Speaker Change: There is plenty of demand.
Speaker Change: What's been noisy if you look over the course of last year.
Speaker Change: Different points in times, where people were having trouble getting those projects funded.
Speaker Change: It is not.
And so we don't see a problem.
Speaker Change: Purity demand. The question is can those security teams get those projects funded if theyre getting the deposits funded we feel great and things are great, but im not going to take a dependency that basically all the security projects that we actually see are actually going to get funded that's what's been noisy over the course of last year you had a difference based upon where security team for all they have to slow down some of their investments.
Corey Eugene Thomas: Over the course of last year, you had different periods of time where security teams were told they had to slow down some of their investments. I, you know, I would say that my hope is that what we're seeing from the regulatory environment and what we're seeing more broadly is going to encourage people to actually fund the projects that their security teams and their CTOs are asking for. But it's also not something that, you know, it would be wise to actually presume that that's going to be the default case.
Speaker Change: Hi.
Speaker Change: I would say that my hope is that what we're seeing from the regulatory environment and what we're seeing more broadly.
Speaker Change: Is going to encourage people to actually fund the projects that they are security teams and their Ceos are asking for but it's also not something that it would be wise to actually have a presumption.
Speaker Change: That's going to be the deep pockets.
Corey Eugene Thomas: That's very helpful. Thanks. Your next question comes from the line of Rob Galvin from Spiefel. Please go ahead.
Speaker Change: That's very helpful. Thanks.
Speaker Change: Okay.
Speaker Change: Your next question comes from the line of Rob Galvin from Stifel. Please go ahead.
Rob Owens: Hi, thanks for taking my question. Corey, last quarter you spoke of a growing number of longer-term contracts with a weighted average deal duration of 20% year-over-year, and I'm wondering if you've seen the same trend persist into Q4 and what your expectations are for 2024 on this front. Thanks.
Rob Owens: Hi, Thanks for taking my question Corey last quarter, you spoke of a growing number of a longer term contracts with weighted average deal duration of 20% year over year I'm wondering if you've seen the same trend partis persist into Q4 and what your expectations are for 2024 on this front. Thanks.
Corey Eugene Thomas: Yes, but still it was strong again in Q4. So we're really pleased with really seeing those contracts being extended out beyond one year contracts were seeing a lot of three year contracts both on the new and renewal side, how does that goes to what we've talked about us becoming and being a strategic for about I think I'm. Most proud of the team is that like if you look up.
Tim Adams: So we're really pleased with seeing those contracts being extended out beyond one year contracts. We're seeing a lot of three year contracts, both on the new and the renewal side. Yeah, I would just say that goes to what we talked about, you know, us becoming and being a strategic provider. I think I'm most proud of the team because, if you look over the last three years, we have become a very strong strategic provider of security. And you see that both reflected in our consolidation offerings, as well as our, you know, our ASPs and ARR, as well as the length and duration of the contracts that customers want to do with us. So yeah, I think that's great. And that's all the time we have for questions.
Corey Eugene Thomas: The last three years, we have become a very strong strategic provider of security and you see that both reflect American foundation offerings as well as our Asps and <unk> as well.
Corey Eugene Thomas: Well, if the met and the duration of the contracts that customers wanted to do so.
Corey Eugene Thomas: Sure.
Corey Eugene Thomas: And Thats all the time, we have for questions I will now turn the call back over to Corey Thomas for closing remarks.
Corey Eugene Thomas: I will now turn the call back over to Corey Thomas for closing remarks. Well, thank you all for joining us on the call today, and I wish you all a good evening. This concludes today's conference call. Thank you for your participation, and you may now disconnect.
Corey Eugene Thomas: Well. Thank you all for joining us on the call today and I wish you all a good evening.
Speaker Change: This concludes today's conference call. Thank you for your participation and you may now disconnect.
Speaker Change: Please wait the conference will begin shortly.
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Operator: Please wait. The conference will begin shortly. Please wait. The conference will begin shortly.
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