Q1 2024 Rapid7 Inc Earnings Call
Okay.
Eric: Turning back my name is Eric and I will be your conference operator today.
Eric: At this time I would like to welcome everyone to the rapid seven first quarter 2024 earnings call.
Eric: All lines have been placed on mute to prevent any background noise.
Eric: After the Speakers' remarks, there will be a question and answers.
Eric: She would like to ask a question. During this time simply press star followed by the number one on your telephone keypad.
Eric: If you would like to withdraw your question.
Eric: Thats Star one again.
Speaker Change: Thank you.
Eric: I would now like to turn the call over to Elizabeth Park.
Daniel J.W. Park: Please go ahead.
Daniel J.W. Park: Thank you operator, and good afternoon, everyone. We appreciate you joining us today to discuss rapid Seven's first quarter 2024 financial and operating results. In addition to our financial outlook for the second quarter and full fiscal year 2024.
Daniel J.W. Park: With me on the call today are Corey Thomas our CEO and Tim Adams, our CFO.
Daniel J.W. Park: Distributed our earnings press release over the wire and it is now posted on our website at investors <unk> rapid dot com, along with the updated company presentation and financial metrics file.
Eric: This call is being broadcast live via webcast.
Eric: An audio replay will be available at investors that rocket Kevin Dot com.
Eric: During this call we may make statements related to our business that are considered forward looking under federal securities laws. These.
Eric: These statements are made pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 1095 and include statements relating to the company's positioning strategy business plans and financial guidance for the second quarter and full year 2024 and.
Eric: And the assumptions underlying such calls and guidance.
Eric: 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 any future results expressed or implied in these statements due to a number of risks and uncertainties, including those contained in our most recent annual report on Form 10-K filed on February.
Eric: 26, 2024, and then the subsequent reports that we file with the SEC.
Eric: The information provided on this conference call should be considered in light of such risks actual results and the timing of certain events may differ materially from the results or timing predicted or implied by such forward looking statements and reported results should not be considered as an indication of future performance.
Eric: Rapid seven does not assume any obligation to update the information presented on this conference call except to the extent required by applicable law.
Eric: 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 <unk> rapid certain dot com.
Eric: At times in our prepared remarks and responses to your questions. We may offer incremental metrics to provide greater insight into the dynamics of our business or our quarterly results.
Eric: Please be advised that this additional detail maybe onetime in nature, and we may or may not update these metrics in future.
Eric: That I would like to turn the call over to our CEO Corey Thomas Alright.
Corey E. Thomas: Hello, everyone and thank you for joining us this afternoon on our first quarter 2024 earnings call.
Corey E. Thomas: <unk> seven in the first quarter with $807 million and they are representing.
Corey E. Thomas: Representing 11% year over year growth, we saw sustained momentum with our direct complete consolidated offerings, which continued ramping nicely.
Corey E. Thomas: However, our NDA or our result was below expectations driven by a slower than anticipated shift of our VM base into our integrated with offering cloud with complete.
Corey E. Thomas: I'll spend some time addressing both of these dynamics on our call today in the context of our long term investment strategy, which will also include steps that we are actively taken to improve our integrated with momentum as we progress through the year.
Corey E. Thomas: As a reminder, we are making deliberate long term investments to build the strongest stock ecosystem for mainstream enterprises and to delivered a leading data platform that contextual access risk across a fragmented complex environment.
Corey E. Thomas: In 2024 being fiscally areas of focus include.
Corey E. Thomas: Building on our detection response momentum by leveraging AI to drive improved efficacy and security operations.
Corey E. Thomas: Expanding beyond P M to accelerate cloud security adoption by improving our integrated risk management offering that contextualized data across customers hybrid attack surfaces.
Corey E. Thomas: And investing further in our substantial services and partner ecosystem to increase our capacity for service delivery as well and provide a strong source of efficient demand generation.
Corey E. Thomas: We remain steadfast in our belief that these long term investments will deliver the best value and economics for our customers.
Corey E. Thomas: Over the past year. It remains clear that amid the current budgetary environment customers are deeply focused on one consolidating reconciling and integrating their vast security ecosystems and to achieving better outcomes from their security providers at a more compelling value.
Eric: Detection response is one area that we're seeing benefit of these trends.
Eric: Rapid separate consolidated detection and response value proposition is particularly compelling to these customers in today's landscape because of our unique managed service offering an ecosystem that allows teams to extend their technology capabilities with our deep security expertise.
Eric: We're actively bolstering this growing business with expanded detection cupboards monitoring of third party alerts and AI innovations for speed accuracy and scalability.
Eric: Specifically, our managed detection and response analysts are using AI throughout the alert lifecycle from machine learning driven detections intelligent triage to AI assistant investigation and remediation guidance.
Eric: Our analysts are leveraging our internal sock AI assistant train on proprietary MBR insights to augment our workforce talent and reduce response time for customers.
Eric: As we continue to invest behind these customer needs. We saw solid performance in the first quarter with our direct complete offering which gives customers integrated detection and response capabilities across their attack surface are overall in our business maintaining growth of over 20% year over year in the first quarter as mainstream.
Eric: The products customers continue to prioritize monitoring and detection of threats across the distributed environments.
Eric: Stripping out to our focus on extending our core customer base beyond traditional vulnerability management and accelerating cloud security adoption with an integrated risk management experience.
Eric: The complete attack surface.
Eric: Last year, we launched an integrated risk management package cloud risk complete.
Eric: Which includes access to both cloud and VM capabilities.
Eric: Although we saw increased attention and demand and accelerated cloud security growth, which validated the clear customer need cloud with complete in its current version lacked depth of integrated experience digital far strong momentum in our threat complete offerings.
Eric: We entered 2024 with a prioritize plan to innovate and deliver an improved cloud with complete experience that integrates distributed hybrid data sources with better economics for rapidly evolving cloud security market.
Eric: And we remain on track to deliver this improved integrated risk management solution. This summer.
Eric: As it relates to the first quarter, while we had a healthy start to the year with overall results that tracked well to our expectations in January and February we saw at this pace. So as we progressed through March. This is primarily due to a slower than expected transition in the quarter of selling our current integrated risk management package into our traditional VM.
Eric: Both our new bookings and renewals.
Eric: We believe we are in a transition period during which customers are not yet able to see the benefit of the compelling foundational work that we're doing to increase customer value by evolving our cloud with complete package into an improved integrated experience.
Eric: Another key component of this updated offering is the acceleration of our cloud security capabilities.
Eric: We have lots of significant capabilities, including revamped, California ability assessment and the general availability of cloud VM across AWS Azure and GCB.
Eric: This updated risk management offering will not only meaningfully improve attack surface visibility and capabilities, but the data integration at the platform level will greatly improve the economics and allow us to be a price leader in this space.
Eric: Looking forward, we expect this transition to temporarily weigh on our growth outlook through the remainder of the year as we expect to launch the updated cloud with complete this summer and begin to regain momentum exiting 2024.
Eric: Now that we've covered our strength in detection response, and the ongoing evolution of our integrated risk management offerings I will touch briefly on how we are increasing both demand generation and service delivery through our partners in China.
Eric: We discussed last quarter that we are strategically shifting to more efficient pipeline sources with stronger conversion for example, our partner ecosystem added over 80% of new <unk> in the first quarter and our top partners drove a 20% increase in partner sourced leads over the prior year, we remain focused.
Eric: On the strategic nature of these relationships and scale in both the relative and absolute contribution they deliver to our business on a go forward basis.
Eric: As we work to drive efficiency across the organization. This channel is an extremely compelling lever for growth and scale.
Eric: While we are seeing promising strength in the channel as a primary demand generation driver we're not.
Eric: Not yet making up for the pipeline sources that would deemphasize as we entered the year.
Eric: Our focus on long term growth investments in demand generation efficiency led to what we believe is a temporary slowdown in new pipeline generation as we transition away from lower quality less efficient sources.
Eric: In addition to the promising channel strength here, we're actively accelerating and seen early traction with actions of our partnerships and marketing campaigns and improved sales enablement.
Eric: Our updated guidance range assumes that pipeline growth improved modestly in the second half of the year, but not at the rate initially assumed in our February guidance range.
Eric: Despite these transitional dynamics, we maintain confidence that we are pursuing the right long term strategy.
Eric: We firmly believe that providing visibility across a customer's risk environment by integrating traditional vulnerability management with a broad set of cloud security solutions and pairing that with World class DNR stock efficacy all in one place allows customers a more effective solution and better overall secured.
Eric: The outcomes at the price value customers are seeking.
Eric: As we build better more connected customer experiences across our security operations platform I am happy to welcome Craig Adams to rapid seven as our chief product Officer.
Timothy M. Adams: He will oversee our product management operation and overall user experience and design.
Timothy M. Adams: <unk> has an extensive cyber security background and high growth companies, including spent 20 years at Akamai.
Timothy M. Adams: We're thrilled to have create on board and believe he will provide expertise and structure for our teams to deliver innovative solutions and compelling value propositions to our customers.
Timothy M. Adams: While we are working duty transitional challenges. This year, we are making progress on our overarching strategic plan and are confident that we are pursuing the right strategy for the long term and value creation.
Timothy M. Adams: Rapid seven has a compelling opportunity to be a leading platform consolidated security operations as we build better more connected customer experiences across our platform.
Eric: We believe that the foundational work, we are doing while somewhat disruptive in a moment will position us to drive market share gains and higher durable growth over the medium to long term.
Eric: Overall, we're focused on responding quickly to address the changes that need to be made in our business to shift more swiftly towards consolidated risk management offerings and to accelerate more efficient sources of pipeline growth.
Eric: We believe that our integrated risk solutions will address customers' needs and accelerate consolidation on our platform for mainstream into practice, we believe the changes and strategic investments that we're making in our business today will support better top and bottom line growth.
Eric: And a strong value proposition for customers that need to solve increasingly complex security challenges.
Eric: At the same time I am proud of our team's commitment to drive business efficiency.
Eric: And scaling our free cash flow as.
Eric: As we continue to realign our business to be more efficient overall.
Eric: Benefits from the operational flexibility within our cost structure and financial model.
Eric: <unk> remained squarely focused on and are on track to scaling free cash flow.
Eric: We are reiterating our $160 million free cash flow target for the full year 2024.
Eric: With that thank you for joining us on the call today I will now turn the call over to our CFO, Tim Adams to share additional detail on our financial results and outlook Tim.
Timothy M. Adams: Corey and good afternoon to everyone on today's call. Thank you for joining us.
Timothy M. Adams: Before I turn to our results a quick reminder, that except for revenue all financial results. We will discuss today are non-GAAP financial measures unless otherwise stated.
Timothy M. Adams: Additionally, reconciliations between our GAAP and non-GAAP results can be found in our earnings press release.
Timothy M. Adams: Rapid seven ended the first quarter of 2024 with $807 million.
Timothy M. Adams: <unk> representing.
Timothy M. Adams: Representing growth of 11% year over year.
Timothy M. Adams: Revenue was at the high end of our guidance range and we delivered strong operating income that exceeded expectations.
Timothy M. Adams: Despite our ending <unk> being below expectations for the quarter.
Timothy M. Adams: We saw healthy traction in our detection and response business.
Timothy M. Adams: Particularly for our threat complete consolidation offers.
Timothy M. Adams: However, our total <unk> was impacted by a lower than anticipated contribution during the first quarter from the transition to integrated risk management offers.
Timothy M. Adams: We saw AOR growth in the first quarter coming from both new and existing customers with.
Timothy M. Adams: With <unk> per customer that grew 7% over the prior year to $70000 and.
Timothy M. Adams: And a global customer base that grew 4% year over year to end the quarter with over 11000 customers.
Timothy M. Adams: As it relates to our sequential change in customers.
Timothy M. Adams: Current positive sequential growth in our platform customer base was more than offset by a sequential decline in our non platform customer base.
Timothy M. Adams: As we saw slower than anticipated traction and our integrated risk offering cloud risk complete.
Timothy M. Adams: First quarter revenue of $205 million grew 12% over the prior year and was at the high end of our guidance range.
Timothy M. Adams: Our recurring product subscription revenue grew 13% over the prior year to $197 million.
Timothy M. Adams: International revenue grew 22% year over year.
Timothy M. Adams: And represented 23% of total revenue, while North America revenue grew 9% and represented 77% of total revenue.
Timothy M. Adams: Turning to our operating and profitability measures for the quarter.
Timothy M. Adams: Product subscriptions gross margin was 76% in the first quarter and.
Timothy M. Adams: And overall gross margin was 74%.
Timothy M. Adams: In line with the prior year.
Timothy M. Adams: And marketing expenses represented 32% of revenue down from 39% in the first quarter of last year.
Timothy M. Adams: R&D and G&A expenses were $16, 6% of revenue, respectively compared to 28% in the prior year.
Timothy M. Adams: We delivered first quarter operating income of $40 million above the high end of our guidance range and representing an operating margin of 20%.
Timothy M. Adams: Our adjusted EBITDA was $47 million in the quarter.
Timothy M. Adams: GAAP net income per share was <unk> <unk> and non-GAAP diluted net income per share was <unk> 55.
Timothy M. Adams: Moving to our balance sheet and cash flow.
Timothy M. Adams: We ended the first quarter with cash cash equivalents and investments of $464 million.
Timothy M. Adams: <unk> two $439 million at the end of 2023.
Timothy M. Adams: Cash from operations during the first quarter reflects a benefit from stronger than expected cash collections, helping drive $28 million of free cash flow in the quarter.
Timothy M. Adams: This brings us to our outlook for the rest of the year.
Timothy M. Adams: As Corey shared in his remarks, we are revising our guidance ranges to incorporate our slower than expected start to 2024.
Timothy M. Adams: Specifically, we are derisking, our expectations for contributions from integrated risk offerings throughout the middle of the year and now anticipate only a modest contribution in Q4 from our upcoming summer launch of our improved cloud risk complete offering.
Timothy M. Adams: As a result for the full year 2024, we now expect ending.
Timothy M. Adams: $850 million to $860 million.
Timothy M. Adams: Which represents growth of 6% to 7% over the prior year.
Timothy M. Adams: While we are disappointed in this range of growth we remain confident that we have the right long term strategy to deliver the best value outcome.
Timothy M. Adams: Outcomes and economics for our customers and to ultimately Reaccelerate this growth rate.
Timothy M. Adams: While we do not customarily provide quarterly commentary on <unk>.
Timothy M. Adams: Given the slow start to the year and as we work through the execution of dynamics that Cory detailed.
Timothy M. Adams: We feel it would be prudent to share some forward direction today.
Timothy M. Adams: For the second quarter, we anticipate a high single digit sequential increase in millions of net new dollars.
Timothy M. Adams: With further sequential improvements in net new <unk> in the back half of the year as we improve our execution.
Timothy M. Adams: We are revising our revenue guidance range to reflect our new our growth outlook and now expect total revenue for 2024 in the range of $830 million to $836 million.
Timothy M. Adams: Representing growth of 7% to 8%.
Timothy M. Adams: Turning to full year profitability I am pleased to share that we are maintaining our full year profitability targets for both operating income and free cash flow.
Timothy M. Adams: Despite a lower top line outlook for the year, we believe we have sufficient flexibility in expense levers to maintain our original profitability targets.
Timothy M. Adams: To $2 21.
Timothy M. Adams: Based on an estimated 75 million diluted weighted average shares outstanding.
Timothy M. Adams: We remain committed to scaling free cash flow in our business. So.
Timothy M. Adams: So we are also maintaining our expectation to generate at least $160 million of free cash flow for full year 2024.
Timothy M. Adams: Moving to quarterly guidance for the second quarter of 2024.
Timothy M. Adams: We expect total revenue in the range of $203 million to $205 million representing growth of 7% to 8%.
Timothy M. Adams: We expect non-GAAP operating income for the second quarter in the range of $35 to $37 million.
Timothy M. Adams: And non-GAAP net income per share of $52 53.
Timothy M. Adams: Which is based on $74 6 million dilutive weighted average shares outstanding.
Speaker Change: Thank you for taking the time to join us on the call today and with that we will open the call for questions operator.
Timothy M. Adams: Okay.
Timothy M. Adams: Okay.
Timothy M. Adams: Okay.
Speaker Change: Alright, I would like to remind everyone in order to ask a question press.
Speaker Change: Started the number one on your telephone keypad.
Speaker Change: Your first question comes from the line of.
Citi: <unk> with Citi.
Citi: Please go ahead.
Citi: Okay.
Citi: Taking my question.
Citi: Corey I wanted to just dig in a little bit more deeply on kind of a comment you made on the <unk>.
Corey E. Thomas: Prepared remarks as it relates to some of the package slowdown momentum being derailed by the fact that customers arent quote unquote necessarily seeing Missouri. So I wanted to really unpack those comments a little bit further and frankly, just payer then mechanics or compare them against from a VM.
Corey E. Thomas: Dynamics, you are already seeing as it relates to elongated sales cycles. So why would the packages having been in the hands of the sales force with better part of the year Arslan slowdowns manifesting.
Corey E. Thomas: Even more pronounced.
Corey E. Thomas: Again some of that.
Corey E. Thomas: More nuanced back on by customers arent seeing the value here and a follow up please.
Speaker Change: Thanks for taking Matt and thanks for the opportunity to clarify that so I just want to be very clear on the debt complete we're actually seeing consistent momentum and the performance is in line or better than expectations. So we're very comfortable there.
Speaker Change: The Big thing that we actually did we took the learnings last year, we saw acceleration and a healthy pick up in the CRC dynamics, we were pretty clear that it wasn't as strong as the threat complete demand and as we dug into it we saw a couple of things one I think we've talked about before we needed to actually continue to make investments to accelerate the class C band.
Speaker Change: And thats actually on track.
Speaker Change: It was already launched in more of its margin now, but the other part is actually driving more integrated experience now I would just say that part of it that we didn't nail as well as we could have with the execution on that transition.
Speaker Change: We started talking to our teams about the fact that we were going to be moving to this more integrated offering taken some learnings and really focusing on taking.
Speaker Change: <unk> completed our integrated risk offering to the next level part of that was also going to be how we actually we assessed packaging and pricing around that specific offering and I would just say, how we manage that transition caused a little bit of a slowdown, especially in new sales.
Speaker Change: As our sales teams were actually waiting for us to actually release and actually bring forward. The updated solution over the course of the year. So both our planning and our communication around that.
Speaker Change: Could have been better.
Speaker Change: That's also why we're optimistic that we'll see some of the benefits of that as we actually progressed throughout the back end of the year and move into next year, but I did want to clarify it was primarily the momentum we saw last year, taking the learnings and actually making adjustments to the cloud with complete.
Speaker Change: Strategy, that's why we felt the pressure the rapidly strategy is still actually executing quite well and the momentum is strong.
Speaker Change: Great.
Speaker Change: To put a quantitative flare coined.
Speaker Change: Some of this discussion I know you don't.
Speaker Change: Actively or consistently.
Speaker Change: <unk> dollar base net expansion rates, our net retention rate, but I'm curious in light of some of the slower conversion rates.
Speaker Change: Some trends around feet dragging as it relates to moving over to deepen their packages.
Speaker Change: Is there anything you can speak to with regards to churn in the base or potentially cannibalization of VR.
Speaker Change: Traditional VM and spend that.
Speaker Change: That is also a contributing factor to the 30% to 40% copier taking revenues in here. Thank you.
Speaker Change: Yes, the team a good question it's Tim.
Timothy M. Adams: So we did see the customer count go down modestly sequentially Q1 to Q4, but the platform customers were actually up sequentially quarter over quarter. So it's really more of a function of some of the.
Timothy M. Adams: Non platform customers that were lost in the quarter, where we saw a little bit of a headwind to turn into the customer count, but when it comes to a platform basis, the count was actually up in the quarter.
Speaker Change: The only thing on anthem assistant to the harder question I do think that we saw some pressure we expect this year over what we saw last year picking up was selling CRC into our install base and we do expect that to be.
Speaker Change: A modest headwind over the next few months, but we expect that to improve as we exit the year, but yeah on the net expansion rate that was a pressure.
Speaker Change: And I think that we feel very good about the lots that we actually have coming up but we did see from a refresher there.
Speaker Change: Thank you. Thank you.
Speaker Change: Question.
Speaker Change: From the line of socket call yet.
Barclays: With Barclays. Please go ahead.
Speaker Change: Okay, Great Hey, guys. Thanks my questions here.
Speaker Change: <unk>.
Speaker Change: Corey maybe for you on.
Corey E. Thomas: On cloud risk complete in and maybe the the demand there not being quite as strong as we expected can you just remind me what are the biggest differences between threat complete and cloud risk complete as we just think about sort of the maybe the product areas, where we're where customers were maybe thinking a little bit more.
Corey E. Thomas: In terms of scrutiny.
Speaker Change: Yes.
Speaker Change: So I think it's a good question I don't think it's actually a demand issue I think it's more of a execution and how we actually timed getting we're going to be introduced so let's just talk about what it is first off cloud.
Speaker Change: Without risk complete integrated risk across the environment, whether it's on Prem endpoint and cloud and providing visibility assessment of risk across the environment and the ability to look at tax apps across the overall.
Speaker Change: Environment.
Speaker Change: Net exposure of the environment. So thats cloud was complete directly please primarily used in the detection response offerings that we've always said that.
Speaker Change: Pretty high up in the priority stack and we'll continue to see momentum there.
Speaker Change: Overall.
Speaker Change: I do want to be clear I don't think it's a demand issue I think there is sort of like two dynamics is one I think we froze ourself out a little bit as we went on the transition to updating our packaging on our staff and our.
Speaker Change: The integrated risk offering and.
Speaker Change: So I think as we actually introduce that I think we will see.
Speaker Change: Momentum on that pickup as we actually exited the year and so I think that thats more of <unk>.
Speaker Change: One product, we have an upcoming launch and how we actually execute that transition. So that's the first part of it. The second part is I think people are pretty hungry.
Speaker Change: For both integrated risk visibility, having ability to do that across their entire environment at a reasonable price point at reasonable cost and I'll remind you that our integrated risk strategy is about how you get visibility and risks across the environment, but also doing that.
Speaker Change: Reasonable cost and more affordable rates because mainstream enterprises, if you think about the Russell.
Speaker Change: They still are lacking on adopting cloud future.
Speaker Change: Because one is expensive.
Speaker Change: And to the experience needs to be productive and Greg.
Speaker Change: Got it got it and maybe maybe the follow up there just to make sure I completely understand and sorry. If this was mentioned during the early part of the prepared remarks, but is.
Speaker Change: As you kind of go through just maybe some revised.
Speaker Change: Maybe the question is what is some of the revised pricing packaging that youre going through on cloud risk risk complete I believe that as well as threat completed been packages that have been around for for a little bit of time now it sounds like something changed and that created a little bit of miscommunication or.
Speaker Change: Can you just dig into what that change was.
Speaker Change: Yes.
Speaker Change: One is we are attempting to do integrated risk across the environment cloud is priced very differently than the traditional environments. You have one price our assets one five resources the multiple of Tau in the price of cloud is astronomically high versus additional asset.
Speaker Change: And.
Speaker Change: Typically there are different silos, our goal is to ask to rationalize it make sure it's affordable and just looking at how you actually simplify getting visibility across the environment. If you look at what we actually did.
Speaker Change: That completes.
Speaker Change: Part of the success of that part of the success of RDR overall was simplify how you actually get detection response across the environment instead of charging for storage. We just listen we will look at all the assets across the environment charge for asset <unk>.
Speaker Change: Ali on the risk complete side, we're actually rationalized and simplified the model, making sure that prices are affordable and asking the question just like we did on the direct complete that is housing affordable for every organization to be able to monitor risks across the environment now.
Speaker Change: While that is a change I think it's one that will benefit our customers I will say socket is that we probably could've actually communicated sooner and more effectively about how we were actually executing that change.
Speaker Change: So that we actually didn't freeze ourselves in the process.
Speaker Change: Got it very helpful. Thanks.
Speaker Change: <unk>.
Speaker Change: Your next question comes from the line of Matthew Hedberg with RBC capital markets.
Matthew George Hedberg: Please go ahead.
Matthew George Hedberg: Hey, guys. This is Mike Richard on for Matt Hedberg.
Michael Turits: I was just wondering what the sort of guide down on the topline, but keeping the profitability for.
Michael Turits: For the year I was just wondering how your investment philosophy has changed from 90 days ago, and sort of where investments might change moving forward for the rest of the year.
Speaker Change: Yes, it's a very fair question. So while we had a fair amount of flexibility that was actually built into our overall model, where we're leaning heavy is that we're focused heavily on making sure that we're building our product and our technology for the long term, we actually think that the strategy that we actually have about making security operations Center.
Speaker Change: Swaps attack surface, both affordable and effective.
Speaker Change: Where we actually want to actually put our focus.
Speaker Change: We are keeping our our other investments frankly quite tight.
Speaker Change: But we are delivering superior products and superior service to our customers and Thats, where we put most of our investments and that strategy. We think allows us to be set up well, it's actually not just sort of show improvement exiting the year, but also set up well for sustained long term growth as we go forward. It is a strategy that is actually focused on the long term, while we take some.
Speaker Change: Short term.
Speaker Change: But we think it's the right one that actually does to both the best for shareholders, but also for customers over the same period.
Speaker Change: Great. Thanks, and thanks for the question.
Speaker Change: And next question comes from the line of Gray Powell with <unk>.
Gray Wilson Powell: Please go ahead.
Gray Wilson Powell: Okay, great. Thank you for taking the question and I apologize for some background noise here I'm just traveling today.
Gray Wilson Powell: Well, yes, I want to I wanted to make sure that.
Gray Wilson Powell: I have.
Gray Wilson Powell: Did the slope for net new AOR correct for the rest of the year I think you said that for Q2, you expect a high single digit.
Speaker Change: First of all is that correct and then does that mean you'd get up to adding $20 million plus per quarter in the second half of the year and can you just sort of talk about the confidence in that ramp and what underpins it.
Speaker Change: Yes, maybe came out that I will just provide some broad so what the team did is we just kept what the trends that we actually saw the early part of the year consistent So we expect continued growth.
Speaker Change: Overall.
Speaker Change: In fact, some swap space, we just took one well over 20% and so we feel very comfortable about that.
Gray Wilson Powell: But we did actually sort of moderate our expectations on the <unk>.
Gray Wilson Powell: The impact of the results that we see this year with the transition as we actually executed will launch this summer we're rolling it out and so we want to be very modest and the expectations there.
Gray Wilson Powell: At least from my perspective, I would remind you of I think Tim will talk to any JV.
Gray Wilson Powell: Expectations for Q2.
Gray Wilson Powell: I think Q3 tends to be very modest I think you've been shipping your Q4, just the cyclicality of our business, but Tim.
Timothy M. Adams: Yes, Corey that's alright, great. Thanks for the question.
Timothy M. Adams: We did say on the prepared remarks high single digits in millions of.
Timothy M. Adams: In Q2, so if I just tried to simplify that and go to the midpoint of what that would be it's in the neighborhood of $7 5 million to <unk> point, we do expect to see a sequential increase in Q3 and then another step up in net new sequential increase in Q4, and then it gets you to the midpoint of the <unk>.
Timothy M. Adams: David Guide, but <unk> point, we really tried to focus on what is working well the DNR business growing north of 20% is still a very healthy business for us.
Timothy M. Adams: And Thats, what we tried to anchor on and the updated plan.
Timothy M. Adams: Sure.
Speaker Change: Got it Okay, and then just a follow up.
Speaker Change: What percentage of the cloud complete I'm, sorry, what percentage of the complete bundles has been direct complete versus cloud complete I thought the cloud side. It was just that.
Timothy M. Adams: Much smaller contributor to incremental growth in the past.
Timothy M. Adams: Yes, it was a one well it was smaller desk multiple threat complete was fairly large and so we actually did see pretty substantial positive growth.
Timothy M. Adams: Sure.
Timothy M. Adams: So it was very complete was dominant mcleod complete was healthy and it actually saw a pretty substantial growth last year.
Timothy M. Adams: We actually thought that we needed to do some things to actually make it even more attractive to frankly customers that were on the sidelines in that mainstream enterprise.
Timothy M. Adams: And so that's the actions that were actually undertook this year.
Speaker Change: Okay got it thank you very much.
Speaker Change: Thank you.
Speaker Change: The next question comes from the line of.
Pago wallet: Pago wallet with Morgan Stanley.
Pago wallet: Please go ahead.
Pago wallet: Hi, you've got all sorts of at all for Hamzah.
Pago wallet: Thank you for taking my question.
Pago wallet: I wanted to dig into the what's embedded in guidance. So last quarter you indicated.
Hamzah: For guidance it doesn't assume an improving macro environment and no.
Speaker Change: Like material contributions from like those investments you've been making on the partner ecosystem.
Hamzah: But given the performance in Q1, and the lowering of the Guy but to what extent are you seeing maybe like.
Hamzah: What extended cycle worsening spend environment affecting your ability to land new customers.
Hamzah: The shift in sales motion that you mentioned and maybe a follow up please.
Speaker Change: Yes, it's a fair question I don't presume that there is any material change in the environment versus last year, it's not any better even if you still see long sales cycles.
Speaker Change: You still see high deal of infection, and so that's not a change versus last year.
Hamzah: Still seeing continued momentum on the detection response side of the house, which is which is an indicator.
Hamzah: So were attributed that mostly to actually how we as quickly as possible by the family.
Hamzah: Ensure that we get the updated pricing packaging and customer experience to market.
Hamzah: And not a fundamental shift in the overall environment. There has been noise in the cloud environment for a while but we factored that in and that was part of our assumption coming into the year about how we were going to be price and packaging. So that expectation I don't think it off at all.
Hamzah: Do think that we probably missed estimated once we decided to pursue this is the slowdown that would occur leading into that change.
Speaker Change: Got it and maybe as a follow up.
Hamzah: As we think about the our guidance over the past four quarters sort of the split between land and expand.
Hamzah: Typically in growth expand has relatively been stable at 7%.
Hamzah: Land has been decreasing.
Hamzah: The guidance is 67% year over year growth, so does that assume in that land.
Hamzah: Drops zero or maybe expand drops a little bit in landfill contributes what sort.
Hamzah: The puts.
Speaker Change: Puts and takes there thank you.
Speaker Change: It's a good question so the easiest way to look at it is to think about the impact from a bottom line perspective.
Speaker Change: Detection of swaps will continue that has I would just say a reasonable mix of land and expand associated with it.
Hamzah: I would just say the cloud probably has a bit more of expansion bias, which puts a little bit more pressure on the expansion and it goes to <unk> question early on.
Hamzah: So that puts a little bit more pressure in the near term, we actually think from a pipeline perspective that'll be quite fine and healthy from a pipeline perspective, we are being I would just say cautious about sort of the expectations.
Hamzah: Deal time, and so if you think about sort of like deal sort of lifecycle of elongated if we're actually launching that in summer we have some modest expectations of impact this year, but we didn't want to be out over our skis in terms of the.
Hamzah: The impact in year of something that we're actually introducing and.
Hamzah: In summer and then we're training and equipping ourselves in rock.
Speaker Change: Got it thank you very much.
Speaker Change: Thanks.
Speaker Change: Your next question comes from the line of Marc Katz with Raymond James.
Marc Katz: Please go ahead.
Marc Katz: Yes. Thanks. This is mark on for Adam So Corey if I could start with you. These these.
Marc Katz: These accounts are taking longer to move to your platform.
Marc Katz: Would you characterize delays and is this a budgetary concern on their end or are they waiting to see the product features youre talking about coming out in the summer.
Speaker Change: <unk> a different pricing dynamic going on.
Speaker Change: And then as a follow up please.
Speaker Change: Okay.
Speaker Change: So why keep in mind, we're settling into a fragmented market. So I think our biggest obstacle overall keep in mind is the do nothing obstacle when we talk about when we talk about the mainstream enterprise is youre talking about like that Russell $3 at mix, you're talking about that mid size enterprise of which cloud security is still pretty pricey around sort of that over.
Speaker Change: Robyn and so one I would just say that the need from the security teams are still quite high.
Speaker Change: But in order to get funding they've got to make sure that they can actually meet all of their needs. That's why we think to providing an affordable enterprise wide solution, it's going to be attracted to our audience.
Speaker Change: I think they are priced out of the market somewhat today, so we view ourselves as unlocking the market overall there.
Speaker Change: Second part of your question that you actually got to it's sort of like is the drive. So I think that's the one part is the value proposition and the simplicity and the ability to not just do a part but the overall environment is that clear in our goal of our packaging is actually to make that clear simple and compelling. The second part of the question is sort of like what.
Speaker Change: Drive the slowdown it just isn't much I think that's driven by the fact of how we actually focused and incentivized and align our sales team I think that they are ramping.
Speaker Change: In the back half of the year on the new solution.
Speaker Change: We Havent initiative early last year in May of last year, where we're focused on the CRC I would say that we probably focus a little bit more heavier on the detection response, leading into this year, knowing that we were actually going to be updating.
Speaker Change: On the integrated risk strategy in CRC.
Speaker Change: Probably should have planned a little bit better about the timing of that transition.
Speaker Change: Okay. Thank you so much.
Speaker Change: And Tim if I can ask you.
Timothy M. Adams: Coming into this fiscal year, you expected modest free cash flow contribution of <unk> and then you'll have a notable ramp in Q2. So I'm just kind of wondering what kind of free cash flow cadence is now expected.
Speaker Change: Now that.
Speaker Change: Kind of nitpicky here, but.
Timothy M. Adams: The guidance for free cash has been adjusted to be about $150 million of previous saying at least $160 million.
Speaker Change: Yeah. So mark. It's good question, we were very pleased with the strength of free cash flow in Q1 and that was really fueled by what I said earlier on the call the strong collections in the quarter.
Speaker Change: We feel very confident in at least a $160 million of free cash flow for the full year.
Speaker Change: Similar to what we saw last year. We expect Q4 also to be a very strong quarter for free cash flow again, driven by the collections. So what youll see in Q2, and Q3 is just a modest step up sequentially over the previous quarter, starting with $28 million in Q1, but again strong collections in Q1 and Q.
Speaker Change: For really driving those those two quarters.
Speaker Change: Great. Thank you so much.
Speaker Change: Thank you. Thank you.
Speaker Change: The next question comes from the line of <unk>, sorry with Baird.
Speaker Change: Please go ahead.
Speaker Change: Hey, this is Zack Snyder on for <unk>.
Zack Snyder: Thanks for taking the question. It appears the transition away from Standalone VM and your overall strategic pivot has brought you into closer competition with some larger players like Microsoft and Palo Alto could you just elaborate a little more on how rapid stacks up against them and sort of the success in our strategy going forward is your market through your market penetration efforts.
Speaker Change: Yes, I think you were talking about specifically on the integrated risk.
Speaker Change: The equation. So yeah I do think we have more exposure probably more for the Palo Alto cloud.
Speaker Change: Cloud security perspective.
Speaker Change: Perspective overall.
Speaker Change: If you look last year, we've talked about the growth in the business as I actually talked about earlier.
Speaker Change: We did not think again, what we were looking at lots of our customer base does not have its not a competitive dynamic is it. They don't have any material about security adoption, which is the primary thing that we're looking at about how do we drive adoption. We know they are adopting cloud and we know that they need it we know that they are actually not using the native cloud technology sort of curious.
Speaker Change: Second because of the complexity around that and so our primary focus overall is how do we actually sort of deliver a mainstream enterprise solution.
Speaker Change: This is very similar to what we did in the detection response space and take something that was filled.
Speaker Change: Tim that was just at the high end of the market and make it mainstream accessible but what the level of sophistication with ease of use that everyone could use and so thats our number one sort of like focus areas like how do we actually unlocked that market. The second thing is when you look at the differentiation that we actually have our view overall is that we want to provide the best experience of looking at risk.
Speaker Change: And in endpoint to the traditional on Prem environment to the cloud environment and have that be integrated across the entire environment and not three or four different sets of technologies and experiences overall.
Speaker Change: Great. Thank you very much.
Speaker Change: Your next question comes from the line of Patrick Colville with Scotiabank. Please go ahead.
Patrick Edwin Ronald Colville: Hey, Thank you so much great to me on the call and we'll.
Patrick Edwin Ronald Colville: So fantastic to be part of the opposite story.
Patrick Edwin Ronald Colville: I wanted to ask about.
Patrick Edwin Ronald Colville: I guess the balance between top line growth and profitability this quarter.
Patrick Edwin Ronald Colville: non-GAAP operating margins were 19%, which is pretty impressive.
Speaker Change: But <unk> was a bit.
Speaker Change: Its soft and.
Speaker Change: Guidance is trend so how should we think about the kind of balance between.
Speaker Change: Topline and Bottomline.
Speaker Change: In light of the head count reductions we had in 2023.
Speaker Change: Yes.
Speaker Change: You have to actually figure out what are you going to focus your resources.
Speaker Change: We thought that the move that we made 23 set us up well this year to make sure that we had a healthy amount of free cash flow.
Speaker Change: And then the second question is just like Okay, where do you invest and we decided not to actually just split it equally we just have to make a very focused investment and how do we actually make sure our products and services are actually ready for the next five years, Matt backwards looking.
Speaker Change: That clearly has some implications in the short term.
Speaker Change: But we believe that setting ourself up to make sure that we're investing in our product and our technology and our teams around services is the path for what I would consider long term healthy growth. So overall, we think that we've got in our profit margins still healthy state.
Speaker Change: Expectation is that we're focused on how we grow in the moment, but how do we actually have healthy growth and frankly accelerate growth from today's levels.
Speaker Change: Over the next several years and we think the best strategy to actually do that is actually focused on making sure that our product strategy capabilities and pricing are set up for the mid to long term.
Speaker Change: That was the focus of the decision that we made now.
Speaker Change: I would just say being that close and focusing on the R&D and the services and the customer experience around service.
Speaker Change: And not putting all of our money in sales and marketing as some short term implications, but we actually think that.
Speaker Change: Overall, we can actually add back sales and marketing spend as we actually go for bill.
Speaker Change: Got stronger base of technology.
Speaker Change: A platform a pricing strategy that actually compelling to customers and overall service experience that delivers high quality service.
Speaker Change: That's correct.
Speaker Change: <unk>.
Speaker Change: Okay. Okay.
Speaker Change: And I guess I wanted to ask my follow up about net new <unk> for the year I mean the.
Speaker Change: The commentary you gave in the prepared remarks around.
Speaker Change: The linearity of your net new <unk> was extremely helpful. So thank you for that.
Speaker Change: Implies is that this quarter is kind of a trough and then we have.
Speaker Change: A decent net new era recovery through the year.
Speaker Change: So we just to circle back just so fully understood just the confidence you have in <unk>.
Speaker Change: That kind of recovery through the year.
Speaker Change: Yes, I would just say.
Speaker Change: If you look at our guidance I think we have pretty strong confidence in it I think that we we didn't get out over our skis.
Speaker Change: Tends to be a little bit backend loaded we.
Speaker Change: We have seen some of the pipeline of some of the deals get larger overall, but our assumptions are that we see only modest benefit.
Speaker Change: Sort of our Reorientate.
Speaker Change: And our updated launch in client risk complete this year. So we didn't want to be too aggressive on the timeline of something that was going to be introduced in the summer.
Speaker Change: I think that our expectations are quite modest there and so I would just say if you look at what we've actually laid out we have pretty high confidence that we can actually execute against that plan.
Speaker Change: And what we really took out we really sort of base that off of the dynamics that we're seeing in sort of like the first half of the year.
Speaker Change: And then have very modest assumptions about improvements in the back half of the year. There are some about to say, they're relatively market orientation and Patrick It's Tim welcome to the rapid seven coverage team and as you'll see if you go back to prior year Q4 is that is always a strong quarter from a seasonal perspective on the net new adds in net we expect that again this.
Patrick Edwin Ronald Colville: Sure, yes, similar to other quarters, but it builds up I would just say something.
Patrick Edwin Ronald Colville: It would've been.
Timothy M. Adams: I'm asked you two months Q3 <unk>.
Timothy M. Adams: Alright. Thank you so much really appreciate it.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Josh Tilton with Wolfe Research.
Joshua Alexander Tilton: Please go ahead.
Joshua Alexander Tilton: Hi, This is Patrick on for Josh you.
Patrick Edwin Ronald Colville: You had mentioned the churn customers in the quarter for the most part they werent platform customers.
Patrick Edwin Ronald Colville: Just curious if you could expand more on sort of the broader reasoning for why they churned and how we should think about that going forward and then maybe how much of an overall impact on expansion opportunities within the base that you foresee that.
Patrick Edwin Ronald Colville: Looking at thanks.
Joshua Alexander Tilton: Yes, I would tell you the thing that we probably did not do a great job of in Q1 was actually driving expansion in our installed base and that's mostly based on.
Speaker Change: We were still working through pricing and packaging and did not want to get too far of our get too far ahead of ourselves. If you think about net expansion rates.
Speaker Change: Was definitely.
Speaker Change: Not as strong in the start of the year as we expect it to be exiting the year. So I think that so to be clear expectation is that we will actually have.
Speaker Change: <unk> coming out of the summer and what the pricing and packaging is the ability to actually sell that into our installed base and drive expansion. Overall. So when you think about net retention rates I would say, yes, we had significant pressure in the first half of this year.
Speaker Change: The expansion.
Speaker Change: Mostly because we work in a lot of ink and we want to make sure that they are right before we go in and find those but we could have executed better, but we do expect that to be a fairly temporary thing.
Speaker Change: And Thats actually normalizes, we actually exited the year, if not actually have some momentum as we go into next year.
Speaker Change: I appreciate it.
Speaker Change: Thank you very much.
Speaker Change: Your next question comes from the line of Eric <unk> with Keybanc capital markets. Please.
Eric: Please go ahead.
Speaker Change: Hi, This is <unk> on for Eric.
Speaker Change: I was wondering what if.
Speaker Change: Hyphen dynamics that youre seeing in the market right now and some of your peers and how does that clean to the pricing strategy that you laid out in your prepayment rate.
Speaker Change: It's a good question.
Speaker Change: I think so.
Speaker Change: The detection of a spot pricing has not materially changed I think we were probably one of the largest changes when we changed from pricing for storage Suez asset resource basis. So I don't think theres any material change in that.
Speaker Change: If you look at part of the things that we struggled a little bit with instead, if you think about the mid market and you want to integrate the pricing is cloud is very different than <unk> seen in the <unk> environment and in the value proposition of the visible on the endpoints is different and so if you really want to simplify for customers do you have to rationalize both the pricing models and the also the price.
Speaker Change: <unk> levels.
Speaker Change: So you have cloud that is volatile the prices by the providers in general quite expensive it keeps a lot of customers out.
Speaker Change: Volatility management, which is effective but like people are mix shifting to the cloud.
Speaker Change: And do you have endpoint, we have lots of visibility sources that you actually have to reconcile so our goal specifically on pricing is how do we actually rationalizing pickup.
Speaker Change: Pick up the complexity, so make it as simple as possible for customers to actually price across the environment and then our goal because we actually have detection response would be a price leader, we actually want it to be we want customers to have full visibility into their environment.
Speaker Change: We got full visibility into their environment, we think that we can actually do a good job of with Cuba do a good job of that.
Speaker Change: By then monetize in southern customers the value of detection response, so in many ways, we think sort of like cost affordable price leadership and integrated risk management is a great platform and a long term good at software detection response, so we won't be pushing the boundaries there of how to get customers the best possible visibility at the best possible value.
Speaker Change: And then we can continue this acceptance in the detection response.
Speaker Change: Got it thank you.
Speaker Change: Thank you.
Speaker Change: Your next question comes from the line of Rob Galvin.
Robert Galvin: Stifel. Please.
Robert Galvin: Please go ahead.
Robert Galvin: Hi, Thanks for taking the question. These past two quarters the gap between international and North America growth has widened and international growth remained pretty stable versus the year ago period, while North America growth compressed by about 600 basis points and I'm wondering if you could provide any commentary into what might be driving that difference in growth rate recently thanks.
Speaker Change: Yes. It is.
Speaker Change: Good question I don't think it's going to actually something Thats got a sustaining capital over the period and keep in mind is.
Speaker Change: I think it was in 'twenty.
Speaker Change: In 2022, we saw lots of pressure in Europe. So you have sort of like deceleration. There. So you had a widening gap there I've got normalized coming out of last year and so you do have some fluctuations in the baseline that youre actually looking at depending on what period of time, you're looking at.
Speaker Change: Our general expectation is that ignoring currency rates that we will see fairly consistent growth around the world.
Speaker Change: So we think that those are short term differences not long term expectations of differences overall.
Speaker Change: Okay.
Speaker Change: Thank you.
Speaker Change: I will now turn the call back over to Corey Thomas for closing remarks. Please go ahead.
Corey E. Thomas: Well. Thank you very much I appreciate everyone, taking time, especially on the incredible busy week and we look forward to talking to you more importantly, updating you on the next earnings call.
Speaker Change: Thank you.
Speaker Change: Ladies and gentlemen that concludes today's call. Thank you all for joining and you may now disconnect.
Speaker Change: Please wait the conference will begin shortly.
Speaker Change: [music].
Speaker Change: Yes.
Speaker Change: Okay.
Speaker Change: Sure.
Speaker Change: [music].
Speaker Change: Yes.
Speaker Change: Yes.
Speaker Change: Yes.
Speaker Change: Yes.
Speaker Change: Yes.