Q3 2024 Rapid7 Inc Earnings Call
Speaker Change: Hello, greetings and welcome to the Rapid 7 3rd quarter 2024 earnings conference call.
All participants are currently in a listen-only mode. Later we will conduct a question and answers session.
to ask a question, please press star, followed by the number one on your telephone keypad. If you would like to withdraw your question, again, just press star one. As I remind you, this conference is being recorded. At this time, I would like to turn the conference over to Elizabeth Chwalk. Senior Director of Investor Relations, please go ahead.
Elizabeth Chwalk: Thank you, operator and good afternoon everyone. We appreciate you joining us today to discuss Rapid 7's 3rd Quarter, 2024 financial and operating results in addition to our financial outlook for the fourth quarter and full fiscal year 2024. With me on the call today, our Corey Thomas, our CEO and Tim Adams, our CSO.
Elizabeth Chwalk: We've distributed our earnings press release over the wire and it is now posted on our website at investors.wrapid7.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.
Elizabeth Chwalk: 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, investments, growth drivers, financial guidance for the fourth quarter and full year 2024, and the assumptions underlying such goals and guidance and our expectations regarding 2025.
These forward-looking statements are based on our current expectations and beliefs and on information currently available to us.
Elizabeth Chwalk: Actual outcomes and results may differ material 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 August 7th, 2024.
Elizabeth Chwalk: and our most recent annual report on Form 10-K on February 26, 2024, 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.
Elizabeth Chwalk: Actual results and the timing of certain events may differ materially from the results or timing predicted or implied by such forward-looking statements, and reported results should not be considered as an indication of future performance.
Rapid 7 does not assume any obligation to update the information presented on this conference call except to the extent required by applicable law.
Elizabeth Chwalk: 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.
Elizabeth Chwalk: At times, in our prepared comments or in responses to your questions, we may offer incremental metrics to provide greater insight into the dynamics of our business or our quarterly results. Please be advised that this additional detail may be one-time in nature and we may or may not update these metrics in the future.
Speaker Change: With that, I'd like to turn the call over to our CEO, Corey Thomas. Corey?
Corey Thomas: Thank you, Elizabeth, and welcome to everyone joining us on the call today.
Corey Thomas: Rapid 7 ended the third quarter of 2024 with 823 million dollars in ARR while delivering revenue and operating income above our guided ranges.
Speaker Change: A Threat Detection and Response Business
Speaker Change: which remains an area of strength and durable double-digit growth continue to drive the majority of our growth in the third quarter. As our robust capabilities, deep expertise, and investment innovation continue to support a proven world-class detection and response experience for our customers.
Speaker Change: There is positive momentum across our business, and this is a key pillar that undermines our compelling opportunity to re-accelerate growth.
Speaker Change: Our Q3 ARR results also reflect customer budgets that remain in flux, especially around the time it has been. We saw deal cycles continue to elongate with additional levels of approval for the release of budget dollars, particularly for larger deals in North America.
Speaker Change: These longer deal cycles remain broad-based across mid-market and large enterprise customers.
Speaker Change: This change put modest pressure on new AR in the third quarter, driving an ARR result slightly below our expectations.
Speaker Change: We have extrapolated these dynamics into the fourth quarter and coupled with the growing mix of large deals that we expect towards the end of the year, we are lowering our 2024 ARR outlook to a range of $835 to $845 million.
Speaker Change: Now, I'd like to give a broader overview of where our business is and the great progress we've made this year on product and service experience for our customers.
Speaker Change: Vendor consolidation continues to be a strong secular theme across software, especially in security operations where the market remains fragmented.
Speaker Change: Our consolidated offerings are addressing this market-wide customer pain point as security teams look for better outcomes and stronger value propositions.
Speaker Change: We continue to see strong demand for our consolidated offerings across both threat detection and risk management, which together have scaled to make up over $175 million of ARR.
Speaker Change: Additionally, the average ARR per customer for customers who own one of our consolidated offerings is roughly $150,000, highlighting the meaningful revenue opportunity for both new and existing customers that expand across our broader SecOuts platform.
Speaker Change: Exposure Command, our recently launched consolidated risk management solution, has also shown encouraging early progress.
Speaker Change: We introduced the command platform at Black Cat Conference in early August, and with less than two months in the market, we have generated over 70% more pipeline for the overall risk management business compared to the second quarter of this year.
Speaker Change: When I refer to the risk management business, that includes our full suite of cloud security, vulnerability management, and attack surface management solutions, including exposure command, that help customers manage and prioritize risk across their attack surface.
Speaker Change: As expected, Exposure Command is gaining steady traction as customers seek to improve visibility across their attack surface while consolidating on the integrated platform at a compelling price point.
Speaker Change: Over time, we expect the average ARR from risk management customers to grow, driven by product expansion within the category, as well as expanding scope of coverage of their environment.
Speaker Change: As an example of the early success we're seeing in Exposure Command is a six-figure ARR deal that we closed during the quarter, with a technology company looking to track all of their cloud assets in a centralized, automated way.
Speaker Change: Rapid 7.1 against three well-known cloud security players based on our proven use cases, added business context for the customer's attack surface, and the ease of use of the command platform's user experience.
Speaker Change: Rapid7 was able to offer the customer multi-cloud data in one place and the single source of truth is critical in removing constant manual workload for an under-resourced security team.
Speaker Change: We started 2024 with a clear set of priorities and three primary focus areas.
Speaker Change: Innovating to deliver world-class detection and response experience to our customers.
Speaker Change: expanding our partner ecosystem for scale and efficient demand generation and accelerating cloud security adoption.
Speaker Change: We knew this would be a product investment year for us and an opportunity to establish leadership in future growth markets for security operations.
Speaker Change: We made the decision to prioritize our investments in customers' product and services experience while being more measured on investments in sales and marketing.
Speaker Change: As we near the end of the year, I am pleased with what we have accomplished in these areas.
Speaker Change: The work we have done this year provides a critical foundation to our success, and we continue to believe these investments will position us for better long-term and durable growth.
Speaker Change: First, our detection and response business continues to drive healthy momentum, particularly for customers looking to extend their SecOps capabilities with our managed services.
Speaker Change: Our commitment to driving innovation within InsightIDR is creating a stronger value proposition for our customers who increasingly need a centralized, actionable view of their environment.
Speaker Change: There are a number of specific reasons that security teams are choosing Rapid7.
Speaker Change: to better pinpoint threats driven by our vetted and expanded detection library which provides relevant and timely insights from Rapid 7 Security Operations Center, open source community, and threat diligence teams.
Speaker Change: for better ability to scale and reduce manual tax with embedded automation and AI for stock efficiency, particularly during the alert lifecycle.
Speaker Change: and for the ease of use of our integrated platform, with growing coverage and ability to ingest and analyze third-party security data.
Speaker Change: Additionally, the breadth and depth of the Rapid7 platform continues to be a competitive differentiator in a market that is still quite fragmented.
Speaker Change: Our leadership in the space was validated by recent vendor assessments by IDC, which positioned Rapid7's Insight IDR solution as a market leader in SAM solutions for both SMB and enterprise.
Speaker Change: Security teams of all sizes are leveraging our core SIEM capabilities as part of our broader detection response platform to gain comprehensive and contextualized view of threats across their environment.
Speaker Change: The second major area of focus for this year has been on expanding our partner ecosystem for scale and efficient demand generation.
Speaker Change: We've made substantial progress and there's still a long runway of opportunity here.
Speaker Change: In the third quarter, 90% of new ARR bookings were sold through our partner ecosystem.
Speaker Change: This achievement marks a significant milestone and underscores our dedication to collaborating with our partner community, aligning with purchasing channels many customers already use to source their security solutions.
Speaker Change: As we remain committed to advancing our partner programs and experience, this quarter we introduced the Rapid7 Partner Academy.
Speaker Change: which equips our partners with technical expertise around the command platform.
Speaker Change: This program is designed to educate our partners quickly as we innovate, and is particularly beneficial as we recently delivered a series of important launches.
Speaker Change: We're also enhancing the partner experience through the recent launch of our Channel Partner Portal, which supports streamlined engagement and a smoother sales process.
Speaker Change: Overall, the progress in this area demonstrates our dedication to seamless interaction, collaboration, and business growth for our Rapid7 partners.
Speaker Change: Lastly, our push to accelerate cloud security adoption is well underway. Our strategy is resonating strongly with customers by bringing cloud security capabilities into a broader platform that provides customers a high-quality integrated view of their broader attack surface.
Speaker Change: The launch of our command platform, including Exposure Command, has been extremely well received. As I mentioned earlier, we increased our quarterly pipeline creation by over 70% on a sequential basis for risk visibility and exposure management.
Speaker Change: The positive early feedback we're hearing from the market is concentrated around a few major themes.
Speaker Change: The command workflows and user experience stand out from the current market offerings.
Speaker Change: particularly by our ability to aggregate diverse range of third-party security data into a single source of truth.
Speaker Change: This integrated platform experience for cost-effective management of an organization's attack service is a clear differentiator for RAPID7.
Speaker Change: Thank you.
Speaker Change: Customers like our improved cloud risk prioritization and visualization tools, which allow them to assess risk in the context of prevention gaps, including allowing security teams to monitor toxic combinations, provide guardrails for secure AI development, and view executive-level risk reporting.
Speaker Change: And thirdly, many customers lack a firm grasp of the assets across their hybrid IT environments, with Gartner estimating that less than 20% of organizations can clearly identify and inventory a majority of their assets.
Speaker Change: Our integrated asset discovery capabilities bring crucial visibility for attack surface management and speak to a common pain point for customers of all sizes.
Speaker Change: Additionally, our MSFT partners, which have historically been focused mainly on detection response, have shown strong interest in our new exposure management offerings.
Speaker Change: Though we had a slow start to 2024, we've since taken the right steps to focus on our strategic priorities. I am proud of how our team has executed over the last six months to improve the foundational aspects of our business, and we see clear signs of progress and momentum, particularly around the command platform.
Speaker Change: As we look out to the next year, there are plenty of promising indicators on the horizon. The investments and focus areas of this year have made a meaningful impact in our ability to go to customers with the best possible security operations platform.
Speaker Change: and we are already seeing tangible proof points of distraction.
Speaker Change: We expect to start 2025 with a stronger pipeline than last year based on how the managed generation is currently trending. And we continue to believe that our risk visibility and exposure management offerings will be meaningful long-term drivers of growth for us.
Speaker Change: We also have more work to do to successfully convert positive customer feedback and early pipeline traction for the command platform into a material contributor of new ARR.
Speaker Change: As we look ahead to the next year, we're taking a measured approach with respect to both the timing of when that contribution materializes and when we will see customer budget stability and consistent deal cycle timing.
Speaker Change: While we expect to provide formal guidance on our February earnings call, our early expectation for 2025 is that our total ARR growth rate for the year
Speaker Change: should show flat to mild acceleration in growth from our 2024 exit growth rate of ARR. That view assumes continued longer deal cycles, particularly for large deals in managed detection response and relatively stable demand environment.
Speaker Change: The strong fundamentals of our business are intact, and we are creating a broad-based platform of integrated security operations solutions that will have long-term product relevance in a dynamic market environment.
Speaker Change: In the meantime, we plan to continue making shifts in our business model amidst slower near-term growth.
Speaker Change: by evolving our products to be leaders in their specific categories, by evolving our pricing model to align to customers' priorities and budget capacity in these areas, and by remaining focused on scaling free cash flow across our business.
Speaker Change: 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?
Tim Adams: Thank you, Corey, and good afternoon to everyone on today's call. Thank you for taking time to join us today.
Tim 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.
Speaker Change: Additionally, reconciliations between our GAAP and our non-GAAP results can be found in our earnings press release.
Speaker Change: Rapid 7 ended the third quarter of 2024 with 823 million dollars in ARR representing six percent growth over the prior year.
Speaker Change: This ARR result reflects the continued strength in our detection and response business, as well as elongated deal cycles, particularly for large deals in North America.
Speaker Change: ARR growth in the third quarter was weighted towards sales expansion as ARR per customer grew 4% over the prior year to $71,000.
Speaker Change: and our total customer base grew 2% year-over-year to end the quarter with over 11,600 customers.
Speaker Change: Third quarter revenue of $215 million grew 8% over the prior year and exceeded our guided range.
Speaker Change: Recurring product subscription revenue grew 8% over the prior year to 206 million dollars, which was better than expected on favorable linearity in the quarter.
Speaker Change: Our revenue mix continues to shift towards international, which grew 17% year-over-year, and now represents nearly a quarter of total revenue.
Speaker Change: Turning to our operating and profitability measures for the third quarter, product gross margin was 76 percent in the quarter and total gross margin was 74 percent, both of which are in line with the prior year.
Speaker Change: Sales and marketing expense was 31% of revenue, down from 34% in the prior year.
Speaker Change: R&D and G&A expenses were in line with the prior year and made up 16% and 6% of revenue respectively.
Speaker Change: Third quarter operating income of 44 million dollars was above our guided range and represented a roughly 21% operating margin.
Speaker Change: The outperformance was driven by higher than expected revenue and the timing benefit of a few million dollars in professional services and marketing spend which we expect to incur in the fourth quarter. Adjusted EBITDA was fifty million dollars in the quarter and net income per diluted share was 66 cents.
Speaker Change: Moving to our balance sheet and cash flow. We ended the third quarter with cash, cash equivalents, and investments of over five hundred million dollars.
Speaker Change: slightly above the $494 million at the end of the second quarter.
Speaker Change: We continue to ramp up our free cash flow generation with $39 million in the quarter, up from $29 million we reported last quarter. This brings us to our outlook for the rest of the year.
Speaker Change: We now expect full year ending ARR to be in the range of $835 million to $845 million, which represents growth of 4-5% over the prior year.
Speaker Change: We have adjusted our outlook for the remainder of the year based on the elongated sales cycles we saw in the third quarter and have carried forth our assumption that these customer budget dynamics will continue through the rest of the year.
Speaker Change: For four-year revenue, we are raising and narrowing our range to $839 to $841 million, representing growth of 8%.
Speaker Change: This increase from our prior guidance of 833 to 837 million reflects revenue outperformance in the third quarter.
Speaker Change: On profitability, we are raising and narrowing our full-year operating income range to $157 to $159 million from our prior guidance of $152 to $156 million.
Speaker Change: Our updated range represents an implied operating margin of 19%, growing over 550 basis points from the full year 2023.
Speaker Change: We expect full year net income per share to be in the range of $2.28 to $2.31 based on an estimated 74.7 million diluted weighted average shares outstanding.
Speaker Change: For free cash flow, we are updating our full-year expectation to a range of $145 to $155 million based on our updated ARR range.
Speaker Change: We remain strongly committed to expanding profitability.
Speaker Change: Moving to quarterly guidance. For the fourth quarter of 2024, we expect total revenue in the range of $211 million to $213 million, representing growth of 3 to 4 percent over the prior year.
Speaker Change: Non-GAAP operating income for the fourth quarter is expected to be in the range of 33 to 35 million dollars, reflecting an implied operating margin of 16 percent.
Speaker Change: We expect non-GAAP net income per share of $0.48 to $0.51, which is based on 75.7 million diluted weighted average shares outstanding.
Speaker Change: I would like to thank our team for the great work they have accomplished so far this year, especially on the foundational improvements across our detection and response business, our partner ecosystem, and our push to drive cloud security adoption.
Speaker Change: The early traction for Exposure Command is encouraging, particularly as it relates to the pipeline growth we saw in our risk visibility business during the third quarter.
Speaker Change: As always, we remain focused on balancing these growth initiatives with profitability improvements in what continues to be a dynamic market environment. With that, we will now open the call for questions. Operator?
Speaker Change: Our leadership in the space was validated by recent vendor assessments by IDC, which positioned Rapid7's Insight IDR solution as a market leader in SIEM solutions for both SMB and enterprise.
Speaker Change: Thank you.
Speaker Change: Sorry about that. And just as a reminder for Q&A, if you'd like to ask a question, simply press star followed by the number one.
Speaker Change: Our first question comes from Satima Bulami from Citi. Please go ahead.
Satima Bulami: Oh, good afternoon. Thank you for taking my questions.
Satima Bulami: Corey, you talked at length about some of the external dynamics that are contributing to, you know, improved customer feedback and receptivity to the launch of the command portfolio and then just general, you know, strong feedback. But I wanted to reconcile that with, you know, the results and some of what you're baking into the guidance, right? And specifically I wanted to ask you on internal dynamics, you now have had a full quarter of that organizational streamlining that you undertook in terms of the organizational structure. So can you give us a sense of
Speaker Change: what some of the proof points of success are there and why maybe that's not moving the needle and overcompensating or at least counterbalancing some of these external dynamics on sales cycle elongation. Thank you.
Speaker Change: Yes, thanks for the question. There's two focus areas entirely that we actually had is one of them was just to make sure we have rigorous processes so that we can actually forecast and deliver consistently well. The second one was making sure we executed our launch of the Command Platform and close command. Thank you very much.
Speaker Change: As you know, we've been relying on this year on the single select focus around D&R, which has performed very, very well. But at the same time, we need to actually launch our updated strategy for the risk management business with our integrated risk strategy. So the launch of that has been a primary focus area, and I would just say the execution has gone well there.
Satima Bulami: If you zoom out and you say, all right, how does that translate into results, is that we built back up the pipeline, frankly exceeded the targets that we actually wanted to see. But most of our pipeline for this year, we told you the core thesis was going to be around the DNR business.
Satima Bulami: of which we have substantial pipe, but they're a larger deal. I think this is maybe the first time.
Satima Bulami: Our history will look at over half of our pipeline deals 54 that are over $100,000 mark.
Satima Bulami: And so, with the elongation of the cell cycle, a higher mix of larger deals, and what we saw both in 2.2 and 2.3 is our primary focus was making sure that we were actually being thoughtful about what cell cycles were for the pipe and then, you know, sharing that information with you all.
Speaker Change: Thank you.
Speaker Change: Yeah, and just some of the... Thank you.
Speaker Change: And our next question comes from Aked Kalia from Barclays. Please go ahead.
Aked Kalia: Awesome. Hey guys, thanks for taking my questions here, Corey and Tim.
Aked Kalia: Corey, maybe just to start with you, in your prepared remarks, you talked about higher ARR per customer for those that buy bundled or rather consolidated offerings.
Speaker Change: Could you just dig into that a little bit? I think you mentioned 150,000 number. I'd love to just dig into that a little bit. And maybe more broadly, can you just talk about what percentage of the base is sort of on that kind of consolidated type of offering?
Speaker Change: Yeah, it's roughly, you know, $150K, as I say in prepared remarks. It is, frankly, led by DNR, so if you think about so far, like, lots of the consolidation
Speaker Change: strategy has been led by the detection and response business.
Satima Bulami: It's an area where we actually have robust pipes. Now, if you look at DNR and now with exposure command.
Satima Bulami: which is frankly a much better consolidation story from this than what we had previously. And we've taken a lot from the process of learning that we actually have from last year.
Satima Bulami: That said, we still think we have a significant amount to actually go in our base. I would say of our base, I would say a little over 10% or so of our base is on one of the consolidated offerings. And we're having steady adoption, steady uptick in pipeline, but those bills are also larger in orientation.
Satima Bulami: and the Upward Boundary School faculty.
Speaker Change: Got it. That makes sense. Maybe for my follow-up for you, Tim, I appreciate the early look at 2025. I think that's prudent. Maybe the question is how do you think about the mix of sort of customer growth versus that ARR per customer dynamic, even qualitatively, as you think about that preliminary outlook?
Tim Adams: Yeah, Saka, thanks for the question. Look, I think we have the opportunity on both fronts.
Tim Adams: to continue to grow. We have over 11,000 customers today. We think that market opportunity is roughly 70,000. So there's always room to expand with new logos.
Tim Adams: And to Corey's earlier point, when you look at the strength that we're seeing and the consolidation offers
Tim Adams: that we see on customers. So by selling into the packages, certainly the strength of MDR being larger deals, gives us opportunity to do the expansion. And even to Corey's earlier point on exposure command, if you think of that as a great way to land with new customers, and then you have that upsell, cross-sell opportunity with MDR with those customers. So I think you can see it from both new customer acquisition and expansion of customers as well.
Speaker Change: Super helpful. Thanks, guys. Thank you.
Speaker Change: And real quick, just to make sure we get to everyone in the queue, we do ask that you limit yourself to one question at this time. Our next question comes from Matt Hedberg from RBC. Please go ahead.
Matt Hedberg: Great. Thanks, Space, for taking my question.
Matt Hedberg: Maybe I'll just double click on the guidance portion as well. You know, it seems like you're taking a conservative initial approach to the framework of what seems like maybe...
Speaker Change: kind of mid-singles to maybe slightly better growth next year. I'm curious, Corey, you know, are there things that you can do from a go-to-market perspective, you know, that could combat elongated deal cycles? Like one thing, it certainly seems like you're getting a lot of channel momentum. I'm kind of curious as you think about company-specific things that could combat some of these.
Speaker Change: macro pressures. I'd be curious on kind of how you think about that.
Corey Thomas: Yeah, I mean, the primary thing that we're actually focused on is.
Speaker Change: We like the dynamic that we have both in the consolidation offers.
Speaker Change: and the DNR Traction. They are larger deals. I would just say customers have their own specific budgets.
Speaker Change: So we want to keep the good. What we want to add to that is, I would just say, more velocity business, as we actually term it, which is, you can think about that more sort of like upgrade, upsell motion.
Speaker Change: and the install base, that's the upside.
Speaker Change: We do have that. I mean, definitely the exposure command has, we start to see that in the pipeline.
Speaker Change: but it's definitely premature to actually sort of like take pipeline and actually
Speaker Change: I'm going to be talking about how to predict conversion rates and how much of that flows through. I like to think it's just too early, but that is our strategy for actually keeping the good stuff, where we have the larger deals, increasing share of wallet, healthy, dynamic, car-in-the-sack, but adding in a mix of velocity deals that are at lower ASCs and frankly balance out some of the large-scale momentum that we actually have.
Speaker Change: Thanks, Corey.
Speaker Change: Our next question comes from Joe Gowell from Jeffries. Please go ahead.
Joe Gowell: Hey guys, appreciate the question and appreciate the deal cycle elongation commentary. Is that broad-based or there are some areas of the platform that are most impacted? I know you don't give updated mixes but just any sense of the growth rates for the different segments and then maybe on the reverse like
Joe Gowell: The gross retention side, was there any impact on the core of vulnerability management or have gross retention rates stayed stable? Thank you.
Speaker Change: Okay, that was a lot. I'm trying to make sure I got all of it.
Speaker Change: On the deal cycle elongation, I think it's primarily larger. It's less product-based, but deal size-based.
Speaker Change: Look, when you become a material part of someone's budget, in this budget environment, we're just seeing customers sort of like there's a gap now between sort of like you're recommended and a customer says they're going to go with you and how long it takes them to actually figure out like when the budget dollars are going to land. So that's kind of how I would describe it. And we are like I would just say being cautious and thoughtful about like our expectations for the year and just keeping consistent with what we.
Speaker Change: overall. As you can imagine is that it's still primarily that's just because you know the exposure command pipe is actually new.
Speaker Change: We expect the same six-month yield cycle, so it's early in that cycle. So that is more DNR-weighted, so you ask sort of like, what's happening? And the growth rates in DNR continue to be strong, and we expect them to stay strong as we actually go forward.
Speaker Change: And then the last one is the gross retention rates. I think that's probably a relationship. Earlier in the year, we had highlighted that we were seeing some gross retention.
Speaker Change: Precious. Those feel like those are actually are in the process of bottoming out. I would just say the early indicators that we're seeing around those are actually quite positive.
Speaker Change: Now part of that is that customers are seeing what we're doing around the exposure command that are the VM customers, and they do like the strategy. And so we're starting to see early confirmations around that. But I would just say that we think, on net, the gross retention trends are positive to up.
Speaker Change: We feel good about those moving forward. I think I got all the questions.
Speaker Change: You did. That was really helpful. Thank you.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Hamza Futurwala from Morgan Stanley. Please go ahead.
Hamza Futurwala: Good evening. Thank you for taking my question.
Hamza Futurwala: for Corey or Tim just um
Speaker Change: You know, there's been a lot of improvement on the profitability side in the last few years.
Speaker Change: close to 20% free cash flow margin. Obviously, you wanna accelerate your growth for 2025. I know we're not providing the full formal guidance, but as you think about that balance between growth and profitability, should we expect to see additional leverage?
Speaker Change: going forward, or is the focus going to be more around investing more for growth? Thank you.
Speaker Change: Yeah, look, the clear focus we actually have right now, if you think about it, we started, you know, last year, we shifted to driving consolidation. I would just say we did good in one part of the business, the threat detection part of the business. We felt like we did not, we felt we had room to improve on the overall risk side of the business.
Speaker Change: This year we invested in the products that they offer around risk while continuing to expand profitability. We've actually built pipelines. We've seen the early indicators. We feel like the setup next year is focused on the growth rate acceleration. So that's the core focus.
Speaker Change: of the business as we actually go forward next year. We think that it's a good time to do it because we actually have the products.
Speaker Change: the product set up well, the feedback from customers and the sales team. We're not out over our speed in terms of the expectations, just because right now, early indicators are good, but there's still early indicators.
Speaker Change: So, you know, my expectation is that, like, you know, we're happy with the profit-dollar range that we're in. We certainly expect to see more free cash flow dollars as we actually go forward, but the real focus that we actually have is re-accelerating growth off the product base that we actually have today.
Speaker Change: Okay.
Speaker Change: Thank you
Speaker Change: Our next question comes from the line of Rob Owens from Piper Sandler. Please go ahead.
Rob Owens: Great, thanks for taking my question. Corey, in prepared remarks you did talk about shifts in the business model and particularly on pricing.
Rob Owens: In the Q&A you did talk about increasing velocity business. Does it speak to that or is there something else afoot if you can maybe elaborate? Thanks.
Rob Owens: Yeah, I think they're interrelated. You know, when we look out at our customer base...
Rob Owens: We've done a really good job, again tied to the threat detection business, of actually sort of like...
Speaker Change: I was just actually tuning, I would say, on larger deals, larger business becoming more strategic for our customers. That's evidenced by the business that we have there. The thing that we actually have not done a good job of is how do we actually get the 20%, 30% upgrade and uplift in the install base?
Speaker Change: In the old days, we used to get a little bit of that from the people adding more VM assets overall. But we did not get enough of that share originally as people moved to the cloud. Now part of what we actually found there was that the cloud pricing was high. We went and looked at our installments. Lots of our customers just don't have any solutions.
Speaker Change: at all. And so what we flipped around there is that, how do we actually monetize, I would just say, share of wallet and risk management in the install base?
Speaker Change: with a more integrated value proposition.
Speaker Change: that's centered around the attack surface source of truth.
Speaker Change: from the endpoint to the on-prem to the cloud environment, and how do we monetize and upgrade the install base. And so that's the strategy that Rob is sort of like making sure that we actually don't become just a business that does large DNR deals.
Speaker Change: from a sales focus, from an offering focus. Yeah, that's not a sales thing, that's more of our offering strategy.
Speaker Change: I feel like we really nailed, I mean, so far the feedback, very early, but we nailed that with the exposure command, where it's the first time we've had an upgrade to our VM install-based customers. It also makes the customers stickier, because they like the strategy that we're actually doing. It also allows us to actually add more assets for a customer from a cloud perspective. And it's a stickier solution to vulnerability management. You know, VM was about scan and report, or collect data and report. And this is about sort of like collect data, but integrate data and become the attack circuit source of truth in the environment.
Speaker Change: and when you are a system of record in an environment, it's just a much better, much bigger value proposition.
Speaker Change: So Rob, that's more what we're talking about is how do we actually sort of like have more offerings that are not just the bigger ASP will be executed well. Again, this is the first time I think half of our pipeline is over $100K deal. And that's okay, but we really do want to keep a lot of that velocity to
Speaker Change: Great. Thank you, Culler.
Speaker Change: Thanks.
Speaker Change: Our next question comes from the line of Gray Powell from BTIG. Please go ahead.
Gray Powell: Great, thanks for taking the questions. I just want to make sure I understood some of the commentary correctly.
Gray Powell: So when you say the pipeline for risk visibility and exposure is up 70% from Q2, can you help us think through like what the base of comparison is there?
Gray Powell: For example, like is it 70% growth off of a small number, or is risk, visibility, and exposure a more meaningful part of the pipeline at the end of the quarter? Yeah, just any additional detail there would be really helpful.
Speaker Change: Yes, thanks for the question because it does come very far. So, today's your call this year as we are re-tooling.
Speaker Change: and upgrading our strategy around risk management to move from the CRCSO to really, I would say, an integrated product platform approach.
Speaker Change: We saw selling and building pipe on that. So, like, you know, you can think about sort of like that really going down precipitously, sort of exiting last year and coming into this year, which put, I would just say, more pressure on growth than we probably anticipated overall.
Speaker Change: And so what that signifies is, one, is now we're actually wearing back up.
Speaker Change: that risk business overall. So while it's up quarter over quarter, most significantly, it's actually back sort of at the levels that it was sort of like in the middle of last year for the risk business. And most importantly,
Speaker Change: The total pipeline is actually sort of like bottomed out, it's decelerating.
Speaker Change: and that's correct.
Speaker Change: But we really have to recover that risk management pipeline generation, and we've actually seen that. And again, the early sort of like data and conversions are pretty good.
Speaker Change: Okay, that's really helpful.
Speaker Change: Thank you. Thank you. Our next question comes from the line of Greg Moskowitz from Mizzou. Please go ahead.
Greg Moskowitz: Okay, thank you for taking the question. Hi guys. This is maybe a bit of a high-level question, and you may have touched on this a little bit in response to Rob's. But all of us on this call are, as we're all aware, there are many security platforms out there, Corey. And to be fair, several of them are a lot bigger than Rapid7. What gives you the confidence that Rapid7 can be one of the real longer-term winners as a security consolidator? Thank you.
Speaker Change: No, look, I think that there's.
Speaker Change: Two approaches to if you're gonna be a what I think you're right like if you're a niche player, it's gonna be hard
Speaker Change: and there's two approaches that you can actually have for consolidation. You can be a general consolidator, of which I think lots of the companies you talk to are general consolidators. They have lots of stuff across a wide breadth.
Speaker Change: of overall security, and they're using the customer relationship to try to deliver.
Speaker Change: Or you can be a focus consolidator. And if you're a focus consolidator, what you're really saying is, we will be best in the world at this, and we will do it better economically than anyone else.
Speaker Change: We're focused on being a focus consolidator. What we're best in the world at is security operations consolidator. We select more data for more systems than anyone else in the world. No one's actually processing data across the on-prem with the traditional vulnerability management technology.
Speaker Change: the cloud technology, the endpoint data collection, and, oh, by the way, we process data from every other select security delivery provider. No one processes more data, integrates more data to actually paint a picture of the attack surface.
Speaker Change: We actually have been investing in this for longer than anyone, we're still like the most comprehensive, even if you compare every single player on the market today, and we do it with better scale, better customer economics, and better value proposition.
Speaker Change: That is still resonating with customers, and if you dig into it, what you see is, in many ways, we've actually executed and continued to do better and go faster than the market, and the hardest part of it, which is the going up market with the DNR stuff, we're just adding back on the risk piece, but we're adding it back on from a rebuilt risk engineering that's more about integration and the integration of the tax service than it is about the traditional vulnerability management approach.
Speaker Change: But that's the approach that we actually have that we think wins. It's a focused recalibration effort.
Speaker Change: That's helpful. Thanks, Corey.
Speaker Change: Our next question comes from the line of Jonathan Ho from William and Blair. Please go ahead.
Jonathan Ho: Hi, good afternoon. Just wanted to see if you could give us a little bit of additional color on what you're seeing in the MDR space and with your own managed offerings as an add-on, and just how meaningful could this be as you start to think about trying to expand wallet share within your own customer base.
Speaker Change: and just similar to that, if you could talk a little bit about what's happening on the Insight IDR side, whether any of the consolidation that's been happening in this space is starting to show benefit there as well. Thank you.
Speaker Change: Yeah, we are showing, look, part of the DNR backdrop is driven by the detection response product and the MDR service.
Speaker Change: From our benchmark, we have one of the
Speaker Change: Highest quality NDR service in the market. It's backstopped by incredibly strong retention rates compared to the overall market We are one of the few product companies that actually built and continues to build an NDR as a product stat So we use our detection response product solution
Speaker Change: to actually build it out. We think that there's lots of opportunity going forward. Our engineering team has been focused on how do we actually allow customers to not just monitor part of the environment. Like lots of the consolidators are still very narrowly focused on just their data. Our goal is for customers to monitor 100% of their environment and do that cost effectively.
Speaker Change: You have to be a product-driven company versus a services company that adds technology, or a product company that actually has MDR as an ancillary feature of how you manage their own offerings.
Speaker Change: So our goal is to monitor and manage 100% of the attack surface. Our team's focused there. The benefit on your question for our SIEM or security analytics offering is that that gives our SIEM customers the most productive solution for actually managing detection and response in their environment because our MDR analysts have to be productive and we have to do it at scale and at quality and that's part of why that solution is so attractive to so many of those customers.
Speaker Change: That strategy of designing it to actually be a scale-monitoring solution that monitors 100% of the environment
Speaker Change: Our next question comes in the line of Josh Tilton from Wolf Research. Please go ahead.
Speaker Change: Hey, this is Patrick on for Josh. Thanks for taking my question.
Speaker Change: Can you talk about the...
Speaker Change: the competitive environment and sort of what you're seeing there right now and maybe any changes observed over the last year. And then within that, is there any changes to your win rates over the first 11 months this year? And if so, what gives you confidence that you can at least stabilize those win rates or maybe improve them with a better pipeline in front of you?
Speaker Change: Yeah, it's good. So Josh, the wind rates haven't changed materially, it's just the pipeline composition has changed, and it's become, again, for this year we had more of a DNR-focused business.
Speaker Change: We're building back up the risk business with exposure commands, but it's too early. I mean, this is why we're not out over our feet.
Speaker Change: I think the win rates will be somewhat high because, like, you know, a significant, you know, half of that is just upgrades of the VM for, like, customer rates. And so that's a, you know, those tend to have different competitive deals. And by the way, those are also faster cycle deals, to the question that was asked earlier.
Speaker Change: So while it's early, we would expect that to overall be positive, and then we'll see how it fares in the head-to-head space. We did not pursue a lot of
Speaker Change: Risk management and cloud opportunities leading into this year, like we did at the start of last year, when we were launched in CRC, we really wanted to retool it for a better approach.
Speaker Change: So in the DNR, so we'll know more on the exposure command side, but it's actually early, but I'll just say, you know, it looks really good, but I don't want to overweight a small set of deals that actually happen to actually move along fast.
Speaker Change: On detection and response, we think we have a very, very competitive solution. We have high win rates.
Speaker Change: If we lose by far, it's because we are like walking away based on price or based on sort of like the extent to which we are going to lose.
Speaker Change: of the customizations that we'll do because we're taking a product-based approach there. The good news there is that we're actually have been aggressively extending what we monitor naturally, and we can actually do that in very, very good growth margins.
Speaker Change: And so I would just say on that MDR space, we actually have a premium solution there that's actually well regarded, and we feel great about the competitive position overall there. I think I've actually hit it. So I don't think... Look, I think the biggest issue this year is that we had to reaccelerate pipeline on the RISC-V.
Speaker Change: It's not that we were actually generating pipe and losing. Our sales team was just waiting for us to actually redo our offering going forward.
Speaker Change: Thank you. Bye.
Speaker Change: Our next question comes from the line of Brian Essex from J.P. Morgan. Please go ahead.
Brian Essex: Thank you.
Brian Essex: Hi, good afternoon. Thank you for taking the question. Corey, I think you mentioned during your prepared remarks that about 90% of new ARRs is sold to the partner ecosystem.
Speaker Change: And I know previously you've talked about investing in channel relationships, MSSP partnerships, marketplaces.
Speaker Change: Can you maybe talk a little bit about the mix of what you're seeing through the partner ecosystem? Is it leading to more consultative sales? Is there anything about that partner mix that might also be contributing to these elongated sales cycles?
Speaker Change: It's a good question. The answer is I don't think that's the primary contributor. Look, I think
Speaker Change: haven't looked at it and spent some time on some of these by themselves. It's mostly, it is, we are now one of the more
Speaker Change: Again, for the deals, our pipeline mix has actually just changed. We just have a lot of larger deals in pipes than probably we have at any point in our history.
Speaker Change: and customers actually have more scrutiny.
Speaker Change: for a $150,000, $200,000, $300,000 plus line item than they actually do for a $20,000, $30,000 line item. I mean, that's just the bottom line. So I think it's the deal size plus environment. I would not attribute that to our partners. I think our partners are doing...
Speaker Change: a great job, who seeks that momentum. They're definitely one of the contributors.
Speaker Change: to our pipeline overall. So, no, I think it's more environmental, and frankly, us not having enough offerings that are in that Velocity space and actually really focusing our partners on our DR business.
Speaker Change: I think that should change a little bit, again, as we actually continue to grow the exposure command, which, again, should be a little bit more of a velocity business at a lower ANC.
Speaker Change: Got it, thank you.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Joel Fishbein from Truist Securities. Please go ahead.
Joel Fishbein: Thanks for taking the question. Corey, for you, just love to hear anything that's going on in the Fed business and how that tracked this quarter and what the pipeline looks like there. Thanks.
Corey Thomas: It's a good question. As you recall, we have a strategic business. It's actually good, but we do much more in state and local. We have some really exciting, I would just say,
Speaker Change: Bad true engagement coming up next year. And so I'll just say next year really starts our aggressive cycle in the US federal government space
Speaker Change: or we have the certifications, we have the momentum, we've been working on lots of precursor work, but it's not a material factor right now for this quarter. On a new growth basis, we have some very strategic brands and companies in the federal government space.
Speaker Change: But it's not a material factor for new business this quarter for this year.
Speaker Change: Great. Thank you.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Srinik Kothari from Robert Baird. Please go ahead.
Srinik Kothari: Thanks for taking my question. So, Corey, on the elongated deal cycle, some cautions on customer budgets being more broad-based, you and Tim, you guys touched upon, of course, pricing and bundling and so on.
Speaker Change: We wish you a Merry Christmas.
Speaker Change: Thank you. Thank you. Thank you.
Speaker Change: Spasms in terms of adjustments.
Speaker Change: So, I'm going to go ahead and...
Speaker Change: Yeah, you're breaking up there. Could you repeat the question, please?
Speaker Change: yeah yeah so I just trying to ask just taking a leaf out of some some other vendors
Speaker Change: flexible financing, some trial periods, other value-based selling techniques just to kind of employ them to alleviate customer hesitations in adopting the platform, just trying to understand
Speaker Change: others might be doing as well.
Speaker Change: Yeah, it's a great point. So I would just say we are active in discussions around that right now. We're learning from others. It's not in the base plan that we actually gave you. We're trying to see the durability of hot impacts.
Speaker Change: but I would just say we are looking at sort of like how we actually think about just securing the business as we go forward. We're doing it, I would just say, strategically and targeted, but we don't actually have a broad-based program in place around some of those things, but I would just say our finance team and our sales teams are actively looking at that right now.
Speaker Change: Great question.
Speaker Change: on the,
Speaker Change: Our next question comes from the line of Eric Heath from KeyBank. Please go ahead.
Eric Heath: Hey Corey, Tim. Thanks for taking the question. I just wanted to come back to the SIM market. There's been a lot of M&A activity across both enterprise focus and mid-market focus vendors.
Eric Heath: There's a lot of vendors out there circling this space and opportunity. So just curious if you think you're getting shots on goal there. And I don't know if that's one of the other sources of why you're seeing longer deal cycles. So just any commentary there would be helpful.
Speaker Change: I mean, I think that, yeah, I think we're doing great at the Shotgun Bowl, I mean, like, and we're scoring lots of points, too, I mean...
Speaker Change: The DNR business has actually proven stable and healthy. And so we feel very good about that overall. It's a competitive market, but I would say our competitive position is actually quite strong. And we're investing a lot in R&D there to actually continue to extend that strength and that leadership.
Speaker Change: Yeah, Corey, the DNR business is very healthy. It's half of the ARR that we have and the growth rate has been very exciting for us, so that remains very strong.
Speaker Change: Our next question comes to the line of Ansh Koval from Scotiabank. Please go ahead.
Speaker Change: Thank you so much for taking my questions. Patrick Holm from Scotiabank. Corey and Tim, I guess I just want to ask about the preliminary 2025 outlook. Did you say that we should use the 4Q exit ARR rate? Which if so, I calculate that to be 4% in 4Q, so we should use that.
Speaker Change: to forecast 2025 ARR.
Speaker Change: And if I'm right in my maths, I guess that guidance would suggest a kind of nice amelioration of demand trends. And so I guess, can you just talk us through the puts and takes as to, you know, how things are going to stabilize?
Speaker Change: as we look into 2025. Thank you.
Speaker Change: Yeah, yeah, I'll give you the assumption sort of like right there. So one, what we said is look at the exit rate and expect sort of like flat to mild acceleration. The core assumption around it, just to be clear, is look, you know, we don't love it but we actually had to actually meet the expectations a couple times this year.
Speaker Change: And while we have extreme excitement, we expect the DNR business to stay stable because it is stable. It's actually very healthy.
Speaker Change: Exposure Command, we actually are saying it actually sort of continues to show the momentum and the retention rates that we actually see.
Speaker Change: But we are taking a wait-and-see approach to see what the conversion rates are on that, and we're not baking that into any base assumptions. We'll update you on that as we actually see it.
Speaker Change: But it launched later in Q3.
Speaker Change: We've been thrilled with the exceeded expectations so far, but we want to get through a full deal cycle versus just taking a random estimate and actually plugging it to the model. So that's just the logic behind from like where we are, but of course we'll actually update sort of as soon as we actually have clarity of like does that momentum that we actually see carry through in the same deal cycle with the ASPs that we're expecting.
Speaker Change: Yeah, Corey and we just, you know, we talked about Q3 and Q4 elongated deal cycles, larger deals, we assume that going into next year.
Speaker Change: Thank you very much.
Speaker Change: Our next question comes from the line of Mark Cash from Raymond James. Please go ahead.
Mark Cash: We're just kind of circling back to the really strong new AR bookings from Partners this quarter.
Mark Cash: It's coming after the pipelines from strategic partners being at 15% last quarter. So just kind of get into what's driving that buy-in and pipeline from partners. And could you also comment and tie in how much of that has come from AWS or the impact of that relationship so far? Thank you.
Speaker Change: Yeah, okay, we have a set of strategic partners that I believe I've talked to you all about before, that are like our top, you know, our top strategic partners.
Speaker Change: and I think 15 partners around the world. That's the lion's share of that sort of like increase.
Speaker Change: And we do see that, you know, part of how you get momentum is partners create pipeline and they close pipeline.
Speaker Change: and we're seeing those healthy trends. Keep in mind that we did shift lots of our investment away from purely internal sources to be more partner-based last year.
Speaker Change: So this is expected. Some of this is expected.
Speaker Change: I would say, again, similar to our overall business, more depth to DNR weighted.
Speaker Change: It's, frankly, it's early on the risk side, but we actually think there's lots of growth opportunity on the exposure command side. But think about that as a part of the natural evolution of starting to see yields from the investment that we made actually last year when we shifted from our own internal sources to more partner-based.
Speaker Change: primarily DNR focused and we're expecting both the pipeline and the conversion to actually line up as we go forward on the exposure command and the risk management.
Speaker Change: Thank you. Bye.
Speaker Change: Our next question comes from the line of Matt Desert from Needham & Company. Please go ahead.
Matt Desert: Thanks for taking the question, guys. I wanted to ask about the shift to a regional sales model that you implemented recently. Can you update us on how that's progressing? And given the early glimpse to 2025,
Matt Desert: any learnings or thoughts around changing go-to-market incentives for sales reps given the pipeline composition is shifting as you alluded to.
Speaker Change: Thank you.
Speaker Change: Yeah, it's a great question. So, it's going very well so far. I mean the pipeline acceleration you're seeing is focused
Speaker Change: execution around the world from our sales leaders and the partnership with our partner teams, frankly, based off having the full product set in market for the first time in a while.
Speaker Change: that was both competitive and the right product set. So, you know, what do you want to see? You want to see...
Speaker Change: the pipeline build. You want to continue to see healthy conversion rates and win rates of DNR, which we actually have. You want to see the pipeline exposure command convert and actually go forward, and that should drive sales productivity.
Speaker Change: next year as we move forward.
Speaker Change: that's certainly sort of like the leading indicators that we actually see but those are the steps we go through. So like if you look today
Speaker Change: Our sales teams have been really focused on both building the pipeline, converting the existing pipeline, and so they hit all the execution goals that we've actually laid out.
Speaker Change: They've also sort of like done a good job of going back and now upgrading our install base and building a pipeline around that.
Speaker Change: So I would say they've hit all the milestones that we've actually laid out and that we want to hit. You know, what's next up is what allows us to actually go in and tell you more than mild acceleration, is that we actually have to see what the deal cycles are for exposure commands.
Speaker Change: We have to actually see what the conversion velocity is around that, and we have to actually execute on that. That's the next thing that we're really focused on.
Speaker Change: Thank you for watching!
Speaker Change: All right, well, thank you all so much. Do we have one more?
Speaker Change: Oh, no, sorry, I was about to turn it back over to you, but please go ahead.
Speaker Change: So I really appreciate everyone taking the time on the call today. I feel I know we've got some changes throughout the year, but we continue the momentum with DNR. We've now landed on a good integrated red strategy that we're actually supposed to do about, and really are focused now is about how do we actually real celebrate and drop closer to actually go forward. Thank you all for your time. Thank you.
Speaker Change: Thank you.
Speaker Change: That does conclude today's presentation. Have a pleasant day.