Q1 2025 Rapid7 Inc Earnings Call
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Hello, and welcome to the Rapid7 First Quarter 2025 earnings call. All lines have been placed on you to prevent any background noise.
Speaker Change: After the speaker's remarks, there will be a question and answer session and if you would like to ask a question during this time, please press star one on your telephone keypad. I would now like to turn the conference over to Elizabeth Chwalk, Head of Investor Relations at Rapid7. You may begin.
Elizabeth Chwalk: Thank you, operator, and good afternoon everyone. We appreciate you joining us today to discuss Rapid7's first quarter 2025 financial and operating results in addition to our financial outlook for the second quarter in full fiscal year 2025. With me on the call today are Corey Thomas, our CEO , and Tim Adams, our CFO .
Speaker Change: We have distributed our earnings press release over the wire and it is now posted on our website investors.rapid7.com along with the updated company presentation and financial metrics file.
Speaker Change: During this call, we may make statements related to our business that are considered forward-looking under federal securities laws. These statements are made pursuant to the safe harbor provisions of the Private Security's litigation reform act of 1995, and include statements related to the company's financial guidance for the second quarter in full year 2025 and the assumptions underlying such goals and guidance.
Speaker Change: These forward looking statements are based on our current expectations and beliefs and on information currently available to us. [inaudible]
Speaker Change: Actual outcomes and results may differ materially from the future results expressed or implied in these statements due to a number of risks and uncertainties, including those contained in our most recent quarterly report on Form 10Q file today at May 12th, 2025, and in the subsequent reports that we file with the SEC.
Speaker Change: The information provided on this conference call should be considered in light of such risks [inaudible]
Speaker Change: Actual results in 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
Speaker Change: Rapid7 does not assume any obligation to update the information presented on this conference call, except to the extent required by applicable law.
Speaker Change: Our commentary today will primarily be in non-GAAP terms and reconciliation between our historical gap and non-GAAP results . . . . . . . .
Speaker Change: 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.
Speaker Change: Please be advised that this additional detail may be one-time in nature and we may or may not update these metrics in the future With that I'd like to turn the call over to our CEO , Corey Thomas, Corey
Corey Thomas: Hello, and thank you to everyone joining us this afternoon. Rapid7 ended the first quarter with revenue and operating income above our guided ranges, while our ARR closed shorter by expectations, ending at $837 million with 4% to year over year growth.
Speaker Change: During the quarter, we saw continued strength and detection of spots, progress towards stabilizing our risk and closure management business, resilience and profitability and free cash flow.
Speaker Change: In a moment, I'll walk through the details of our performance. But first, I want to remind everyone of the expectations we share, or our last earnings call.
Speaker Change: We entered 2025 with a clear strategy and commitment to re-accelerate long-term growth and expand free cash flow over time [inaudible]
This strategy rests on three pillars. [inaudible]
First,
Speaker Change: Bill Deer on our scale and success in the tips and response where we have strong cuts where to man in a well positioned to sustain growth [inaudible]
Speaker Change: Second, upgrading our large vulnerability management customer base to our exposure management platform, which will both increase retention and provide a valuable on-around to our DNR platform.
Speaker Change: and third, improving our underlying call structure while continuing to innovate, by leveraging our new operations center in India and streamlining our processes.
Speaker Change: In Q1, Detectionary Spot continued as the core gold driver of our business from both an ARR and Proud Expansion perspective.
Speaker Change: This business now represents over half of our total ARR and maintains growth in the core.
Speaker Change: Our DNR performance would have been even better if not for a few seven-figure deals slipping into the second quarter, which have now since closed.
Speaker Change: However, our risk and exposure management business can teed to see challenges, missing our expectations with continued growth desolation.
Speaker Change: While exposure command continued to gain traction, this was all set by ongoing negative growth in our traditional water-believe miniature often.
Speaker Change: A positive note are investments to improve our call structure, remain on track, generous up for profitability re-acceleration in 2026.
Speaker Change: Our performance took place in a more challenging macro-environment than we anticipated in the year.
Speaker Change: We observe customers becoming increasingly cautious and measured about their investments, both in terms of what they purchase and when.
Speaker Change: Extended deal cycles have become more common across multiple sectors, and many organizations are actively evaluating vendors, reprioritizing budgets, and implementing tighter spending controls. [inaudible]
Speaker Change: These dynamics are particularly evident in the North American made market enterprise segment, which is experience of slower deal cycles.
Speaker Change: This customer segment is demonstrating greater scrutiny and tighter budget control trends that are reflected more broadly as customers reassess their priorities and spending commitments
Speaker Change: As we've seen in previous periods of economic uncertainty, the pressure is more pronounced in our risk and exposure management products [inaudible]
while our detection and response offers continue to show resilience. [inaudible]
Now let's explain our product-based performance in detail.
Speaker Change: Our Detection Response Business continues to be our growth engine, anchored by strong momentum and our man's offering.
Speaker Change: We in the 2-1 with a rehab where AR are coming from detection spots, growing in the mid-teens year-over-year [inaudible]
Speaker Change: This growth is driven by persistent demand trends, particularly for MBR, which represents more than 75% of our DNR business. As customers seek enhanced disability, broader coverage, and operational efficiency in managing an increasingly complex threat landscape. This growth is driven by an increasingly complex threat landscape, which represents more than 75% of our DNR business.
Speaker Change: We believe the detection response market offers attracted and durable tailwinds, and we're still in the early innings of this development.
Speaker Change: We respect years investing in land-to-foundation to position ourselves to capital out from this opportunity, and we continue to innovate and invest for growth [inaudible]
Speaker Change: This includes our recently announced Intelligence Hub, which seamlessly integrates threat intelligence into our command platform experience, and expanding our capabilities for our recently opened Socket Innovation Center in India, which will scale over the coming quarters.
Speaker Change: These investments are helping us deliver services more efficiently while traveling better customer outcomes.
Speaker Change: As organizations increasingly turn to Rapid7 to monitor and respond to threats across complex environments, our integrated platform and M. Jarek Fatis continues to stand out in a crowded marketplace.
Speaker Change: A great example is a first quarter competitive win with a mid-size enterprise health care customer who could solidate their security stack with our mayor's direct complete solution.
Speaker Change: They were seeking broader visibility greater automation and reduced operational complexity challenges we were uniquely positioned to address. [inaudible]
Our differentiation was clear across several dimensions.
Speaker Change: Our managed XDR capabilities enable seamless third-party detection of spots to native integrations with their existing tools.
Speaker Change: R.A.I. Power II and Log Management offered unlimited ingestment and long-term attention, providing unmatched visibility.
Speaker Change: Our customizable analytics and automated alert triads streamlined their operations [inaudible]
Speaker Change: and we deliver true defense and depth by correlating alerts across multiple sources, not just in points, creating a more robust security posture.
Speaker Change: This win was driven by our technology and strengthen by our partner collaboration and ability to support the customer's goals with speed and clarity.
Speaker Change: It exemplifies our consolidated platform continues to draft success in highly competitive environments. [inaudible]
Speaker Change: With our proven brand, our track record, and the right capabilities to win, we remain excited about the future of this business and expect it to continue to drive girls for Rapid7
Speaker Change: Now, let's turn to our risk and exposure management business, which is where we experience the most pressure during the first quarter
Speaker Change: Consolidated risk insights across hybrid environments automated with spots workflows and focusing teams on what truly matters real affordable threats, we're helping security teams efficiently secure youre expanding the attack surface.
Speaker Change: Our strategy to improve risk and exposure management is centered on driving adoption of exposure command across our <unk> customer base and we continue to believe this will stabilize performance and ultimately position the business back to growth.
Speaker Change: We laid the right foundation in 2024 with our exposure coming out lots and to date, we are actively working to transition our <unk> installed base to this more modern integrated solution.
Speaker Change: While we've not yet made the full progress we hoped we are resolute in our strategy and the key consideration is around timing.
Speaker Change: The most significant variable in our near term performance will be the velocity of the upgrade cycle and risk and exposure management.
Speaker Change: This is where we're focusing our efforts accelerating migrations, enabling partners and removing friction points to shorten the time to upgrade and what is clearly a more competitive and measured environment.
Speaker Change: On the go to market side, we've completed initial partner and field enablement and are now refining our packaging and pricing to support clear customer pads and more streamlined upgrades.
Speaker Change: We also recognize the need to better communicate the strength of our C&I capabilities, which remain a core differentiator, but are still underappreciated in the market.
Speaker Change: On the product side, we continue to invest in innovation, including separate we sit enhancements that expand coverage improve automation and reinforce our leadership and unified exposure management across hybrid environments.
Speaker Change: Now turning to our outlook for the remainder of the year.
Speaker Change: We remain confident that our strategy and position rapid seven for sustainable growth and expanding cash flow in the years ahead.
Speaker Change: It takes a response business continues to perform and remains the primary growth engine for 2025, as we work to modernize our risk and exposure management platform and return that business to growth.
Speaker Change: That said, it's clear that the environment is more dynamic and fluid than when we initially provided guidance in February.
Speaker Change: We are seeing greater variability in customer decision cycles.
Speaker Change: We experienced firsthand with certain large deals slipping into April.
Speaker Change: And we recognize the broader policy and budget implications may take additional time to play out.
Speaker Change: Additionally, we've taken the opportunity to leverage the expertise of input from our new board members to help evaluate and enhance our guidance approach.
Speaker Change: Given the evolving backdrop and our slower start to the year, we're adjusting our guidance.
Speaker Change: Guidance by lowering the overall range.
Speaker Change: And also widening the range to account for increased budgetary uncertainty.
Speaker Change: Importantly, we are maintaining our expectations for <unk>.
Speaker Change: Operating profitability, which is a reflection of the operating discipline flexibility and resiliency that we've built into our model.
Speaker Change: As we look ahead, our focus remains clear and grounded in three strategic priorities.
Speaker Change: First we will continue to drive industry, leading product innovation across both our rolling DNR franchise, and our established risk and exposure management business.
Speaker Change: Second we remain committed to delivering successful outcomes for our customers, helping them navigate increasingly complex threat environment, while ensuring clear returns to their security investments.
Speaker Change: And third we're focused on driving profitable growth and strong cash generation, including through operational efficiency and continued leverage in our expanding partner ecosystem.
Speaker Change: Before I turn the call over to our CFO, Tim Adams to discuss financials I want to take a moment to welcome. Our newest addition to our board of directors, while Muhammad Michael Burns and Kevin Gallium.
Speaker Change: Each brings expertise that will support our efforts as we navigate a rapidly evolving landscape, we look forward to leveraging their experience to drive growth enhance our industry leadership and create value for all our shareholders.
Tim Adams: With that I'll turn the call over to Tim to walk through the results in more detail.
Tim Adams: Thank you Corey and good afternoon to everyone.
Tim Adams: We appreciate you taking the time to join us on today's call.
Tim Adams: Before I turn to the results a quick reminder, that except for revenue all financial results. We will discuss today are non-GAAP financial measures.
Tim Adams: Otherwise stated.
Tim Adams: Additionally, reconciliations between our GAAP and non-GAAP results can be found in our earnings press release.
Tim Adams: Rapid seven ended the first quarter of 2025 with $837 million in <unk>.
Tim Adams: Representing growth of 4% over the prior year.
Tim Adams: Our results came in below our expectations and reflect continued healthy growth in our detection and response business.
Tim Adams: Offset by both macroeconomic headwinds and continued pressure in our risk and exposure management business.
Tim Adams: Softness in our Standalone vulnerability management business and a few delayed new deals were the primary headwinds combined with an incrementally more cautious customer spending environment, which muted potential upside drivers in the first quarter.
Tim Adams: Admit this we delivered revenue and profitability that exceeded our guided ranges.
Tim Adams: And we continued to demonstrate strong operational discipline and free cash flow generation.
Tim Adams: Now turning to the rest of our financial results for the quarter.
Tim Adams: Year over year <unk> growth in the first quarter was split fairly evenly between new and existing customers.
Tim Adams: <unk> per customer grew 2% year over year to approximately $72000.
Tim Adams: And our total customer base grew 2% year over year to 11685 customers globally.
Tim Adams: Revenue of $210 million for the first quarter grew 3% year over year and was above our guided range.
Tim Adams: Product revenue grew 4% year over year to $204 million.
Tim Adams: Professional services declined year over year, consistent with our decision to deemphasize certain lower margin service engagements.
Tim Adams: International revenue represented 25% of total revenue and grew 10% over the prior year.
Tim Adams: On operating and profitability measures our product gross margin was 76% and total gross margin was 75%.
Tim Adams: <unk> and marketing expenses were 34% of revenue, reflecting disciplined investments in growth initiatives.
Tim Adams: R&D and G&A expenses were 18% and 8% of revenue respectively.
Tim Adams: And consistent with our plan to prioritize targeted investments behind our core security operations platform and scaling our India Innovation Center.
Tim Adams: Operating income for the first quarter was $32 million and above our guided range due to the timing of certain hiring in G&A expenses.
Tim Adams: We now expect these costs will be reflected in the later quarters.
Tim Adams: Adjusted EBITDA was $39 million in the quarter and non-GAAP net income per share was <unk> 49.
Tim Adams: Turning to our balance sheet and cash flow statement.
Tim Adams: We ended the first quarter with cash cash equivalents and investments of $593 million.
Tim Adams: In early May we fully repaid the remaining $46 million balance of our 2025 convertible notes further simplifying our capital structure our.
Tim Adams: Our existing convertible debt is attractively priced and we plan to meet these obligations through a combination of cash on hand, and free cash flow generated from the business we.
Tim Adams: We believe this financial flexibility positions us well to continue investing in growth.
Tim Adams: Maintaining a strong capital structure.
Tim Adams: Free cash flow for the quarter was $25 million.
Tim Adams: This brings us to our outlook for the remainder of the year.
Tim Adams: For the full year 2025, we are adjusting our guidance to reflect the slower start to our year along with increased uncertainty we're seeing in the market.
Tim Adams: While detection and response remains a consistent performer for.
Tim Adams: The softness in our risk and exposure management business and lengthening sales cycles.
Tim Adams: Early in March have created more variability than we anticipated at the start of the year.
Tim Adams: As a result, we are lowering and widening our full year <unk> range to $850 million to $880 million growth of 1% to 5% over the prior year in order to better account for these dynamics.
Tim Adams: We continue to monitor the macro environment closely and are staying agile in our planning and execution.
Tim Adams: Given the changes in the outlook, we now expect full year revenue of $853 million to $863 million representing growth of 1% to 2% over 2024.
Tim Adams: Recurring product revenue growth will outpace total revenue growth offset partially by a year over year decline in professional services.
Tim Adams: On operating profitability, we are reiterating our full year operating income outlook of $125 million to $135 million.
Tim Adams: We are adjusting our full year free cash flow guidance to a range of $125 million to a $135 million to reflect billings and collection dynamics associated with our lower outlook.
Tim Adams: non-GAAP net income per share is expected to be between $1 78.
Tim Adams: And $1 91.
Tim Adams: Based on approximately $76 7 million diluted weighted average shares.
Tim Adams: For the second quarter, we expect revenue in the range of $211 million to $213 million representing year over year growth of 1% to 2%.
Tim Adams: We expect non-GAAP operating income between 30% and 32 million and non-GAAP net income per share of <unk> 43 to 46.
Tim Adams: Based on approximately $75 3 million diluted weighted average shares outstanding.
Tim Adams: In closing, while the broader environment remains cautious we are confident that the steps we are taking driving innovation in our product portfolio deepening customer relationships and operating with financial discipline.
<unk> us well to drive improved execution through the balance of 2025 and beyond.
Tim Adams: To close I'd like to thank our teams for their hard work and continued focus as we execute against our long term strategy.
Tim Adams: We remain committed to driving sustainable growth expanding profitability over time, and reinforcing rapid seven's leadership in the security operations.
Tim Adams: Thank you again for joining us today, operator, we will now open the line for questions.
Tim Adams: Thank you. Thank you I would like to ask a question. Please press star one on your telephone keypad. If you would like to withdraw your question simply press Star one again.
These ensure that your phone is not on mute when called upon.
Tim Adams: We ask that you please limit yourself to one question and rejoin the queue if necessary. Thank you.
Tim Adams: Your first question comes from <unk> Kalia with Barclays. Your line is open.
Speaker Change: Okay, Great Hey, guys. Thanks for taking my questions here how are you.
Tim Adams: Thanks Chuck.
Corey Thomas: Hey, guys, maybe I'll stick to the rule just around one question and maybe make it for you Corey.
Corey Thomas: Can you just go one level deeper into why you think maybe the upgrade cycle.
Corey Thomas: <unk> demand is just going a little bit longer than you expected I mean, it's clearly a tough macro but can you just maybe dig into some of the product considerations here.
Corey Thomas: Customers thinking about really consolidating multiple tools with that with that product.
Corey Thomas: Yes, so if you look at the.
Corey Thomas: Budgetary or if you look at so let me step back.
Corey Thomas: Why do customers want to upgrade to a product like exposure to command.
Corey Thomas: Large customers have a more complex risk environment. So they have more cloud assets more SaaS assets, they need to actually look at risk across the environment.
Corey Thomas: Understand their environment.
Corey Thomas: A malware attack surface and indeed, you manage their remediation and compliance across that complex environment. So complexity is the primary driver of demand. The reason that we actually have confidence in the cycle as we're seeing good interest and demand in solving the problem.
Corey Thomas: We are seeing especially in our core mid market install base.
Corey Thomas: It's not readily available budget and so part of <unk>.
Corey Thomas: How we think about the opportunity is where we've seen budget that people can actually allocate and where are we not as we entered the year, we actually looked at it across the board and thought that there'll be a pace of upgrades across which we still think that there'll be a healthy pace of upgrades, but we are seeing a difference between those that can actually afford the budget and those that can't afford the budget I'll remind you that we tend to have.
Corey Thomas: Heavily more heavy weighted mid market install base, especially in traditional VM and Thats what were expecting it to take a little bit longer on the time to actually get through that upgrade cycle because it is incremental expense.
Speaker Change: Got it very helpful I'll hop back in queue.
Corey Thomas: Thank you very much.
Corey Thomas: The next question comes from Jonathan Ho with William Blair. Your line is open.
Jonathan Ho: Hi, good afternoon.
Jonathan Ho: I guess, one thing I wanted to understand a little bit better is when it comes to your expectations around the AR side of things I mean, clearly it is a bit more challenging here with the macro and with what's happened around exposure management, but.
Jonathan Ho: What has to happen to sort of reaccelerate.
Jonathan Ho: And what could maybe be some upside scenarios here as we look at sort of the.
Jonathan Ho: The environment. Thank you.
Jonathan Ho: Yes. Thanks for the question look we see two drivers, which is why we have a pretty wide range right now.
Jonathan Ho: First Robert is the continuation of what we're seeing right now we've seen strong demand for extra was Fox, we just expanded the offering.
Jonathan Ho: To be able to actually go after more customized more enterprise use cases.
Jonathan Ho: Just launched off so we're expecting.
Jonathan Ho: Execution, there now those sales cycles are longer and so we're not forecasting or baking that into the plan.
Jonathan Ho: We're definitely bullish on what we're seeing and even with the performance in Q1.
Jonathan Ho: I would just say some banks that were.
Jonathan Ho: Headwinds, where deals got delayed and DNR and they showed up in the early part of Q2.
Jonathan Ho: M&A, we still felt very very healthy performance on DNR, and which has significantly expanded the market opportunity and the Tam there and so that's an area, where we actually have a lot of confidence overall the second part is that the ability to upgrade our installed base. We don't have to get the material parts of the installed base to see upside we are incrementally more cautious.
The U S mid market, we still see lots of strength internationally around the world, but when we look at sort of what it takes to see re acceleration, it's really sort of like can we actually start to get the upgrade engine going keep in mind. The upgrade it's a new agent for US. This is the first time in a long time that we've had the ability to upgrade a material part of the installed base and so again, that's why we have a water.
Jonathan Ho: So again to simplify it continued to gain momentum.
Jonathan Ho: Pursuing the expanded opportunity, which we just opened up from a product portfolio and we're well positioned.
Jonathan Ho: I actually get and then we need to actually see the upgrade cycle perform on the risk side all of those give us plenty of room to actually achieve the upside but timing is one of those things that we did not want to actually overcommit on the timing because the upgrade cycle, especially if you take a little bit of that.
Speaker Change: Thank you.
Jonathan Ho: Thank you very much.
Speaker Change: The next question comes from Matt Hedberg with RBC. Your line is open.
Speaker Change: Great. Thanks for taking my question guys I wanted to follow up on <unk> first question at the start and it seems like you outlined a couple of steps for improving risk and exposure management that you talked about enabling partners and accelerating migrations I'm just kind of curious what sort of timeline should we think about four.
Speaker Change: Stabilization, if not improvement in that business.
Speaker Change: Thats a great question and this is one of the things that we focus a lot on.
Speaker Change: If you look at the guidance range that we actually have now.
Speaker Change: We're expecting moderate stabilization over the course of this year.
Speaker Change: And then I would just say reacceleration as we actually move forward.
Speaker Change: When we look at the core drivers you really do have to break it down and say what's happening biased.
Speaker Change: By segment basis, and so what we're finding right now is that customers that actually have flexibility. The budget, we're seeing movement and we're continuing to see upgrade cycle not at the pace that we would want to see just to be clear to offset the larger macro pressure.
Speaker Change: We are seeing momentum and we are seeing upgrades and we are seeing the proof points around those.
Speaker Change: The deal cycles tend to be a little bit larger which is one of our indicators that we're seeing more pressure in our core mid market install base. There is some things that we're doing around packaging and pricing to actually try to ease the upgrade cycle for that core mid market customer but to answer. Your core question is that we expect our two phase stabilization as we moderate.
Stabilization as we actually go through the year, we are expecting to be more pressure than we actually expected as we started the year overall and the risks and detection business, but we're currently focused on what it takes to unlock that the steps that you outlined our sales and channel enablement.
Speaker Change: Honing in to any of the pricing and packaging driving campaigns against the installed base and second Randy install base really focus on those who actually have the budget and the ability to actually upgrade overall and most importantly, continuing to improve the product's value proposition.
Speaker Change: On the cheese that we actually see that drop the mid term cycle here in the interim we're not jamming the timing on that we're focused on and we're focusing our sales teams and marketing on what's working we have a strong value proposition in the text a response until we're really focusing on that as we actually continue to drop the systematic upgrade of the installed base.
Speaker Change: Thanks Super helpful.
Speaker Change: Thank you.
Speaker Change: The next question comes from Erin Samuel with Susquehanna. Your line is open.
Erin Samuel: Hey, good afternoon. Thank you very much for taking the question.
I wanted to ask a little bit more about the macro you mentioned some pressure from U S mid market customers.
Erin Samuel: You have any callouts in terms of customers that are staying relatively more resilient, whether by customer size geography or industry vertical. Thank you.
Erin Samuel: Yes, it's a good question.
Erin Samuel: It's interesting is that.
Erin Samuel: I would just say customers where security.
Erin Samuel: Is required and mandated are clearly easier to actually sort of like withstand they get their budgets more so that is why we find it more and both highly regulated industries.
Erin Samuel: As well as slightly I would just say not large large but I would just say the.
Erin Samuel: The.
Erin Samuel: Larger end of our install base when you think about that over.
Erin Samuel: $1 billion of revenue customers.
Erin Samuel: And so there tends to be more we have to solve but we actually do see real benefits and tailwind from the fact that those customers also have the scale their operations and so we think that there's a real opportunity, especially with our expanded enterprise MBR offering tax.
Erin Samuel: To actually be able to drive growth and acceleration there. So thats, what we actually see opportunities. We also see lots of actually opportunities and Europe, especially outside of the U S.
Erin Samuel: We continue to actually have healthy growth and healthy demand drivers overall, the places that we're seeing pressure. Unfortunately places.
Erin Samuel: I would say critical through efforts have been focused on resource constrained buyers historically as we see pressure in the health care sector, we see pressure in education sector, where again they are still moving forward, but those deals are definitely taken longer and there is lots of budget concerns as you go as you go around same with state and local sectors.
Erin Samuel: And then we've talked about sort of like the general middle market. So we see areas of strength. We also see areas of pressure. The one thing I will say as you look across those things we are seeing even though it may take a little bit longer. The DNR projects are closing now people want to make sure they get great value for what they're getting but those PNR deals are closing and moving forward. We saw those in the month to date products slip from March.
Okay. So that's very positive.
Speaker Change: Thank you for the question. Thank you.
Speaker Change: The next question comes from Fatima <unk> with Citigroup. Your line is open.
Mark: Hey, good afternoon, Kim this is mark <unk>, thanks for taking our questions.
Speaker Change: Maybe just to.
Speaker Change: Just on the challenging macro economic environment and also the new upgrade cycle motion that you guys are seeing on can you maybe speak to the level of gross churn and attrition during the quarter any sense of observed disruptions from the upgrade cycle and related to that any color you could provide on tenor or what would be great. Thank you.
Speaker Change: Yes, no. It's a good question. So when you look at the churn that we actually saw its pretty consistent with what we actually saw exiting last year. So.
Speaker Change: So if you think about the pressure from a net perspective is the churn was consistent especially the risk business with what we saw exiting last year with the crushing environment. So we didn't expect any major changes overall I will say that we were pressured more on the new side of the equation and that core mid market space.
Speaker Change: As you think about sort of like the traditional mobility management, while it's not a big factor, it's still sort of a factor when you think about total net growth.
Speaker Change: But churn was relatively consistent to what we expected as we exited last year.
Speaker Change: And that has the upgrade cycle hasn't been a major factor in the churn overall.
Speaker Change: Just a quick question is just putting more deals up for risk no. We're not seeing that at all.
Patrick Colville: The next question comes from Patrick Colville with Scotiabank. Your line is open.
Patrick Colville: Thank you so much for taking my question.
Speaker Change: Yes, Corey I mean, this one's for you I mean in the quarter we had.
Speaker Change: RSA Conference recently and.
Speaker Change: A large.
Speaker Change: Cyber security company best known for its endpoint tool.
Speaker Change: Put into its network based VM.
Speaker Change: Yes.
Speaker Change: Clearly too early to tell what that might mean, but can you just give some thoughts on.
Speaker Change: On.
Speaker Change: What this engine could be rapid seven and how you guys are going to compete against them to kind of lock them out. Thank you.
Speaker Change: Yes, so when we look at <unk>, we continue to be a hyper competitive pressures, but also in that high growth space and so we do have to actually defend and upgrade our strategy is pretty straightforward, we uniquely have a very.
Speaker Change: Our differentiated approach to actually provide the integrated risk visibility across the attack surface, which is what people are looking for now.
Speaker Change: I've said it before if you were looking at monetizing Jeff's traditional standalone VM, it's going to be unattractive business part of what we're doing as part of the upgrade cycle is we're drawing down the value of historical traditional standalone, VM and providing more value from the ability to actually track all of the assets resources technology across the attack surface looked at the <unk>.
Speaker Change: Weighted risk profile across the attack surface manage remediation across the attack surface and manage compliance across the attack surface I look at all the announcements at RSA. None of them are actually taken a truly integrated approach overall there. So we think that our upgrade strategy. This is why we said that it is an imperative to upgrade our installed base because we are upgrading and.
Speaker Change: Wait it actually makes us stickier and so that's a no we have to execute on it but that's a no no but the other part of it is is there's a lot of focus on I would just say it is defense and we are definitely declining.
Speaker Change: On the overall traditional wanted to lead management market and Thats the imperative upgrade but the other part of that is to actually continue to play offense about what's working in the data. Our growth engine also provides a stickier avenue on approach for those VM customers as they consolidate on the platform and so if you think about our strategy of defenses to Paul if we have a bunch of our just a stretch.
Speaker Change: Vulnerability management customers that don't have any sort of like other compelling value and that's at a higher risk for disruption and we acknowledge that the imperative there, but either upgrade so exposure demand or upgrade them to our D integrated.
Speaker Change: Detection and response offering those customers are much much more stickier than we've already seen that with our overall DNR customer base. So thats the strategy and Thats. The approach I would just say regardless of what anyone does standing still was never an option. We've known that we can manage the change better but we've known that standing still is never an option. We are the place that we.
Speaker Change: We have massive momentum and we are participating in a core growth market and we're getting more than our share of that core growth market, which is DNR as we actually then address the changes that are happening in the vulnerability management market overall, which we forecast with all that color.
Speaker Change: Very clear. Thank you. Thank you Corey.
Speaker Change: The next question comes from Eric <unk> of Keybanc capital markets. Your line is open.
Hey, great. Thanks for taking the question just curious to understand maybe at a high level how.
Speaker Change: How much of the success on DNR is dependent on the installed base.
Speaker Change: Just Ken DNR, continuing to grow double digits BM continues to decline and Tim if I could sneak one in I think in the past you've given some guardrails on IRR for the upcoming quarter. So just curious if there's any guardrails on <unk>. Thanks.
Speaker Change: Yes.
So.
Speaker Change: To answer your question is we've been pretty Luckily within our business is that the growth has actually come from both within our installed base I'll just point out that we saw massive upgrade opportunity within our overall installed base both on a closer upsell basis, but also on the existing DNR and technology customers in the installed base. So we sell plenty of upward.
Speaker Change: <unk>, that's one of our under leveraged opportunities that we're really focusing our sales engine homebuilding the motion about how do we actually expand and grow on the installed base so to.
Speaker Change: To answer your question is one are we running our room because of the VM dynamics is no we have massive <unk>.
Speaker Change: As always I think the second part of your question is.
Speaker Change: Is when I think about it do.
Speaker Change: Do you actually have a land motion independent of the installed base and yes. The unique thing about our business and this is why it makes us very proud is that we've always been able to actually add new land customers and im not saying thats like 10%, 20% its been pretty close to half of the installed base has actually come from new land customers, which is much higher than we expected. So we still have more than enough land.
Speaker Change: And to actually drive sustained growth as we actually go forward in.
Speaker Change: And that business overall, even as we have opportunities to upgrade existing media and our businesses are focused on what some of the stuff that we're actually launching later this year around AI for it and our customers. We think will actually be a boon for both our technology customers, but also for our MBR customers, who continue to want us to cover and manage more and more of the environment.
Speaker Change: Youre seeing some of the early indicators of that with our recently launched enterprise MTR customizable services business, what we are using more and more AI for that and Thats a great opportunity.
Speaker Change: Last point is Tim you can do a quick one on the bank, which will keep everyone of course, yes.
Speaker Change: Eric on Q2, I would say, we're anticipating a modest increase from where we ended Q1.
Speaker Change: Our full year guide for the year is more second half weighted this year.
Speaker Change: Thank you.
Speaker Change: The next question comes from Gregg Moskowitz with Mizuho. Your line is open.
Corey Thomas: Okay. Thank you for taking the question Corey Anecdotally speaking why is it that the U S mid market team, particularly cautious about spending right. Now for example, our customers deliberating for a longer period of time or they decide.
Corey Thomas: Significantly they may consolidate in cyber security and with which vendors where tariffs mentioned at all is an issue in late March or in April any additional color here would be it would be helpful.
Corey Thomas: Yes look I actually think its general uncertainty what we found in almost every cycle. We've had that we were probably one of the few cyber companies and enterprise companies, who had a mid market business for longer. So we've seen a lot of these cycles.
Corey Thomas: Mid market tends to respond faster to economic pressures it tends to shut off faster come on faster and so that's not anything new which is why as we saw things play out in the early part of the year.
Corey Thomas: We actually did shift our position I think are more than.
Corey Thomas: And we talked to them a validated with taking a more cautionary approach now to get down to the regions.
Corey Thomas: Very very differently across the industry. So manufacturers of course worried about tariffs our cost structures pricing how much they can cope with their businesses.
Corey Thomas: The mid sized health care companies are clearly worried about margins, whether you're a health provider our health insurer.
Corey Thomas: That is a concern that you are actually going.
Corey Thomas: Regardless.
Corey Thomas: Retailers are very worried about their cost structure. So again I won't say, it's a formal survey, but we do do our pressure chest across a bunch of different segments.
Corey Thomas: So it does vary about what the pressure is but what I will tell you that we saw in the cobalt cycle. We've seen in previous cycles is retail customers tend to pause and wait to see what's happening much faster than some of the larger customers some of the larger enterprises.
Corey Thomas: And one thing Thats unique is we obviously have more pressure in the education sector. This go round for obvious reasons.
Exactly thank you.
Corey Thomas: Thank you.
Gray Powell: The next question comes from Gray Powell with <unk>. Your line is open.
Speaker Change: Okay, great. Thank you very much.
Speaker Change: Yes, another question on the macro environment.
Speaker Change: Everything you said.
Speaker Change: It makes a lot of sense and I just really appreciate it.
Speaker Change: Youre being upfront with everybody.
Speaker Change: I am curious like can you give us a sense as to the tone of customer conversations in April and May and just broadly speaking, but my understanding was that people were pretty panic. The week after liberation day, and I actually heard some people say it felt like March of 2020, but once the tariff pause went into place like an April nights.
Speaker Change: Hearing that things starting to fall out so I'm just curious if you heard anything like that any conversations start to improve the last few weeks.
Speaker Change: Yeah, absolutely I mean, so Tim said earlier, we have closed some of the deals that we were worried about.
Speaker Change: You can make an argument that things are stabilizing.
Speaker Change: Anyone who would actually estimate that being stays stable in this environment, it's probably a little delusional because I think we're probably in an up and down cycle on the new cycle.
Speaker Change: There's just as much reason to actually see stabilization and upside down.
Speaker Change: The outback pressure I just want to be clear, we're not I would just say overly pessimistic about the macro we just realizing that now there is a wider range of outcomes. There we have seen some customer deals progress and move we see continued opportunity to creation. So it's not a.
Speaker Change: It's not a negative read I would just say on balance we see increased pressure.
Speaker Change: But as you said earlier as people do respond to actually work in front of them.
Speaker Change: And it feels like it's not the worst of the worst right now will be my my read of it but I don't think yes.
Speaker Change: I would consider a stable macro environment I think there's a lot of unknown and we're trying to reflect that that's why you see we actually have a wider range here because we haven't.
Speaker Change: We have the upside and we have the base case, and we have the downside scenario.
Speaker Change: But that required a wider range.
Speaker Change: Understood. Thank you very much.
Speaker Change: Thank you. Thank you.
Speaker Change: The next question comes from Roger Boyd with UBS Securities. Your line is open.
Speaker Change: Awesome. Thanks for taking the questions you mentioned confidence in the scene that product and I understand that the big opportunity there, but I think we've all kind of seen that it's incredibly expensive to compete there.
Speaker Change: Others in that space that have been there for a long time that are now looking to partner or just how are you thinking about the health of the cloud security market and how do you think about kind of the investment strategy to capitalize on the opportunity there. Thanks.
Speaker Change: Yes, that's a great question. So I would just say we've been very deliberate about how we think about it our primary focus is just upgrading the installed base.
Speaker Change: Integrated offering.
Speaker Change: We have lots of I would just say levers to actually pull there. This is not one where we're going to go out and spend a ton of money trying to acquire new land in cloud security is we think we can provide compelling.
Speaker Change: Economically leverage upgrades for our customers and our installed base.
Speaker Change: Our installed base is underpenetrated or having any cloud security solutions there.
Speaker Change: That tends to just describe a little bit of that resource constrained buyer that we have heavily in our installed base.
Speaker Change: And so we see that as the primary opportunity, which is a much more efficient cost of sales and marketing.
Speaker Change: We are maturing in our ability to actually pursue that opportunity. Because this is probably the first time in a long time that we've got a big upgrade cycle in front of us. So we're getting the engine ramp and targeted.
Speaker Change: I'll talk to one of our associates earlier today, and they say listen we're starting to actually progress on ramping up the sales engineer, but we're targeting a much more efficient growth opportunity. There is which is really how do we grow the installed base.
Speaker Change: <unk> debt to achieve success.
Speaker Change: We actually just need a moderate uplift across a portion of our installed base and that actually drives stability, which takes away negative growth engine and our overall risk exposure management installed base, but it's a net neutral to slightly positive and then we can actually really leverage the tailwind that we see on the traditional gain on our side of the equation.
That said, we will focus it sounds like you have a <unk> city. So stabilize then you get into a neutral or positive on the risk and exposure, which is really about upgrading install base, even acknowledging some of the traditional churn pressure, while we actually continued to actually really focused on the massive growth engine that is that DNR business.
Speaker Change: Great. Thanks very much.
Speaker Change: Thank you.
Speaker Change: The next question comes from Joshua Tilton with Wolfe Research Your line is open.
Joshua Tilton: Hey, guys can you hear me.
Yes, Hey, Jeff.
Speaker Change: Great. Thanks for thanks for sneaking me in I want to start by echoing Greg's comments.
Joshua Tilton: I appreciate you guys being upfront on what Youre seeing out there.
Joshua Tilton: The one I had is just kind of parsing out some of the comments that have come out during the Q&A and I guess in the prepared remarks, you talked to <unk>, there will be a mid teens growth, but some deal slipped it would've been better.
Joshua Tilton: These deals have closed I guess was that macro dynamic and then did you see a similar dynamic on the risk in the closure side of the business in the sense that.
Joshua Tilton: You had a light quarter, but what has happened to those deals.
Joshua Tilton: And what's expected in the guide for the for everything uplift going forward. Thanks.
Joshua Tilton: Yes, no. It's a very fair question so the.
Joshua Tilton: On the DNR.
Joshua Tilton: Deals that actually slipped.
What I would describe it was just very large deals with EBIT County, I guess, a handful if not even a handful couple of deals that just happened to be very material in orientation and the reason that they slipped.
We're probably I would just say macro pressures situations, one with a large educational institution.
Joshua Tilton: We really need to see how things are going to actually play out and another one in the retail sector.
Joshua Tilton: And so that those are.
Joshua Tilton: Those sectors, we have a smattering of I would just say manufacturing companies too that I think most of those are actually since close.
Joshua Tilton: And then when you look at the risk exposure management factory in my our strategy on the uprate. Its just much smaller asps. So it's not like you didnt have deal slippage on that side.
Joshua Tilton: It's just it's not as concentrated the DNR business tends to actually have.
Joshua Tilton: Larger average Asps and then water ranges overall.
Joshua Tilton: Yes.
Joshua Tilton: The read through is that.
Joshua Tilton: And then on your question about what's in the guide and the expectations look our core Guy is really anchored on I would just say consistent DNR Columbus, which is I would just say in line with what we saw in Q1. There is no real Delta is that we're experiencing there overall I would say the range of outcomes on the hiring the lowest debt do we actually get some acceleration.
Joshua Tilton: Based on the expanding offerings that we think are pretty competitive that's upside there, but without the industry doesn't make sense to make it into the range.
Joshua Tilton: And then we are more modest on ballots on the pace of the upgrades, which can offset some of the pressure.
Joshua Tilton: Working very very hard to actually drive the upgrade cycle in the operationalize that.
Joshua Tilton: But I would just say incrementally versus the start of the year.
Joshua Tilton: We are expecting is that cycle to actually take a little bit longer and we're expecting to see continued pressure and the overall traditional vulnerability management business for all the reasons that we actually talked about earlier do we have upside there based on equity cycle absolutely there.
Joshua Tilton: But we are at where we are based on what we've seen so far.
Speaker Change: Super helpful. Thank you.
Joshua Tilton: Thank you.
Speaker Change: The next question comes from Mr. Nick Kotare with Robert Baird. Your line is open.
Speaker Change: Great. Thanks, a lot for taking my question. So Corey you mindshare of course structural pressures in traditional rehab and slower mid market.
Speaker Change: Despite all of that being able to drive <unk> growth.
Speaker Change: And of course, lower Tcl wire AI automation, but also differentiate and beyond on cost so on the risk and exposure management.
Speaker Change: Thanks, a lot of course package and pricing.
Speaker Change: Great enablement in terms of messaging right touch up on that how are you this broader risk and exposure management.
Speaker Change: Thanks, Saar approach Robert sounds approach from either VM players adequate follow up after thanks.
Speaker Change: Sure.
Speaker Change: So I think the question is how are we differentiating versus traditional VM players well what I would just say look we have to recognize that the VM market has a lot of approaches players avenues.
Speaker Change: I would just say overlaps with the cloud market in some ways. We've taken a very very specific approach of focusing on integrated risk manage it.
Speaker Change: And so the way to think about that is that what's unique about US is we're one of the few players only play I'm aware that fully out of the box integrates all of the assets all the information all the topics in your market, we actually consolidate risk across the environment not just from our tools and technologies better cost environment, we have open API.
Speaker Change: Our data team.
Speaker Change: We believe an open API.
Speaker Change: Toward that and we think that's good for the technology industry in general.
Speaker Change: We consolidate the remediation cost environment, we have some enhanced this later that we're going to accelerate our ability to process and help customers drive compliance leveraging AI across the environment and then we actually build automated workflows in general the way to think about what we're doing is when you think about the CGM structure that Gartner recommends across is our big focus is about being the integral.
Speaker Change: The engine behind that and enabling the automation of the response and management of those processes, we see ourselves in highly differentiated there's areas that we're catching up like some of the long tail will be cloud capabilities that some of the cloud pure plays or actually that is what played catch up at some of those areas.
We look at our core installed base, while there may be more budget constraints and more resource constrained lots of them are trying to figure out how to actually get efficacy at scale and we think we have a great story and a great solution for that installed base.
Speaker Change: The next question comes from Adrian Perry with Piper Sandler Your line is open.
Adrian Perry: Hi, good afternoon, staying on for Rob Owens and thank you for taking the question.
Adrian Perry: And earlier that complexity, the driver demand and with the launch of MTR for Enterprise do you think these new capabilities will allow you to go after specific verticals with complex environments more effectively or if this offering intended to address large customers more broadly. Thank you.
Adrian Perry: Alright.
Adrian Perry: It tended to address large customers more broadly.
Adrian Perry: But look there is also some large vertical that we see like we've got lots of demand from the manufacturing vertical for example, which really hasnt massive amount to manage and Theyre looking for scale help healthcare, we actually see on the larger end real dynamics there. So.
Adrian Perry: Do you think about our sweet spot here is very very large customers.
Adrian Perry: That have to scale secure.
Adrian Perry: Security is mandatory.
Adrian Perry: Looking for a partner they have some security resources, where they're looking to scale. The unique thing that we do is we help them understand what their attack surface is we actually help them monitor 100% of the attack surface that efficacy. They know that they have to monitor the not just the important to know we have to monitor the identities all the cloud resources, which are incredibly noisy across that environment. They know that.
Adrian Perry: They actually have to actually process all the security telemetry together you have to reconcile the data we are leveraging both AI and our talent to actually do that and so we're adding real scale to those organizations.
Adrian Perry: We're assisting them in a way that works for them. This took a lot of effort and investment to actually be able to do that in a way that had.
Adrian Perry: Healthy gross margins.
Adrian Perry: But can operate in a way that customers want so we're credibly excited about the launch that is one of the upsides hours for the year, we had a nice warm reception.
Adrian Perry: From our initial pilot customers and some of the customers that RFA.
Adrian Perry: That is a growth driver, but I would just say its thinks about very very large resource constrained buyers.
Adrian Perry: We offer the best economic solution to actually get efficacy of scale.
Adrian Perry: Okay.
Joe Gallo: The next question comes from Joe Gallo with Jefferies. Your line is open.
Joe Gallo: Hey, guys. Thanks for the question last quarter, you announced heavy investments for DNR, which seems justified but maybe can you just talk a little bit about your overall profit versus growth framework or some of these investments fluid if growth doesn't accelerate and then maybe how should we think about sales capacity as well.
Joe Gallo: Yes.
Joe Gallo: There's a lot of questions built in there. So let me just add a couple of months.
Joe Gallo: It looks like any company, we need to invest behind growth opportunities and the textile spots you have a massive market we have a healthy position and we can actually create an even stronger position and frankly expand our addressable market. There. So that's a clear I would just say profitable growth opportunities.
Joe Gallo: And almost any definition you actually invest.
Joe Gallo: For profitable growth.
Joe Gallo: And the growth opportunities.
Joe Gallo: When you think about the allocation of resources across is that again, we're not trying to be all things to all people. We are focused when we think about outside of that things that we enforce our overall stack. So we're going to be the best at actually integrating telemetry across the environment.
Speaker Change: Both the NTT data the.
Joe Gallo: The risk data.
Joe Gallo: And the monitoring data so our integration engine is a core investment prioritization that we're focused all across the environment and then we're going to make sure that we actually have the right capabilities to serve our core mainstream customer.
Joe Gallo: When it comes to the risk and the exposure at the best Economics. So we have a rational allocation view. It takes focus it takes discipline around it but we are invested in the areas that actually have the best growth profile.
Joe Gallo: You need to see us sort of like both innovate partner to actually drive success in the overall market.
Hey, Joe It's Tim I would just underscore something Cory brought up earlier selling into the installed base. As you know were just under 12000 customers and that really creates a large market opportunity for us with customers that we have a good relationship with the expansion motion and that does come at a lower cost of sale for us. So that's one.
Joe Gallo: One area, where we can see leverage in the future.
Joe Gallo: Yes, that's great to hear thanks, guys great for us.
Joe Gallo: And our go to market motions are pretty straightforward it's the.
Joe Gallo: You look at what we're doing we are driving the integrated land motion about like looking at how customers look at integrated security operations, we're upgrading our installed base MTM to exposure command and with Rob and adoption as our big thrust and detection response.
Joe Gallo: Thank you.
Speaker Change: The next question comes from Adam Borg with Stifel. Your line is open.
Speaker Change: Awesome and thanks for fitting me in maybe just building off of Joes question. So when we think about the new socket, India, maybe Corey.
Speaker Change: Can you could talk a little bit more about how that's supposed to help not just from an innovation perspective, but also from an efficiency perspective as well. Thanks.
Speaker Change: Yes, there's a couple of elements. So one if you think about our operations.
Speaker Change: India, India is another global development centers, just like we have a couple of them in the U S. We have.
Speaker Change: One in the UK.
Speaker Change: We just opened up a development center, specifically in fall and that will have a global operation Center in India that will have some developments stood operations.
Speaker Change: Just to be clear the number one driver of the center that would go on for the stock when we think about India is that we've had significant growth.
Speaker Change: And in EMEA and APAC in our core detection response business and so having people that are in regions that have overlapping lapsed that can actually do multiple paths on coverage as a response to customer demand thats and Im wondering if it happens. It then also has some economic benefits.
Speaker Change: I just want to recognize that the customer benefits are massive and significant.
Speaker Change: Because that's where the growth is again this is very clear just invest behind the growth. So we see great growth internationally in those regions.
Speaker Change: That said when you think about how do we actually scale DNR and we have big MBR demand.
Speaker Change: We're customizing more of it you have to engineer that and you have to have a product based approach and also it's a combination of technology and sort of like the cost of the talent. There I want to be clear is there is definitely cost talent arbitrage there, but if you say, what's the majority of the past efficacy that's going to allow us to continue to scale. This business.
As it actually serves more and more customer use cases, it's definitely the investments that we're making and our adoption of AI technology, which is a big part of the investment thesis that Tim laid out earlier and I met with our teams over the last couple of weeks and that is on track and frankly accelerating the investments that we're actually having our belief is that our tech.
Speaker Change: Analogy and the AI investments already made and they are in the stock and frankly, we're going to make available to our broader customer base.
Speaker Change: Little bit later this year are already yielding massive dividends that are allowing us to actually what.
Better operating margins.
From a traditional MBR player and if you say where most of the gains is going to come from it's going to come from the technology innovation side of the equation, yes that we lower cost talent Thats actually play a factor there, but we're seeing real gains from sort of our ability to leverage both AI and automation to drive the efficacy of the stock and that'll be the dominant driver of how we continue to actually have.
Corey Thomas: Better margins than most traditional MBR players Corey and we're already seeing that in the numbers on international's, 25% of revenue and it's growing faster than what we saw in the U S at 10%.
Corey Thomas: As part of how we actually are able to actually even with some of the wider range is continuing to manage profitability. This year, because we're already seeing some of those benefits.
Speaker Change: That is all the time, we have for questions. This concludes today's call. Thank you for joining you may now disconnect.
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