What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-05-10 compared with 2022-11-03 · 107 added, 209 removed, 358 unchanged (47% of the section changed)

8 unchanged sentences

• our ability to continue to add new customers, maintain existing customers and sell new products and professional services to new and existing customers;

• uncertain impacts that the ongoing COVID-19 pandemic may have on our business, strategy, operating results, financial condition and cash flows, as well as changes in overall level of software spending and volatility in the global economy;

• uncertain impacts that changes in overall level of software spending and ongoing volatility in the global economy as well as effects of inflation and increased interest rates may have on our business, strategy, operating results, financial condition and cash flows;

• the effects of increased competition as well as innovations by new and existing competitors in our market;

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Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” included under Part II, Item 1A.

Furthermore, such forward-looking statements

speak only as of the date of this report.

Furthermore, such forward-looking statements speak only as of the date of this report.

Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances that occur after the date of this report.

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and its subsidiaries unless the context indicates otherwise.

Rapid7 is advancing security with visibility, analytics, and automation delivered through our Insight Platform.

Our solutions simplify the complex, allowing security teams to work more effectively with IT and development to reduce vulnerabilities, monitor for misconfigurations and malicious behavior, investigate and shut down attacks, and automate routine tasks.

Rapid7 is on a mission to create a safer digital world by making cybersecurity simpler and more accessible.

We empower security professionals to manage a modern attack surface through our best-in-class technology, leading-edge research, and broad, strategic expertise.

Our comprehensive security solutions help our customers unite cloud risk management and threat detection to reduce attack surfaces and eliminate threats with speed and precision.

In the over 20 years that Rapid7 has been in business, security companies and trends have come and gone, while broader technology innovation continues to advance rapidly.

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Our customers span a wide variety of industries such as technology, energy, financial services, healthcare and life sciences, manufacturing, media and entertainment, retail, education, real estate, transportation, government and professional services.

As of September 30, 2022, we had over 10,000 customers in 144 countries, including 46% of the Fortune 100.

Our revenue was not concentrated with any individual customer and no customer represented more than 1% of our revenue for the three and nine months ended September 30, 2022 or 2021.

As of March 31, 2023, we had over 11,000 customers in 147 countries, including 42% of the Fortune 100.

Our revenue was not concentrated with any individual customer and no customer represented more than 1% of our revenue for the three months ended March 31, 2023 or 2022.

Recent Developments

COVID-19 Response

Rapid7 remains focused on supporting its customers, partners, employees and communities during the ongoing COVID-19 pandemic.

The impact of COVID-19 on the global economy and on our business continues to be a fluid situation.

In response to the COVID-19 pandemic, we have taken, and continue to take, a variety of actions to ensure the continued availability and functioning of our business operations, promote the safety and security of our employees and support the communities in which we operate.

We will continue to actively monitor the evolving situation related to COVID-19 and may take further actions that alter our business operations, including those that may be required by federal, foreign, state or local authorities, or that we determine are in the best interests of our employees, customers, partners, suppliers, vendors and stockholders.

At this point, the extent to which the ongoing COVID-19 pandemic may impact our business, results of operations and financial condition is uncertain.

While we have not experienced significant disruptions from the COVID-19 pandemic during the three and nine months ended

September 30, 2022, we are unable to accurately predict the full impact that COVID-19 will have due to numerous uncertainties, including continued spread and reemergence of the pandemic, including any new variants, the duration of any outbreak, the result of vaccination efforts, actions that may be taken by governmental authorities, the impact on our business including our sales cycle, sales execution and marketing efforts, and the impact to the business of our customers, vendors and partners.

Furthermore, due to our subscription model, any effect of the COVID-19 pandemic may not be fully reflected in our results of operations until future periods.

For further discussion of the challenges and risks we confront related to the COVID-19 pandemic, please refer to Part II, Item 1A Risk Factors of this Quarterly Report on Form 10-Q.

On March 14, 2023, we acquired Minerva Labs Ltd.

(“Minerva”), a leading provider of anti-evasion and ransomware prevention technology, for a purchase consideration of $35.0 million, which was funded in cash.

Additionally, we issued an aggregate of 73,846 shares of our common stock to the founders of Minerva with a fair value of $3.6 million.

Our Business Model

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Our Managed Vulnerability Management, Managed Application Security and Managed Detection and Response products are offered on a managed service basis, generally pursuant to one-year agreements.

• Licensed software consists of term licenses and to a lesser extent perpetual licenses.

When a term license is purchased, maintenance and support and content subscriptions, as applicable, are bundled with the license for the term period.

• Licensed software consists of term licenses.

When licensed software is purchased, maintenance and support and content subscriptions, as applicable, are bundled with the license for the term period.

Our Nexpose, Metasploit and AppSpider products are offered through term software licenses.

When a perpetual license is purchased, a customer typically purchases maintenance and support and content subscriptions, as applicable.

Our maintenance and support provides our customers with telephone and web-based support and ongoing bug fixes and repairs during the term of the maintenance and support agreement, and our customers who purchase our Nexpose and Metasploit products also purchase content subscriptions, which provide them with real-time access to the latest vulnerabilities and exploits.

Our maintenance and support and content subscription agreements are typically for one-year terms.

We also offer various professional services across all of our offerings, including deployment and training services related to our software and cloud-based products, incident response services, penetration testing and security advisory services.

Customers can purchase our professional services together with our product offerings or on a stand-alone basis pursuant to fixed fee or time-and-materials agreements.

For the three months ended September 30, 2022 and 2021, recurring revenue, defined as revenue from term software licenses, content subscriptions, managed services, cloud-based subscriptions and maintenance and support, was 94% and 92%, respectively, of total revenue.

For the nine months ended September 30, 2022 and 2021, recurring revenue was 94% and 92%, respectively, of total revenue.

For the three months ended March 31, 2023 and 2022, recurring revenue, defined as revenue from term software licenses, content subscriptions, managed services, cloud-based subscriptions and maintenance and support, was 95% and 94%, respectively, of total revenue.

We monitor the following key metrics to help us measure and evaluate the effectiveness of our operations and as a means to evaluate period-to-period comparisons.

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We believe these key metrics are useful to investors both because they allow for greater transparency with respect to key metrics used by management in their financial and operational decision-making and also because they are used by institutional investors and the analyst community to help evaluate the health of our business:

Three Months Ended September 30, Nine Months Ended September 30,

2022 2021 2022 2021

Three Months Ended March 31,

(dollars in thousands)

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Non-GAAP income from operations $ 10,993 $ (5,619)

Non-GAAP operating margin 6.0 % (3.6 %)

Free cash flow $ (1,219) $ 3,828

As of September 30,

As of March 31,

(dollars in thousands)

Number of customers 10,791 9,909

Year-over-year customer growth 9 % 17 %

Annualized recurring revenue (“ARR”) $ 727,853 $ 627,122

Year-over-year ARR growth 24.3 % 38.0 %

Year-over-year growth 16.1 % 37.6 %

Number of customers 11,034 10,407

Year-over-year growth 6.0 % 16.0 %

ARR per customer $ 66.0 $ 60.3

Year-over-year growth 9.5 % 18.3 %

Total Revenue and Growth .

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We monitor total revenue and believe it is useful to investors as a measure of the overall success of our business.

Non-GAAP Income from Operations .

We monitor non-GAAP income from operations, a non-GAAP financial measure, to analyze our financial results.

We believe non-GAAP income from operations is useful to investors, as a supplement to GAAP measures, in evaluating our ongoing operational performance and enhancing an overall understanding of our past financial performance and allowing for greater transparency with respect to metrics used by our management in its financial and operational decision-making.

Non-GAAP Income from Operations and Non-GAAP Operating Margin .

We monitor non-GAAP income from operations and non-GAAP operating margin, non-GAAP financial measures, to analyze our financial results.

We believe non-GAAP income from operations and non-GAAP operating margin are useful to investors, as supplements to U.S.

GAAP measures, in evaluating our ongoing operational performance and enhancing an overall understanding of our past financial performance and allowing for greater transparency with respect to metrics used by our management in its financial and operational decision-making.

See Non-GAAP Financial Results below for further information on non-GAAP income from operations and a reconciliation of non-GAAP income from operations to the comparable GAAP financial measure.

Free Cash Flow .

Free cash flow is a non-GAAP measure that we define as net cash provided by operating activities less purchases of property and equipment and capitalization of internal-use software costs.

Free cash flow is a non-GAAP measure that we define as cash provided by operating activities less purchases of property and equipment and capitalization of internal-use software costs.

We consider free cash flow to be a liquidity measure that provides useful information to management and investors about the amount of cash generated by the business after necessary capital expenditures.

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We believe that the size of our customer base is an indicator of our global market penetration and that our net customer additions are an indicator of the growth of our business.

We define a customer as any entity that has an active Rapid7 recurring revenue contract as of the specified measurement date, excluding InsightOps and Logentries only customers with a contract value less than $2,400 per year.

We define a customer as any entity that has an

active Rapid7 recurring revenue contract as of the specified measurement date, excluding InsightOps and Logentries only customers with a contract value less than $2,400 per year.

ARR per Customer .

ARR per customer is defined as ARR divided by the number of customers at the end of the period.

Non-GAAP Financial Results

To supplement our consolidated financial statements, which are prepared and presented in accordance with GAAP, we provide investors with certain non-GAAP financial measures, including non-GAAP gross profit, non-GAAP income (loss) from operations, non-GAAP net income (loss), non-GAAP net income (loss) per share, adjusted EBITDA and free cash flow.

To supplement our consolidated financial statements, which are prepared and presented in accordance with GAAP, we provide investors with certain non-GAAP financial measures, including non-GAAP gross profit, non-GAAP income from operations, non-GAAP operating margin, non-GAAP net income (loss), non-GAAP net income (loss) per share, adjusted EBITDA and free cash flow.

The presentation of the non-GAAP financial measures is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP.

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While our non-GAAP financial measures are an important tool for financial and operational decision-making and for evaluating our own operating results over different periods of time, you should review the reconciliation of our non-GAAP financial measures to the comparable GAAP financial measures included below, and not rely on any single financial measure to evaluate our business.

We define non-GAAP gross profit, non-GAAP income (loss) from operations, non-GAAP net income (loss) and non-GAAP net income (loss) per share as the respective GAAP balances excluding the effect of stock-based compensation expense, amortization of acquired intangible assets, amortization of debt issuance costs and certain other items such as acquisition-related expenses, litigation-related expenses and induced conversion expense.

We define non-GAAP gross profit, non-GAAP income from operations, non-GAAP operating margin, non-GAAP net income (loss) and non-GAAP net income (loss) per share as the respective GAAP balances excluding the effect of stock-based compensation expense, amortization of acquired intangible assets, amortization of debt issuance costs and certain other items such as acquisition-related expenses and litigation-related expenses.

Non-GAAP net income (loss) per basic and diluted share is calculated as non-GAAP net income (loss) divided by the weighted average shares used to compute net income (loss) per share, with the number of weighted average shares decreased, when applicable, to reflect the anti-dilutive impact of the capped call transactions entered into in connection with our convertible senior notes.

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We believe that excluding the impact of amortization of acquired intangible assets allows for more meaningful comparisons between operating results from period to period as the intangible assets are valued at the time of acquisition and are amortized over several years after the acquisition.

• Amortization of debt issuance costs.

• Amortization of issuance costs.

The expense for the amortization of debt issuance costs related to our convertible senior notes and revolving credit facility is a non-cash item and we believe the exclusion of this interest expense provides a more useful comparison of our operational performance in different periods.

• Induced conversion expense.

In conjunction with the first quarter of 2021 partial repurchase of our 1.25% convertible senior notes due 2023 (the “2023 Notes”), we incurred an induced conversion expense of $2.7 million.

We exclude induced conversion expense because this amount is not indicative of the performance of, or trends in, our business and is neither comparable to the prior period nor predictive of future results.

• Litigation-related expenses.

We exclude certain litigation-related expenses consisting of professional fees and related costs incurred by us related to significant litigation outside the ordinary course of business.

We believe it is useful to exclude such expenses because we do not consider such amounts to be part of our ongoing operations.

We exclude non-ordinary course litigation expense because we do not consider legal costs and settlement fees incurred in litigation and litigation-related matters of non-ordinary course lawsuits and other disputes to be indicative of our core operating performance.

We do not adjust for ordinary course legal expenses, including legal costs and settlement fees resulting from maintaining and enforcing our intellectual property portfolio and license agreements.

• Acquisition-related expenses.

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Although we cannot reflect the anti-dilutive impact of the capped call transactions under GAAP, we do reflect the anti-dilutive impact of the capped call transactions in non-GAAP net income (loss) per diluted share, when applicable, to provide investors with useful information in evaluating our financial performance on a per share basis.

We define adjusted EBITDA as net loss before (1) interest income, (2) interest expense, (3) other income (expense), net, (4) provision for income taxes, (5) depreciation expense, (6) amortization of intangible assets, (7) stock-based compensation expense, and (8) certain other items.

We believe that the use of adjusted EBITDA is useful to investors and other users of our

financial statements in evaluating our operating performance because it provides them with an additional tool to compare business performance across companies and across periods.

expense, (8) acquisition-related expenses and (9) litigation-related expenses.

We believe that the use of adjusted EBITDA is useful to investors and other users of our financial statements in evaluating our operating performance because it provides them with an additional tool to compare business performance across companies and across periods.

Our non-GAAP financial measures may not provide information that is directly comparable to that provided by other companies in our industry, as other companies in our industry may calculate non-GAAP financial results differently, particularly related to non-recurring, unusual items.

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Further, stock-based compensation expense has been and will continue to be for the foreseeable future a significant recurring expense in our business and an important part of the compensation provided to our employees.

The following tables reconcile GAAP gross profit to non-GAAP gross profit for the three and nine months ended September 30, 2022 and 2021:

Three Months Ended September 30, Nine Months Ended September 30,

2022 2021 2022 2021

The following tables reconcile GAAP gross profit to non-GAAP gross profit for the three months ended March 31, 2023 and 2022:

Three Months Ended March 31,

(in thousands)

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Non-GAAP total gross profit $ 134,387 $ 113,029

Three Months Ended September 30, Nine Months Ended September 30,

2022 2021 2022 2021

Three Months Ended March 31,

(in thousands)

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Non-GAAP gross profit – products $ 132,082 $ 111,892

Three Months Ended September 30, Nine Months Ended September 30,

2022 2021 2022 2021

Three Months Ended March 31,

(in thousands)

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Non-GAAP gross profit – professional services $ 2,305 $ 1,137

The following table reconciles GAAP loss from operations to non-GAAP income from operations for the three and nine months ended September 30, 2022 and 2021:

Three Months Ended September 30, Nine Months Ended September 30,

2022 2021 2022 2021

The following table reconciles GAAP loss from operations to non-GAAP income from operations for the three months ended March 31, 2023 and 2022:

Three Months Ended March 31,

(in thousands)

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Non-GAAP income from operations $ 10,993 $ (5,619)

The following table reconciles GAAP net loss to non-GAAP net income (loss) for the three and nine months ended September 30, 2022 and 2021:

Three Months Ended September 30, Nine Months Ended September 30,

2022 2021 2022 2021

The following table reconciles GAAP net loss to non-GAAP net income (loss) for the three months ended March 31, 2023 and 2022:

Three Months Ended March 31,

(in thousands, except share and per share data)

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Amortization of debt issuance costs 994 979

Induced conversion expense — — — 2,740

Non-GAAP net income (loss) $ 10,037 $ (9,260)

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There was no add-back of interest expense or additional dilutive shares related to the convertible senior notes where the effect was anti-dilutive.

On an if-converted basis, for the three months ended September 30, 2022, the 2027 convertible senior notes were dilutive and the 2025 convertible senior notes were anti-dilutive.

On an if-converted basis, for the three months ended March 31, 2023, the 2027 convertible senior notes were dilutive and the 2025 convertible senior notes were anti-dilutive.

(2) We use the treasury method to compute the dilutive effect of employee equity incentive plan awards.

The following table reconciles GAAP net loss to adjusted EBITDA for the three and nine months ended September 30, 2022 and 2021:

Three Months Ended September 30, Nine Months Ended September 30,

2022 2021 2022 2021

The following table reconciles GAAP net loss to adjusted EBITDA for the three months ended March 31, 2023 and 2022:

Three Months Ended March 31,

(in thousands)

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Adjusted EBITDA $ 16,821 $ (1,173)

The following table reconciles net cash provided by operating activities to free cash flow for the three and nine months ended September 30, 2022 and 2021:

Three Months Ended September 30, Nine Months Ended September 30,

2022 2021 2022 2021

The following table reconciles net cash provided by operating activities to free cash flow for the three months ended March 31, 2023 and 2022:

Three Months Ended March 31,

(in thousands)

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We generate products revenue from the sale of (1) cloud-based subscriptions, (2) managed services offerings, which utilize our products and (3) software licenses with related maintenance and support and content subscription, as applicable.

Software license revenue consist of revenues from term licenses, and to a lesser extent perpetual licenses.

When a term license is purchased, maintenance and support and content subscription, as applicable, is bundled with the license for the term period.

When a perpetual license is purchased, a customer typically purchases maintenance and support and content subscription, as applicable.

Software license revenue consists of revenues from term licenses.

When software licenses are purchased, maintenance and support and content subscription, as applicable, is bundled with the license for the term period.

Professional Services

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Additional expenses include third-party infrastructure costs, travel and entertainment, consulting and professional fees for third-party development resources as well as allocated overhead costs.

We expect research and development expense to increase on an absolute dollar basis in the near term as we continue to increase investments in our products and technology platform innovation, but to remain relatively consistent as a percentage of total revenue.

Sales and Marketing Expense

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The following table sets forth our selected consolidated statements of operations data:

Three Months Ended September 30, Nine Months Ended September 30,

2022 2021 2022 2021

Three Months Ended March 31,

(in thousands)

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(1) Cost of revenue and operating expenses include stock-based compensation expense and depreciation and amortization expense as follows:

Three Months Ended September 30, Nine Months Ended September 30,

2022 2021 2022 2021

Three Months Ended March 31,

(in thousands)

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Total stock-based compensation expense $ 29,373 $ 28,922

Three Months Ended September 30, Nine Months Ended September 30,

2022 2021 2022 2021

Three Months Ended March 31,

(in thousands)

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The following table sets forth our selected consolidated statements of operations data expressed as a percentage of revenue:

Three Months Ended September 30, Nine Months Ended September 30,

2022 2021 2022 2021

Three Months Ended March 31,

Consolidated Statement of Operations Data:

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Net loss (14.1) % (28.6) %

Comparison of the Three Months Ended September 30, 2022 and 2021

Three Months Ended September 30, Change

Comparison of the Three Months Ended March 31, 2023 and 2022

Three Months Ended March 31, Change

2023 2022 $ %

3 unchanged sentences

Total revenue $ 183,174 $ 157,384 $ 25,790 16.4 %

Total revenue increased by $35.9 million in the three months ended September 30, 2022 compared to the same period in 2021.

Total revenue increased by $25.8 million in the three months ended March 31, 2023 compared to the same period in 2022.

The $25.8 million increase in revenue consisted of a $3.3 million increase in revenue from new customers and a $22.5 million increase in revenue from existing customers.

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Revenue from new customers represents the revenue recognized from the customer's initial purchase.

The increase in total revenue in the three months ended September 30, 2022 compared to the same period in 2021 was comprised of $25.9 million generated from sales in North America and $10.0 million generated from sales from the rest of the world.

Cost of Revenue

Three Months Ended September 30, Change

2022 2021 $ %

(dollars in thousands)

Cost of revenue:

Products $ 45,957 $ 36,497 $ 9,460 25.9 %

Professional services 7,893 6,973 920 13.2 %

Total cost of revenue $ 53,850 $ 43,470 $ 10,380 23.9 %

Gross margin %:

Products 72.4 % 72.2 %

Professional services 14.8 % 20.3 %

Total gross margin % 69.4 % 68.9 %

Total cost of revenue increased by $10.4 million in the three months ended September 30, 2022 compared to the same period in 2021, primarily due to a $3.7 million increase in cloud computing costs related to growing cloud-based subscription and managed services revenue and a $5.4 million increase in personnel costs, inclusive of a $1.1 million increase in stock-based compensation expense, resulting from an increase in headcount to support our growing customer base.

Our increase in total cost of revenue also included a $1.2 million increase in allocated overhead driven largely by an increase in IT and facilities costs and a $0.1 million increase in other expenses.

Total gross margin percentage increased for the three months ended September 30, 2022 compared to the same period in 2021 primarily due to the change in revenue mix.

Products gross margin for the three months ended September 30, 2022 remained relatively consistent with the same period in 2021.

The decrease in professional services gross margin for the three months ended September 30, 2022 was due to an increase in personnel costs.

Operating Expenses

Research and Development Expense

Three Months Ended September 30, Change

2022 2021 $ %

(dollars in thousands)

Research and development $ 48,622 $ 43,880 $ 4,742 10.8 %

% of revenue 27.7 % 31.4 %

Research and development expense increased by $4.7 million in the three months ended September 30, 2022 compared to the same period in 2021, primarily due to a $2.6 million increase in personnel costs, resulting from an increase in headcount, inclusive of a $1.1 million decrease in stock-based compensation expense, a $2.0 million increase in allocated overhead driven largely by an increase in IT and facilities costs and a $0.1 million increase in other expenses.

The $1.1 million decrease in stock-based compensation expense was primarily due to $3.1 million of additional expense in the prior period related to the modification of a stock award.

Sales and Marketing Expense

Three Months Ended September 30, Change

2022 2021 $ %

(dollars in thousands)

Sales and marketing $ 75,968 $ 63,041 $ 12,927 20.5 %

% of revenue 43.2 % 45.1 %

Sales and marketing expense increased by $12.9 million in the three months ended September 30, 2022 compared to the same period in 2021, primarily due to a $5.5 million increase in personnel costs, inclusive of a $1.7 million increase in stock-based compensation expense, resulting from an increase in headcount, a $2.6 million increase in commission expense, a $2.2 million increase in allocated overhead driven largely by an increase in IT and facilities costs, a $1.5 million increase in marketing and advertising costs, a $0.6 million increase in travel and entertainment expense and a $0.5 million increase in other expenses.

General and Administrative Expense

Three Months Ended September 30, Change

2022 2021 $ %

(dollars in thousands)

General and administrative $ 20,561 $ 23,818 $ (3,257) (13.7) %

% of revenue 11.7 % 17.0 %

General and administrative expense decreased by $3.3 million in the three months ended September 30, 2022 compared to the same period in 2021, primarily due to a $4.3 million decrease in acquisition-related expenses and other professional consulting fees and a $0.5 million decrease in other expenses.

These decreases were partially offset by a $1.5 million increase in personnel costs due to an increase in headcount, inclusive of a $0.1 million increase in stock-based compensation expense.

Interest Income

Three Months Ended September 30, Change

2022 2021 $ %

(dollars in thousands)

Interest income $ 498 $ 84 $ 414 492.9 %

% of revenue 0.3 % 0.1 %

Interest income increased by $0.4 million in the three months ended September 30, 2022 compared to the same period in 2021 primarily due to an increase in interest rates.

Interest Expense

Three Months Ended September 30, Change

2022 2021 $ %

(dollars in thousands)

Interest expense $ (2,749) $ (2,962) $ 213 (7.2) %

% of revenue (1.6) % (2.1) %

Interest expense decreased by $0.2 million in the three months ended September 30, 2022 compared to the same period in 2021 primarily due to a decrease in contractual interest and amortization of debt issuance costs related to the 2023 Notes which were partially repurchased in the first quarter of 2021, with the remaining outstanding amount repurchased in the fourth quarter of 2021.

Other Income (Expense), Net

Three Months Ended September 30, Change

2022 2021 $ %

(dollars in thousands)

Other income (expense), net $ (2,205) $ (299) $ (1,906) 637.5 %

% of revenue (1.3) % (0.2) %

Other income (expense), net increased by $1.9 million in the three months ended September 30, 2022 compared to the same period in 2021 due to realized and unrealized foreign currency losses, primarily related to the euro and British pound sterling.

Provision for Income Taxes

Three Months Ended September 30, Change

2022 2021 $ %

(dollars in thousands)

Provision for income taxes $ 1,035 $ 208 $ 827 397.6 %

% of revenue 0.5 % 0.1 %

Provision for income taxes increased by $0.8 million in the three months ended September 30, 2022 compared to the same period in 2021 primarily due to our increased operations in foreign jurisdictions.

Comparison of the Nine Months Ended September 30, 2022 and 2021

Nine Months Ended September 30, Change

2022 2021 $ %

(dollars in thousands)

Products $ 474,643 $ 359,581 $ 115,062 32.0 %

Professional services 25,961 24,185 1,776 7.3 %

Total revenue $ 500,604 $ 383,766 $ 116,838 30.4 %

Total revenue increased by $116.8 million in the nine months ended September 30, 2022 compared to the same period in 2021 and consisted of $101.8 million of organic growth and $15.0 million related to the acquisition of IntSights in July 2021.

The $101.8 million increase in revenue related to organic growth consisted of a $7.6 million increase in revenue from new customers and a $94.2 million increase in revenue from existing customers.

The $94.2 million increase from existing customers was due to an increase in revenue from renewals, upsells and cross-sells as a result of the continued growth of our existing customer base.

Revenue from new customers represents the revenue recognized from the customer's initial purchase.

The increase in total revenue in the nine months ended September 30, 2022 compared to the same period in 2021 was comprised of $83.6 million generated from sales in North America and $33.2 million generated from sales from the rest of the world.

The increase in total revenue in the three months ended March 31, 2023 compared to the same period in 2022 was comprised of $19.0 million generated from sales in North America and $6.8 million generated from sales from the rest of the world.

Cost of Revenue

Nine Months Ended September 30, Change

Three Months Ended March 31, Change

2023 2022 $ %

8 unchanged sentences

Total gross margin % 69.4 % 67.4 %

Total cost of revenue increased by $40.3 million in the nine months ended September 30, 2022 compared to the same period in 2021, primarily due to a $16.0 million increase in personnel costs, inclusive of a $2.6 million increase in stock-based compensation expense, resulting from an increase in headcount to support our growing customer base and $1.5 million of additional costs attributable to the employees acquired in the IntSights acquisition in July 2021.

Our increase in total cost of revenue also included an $12.2 million increase in cloud computing costs related to growing cloud-based subscription and managed services revenue, a $5.3 million increase in allocated overhead driven largely by an increase in IT and facilities costs, a $3.6 million increase in amortization expense for acquired intangible assets, a $1.2 million increase in third-party professional service consulting costs, a $1.0 million increase in amortization expense for capitalized internally-developed software, and a $1.0 million increase in other expenses.

Total gross margin percentage decreased for the nine months ended September 30, 2022 compared to the same period in 2021.

The decrease in products gross margin was primarily due an increase in revenue from cloud-based subscriptions and managed services, which have lower margins than our licensed software products.

The decrease in professional services gross margin for the nine months ended September 30, 2022 was due to an increase in personnel costs.

Total cost of revenue increased by $4.7 million in the three months ended March 31, 2023 compared to the same period in 2022, primarily due to a $3.6 million increase in personnel costs, inclusive of a $0.7 million increase in stock-based compensation expense, resulting from an increase in headcount to support our growing customer base.

Our increase in total cost of revenue also included a $1.4 million increase in cloud computing costs related to growing cloud-based subscription and managed services revenue.

These increases were partially offset by a $0.3 million decrease in other expenses.

Total gross margin percentage increased for the three months ended March 31, 2023 compared to the same period in 2022.

The increase in products gross margin was driven by our ability to scale as our revenue continues to grow.

The increase in professional services gross margin for the three months ended March 31, 2023 was primarily due to an increase in revenue.

Operating Expenses

Research and Development Expense

Nine Months Ended September 30, Change

Three Months Ended March 31, Change

2023 2022 $ %

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% of revenue 25.3 % 31.7 %

Research and development expense increased by $35.1 million in the nine months ended September 30, 2022 compared to the same period in 2021, primarily due to a $25.5 million increase in personnel costs, a $7.6 million increase in allocated overhead driven largely by an increase in IT and facilities costs, and a $2.0 million increase in other expenses.

The $25.5 million increase in personnel costs was primarily due to a $16.9 million increase in salaries and related costs driven by growth in headcount, inclusive of $5.6 million in additional salaries and related costs attributable to the employees acquired in the acquisition of IntSights in July 2021, and an $8.6 million increase in stock-based compensation expense, inclusive of an increase of $7.0 million of stock-based compensation expense related to the RSUs issued to retained employees and common stock issued to the IntSights founders as part of the acquisition and a decrease of $3.1 million related to the modification of a stock award in the prior year.

Research and development expense decreased by $3.5 million in the three months ended March 31, 2023 compared to the same period in 2022, primarily due to a $2.6 million decrease in stock-based compensation expense and a $0.9 million decrease in other expenses.

Sales and Marketing Expense

Nine Months Ended September 30, Change

Three Months Ended March 31, Change

2023 2022 $ %

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% of revenue 44.0 % 47.7 %

Sales and marketing expense increased by $54.9 million in the nine months ended September 30, 2022 compared to the same period in 2021, primarily due to a $24.2 million increase in personnel costs, a $9.6 million increase in commission expense, a $9.2 million increase in allocated overhead driven largely by an increase in IT and facilities costs, a $6.1 million increase in marketing and advertising costs, a $2.1 million increase in travel and entertainment expense, a $0.7 million increase in amortization expense for acquired intangible assets and a $3.0 million increase in other expenses.

The $24.2 million increase in personnel costs was primarily due to a $19.1 million increase in salaries and related costs driven by growth in headcount, inclusive of $5.1 million of additional costs attributable to the employees acquired in the IntSights acquisition in July 2021, and a $5.1 million increase in stock-based compensation expense, inclusive of $0.9 million in stock-based compensation expense related to RSUs issued to retained employees acquired in the acquisition of IntSights.

Sales and marketing expense increased by $5.4 million in the three months ended March 31, 2023 compared to the same period in 2022, primarily due to a $7.3 million increase in personnel costs, inclusive of a $1.1 million increase in stock-based compensation expense, resulting from an increase in headcount.

These increases were partially offset by a decrease of $1.9 million in other expenses.

General and Administrative Expense

Nine Months Ended September 30, Change

Three Months Ended March 31, Change

2023 2022 $ %

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% of revenue 13.2 % 13.7 %

General and administrative expense increased by $5.4 million in the nine months ended September 30, 2022 compared to the same period in 2021, primarily due to a $7.8 million increase in personnel costs due to an increase in headcount, inclusive of a $2.1 million increase in stock-based compensation expense, a $0.7 million increase in allocated overhead driven largely by an increase in IT and facilities costs and a $2.2 million increase in other expenses.

These increases were partially offset by a $5.3 million decrease in professional fees primarily due to a decrease in acquisition-related expenses and other professional consulting fees.

General and administrative expense increased by $2.7 million in the three months ended March 31, 2023 compared to the same period in 2022, primarily due to a $2.3 million increase in personnel costs due to an increase in headcount, inclusive of a $1.2 million increase in stock-based compensation expense, and a $0.4 million increase in other expenses.

Interest Income

Nine Months Ended September 30, Change

Three Months Ended March 31, Change

2023 2022 $ %

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% of revenue 0.9 % 0.1 %

Interest income increased by $0.6 million in the nine months ended September 30, 2022 compared to the same period in 2021 primarily due to an increase in interest rates.

Interest income increased by $1.6 million in the three months ended March 31, 2023 compared to the same period in 2022 primarily due to an increase in interest rates.

Interest Expense

Nine Months Ended September 30, Change

Three Months Ended March 31, Change

2023 2022 $ %

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% of revenue (1.4) % (1.7) %

Interest expense decreased by $3.2 million in the nine months ended September 30, 2022 compared to the same period in 2021 primarily due to a $2.7 million decrease of induced conversion expense incurred in conjunction with the partial repurchase of the 2023 Notes in March 2021 as well as a decrease in contractual interest expense related to the 2023 Notes which were partially repurchased in the first quarter of 2021, with the remaining amount repurchased in the fourth quarter of 2021.

Interest expense remained consistent in the three months ended March 31, 2023 compared to the same period in 2022.

Other Income (Expense), Net

Nine Months Ended September 30, Change

Three Months Ended March 31, Change

2023 2022 $ %

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% of revenue (0.2) % (0.4) %

Other income (expense), net increased by $4.0 million in expense for the nine months ended September 30, 2022 compared to the same period in 2021 due to realized and unrealized foreign currency losses, primarily related to the euro and British pound sterling.

Other income (expense), net decreased by $0.3 million in the three months ended March 31, 2023 compared to the same period in 2022 due to realized and unrealized foreign currency losses, primarily related to the euro and British pound sterling.

Provision for Income Taxes

Nine Months Ended September 30, Change

Three Months Ended March 31, Change

2023 2022 $ %

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% of revenue 0.3 % 0.9 %

Provision for income taxes decreased by $7.5 million in the nine months ended September 30, 2022 compared to the same period in 2021 primarily due to $9.0 million of tax expense recorded in the prior period for the 2021 intercompany sale of intellectual property as part of post-acquisition tax planning related to the Alcide acquisition, partially offset by an increase of $1.5 million due to our increased operations in foreign jurisdictions.

Provision for income taxes decreased by $0.8 million in the three months ended March 31, 2023 compared to the same period in 2022 primarily due to a decrease in foreign tax expense.

Liquidity and Capital Resources

As of September 30, 2022, we had $168.4 million in cash and cash equivalents, $99.9 million in short- and long-term investments that have maturities ranging from one to twenty months and an accumulated deficit of $849.4 million.

As of March 31, 2023, we had $205.8 million in cash and cash equivalents, $63.8 million in investments that have maturities ranging from one to sixteen months and an accumulated deficit of $886.7 million.

Since our inception, we have generated significant losses and expect to continue to generate losses for the foreseeable future.

Our principal sources of liquidity are cash and cash equivalents, short and long-term investments and our Credit and Security Agreement, as amended (the “Credit Agreement”).

Our principal sources of liquidity are cash and cash equivalents, investments and our Credit and Security Agreement (“Credit Agreement”).

To date, we have financed our operations primarily through private and public equity financings, issuance of convertible senior notes and through cash generated by operating activities.

We believe that our existing cash and cash equivalents, our short- and long-term investments, our available borrowings under our Credit Agreement and cash generated by operating activities will be sufficient to meet our operating and capital requirements for at least the next 12 months as well as our longer-term expected future cash requirements and obligations.

We believe that our existing cash and cash equivalents, our investments, our available borrowings under our Credit Agreement and cash generated by operating activities will be sufficient to meet our operating and capital requirements for at least the next 12 months as well as our longer-term expected future cash requirements and obligations.

Our foreseeable cash needs, in addition to our recurring operating expenses, include our expected capital expenditures to support expansion of our infrastructure and workforce, office facilities lease obligations, purchase commitments, including our cloud infrastructure services (including with Amazon Web Services (“AWS”)), potential future acquisitions of technology businesses and any election we make to redeem our convertible senior notes.

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If we are unable to raise additional capital on terms satisfactory to us when we require it, our business, operating results and financial condition could be adversely affected.

The following table shows a summary of our cash flows for the nine months ended September 30, 2022 and 2021:

Nine Months Ended September 30,

The following table shows a summary of our cash flows for the three months ended March 31, 2023 and 2022:

Three Months Ended March 31,

(in thousands)

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Operating Activities

Operating activities provided $38.0 million of cash and cash equivalents in the nine months ended September 30, 2022, which reflects the timing of working capital adjustments and our continued growth in revenue partially offset by our continued investments in our operations.

Cash provided by operating activities reflected our net loss of $113.3 million, offset by a decrease in our net operating assets of $21.5 million and non-cash charges of $129.8 million related primarily to depreciation and amortization, stock-based compensation expense, amortization of debt issuance costs and other non-cash charges.

The decrease in our net operating assets was primarily due to a $18.3 million increase in deferred revenue, a $21.4 million decrease in accounts receivable due to an increase in collections and an $8.5 million increase in accounts payable, which each had a positive impact on operating cash flow.

These factors were partially offset by a $12.2 million decrease in accrued expenses, primarily as a result of the payout of annual bonuses and year-end commissions, a $5.4 million increase in prepaid expenses, a

$8.0 million increase in deferred contract acquisition and fulfillment costs and a $1.1 million decrease in other liabilities, which each had a negative impact on operating cash flow.

Operating activities provided $49.2 million of cash and cash equivalents in the nine months ended September 30, 2021, which reflects the timing of working capital adjustments and our continued growth in revenue partially offset by our continued investments in our operations.

Operating activities provided $5.8 million of cash and cash equivalents in the three months ended March 31, 2023, which reflects continued growth in revenue partially offset by our continued investments in our operations and the timing of working capital adjustments.

Cash provided by operating activities reflected our net loss of $25.9 million and a decrease in our net operating assets and liabilities of $10.7 million, offset by non-cash charges of $42.4 million related primarily to depreciation and amortization, stock-based compensation expense, amortization of debt issuance costs and other non-cash charges.

The change in our net operating assets and liabilities was primarily due to a $24.0 million decrease in accrued expenses, primarily as a result of the payout of annual bonuses and year-end commissions, a $12.1 million decrease in deferred revenue, a $2.7 million decrease in accounts payable, a $5.6 million increase in prepaid expenses and a $2.2 million increase in deferred contract acquisition and fulfillment costs, which each had a negative impact on operating cash flow.

These factors were offset by a $35.8

million decrease in accounts receivable due to an increase in collections and a $0.1 million increase in other liabilities, which each had a positive impact on operating cash flow.

Operating activities provided $10.4 million of cash and cash equivalents in the three months ended March 31, 2022, which reflects continued growth in revenue and the timing of working capital adjustments, partially offset by our continued investments in our operations.

Cash provided by operating activities reflected our net loss of $45.0 million, offset by a decrease in our net operating assets of $14.8 million and non-cash charges of $40.6 million related primarily to depreciation and amortization, stock-based compensation expense, deferred income taxes, induced conversion expense, amortization of debt issuance costs and other non-cash charges.

The decrease in our net operating assets was primarily due to a $24.4 million increase in deferred revenue due to increased billings, a $23.5 million decrease in accounts receivable due to an increase in collections, a $3.6 million increase in other liabilities, a $3.1 million decrease in prepaid expenses and other assets and a $2.1 million increase in accounts payable, which each had a positive impact on operating cash flow.

These factors were partially offset by a $4.6 million decrease in accrued expenses, primarily as a result of the payout of annual bonuses and year-end commissions and a $9.8 million increase in deferred contract acquisition and fulfillment costs, which each had a negative impact on operating cash flow.

The decrease in our net operating assets was primarily due to a $36.3 million decrease in accounts receivable due to an increase in collections, a $3.8 million increase in deferred revenue and a $8.7 million increase in accounts payable, which each had a positive impact on operating cash flow.

These factors were partially offset by a $24.0 million decrease in accrued expenses, primarily as a result of the payout of annual bonuses and year-end commissions, a $6.6 million increase in prepaid expenses, a $2.9 million increase in deferred contract acquisition and fulfillment costs and a $0.5 million decrease in other liabilities, which each had a negative impact on operating cash flow.

Investing Activities

Investing activities used $34.8 million of cash in the nine months ended September 30, 2022, consisting of $12.6 million for capitalization of internal-use software costs, $13.1 million in capital expenditures to purchase computer equipment and leasehold improvements, $8.1 million of investment purchases, net of sales and maturities, and $1.0 million of other investments.

Investing activities used $307.9 million of cash in the nine months ended September 30, 2021, consisting of $358.4 million of cash paid for the acquisitions of IntSights, Alcide and Velocidex, net of cash acquired, $7.2 million for capitalization of internal-use software costs, $3.0 million for other investing activities, $4.8 million in capital expenditures to purchase computer equipment, furniture and fixtures and leasehold improvements, partially offset by $65.5 million of investment sales and maturities, net of purchases.

Investing activities used $10.2 million of cash in the three months ended March 31, 2023, consisting of $34.0 million of cash paid for the acquisition of Minerva, $4.8 million for capitalization of internal-use software costs, $2.3 million in capital expenditures to purchase computer equipment and leasehold improvements, partially offset by $30.9 million of investment sales and maturities, net of purchases.

Investing activities used $35.9 million of cash in the three months ended March 31, 2022, consisting of $29.3 million of investment purchases, net of sales and maturities, $3.5 million for capitalization of internal-use software costs and $3.1 million in capital expenditures to purchase computer equipment, furniture and fixtures and leasehold improvements.

Financing Activities

Financing activities provided $6.4 million of cash in the nine months ended September 30, 2022, which consisted primarily of $11.9 million in proceeds from the issuance of common stock purchased by employees under the Rapid7, Inc.

2015 Employee Stock Purchase Plan (“ESPP”) and $1.6 million in proceeds from the exercise of stock options, partially offset by $6.7 million in withholding taxes paid for the net share settlement of equity awards, $0.3 million in payments related to the acquisition of Velocidex and $0.1 million in payments of debt issuance costs.

Financing activities provided $313.4 million of cash in the nine months ended September 30, 2021, which consisted primarily of $585.0 million in proceeds from the issuance of the 2027 Notes, net of issuance costs paid of $15.0 million, $9.3 million in proceeds from the issuance of common stock purchased by employees under the ESPP and $3.3 million in proceeds from the exercise of stock options, partially offset by $184.6 million for the repurchase and conversion of the 2023 Notes, $76.0 million for the purchase of 2027 Capped Calls, $11.5 million in withholding taxes paid for the net share settlement of equity awards and $12.1 million for payments related to the acquisitions of DivvyCloud, Alcide and IntSights.

Financing activities provided $2.8 million of cash in the three months ended March 31, 2023, which consisted primarily of $6.2 million in proceeds from the issuance of common stock purchased by employees under the Rapid7, Inc.

2015 Employee Stock Purchase Plan (“ESPP”) and $0.2 million in proceeds from the exercise of stock options, partially offset by $2.3 million in payments related to the acquisition of IntSights and $1.3 million in withholding taxes paid for the net share settlement of equity awards.

Financing activities provided $3.2 million of cash in the three months ended March 31, 2022, which consisted primarily of $5.7 million in proceeds from the issuance of common stock purchased by employees under the ESPP and $1.0 million in proceeds from the exercise of stock options, partially offset by $3.5 million in withholding taxes paid for the net share settlement of equity awards.

Contractual Obligations and Commitments

In March 2022, we entered into a new agreement with AWS for cloud infrastructure services.

The agreement is for a 36-month period beginning on April 1, 2022 for a total commitment of $300.0 million.

As of September 30, 2022, there were no additional material changes other than that noted above in our contractual obligations and commitments from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on February 24, 2022 (the “Annual Report”).

As of March 31, 2023, there were no additional material changes from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC on February 24, 2023 (the “Annual Report”).

Off-Balance Sheet Arrangements

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We do not engage in off-balance sheet financing arrangements.

In addition, we do not engage in trading activities involving non-exchange traded contracts.

We therefore believe that we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships.

Recent Accounting Pronouncements

See Note 1 in the notes to the unaudited consolidated financial statements for a discussion of recent accounting pronouncements.

See Note 1 in the Notes to our Consolidated Financial Statements for a discussion of recent accounting pronouncements.

Critical Accounting Policies and Estimates

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The preparation of our consolidated financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenue, costs and expenses.

We base our estimates and assumptions on historical experience and other factors that we believe to be reasonable under the circumstances.

estimates and assumptions on historical experience and other factors that we believe to be reasonable under the circumstances.

We evaluate our estimates and assumptions on an ongoing basis.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis