What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-11-06 compared with 2023-08-09 · 154 added, 114 removed, 475 unchanged (36% of the section changed)

55 unchanged sentences

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 June 30, 2023, we had over 11,000 customers in 149 countries, including 41% 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 six months ended June 30, 2023 or 2022.

As of September 30, 2023, we had over 11,412 customers in 151 countries, including 41% 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, 2023 or 2022.

Recent Developments

Convertible Notes

In September 2023, we issued $300.0 million aggregate principal amount of 1.25% Convertible Senior Notes due March 15, 2029 (the “2029 Notes”).

The total net proceeds from the offering, after deducting initial purchase discounts and estimated debt

issuance costs, were $292.0 million.

The 2029 Notes are unsecured obligations and bear interest at a fixed rate of 1.25% per annum, payable semi-annually in arrears on March 15 and September 15 of each year, commencing on March 15, 2024.

The 2029 Notes will mature on March 15, 2029, unless earlier converted, redeemed or repurchased.

The Notes do not contain any financial covenants.

The 2029 Notes are governed by an indenture between the Company, as issuer, and U.S.

Bank Trust Company, National Association, as trustee (the “2029 Indenture”).

In connection with the issuance of the 2029 Notes, we entered into capped call transactions with certain counterparties (the “2029 Capped Calls”).

We used $36.6 million of the net proceeds from the 2029 Notes to purchase the Capped Calls.

The Capped Calls are expected to offset potential dilution to our common stock upon conversion of the 2029 Notes.

The Capped Calls have an initial cap price of $97.88 per share (which initially represents a premium of 100% over the last reported sale price of our common stock on September 5, 2023), subject to certain adjustments.

The 2029 Capped Calls are separate transactions we entered into with certain counterparties and are not part of the terms of the 2029 Notes.

We also used $201.5 million of the net proceeds from the 2029 Notes to repurchase $184.0 million aggregate principal amount of our outstanding 2.25% Convertible Senior Notes due 2025 (the “2025 Notes”), and paid accrued and unpaid interest thereon, pursuant to one or more separate and privately negotiated transactions entered into concurrently with the pricing of the 2029 Notes.

Restructuring Plan

In August 2023, we announced a restructuring plan designed to improve operational efficiencies, reduce operating costs and better align the Company’s workforce with current business needs, top strategic priorities, and key growth opportunities (the “Restructuring Plan”).

The Restructuring Plan includes a reduction of our workforce and office space reductions within certain

The actions associated with the Restructuring Plan are expected to be completed by the end of fiscal 2023, subject to local law and consultation requirements.

Settlement of 2023 Capped Call

In August 2023, we received $17.5 million in cash from the settlement of the capped call option related to the 1.25% convertible senior notes due 2023.

The Restructuring Plan included a reduction of our workforce and office space reductions within certain markets.

The actions associated with the Restructuring Plan are expected to be substantially completed by the end of fiscal year 2023, subject to local law and consultation requirements.

For further information, refer to Note 16, Restructuring , in the Notes to our Consolidated Financial Statements.

Settlement of 2023 Capped Calls

In August 2023, we received $17.5 million in cash from the settlement of the 2023 Capped Calls.

Our Business Model

12 unchanged sentences

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 and six months ended June 30, 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.

For the three and nine months ended September 30, 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.

2 unchanged sentences

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 June 30, Six Months Ended June 30,

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

2023 2022 2023 2022

2 unchanged sentences

Year-over-year revenue growth 13.1 % 25.6 % 14.3 % 30.4 %

Non-GAAP income (loss) from operations $ 12,957 $ 3,483 $ 23,950 $ (2,136)

Non-GAAP income from operations $ 36,773 $ 13,044 $ 60,723 $ 10,908

Non-GAAP operating margin 18.5 % 7.4 % 10.6 % 2.2 %

Free cash flow $ (582) $ 9,657 $ 23,780 $ 12,227

As of June 30,

As of September 30,

(dollars in thousands)

24 unchanged sentences

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 .

6 unchanged sentences

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.

compensation expense, amortization of acquired intangible assets, amortization of debt issuance costs and certain other items such as acquisition-related expenses, impairment of long-lived assets, change in the fair value of derivative assets and litigation-related expenses.

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, impairment of long-lived assets, restructuring expense, induced conversion expense, change in the fair value of derivative assets 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.

5 unchanged sentences

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 issuance costs.

• Amortization of debt 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 third quarter of 2023 partial repurchase of our 2025 Notes, we incurred a non-cash induced conversion expense of $53.9 million.

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

• Litigation-related expenses.

7 unchanged sentences

Impairment of long-lived assets consists of impairment charges allocated to the carrying amount of certain operating right-of-use assets and the associated leasehold improvements when the carrying amounts exceed their respective fair values and we believe the exclusion of the impairment charges provides a more useful comparison of our operational performance in different periods.

• Restructuring expense.

We exclude non-ordinary course restructuring expenses related to a restructuring plan because we do not believe these charges are indicative of our core operating performance and we believe the exclusion of the restructuring expenses provides a more useful comparison of our performance in different periods.

• Anti-dilutive impact of capped call transaction.

1 unchanged sentence

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, (8) acquisition-related expenses, (9) litigation-related expenses and (10) impairment of long-lived assets.

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.

2 unchanged sentences

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 six months ended June 30, 2023 and 2022:

Three Months Ended June 30, Six Months Ended June 30,

The following tables reconcile GAAP gross profit to non-GAAP gross profit for the three and nine months ended September 30, 2023 and 2022:

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

2023 2022 2023 2022

4 unchanged sentences

Non-GAAP total gross profit $ 148,315 $ 129,089 $ 422,787 $ 362,917

Three Months Ended June 30, Six Months Ended June 30,

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

2023 2022 2023 2022

4 unchanged sentences

Non-GAAP gross profit – products $ 145,330 $ 126,974 $ 415,077 $ 358,977

Three Months Ended June 30, Six Months Ended June 30,

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

2023 2022 2023 2022

3 unchanged sentences

Non-GAAP gross profit – professional services $ 2,985 $ 2,115 $ 7,710 $ 3,940

The following table reconciles GAAP loss from operations to non-GAAP income (loss) from operations for the three and six months ended June 30, 2023 and 2022:

Three Months Ended June 30, Six Months Ended June 30,

The following table reconciles GAAP loss from operations to non-GAAP income (loss) from operations for the three and nine months ended September 30, 2023 and 2022:

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

2023 2022 2023 2022

6 unchanged sentences

Impairment of long-lived assets 3,553 — 30,784 —

Non-GAAP income (loss) from operations $ 12,957 $ 3,483 $ 23,950 $ (2,136)

The following table reconciles GAAP net loss to non-GAAP net income (loss) for the three and six months ended June 30, 2023 and 2022:

Three Months Ended June 30, Six Months Ended June 30,

Restructuring expense 19,996 — 19,996 —

Non-GAAP income from operations $ 36,773 $ 13,044 $ 60,723 $ 10,908

The following table reconciles GAAP net loss to non-GAAP net income (loss) for the three and nine months ended September 30, 2023 and 2022:

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

2023 2022 2023 2022

6 unchanged sentences

Amortization of debt issuance costs 1,041 1,046 3,061 3,036

Induced conversion expense 53,889 — 53,889 —

Change in fair value of derivative assets 2,851 — 15,511 —

Impairment of long-lived assets 3,553 — 30,784 —

Restructuring expense 19,996 — 19,996 —

Non-GAAP net income (loss) $ 33,984 $ 8,599 $ 55,541 $ (1,122)

8 unchanged sentences

Diluted $ 0.50 $ 0.14 $ 0.82 $ (0.02)

(1) We use the if-converted method to compute diluted earnings per share with respect to our convertible senior notes.

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 and six months ended June 30, 2023, the 2027 convertible senior notes were dilutive and the 2025 convertible senior notes were anti-dilutive.

(1) We use the if-converted method to compute diluted earnings per share with respect to our Notes.

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

On an if-converted basis, for the three and nine months ended September 30, 2023, the 2027 and the 2029 Notes were dilutive and the 2025 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 six months ended June 30, 2023 and 2022:

Three Months Ended June 30, Six Months Ended June 30,

The following table reconciles GAAP net loss to adjusted EBITDA for the three and nine months ended September 30, 2023 and 2022:

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

2023 2022 2023 2022

11 unchanged sentences

Impairment of long-lived assets 3,553 — 30,784 —

Restructuring expense 19,996 $ — 19,996 $ —

Adjusted EBITDA $ 42,925 $ 17,930 $ 78,842 $ 24,740

The following table reconciles net cash provided by operating activities to free cash flow for the three and six months ended June 30, 2023 and 2022:

Three Months Ended June 30, Six Months Ended June 30,

The following table reconciles net cash provided by operating activities to free cash flow for the three and nine months ended September 30, 2023 and 2022:

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

2023 2022 2023 2022

25 unchanged sentences

Operating Expenses

Operating expenses consist of research and development, sales and marketing, and general and administrative expenses.

Operating expenses consist of research and development, sales and marketing, general and administrative expenses, impairment of long-lived assets and restructuring.

Operating expenses include overhead costs for depreciation, facilities, IT, information security and recruiting.

4 unchanged sentences

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 decrease as a percentage of total revenue in the second half of 2023.

We expect research and development expense to decrease as a percentage of total revenue in the near term.

Sales and Marketing Expense

1 unchanged sentence

Additional expenses include marketing activities and promotional events, travel and entertainment, training costs, amortization of certain intangible assets and allocated overhead costs.

We expect sales and marketing expense to decrease as a percentage of total revenue in the second half of 2023.

We expect sales and marketing expense to decrease as a percentage of total revenue in the near term.

General and Administrative Expense

1 unchanged sentence

Additional expenses include travel and entertainment, professional fees, litigation-related expenses, insurance, acquisition-related expenses, amortization of certain intangible assets and allocated overhead costs.

We expect general and administrative expense to decrease as a percentage of total revenue in the second half of 2023.

We expect general and administrative expense to decrease as a percentage of total revenue in the near term.

Impairment of Long-Lived Assets

Restructuring

Restructuring expenses consist of charges related to a restructuring plan such as employee transition, notice period and severance payments and employee benefits and related facilitation costs.

For further information, refer to Note 16, Restructuring , in the Notes to our Consolidated Financial Statements.

Interest Income

1 unchanged sentence

Interest Expense

Interest expense consists primarily of contractual interest expense and amortization of debt issuance costs related to our convertible senior notes and revolving credit facility.

Interest expense consists primarily of contractual interest expense, amortization of debt issuance costs related to our convertible senior notes and revolving credit facility and induced conversion expense.

We expect interest expense in the near term to represent contractual interest expense and amortization of debt issuance costs related to our convertible senior notes and revolving credit facility.

2 unchanged sentences

Provision for Income Taxes

Provision for income taxes consists of income taxes in foreign jurisdictions where we conduct business, withholding taxes, and state income taxes in the United States.

Provision for income taxes consists of domestic and foreign taxes on income and withholding taxes.

We maintain a full valuation allowance for domestic and certain foreign deferred tax assets, including net operating loss carryforwards and tax credits.

2 unchanged sentences

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

Three Months Ended June 30, Six Months Ended June 30,

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

2023 2022 2023 2022

13 unchanged sentences

Impairment of long-lived assets 3,553 — 30,784 —

Restructuring 19,996 — 19,996 —

Total operating expenses 157,054 145,151 492,111 439,456

7 unchanged sentences

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

Three Months Ended June 30, Six Months Ended June 30,

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

2023 2022 2023 2022

6 unchanged sentences

Total stock-based compensation expense $ 23,768 $ 30,971 $ 84,836 $ 92,304

Three Months Ended June 30, Six Months Ended June 30,

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

2023 2022 2023 2022

7 unchanged sentences

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

Three Months Ended June 30, Six Months Ended June 30,

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

2023 2022 2023 2022

12 unchanged sentences

Impairment of long-lived assets 1.8 — 5.4 —

Restructuring 10.1 — 3.5 —

Total operating expenses 79.0 82.6 86.0 87.8

6 unchanged sentences

Net loss (38.5) % (16.3) % (29.6) % (22.6) %

Comparison of the Three Months Ended June 30, 2023 and 2022

Three Months Ended June 30, Change

Comparison of the Three Months Ended September 30, 2023 and 2022

Three Months Ended September 30, Change

2023 2022 $ %

3 unchanged sentences

Total revenue $ 198,843 $ 175,765 $ 23,078 13.1 %

Total revenue increased by $23.0 million in the three months ended June 30, 2023 compared to the same period in 2022.

The $23.0 million increase in revenue consisted of a $0.9 million increase in revenue from new customers and a $22.1 million increase in revenue from existing customers.

The $22.1 million increase in revenue 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 three months ended June 30, 2023 compared to the same period in 2022 was comprised of $17.0 million generated from sales in North America and $6.0 million generated from sales from the rest of the world.

Total revenue increased by $23.1 million in the three months ended September 30, 2023 compared to the same period in 2022.

The $23.1 million increase in revenue is attributable primarily to an increase in revenue from existing customers due to an increase in revenue from renewals, upsells and cross-sells as a result of the continued growth of our existing customer base.

The increase in total revenue in the three months ended September 30, 2023 compared to the same period in 2022 was comprised of $17.3 million generated from sales in North America and $5.8 million generated from sales from the rest of the world.

Cost of Revenue

Three Months Ended June 30, Change

Three Months Ended September 30, Change

2023 2022 $ %

8 unchanged sentences

Total gross margin % 70.9 % 69.4 %

Total cost of revenue increased by $3.9 million in the three months ended June 30, 2023 compared to the same period in 2022, primarily due to a $2.4 million increase in cloud computing costs related to growing cloud-based subscription and managed services revenue and a $1.1 million increase in amortization expense for capitalized internally-developed software.

Our increase in total cost of revenue also included a $0.8 million increase in personnel costs, inclusive of a $0.2 million increase in stock-based compensation expense, resulting from an increase in headcount to support our growing customer base.

These increases were partially offset by a $0.4 million decrease in other expenses.

Total gross margin percentage increased for the three months ended June 30, 2023 compared to the same period in 2022.

Total cost of revenue increased by $4.0 million in the three months ended September 30, 2023 compared to the same period in 2022, primarily due to a $2.6 million increase in cloud computing costs related to growing cloud-based subscription and managed services revenue and a $1.4 million increase in amortization expense for capitalized internally-developed software.

Total gross margin percentage increased for the three months ended September 30, 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 June 30, 2023 was primarily due to a decrease in personnel costs.

The increase in professional services gross margin for the three months ended September 30, 2023 was primarily due to a decrease in personnel costs.

Operating Expenses

Research and Development Expense

Three Months Ended June 30, Change

Three Months Ended September 30, Change

2023 2022 $ %

2 unchanged sentences

% of revenue 20.1 % 27.7 %

Research and development expense increased by $1.9 million in the three months ended June 30, 2023 compared to the same period in 2022, primarily due to a $3.2 million write-off of a capitalized internal-use software project and a $1.0 million increase in other expenses.

These increases were partially offset by a $2.3 million decrease in stock-based compensation expense.

Research and development expense decreased by $8.7 million in the three months ended September 30, 2023 compared to the same period in 2022, primarily due to a $7.8 million decrease in personnel costs, inclusive of a $5.0 million decrease in stock-based compensation expense, resulting from a decrease in headcount due to our Restructuring Plan, and a $0.9 million decrease in other expenses.

Sales and Marketing Expense

Three Months Ended June 30, Change

Three Months Ended September 30, Change

2023 2022 $ %

2 unchanged sentences

% of revenue 38.2 % 43.2 %

Sales and marketing expense increased by $5.0 million in the three months ended June 30, 2023 compared to the same period in 2022, primarily due to a $4.4 million increase in personnel costs resulting from an increase in headcount and a $0.6 million increase in other expenses.

Sales and marketing expense decreased by $0.3 million in the three months ended September 30, 2023 compared to the same period in 2022, primarily due to a $1.8 million decrease in marketing and advertising expenses and a $0.3 million decrease in other expenses, partially offset by a $1.8 million increase in personnel costs.

General and Administrative Expense

Three Months Ended June 30, Change

Three Months Ended September 30, Change

2023 2022 $ %

2 unchanged sentences

% of revenue 9.0 % 11.7 %

General and administrative expense increased by $2.0 million in the three months ended June 30, 2023 compared to the same period in 2022, primarily due to a $2.0 million increase in professional fees.

General and administrative expense decreased by $2.7 million in the three months ended September 30, 2023 compared to the same period in 2022, primarily due to a $2.4 million decrease in personnel costs, resulting from a decrease in headcount due to our Restructuring Plan, as well as a $0.3 million decrease in other expenses.

Impairment of Long-Lived Assets

Three Months Ended June 30, Change

Three Months Ended September 30, Change

2023 2022 $ %

2 unchanged sentences

% of revenue 1.8 % — %

Impairment of long-lived assets expense increased by $27.2 million in the three months ended June 30, 2023 compared to the same period in 2022, due to an impairment charge recorded after a triggering event related to a change in usage of certain idle office space at our corporate headquarters in Boston, Massachusetts indicated that the carrying value of our right of use and other lease-related assets may not be fully recoverable.

Impairment of long-lived assets expense increased by $3.6 million in the three months ended September 30, 2023 compared to the same period in 2022, due to an impairment charge recorded after a triggering event related to a change in usage of certain idle office spaces located in Plano Texas, Los Angeles, California and Toronto, Canada indicated that the carrying value of our right of use and other lease-related assets may not be fully recoverable.

Restructuring

Three Months Ended September 30, Change

2023 2022 $ %

(dollars in thousands)

Restructuring $ 19,996 $ — $ 19,996 100.0 %

% of revenue 10.1 % — %

Restructuring expense increased by $20.0 million in the three months ended September 30, 2023 compared to the same period in 2022, due to restructuring charges consisting of employee transition, notice period and severance payments and employee benefits and related facilitation costs related to our Restructuring Plan.

Refer to Note 16, Restructuring , in the Notes to our Consolidated Financial Statements for further details on our Restructuring Plan.

Interest Income

Three Months Ended June 30, Change

Three Months Ended September 30, Change

2023 2022 $ %

2 unchanged sentences

% of revenue 1.3 % 0.3 %

Interest income increased by $1.5 million in the three months ended June 30, 2023 compared to the same period in 2022 primarily due to an increase in interest rates.

Interest income increased by $2.0 million in the three months ended September 30, 2023 compared to the same period in 2022 primarily due to an increase in interest rates.

Interest Expense

Three Months Ended June 30, Change

Three Months Ended September 30, Change

2023 2022 $ %

2 unchanged sentences

% of revenue (28.4) % (1.6) %

Interest expense remained consistent in the three months ended June 30, 2023 compared to the same period in 2022.

Interest expense increased by $53.8 million the three months ended September 30, 2023 compared to the same period in 2022 primarily due to $53.9 million of induced conversion expense incurred in conjunction with the partial repurchase of the 2025 Notes.

Other Income (Expense), Net

Three Months Ended June 30, Change

Three Months Ended September 30, Change

2023 2022 $ %

2 unchanged sentences

% of revenue (2.3) % (1.3) %

Other income (expense), net increased by $10.9 million in the three months ended June 30, 2023 compared to the same period in 2022 due to a $12.7 million expense for the change in fair value on derivative assets related to our 2023 capped calls settlement as well as increases in realized and unrealized foreign currency gains, primarily related to the euro and British pound sterling.

Other income (expense), net increased by $2.3 million in the three months ended September 30, 2023 compared to the same period in 2022 due to a $2.9 million expense for the change in fair value on derivative assets related to our 2023 Capped Calls, partially offset by increases in realized and unrealized foreign currency gains, primarily related to the euro and British pound sterling.

Provision for Income Taxes

Three Months Ended June 30, Change

Three Months Ended September 30, Change

2023 2022 $ %

2 unchanged sentences

% of revenue 1.0 % 0.5 %

Provision for income taxes increased by $0.8 million in the three months ended June 30, 2023 compared to the same period in 2022 primarily due to an increase in foreign tax expense.

Comparison of the Six Months Ended June 30, 2023 and 2022

Six Months Ended June 30, Change

Provision for income taxes increased by $1.0 million in the three months ended September 30, 2023 compared to the same period in 2022 primarily due to an increase in domestic taxable income.

Comparison of the Nine Months Ended September 30, 2023 and 2022

Nine Months Ended September 30, Change

2023 2022 $ %

3 unchanged sentences

Total revenue $ 572,439 $ 500,604 $ 71,835 14.3 %

Total revenue increased by $48.8 million in the six months ended June 30, 2023 compared to the same period in 2022.

Total revenue increased by $71.8 million in the nine months ended September 30, 2023 compared to the same period in 2022.

The $71.8 million increase in revenue consisted of a $3.5 million increase in revenue from new customers and a $68.3 million increase in revenue from existing customers.

1 unchanged sentence

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

The increase in total revenue in the six months ended June 30, 2023 compared to the same period in 2022 was comprised of $36.0 million generated from sales in North America and $12.8 million generated from sales from the rest of the world.

The increase in total revenue in the nine months ended September 30, 2023 compared to the same period in 2022 was comprised of $53.3 million generated from sales in North America and $18.5 million generated from sales from the rest of the world.

Cost of Revenue

Six Months Ended June 30, Change

Nine Months Ended September 30, Change

2023 2022 $ %

8 unchanged sentences

Total gross margin % 70.0 % 68.2 %

Total cost of revenue increased by $8.6 million in the six months ended June 30, 2023 compared to the same period in 2022, primarily due to a $4.4 million increase in personnel costs, inclusive of a $1.0 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 $3.8 million increase in cloud computing costs related to growing cloud-based subscription and managed services revenue and a $2.0 million increase in in amortization expense for capitalized internally-developed software.

Total cost of revenue increased by $12.6 million in the nine months ended September 30, 2023 compared to the same period in 2022, primarily due to a $6.4 million increase in cloud computing costs related to growing cloud-based subscription and managed services revenue, a $3.6 million increase in personnel costs, inclusive of a $0.7 million increase in stock-based compensation expense and a $3.4 million increase in in amortization expense for capitalized internally-developed software.

These increases were partially offset by a $0.8 million decrease in other expenses.

Total gross margin percentage increased for the six months ended June 30, 2023 compared to the same period in 2022.

Total gross margin percentage increased for the nine months ended September 30, 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 six months ended June 30, 2023 was primarily due to an increase in revenue.

The increase in professional services gross margin for the nine months ended September 30, 2023 was primarily due to an increase in revenue.

Operating Expenses

Research and Development Expense

Six Months Ended June 30, Change

Nine Months Ended September 30, Change

2023 2022 $ %

2 unchanged sentences

% of revenue 23.9 % 29.4 %

Research and development expense decreased by $1.6 million in the three months ended June 30, 2023 compared to the same period in 2022, primarily due to a $4.8 million decrease in stock-based compensation expense, partially offset by a $3.2 million write-off of a capitalized internal-use software project.

Research and development expense decreased by $10.3 million in the three months ended September 30, 2023 compared to the same period in 2022, primarily due to a $11.4 million decrease in personnel costs, inclusive of a $9.8 million decrease in stock-based compensation expense, resulting from a decrease in headcount, and a $2.4 million decrease in other expenses.

These decreases were partially offset by a $3.5 million write-off of capitalized internal-use software projects.

Sales and Marketing Expense

Six Months Ended June 30, Change

Nine Months Ended September 30, Change

2023 2022 $ %

2 unchanged sentences

% of revenue 41.8 % 45.8 %

Sales and marketing expense increased by $10.4 million in the six months ended June 30, 2023 compared to the same period in 2022, primarily due to a $11.4 million increase in personnel costs, inclusive of a $0.8 million increase in stock-based compensation expense, resulting from an increase in headcount.

These increases were partially offset by a decrease of $1.0 million in other expenses.

Sales and marketing expense increased by $10.2 million in the nine months ended September 30, 2023 compared to the same period in 2022, primarily due to a $13.2 million increase in personnel costs, partially offset by a decrease of $1.0 million in marketing and advertising expenses and a $2.0 million decrease in other expenses.

General and Administrative Expense

Six Months Ended June 30, Change

Nine Months Ended September 30, Change

2023 2022 $ %

2 unchanged sentences

% of revenue 11.3 % 12.6 %

General and administrative expense increased by $4.7 million in the six months ended June 30, 2023 compared to the same period in 2022, primarily due to a $2.8 million increase in stock-based compensation expense and a $2.5 million increase in professional fees.

These increases were partially offset by a $0.6 million decrease in other expenses.

General and administrative expense increased by $2.0 million in the nine months ended September 30, 2023 compared to the same period in 2022, primarily due to a $2.9 million increase in professional fees, partially offset by a $0.9 million decrease in other expenses.

Impairment of Long-Lived Assets

Six Months Ended June 30, Change

Nine Months Ended September 30, Change

2023 2022 $ %

2 unchanged sentences

% of revenue 5.4 % — %

Impairment of long-lived assets expense increased by $27.2 million in the six months ended June 30, 2023 compared to the same period in 2022, due to an impairment charge recorded after a triggering event related to a change in usage of certain idle office space at our corporate headquarters in Boston, Massachusetts indicated that the carrying value of our right of use and other lease-related assets may not be fully recoverable.

Impairment of long-lived assets expense increased by $30.8 million in the nine months ended September 30, 2023 compared to the same period in 2022, due to an impairment charge recorded after a triggering event related to a change in usage of certain idle office space at our corporate headquarters in Boston, Massachusetts as well as idle office spaces located in Plano, Texas, Los Angeles, California and Toronto, Canada indicated that the carrying value of our right of use and other lease-related assets may not be fully recoverable.

Restructuring

Nine Months Ended September 30, Change

2023 2022 $ %

(dollars in thousands)

Restructuring $ 19,996 $ — $ 19,996 100.0 %

% of revenue 3.5 % — %

Restructuring expense increased by $20.0 million in the nine months ended September 30, 2023 compared to the same period in 2022, due to restructuring charges consisting of employee transition, notice period and severance payments and employee

benefits and related facilitation costs related to our Restructuring Plan.

Refer to Note 16, Restructuring , in the Notes to our Consolidated Financial Statements for further details on our Restructuring Plan.

Interest Income

Six Months Ended June 30, Change

Nine Months Ended September 30, Change

2023 2022 $ %

2 unchanged sentences

% of revenue 1.0 % 0.2 %

Interest income increased by $3.1 million in the six months ended June 30, 2023 compared to the same period in 2022 primarily due to an increase in interest rates.

Interest income increased by $5.1 million in the nine months ended September 30, 2023 compared to the same period in 2022 primarily due to an increase in interest rates.

Interest Expense

Six Months Ended June 30, Change

Nine Months Ended September 30, Change

2023 2022 $ %

2 unchanged sentences

% of revenue (10.8) % (1.6) %

Interest expense remained consistent in the six months ended June 30, 2023 compared to the same period in 2022.

Interest expense increased by $53.8 million in the nine months ended September 30, 2023 compared to the same period in 2022 primarily due to $53.9 million of induced conversion expense incurred in conjunction with the partial repurchase of the 2025 Notes.

Other Income (Expense), Net

Six Months Ended June 30, Change

Nine Months Ended September 30, Change

2023 2022 $ %

2 unchanged sentences

% of revenue (3.2) % (1.1) %

Other income (expense), net increased by $10.6 million in the six months ended June 30, 2023 compared to the same period in 2022 due to a $12.7 million expense for the change in fair value of derivative assets related to our 2023 capped calls settlement and an increase in realized and unrealized foreign currency gains, primarily related to the euro and British pound sterling.

Other income (expense), net increased by $12.9 million in the nine months ended September 30, 2023 compared to the same period in 2022 due to a $15.5 million expense for the change in fair value of derivative assets related to our 2023 capped calls settlement and an increase in realized and unrealized foreign currency gains, primarily related to the euro and British pound sterling.

Provision for Income Taxes

Six Months Ended June 30, Change

Nine Months Ended September 30, Change

2023 2022 $ %

2 unchanged sentences

% of revenue 0.6 % 0.5 %

Provision for income taxes remained consistent in the six months ended June 30, 2023 compared to the same period in 2022.

Provision for income taxes increased by $1.0 million in the nine months ended September 30, 2023 compared to the same period in 2022 primarily due to an increase in domestic taxable income.

Liquidity and Capital Resources

As of June 30, 2023, we had $185.9 million in cash and cash equivalents, $110.0 million in investments that have maturities ranging from one to thirteen months and an accumulated deficit of $953.4 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, investments and our Credit and Security Agreement (“Credit Agreement”).

As of September 30, 2023, we had $182.7 million in cash and cash equivalents, $190.0 million in investments that have maturities ranging from one to thirteen months and an accumulated deficit of $1,030.1 million.

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

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

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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 six months ended June 30, 2023 and 2022:

Six Months Ended June 30,

The following table shows a summary of our cash flows for the nine months ended September 30, 2023 and 2022:

Nine Months Ended September 30,

(in thousands)

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Operating Activities

Operating activities provided $37.1 million of cash and cash equivalents in the six months ended June 30, 2023, which reflects continued growth in revenue partially offset by our continued investments in our operations and the timing of working capital adjustments.

Operating activities provided $40.8 million of cash and cash equivalents in the nine months ended September 30, 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 $169.3 million and a decrease in our net operating assets and liabilities of $18.1 million, offset by non-cash charges of $228.2 million related primarily to depreciation and amortization, stock-based compensation expense, impairment of long-lived assets, change in fair value of derivative assets, amortization of debt issuance costs and other non-cash charges.

The change in our net operating assets and liabilities was primarily due to a $12.0 million decrease in accrued expenses, primarily as a result of the payout of annual bonuses and year-end commissions, a $1.3 million decrease in accounts payable and a $6.0 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 $15.1 million decrease in accounts receivable due to an increase in collections, a $1.4 million decrease in prepaid expenses, a $1.8 million

increase in deferred revenue and a $0.5 million increase in other liabilities, which each had a positive impact on operating cash flow.

Operating activities provided $17.9 million of cash and cash equivalents in the six months ended June 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.

The change in our net operating assets and liabilities was primarily due to a $18.0 million decrease in accrued expenses, primarily as a result of the payout of annual bonuses and year-end commissions, a $6.4 million decrease in deferred revenue, a $1.2 million decrease in accounts payable, a $0.9 million decrease in other liabilities and a $9.5 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 $12.4 million decrease in accounts receivable due to an

increase in collections, and a $5.5 million decrease in prepaid expenses, which each had a positive impact on operating cash flow.

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.

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Investing Activities

Investing activities used $62.2 million of cash in the six months ended June 30, 2023, consisting of $34.8 million of cash paid for the acquisition of Minerva, $9.1 million for capitalization of internal-use software costs, $3.7 million in capital expenditures to purchase computer equipment and leasehold improvements, partially offset by $14.6 million in purchases of investments, net of sales and maturities.

Investing activities used $14.5 million of cash in the six months ended June 30, 2022, consisting of $8.1 million for capitalization of internal-use software costs, $7.2 million in capital expenditures to purchase computer equipment and leasehold improvements and $0.5 million of other investments, partially offset by $1.3 million of investment sales and maturities, net of purchases.

Investing activities used $145.2 million of cash in the nine months ended September 30, 2023, consisting of $93.4 million in purchases of investments, net of sales and maturities, $34.8 million of cash paid for the acquisition of Minerva, $13.0 million for capitalization of internal-use software costs and $4.0 million in capital expenditures to purchase computer equipment and leasehold improvements.

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 and $8.1 million of investment purchases, net of sales and maturities, and $1.0 million of other investments.

Financing Activities

Financing activities provided $4.0 million of cash in the six months ended June 30, 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 $2.7 million in proceeds from the exercise of stock options, partially offset by $2.3 million in payments related to the acquisition of IntSights and $2.6 million in withholding taxes paid for the net share settlement of equity awards.

Financing activities provided $1.4 million of cash in the six months ended June 30, 2022, which consisted primarily of $5.7 million in proceeds from the issuance of common stock purchased by employees under the ESPP and $1.2 million in proceeds from the exercise of stock options, partially offset by $5.1 million in withholding taxes paid for the net share settlement of equity awards, $0.3 million in payments related to the acquisition of Velocidex Enterprises Pty Ltd.

Financing activities provided $81.8 million of cash in the nine months ended September 30, 2023, which consisted primarily of $292.8 million in proceeds from the issuance of the 2029 Notes, net of issuance costs paid of $7.2 million, $17.5 million in proceeds from the settlement of the 2023 Capped Calls, $11.3 million in proceeds from the issuance of common stock purchased by employees under the Rapid7, Inc.

2015 Employee Stock Purchase Plan (“ESPP”) and $3.0 million in proceeds from the exercise of stock options, partially offset by $200.0 million for the repurchase and conversion of the 2025 Notes, $36.6 million for the purchase of the 2029 Capped Calls, $4.0 million in withholding taxes paid for the net share settlement of equity awards and $2.2 million in payments related to the acquisition of IntSights.

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 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 Enterprises Pty Ltd.

and $0.1 million in payments of debt issuance costs.

Contractual Obligations and Commitments

As of June 30, 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”).

As of September 30, 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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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