What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-05-08 compared with 2023-11-06 · 135 added, 311 removed, 318 unchanged (58% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with (1) our unaudited consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and (2) the audited consolidated financial statements and the related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations for the fiscal year ended December 31, 2022 included in our Annual Report on Form 10-K, filed with the SEC on February 24, 2023.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with (1) our unaudited condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and (2) the audited consolidated financial statements and the related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations for the fiscal year ended December 31, 2023 included in our Annual Report on Form 10-K, filed with the SEC on February 26, 2024.

Forward-looking statements in this review are qualified by the cautionary statement included under the next sub-heading, “Special Note Regarding Forward-Looking Statements”.

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• 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 benefits and efficiencies we expect to derive from our restructuring plan and other cost-saving initiatives, including reducing our global office footprint and any challenges or delays in the execution of these restructuring efforts;

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

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and its subsidiaries unless the context indicates otherwise.

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.

Every company is now a technology company, and rampant innovation inevitably creates security risk.

The migration of businesses to the cloud, more distributed workforces, and ubiquitous connected devices present security teams with an increasingly complex, ever-changing, and unpredictable attack surface.

We believe as cybersecurity challenges continue to rise exponentially, two key factors can prevent organizations from effectively managing their growing security exposure.

First, the tools to manage complex security problems are often equally complicated to use.

Second, there is a scarcity of cybersecurity professionals who are qualified to successfully manage these sophisticated tools.

These two factors compound the difficulties that resource-constrained organizations face when attempting to minimize their security exposure, meet security compliance regulations, and provide visibility to their leadership.

We call the expanding divide between risk created through innovation and risk effectively managed by security teams the security achievement gap.

We believe Rapid7 is uniquely positioned to improve how security challenges are addressed.

Our solutions and services are built with and supported by the expertise of our dedicated team of security researchers, expert SOC analysts and consultants, who bring knowledge of attacker behavior and emerging vulnerabilities directly to customers.

We also continue to invest in further simplifying our technology to improve usability, lowering the barrier for teams and organizations who lack resources to manage their security posture.

While our security technology is the foundation of our mission to make successful security accessible to all, technology alone will not solve today’s cybersecurity challenges.

Our ongoing commitment to researching and partnering with the technology community helps to curb new security risks born through innovation.

We are also investing in under-served, at risk communities, like non-profits and hospitals, to better understand their needs and make security technology and services accessible.

By continuously improving our technology, stemming the creation of risk in the community, and making security more usable and accessible, Rapid7 aims to close the security achievement gap.

Rapid7 is a global cybersecurity software and services provider on a mission to offer customers greater clarity and control of their attack surface through our comprehensive and consolidated security offerings.

For more than twenty years, Rapid7 has partnered with customers across the globe representing a diverse range of industries and sizes to improve the efficacy and productivity of their security operations (“SecOps”).

In today's rapidly evolving IT environment, customers are encountering escalating challenges due to the proliferation of cyberattacks leveraging artificial intelligence (“AI”), targeted automation, and a widening spectrum of attackers and techniques.

To fortify their security posture, organizations will require greater visibility, advanced capabilities leveraging increased expertise, and integrated data to effectively anticipate, identify, and respond to exposure-led threats.

Through our security operations platform, anchored on our cloud security, security information and event management (“SIEM”), advanced detection and response, and vulnerability management offerings, we believe that Rapid7 is poised to expand the capabilities of today's SecOps teams.

Rapid7 extends and expands the expertise of the Security Operations Center (“SOC") across information security, cloud operations, development, and IT teams, enabling them to better understand the attacker and leverage that information to take control of their fragmented attack surface.

Enriched by years of managed services expertise, our integrated security operations platform enables SecOps teams to move away from a reactive approach, reduce their attack surface, and enhance response efficiency with a deep contextual understanding of their environment.

In the past few years, we have observed the industry undergoing a customer-driven shift to consolidated security platforms.

As part of this transition, customers are moving away from cloud security as a specialized function towards cloud security as an integrated capability for SecOps teams.

We view this as a demand driver for integrated SecOps, and believe that we have an opportunity to be a leader in delivering integrated risk and threat management across on-premise, cloud, and external attack surfaces.

As we have shifted our strategic focus to SecOps consolidation, we are focused on continuing to drive innovation across our core products and capabilities to accelerate customer value and provide a frictionless and integrated cloud security experience.

As the threat landscape continues to grow in complexity, customers are demonstrating demand for integrated expertise to support them in effectively managing their security technologies.

The convergence of these key trends – security consolidation, integrated cloud security, and expertise driven outcomes – are the foundation of what we view as the new extended SOC.

Our focus is to be the leading provider of integrated security solutions for the extended SOC by providing risk and threat management within the context of overall security.

We market and sell our products and professional services to organizations of all sizes globally, including mid-market businesses, enterprises, non-profits, educational institutions and government agencies.

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, 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 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.

As of March 31, 2024, we had over 11,000 customers in 148 countries, including 47% 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, 2024 or 2023.

Our Business Model

We have offerings in six key areas:

(1) Incident Detection and Response, (2) Cloud Security, (3) Vulnerability Risk Management, (4) Application Security, (5) Threat Intelligence and (6) Security Orchestration and Automation Response.

We offer our products through a variety of delivery models to meet the needs of our diverse customer base, including:

• Cloud-based subscriptions, which provide our software capabilities to our customers through cloud access and on a subscription basis.

Our InsightIDR, InsightCloudSec, InsightVM, InsightAppSec, InsightConnect and Threat Intelligence products are offered as cloud-based subscriptions, generally with a one-year term.

Our InsightIDR, InsightCloudSec, InsightVM, InsightAppSec, InsightConnect and Threat Command products are offered as cloud-based subscriptions, with an option for a one or multi-year term.

• Managed services, through which we operate our products and provide our capabilities on behalf of our customers.

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.

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.

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

• Licensed on-premise software consists of term licenses.

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

Our Nexpose and Metasploit products are offered through term software licenses with an option for one or multi-year terms.

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.

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 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.

Additionally, we offer our products through our consolidation offerings, which unify our products and services to our customers in a single package.

Our Threat Complete and Cloud Risk Complete packages are offered as cloud based subscriptions, with an option for a one or multi-year term.

Our Managed Threat Complete Offering is offered on a managed service basis, generally pursuant to one or multi-year agreements.

For the three months ended March 31, 2024 and 2023, recurring revenue, defined as revenue from term software licenses, content subscriptions, managed services, cloud-based subscriptions and maintenance and support, was 96% , and 95%, 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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These key metrics also facilitate management's internal comparisons to our historical performance as well as comparisons to certain competitors' operating results.

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,

2023 2022 2023 2022

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 its 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 March 31,

(dollars in thousands)

Total revenue $ 205,101 $ 183,174

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

Year-over-year growth 12.0 % 16.4 %

Non-GAAP income from operations $ 40,285 $ 10,993

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Free cash flow $ 27,534 $ (1,219)

As of September 30,

As of March 31,

(dollars in thousands)

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ARR should be viewed independently of revenue and deferred revenue, as ARR is an operating metric and is not intended to be combined with or replace these items.

ARR is not a forecast of future revenue, which can be impacted by contract start and end dates and renewal rates and does not include revenue reported as perpetual license or professional services revenue in our consolidated statement of operations.

ARR is not a forecast of future revenue, which can be impacted by contract start and end dates and renewal rates and does not include revenue reported as professional services revenue in our consolidated statement of operations.

We use ARR and believe it is useful to investors as a measure of the overall success of our business.

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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 only InsightOps and Logentries customers with a contract value less than $2,400 per year.

ARR per Customer .

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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 from operations, non-GAAP operating margin, 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, non-GAAP net income 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 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.

We define non-GAAP gross profit, non-GAAP income from operations, non-GAAP operating margin, non-GAAP net income and non-GAAP net income 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, restructuring expense and discrete tax items.

Non-GAAP net income per basic and diluted share is calculated as non-GAAP net income divided by the weighted average shares used to compute net income 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.

We believe these non-GAAP financial measures are useful to investors in assessing our operating performance due to the following factors:

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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.

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.

We exclude acquisition-related expenses that are unrelated to the current operations and neither are comparable to the prior period nor predictive of future results.

• Change in fair value of derivative assets.

The change in fair value of derivative assets related to our capped calls settlement is a non-cash item and we believe the exclusion of this other income (expense) provides a more useful comparison of our operational performance in different periods.

• Impairment of long-lived assets.

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.

• Discrete tax items.

We exclude certain discrete tax items such as income tax expenses or benefits that are not related to ongoing business operations in the current year and adjustments to uncertain tax position reserves as these charges are not indicative of our ongoing operating results, and they are not considered when we are forecasting our future results.

• 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.

We exclude non-ordinary course restructuring expenses related to the restructuring plan we announced in August 2023, which was concluded in the three months ended March 31, 2024 (the "Restructuring Plan") because we do not believe these charges are indicative of our core operating performance and we believe the exclusion of the restructuring expense provides a more useful comparison of our performance in different periods.

For further information see Note 15, Restructuring , in the Notes to our Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.

• Anti-dilutive impact of capped call transaction.

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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, (8) acquisition-related expenses, (9) litigation-related expenses, (10) impairment of long-lived assets and (11) restructuring expense.

We define adjusted EBITDA as net income 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 and (9) restructuring expense.

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.

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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, 2023 and 2022:

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

2023 2022 2023 2022

The following tables reconcile GAAP gross profit to non-GAAP gross profit for the three months ended March 31, 2024, and 2023:

Three Months Ended March 31,

(in thousands)

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Non-GAAP total gross profit $ 151,095 $ 134,387

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

2023 2022 2023 2022

Three Months Ended March 31,

(in thousands)

GAAP gross profit – products $ 138,615 $ 120,539 $ 394,752 $ 339,347

GAAP gross profit – product subscriptions $ 142,263 $ 125,584

Stock-based compensation expense 2,219 2,123

Amortization of acquired intangible assets 4,317 4,375

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

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

2023 2022 2023 2022

Non-GAAP gross profit – product subscriptions $ 148,799 $ 132,082

Three Months Ended March 31,

(in thousands)

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Non-GAAP gross profit – professional services $ 2,296 $ 2,305

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

The following table reconciles GAAP income (loss) from operations to non-GAAP income from operations for the three months ended March 31, 2024, and 2023:

Three Months Ended March 31,

(in thousands)

GAAP loss from operations $ (16,041) $ (23,236) $ (91,665) $ (98,266)

GAAP income (loss) from operations $ 10,568 $ (23,965)

Stock-based compensation expense 24,893 29,373

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Acquisition-related expenses — 363

Litigation-related expenses — — — 115

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

Restructuring expense (1)

Non-GAAP income from operations $ 40,285 $ 10,993

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

(1) For the three months ended March 31, 2024, restructuring expense was recorded within general and administrative expense in our condensed consolidated statement of operations.

The following table reconciles GAAP net income (loss) to non-GAAP net income for the three months ended March 31, 2024, and 2023:

Three Months Ended March 31,

(in thousands, except share and per share data)

GAAP net loss $ (76,611) $ (28,727) $ (169,308) $ (113,332)

GAAP net income (loss) $ 2,258 $ (25,915)

Stock-based compensation expense 24,893 29,373

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Acquisition-related expenses — 363

Litigation-related expenses — — — 115

Amortization of debt issuance costs 1,053 994

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 (190) —

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

Discrete tax items 6,360 —

Non-GAAP net income $ 39,388 $ 10,037

Interest expense of convertible senior notes (1) 1,571 375

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Weighted average shares used in non-GAAP earnings per share calculation, diluted 74,021,704 66,400,126

Non-GAAP net income (loss) per share:

Non-GAAP net income per share:

Basic $ 0.64 $ 0.17

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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.

On an if-converted basis, for the three months ended March 31, 2024, the 2025 Notes, the 2027 Notes and the 2029 Notes were dilutive.

On an if-converted basis, for the three months ended March 31, 2023, the 2027 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 nine months ended September 30, 2023 and 2022:

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

2023 2022 2023 2022

The following table reconciles GAAP net income (loss) to adjusted EBITDA for the three months ended March 31, 2024, and 2023:

Three Months Ended March 31,

(in thousands)

GAAP net loss $ (76,611) $ (28,727) $ (169,308) $ (113,332)

GAAP net income (loss) $ 2,258 $ (25,915)

Interest income (4,720) (1,668)

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Acquisition-related expenses — 363

Litigation-related expenses — — — 115

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

Restructuring expense (190) —

Adjusted EBITDA $ 46,619 $ 16,821

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

The following table reconciles net cash provided by operating activities to free cash flow for the three months ended March 31, 2024, and 2023:

Three Months Ended March 31,

(in thousands)

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We generate revenue primarily from selling products and professional services through a variety of delivery models to meet the needs of our diverse customer base.

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.

Product subscriptions

We generate product subscriptions 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 consists of revenues from term licenses.

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All overhead costs are allocated based on relative headcount.

Cost of Products

Cost of products consists of personnel and related costs for our content, support, managed service and cloud operations teams, including salaries and other payroll related costs, bonuses, stock-based compensation and allocated overhead costs.

Cost of Product Subscriptions

Cost of product subscriptions consists of personnel and related costs for our content, support, managed service and cloud operations teams, including salaries and other payroll related costs, bonuses, stock-based compensation and allocated overhead costs.

Also included in cost of products are software license fees, cloud computing costs and internet connectivity expenses directly related to delivering our products, amortization of contract fulfillment costs, as well as amortization of certain intangible assets including internally developed software.

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Operating Expenses

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

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

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

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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

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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.

Based on our history of losses, we expect to maintain this full valuation allowance for the foreseeable future as it is more likely than not that some or all of those deferred tax assets may not be realized.

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

Based on our history of losses, we expect to maintain this substantially full valuation allowance for the foreseeable future as it is more likely than not that some or all of those deferred tax assets may not be realized.

Results of Operations

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

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

2023 2022 2023 2022

Three Months Ended March 31,

(in thousands)

Consolidated Statement of Operations Data:

Products $ 189,876 $ 166,496 $ 545,349 $ 474,643

Product subscriptions $ 196,918 $ 173,772

Professional services 8,183 9,402

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Cost of revenue:

Products 51,261 45,957 150,597 135,296

Product subscriptions 54,655 48,188

Professional services 6,248 7,811

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General and administrative 19,835 24,207

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

Restructuring 19,996 — 19,996 —

Total operating expenses 133,630 151,140

Loss from operations (16,041) (23,236) (91,665) (98,266)

Income (loss) from operations 10,568 (23,965)

Interest income 4,720 1,668

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Other income (expense), net (1,435) (307)

Loss before income taxes (74,529) (27,692) (165,763) (110,824)

Income (loss) before income taxes 11,183 (25,321)

Provision for income taxes 8,925 594

Net loss $ (76,611) $ (28,727) $ (169,308) $ (113,332)

Net income (loss) $ 2,258 $ (25,915)

(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,

2023 2022 2023 2022

Three Months Ended March 31,

(in thousands)

5 unchanged sentences

Total stock-based compensation expense $ 24,893 $ 29,373

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

2023 2022 2023 2022

Three Months Ended March 31,

(in thousands)

5 unchanged sentences

Total depreciation and amortization expense $ 11,348 $ 11,050

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,

2023 2022 2023 2022

Consolidated Statement of Operations Data:

Products 95.5 94.7 % 95.3 % 94.8 %

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

Three Months Ended March 31,

Condensed Consolidated Statement of Operations Data:

Product subscriptions 96.0 % 94.9 %

Professional services 4.0 5.1

1 unchanged sentence

Cost of revenue:

Products 25.8 26.1 26.3 27.0

Product subscriptions 26.7 26.3

Professional services 3.0 4.3

4 unchanged sentences

General and administrative 9.7 13.2

Impairment of long-lived assets 1.8 — 5.4 —

Restructuring 10.1 — 3.5 —

Total operating expenses 65.1 82.5

Loss from operations (8.1) (13.2) (16.0) (19.6)

Interest income 1.3 0.3 1.0 0.2

Interest expense (28.4) (1.6) (10.8) (1.6)

Other income (expense), net (2.3) (1.3) (3.2) (1.1)

Loss before income taxes (37.5) (15.8) (29.0) (22.1)

Provision for income taxes 1.0 0.5 0.6 0.5

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

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

Three Months Ended September 30, Change

2023 2022 $ %

(dollars in thousands)

Products $ 189,876 $ 166,496 $ 23,380 14.0 %

Professional services 8,967 9,269 (302) (3.3 %)

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

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 September 30, Change

2023 2022 $ %

(dollars in thousands)

Cost of revenue:

Products $ 51,261 $ 45,957 $ 5,304 11.5 %

Professional services 6,569 7,893 (1,324) (16.8 %)

Total cost of revenue $ 57,830 $ 53,850 $ 3,980 7.4 %

Gross margin %:

Products 73.0 % 72.4 %

Professional services 26.7 % 14.8 %

Total gross margin % 70.9 % 69.4 %

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 September 30, 2023 was primarily due to a decrease in personnel costs.

Operating Expenses

Research and Development Expense

Three Months Ended September 30, Change

2023 2022 $ %

(dollars in thousands)

Research and development $ 39,940 $ 48,622 $ (8,682) (17.9 %)

% of revenue 20.1 % 27.7 %

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 September 30, Change

2023 2022 $ %

(dollars in thousands)

Sales and marketing $ 75,699 $ 75,968 $ (269) (0.4 %)

% of revenue 38.2 % 43.2 %

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 September 30, Change

2023 2022 $ %

(dollars in thousands)

General and administrative $ 17,866 $ 20,561 $ (2,695) (13.1) %

% of revenue 9.0 % 11.7 %

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 September 30, Change

2023 2022 $ %

(dollars in thousands)

Impairment of long-lived assets $ 3,553 $ — $ 3,553 100.0 %

% of revenue 1.8 % — %

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 September 30, Change

2023 2022 $ %

(dollars in thousands)

Income (loss) from operations 5.2 (13.1)

Interest income 2.3 0.9

% of revenue 1.3 % 0.3 %

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 (1.3) (1.5)

Three Months Ended September 30, Change

2023 2022 $ %

(dollars in thousands)

Interest expense $ (56,515) $ (2,749) $ (53,766) 1,955.8 %

% of revenue (28.4) % (1.6) %

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 (0.7) (0.1)

Three Months Ended September 30, Change

2023 2022 $ %

(dollars in thousands)

Other income (expense), net $ (4,518) $ (2,205) $ (2,313) 104.9 %

% of revenue (2.3) % (1.3) %

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 September 30, Change

2023 2022 $ %

(dollars in thousands)

Income (loss) before income taxes 5.5 (13.8)

Provision for income taxes 4.4 0.3

% of revenue 1.0 % 0.5 %

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

Net income (loss) 1.1 % (14.1) %

Comparison of the Three Months Ended March 31, 2024 and 2023

Three Months Ended March 31, Change

2024 2023 $ %

(dollars in thousands)

Products $ 545,349 $ 474,643 $ 70,706 14.9 %

Product subscriptions $ 196,918 $ 173,772 $ 23,146 13.3 %

Professional services 8,183 9,402 (1,219) (13.0) %

Total revenue $ 205,101 $ 183,174 $ 21,927 12.0 %

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

Total revenue increased by $21.9 million in the three months ended March 31, 2024 compared to the same period in 2023.

The $21.9 million increase in revenue consisted of a $1.9 million increase in revenue from new customers and a $20.0 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 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.

The increase in total revenue in the three months ended March 31, 2024 compared to the same period in 2023 was comprised of $13.4 million generated from sales in North America and $8.5 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

2024 2023 $ %

1 unchanged sentence

Cost of revenue:

Products $ 150,597 $ 135,296 $ 15,301 11.3 %

Product subscriptions $ 54,655 $ 48,188 $ 6,467 13.4 %

Professional services 6,248 7,811 (1,563) (20.0) %

1 unchanged sentence

Gross margin %:

Products 72.4 % 71.5 %

Product subscriptions 72.2 % 72.3 %

Professional services 23.6 % 16.9 %

Total gross margin % 70.3 % 69.4 %

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 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 nine months ended September 30, 2023 was primarily due to an increase in revenue.

Total cost of revenue increased by $4.9 million in the three months ended March 31, 2024 compared to the same period in 2023, primarily due to a $6.1 million increase in cloud computing costs related to growing cloud-based subscription and managed services revenue, a $1.4 million increase in amortization expense for capitalized internally-developed software and a $0.5 million increase in other expenses.

These increases were partially offset by a $3.1 million decrease in personnel costs, inclusive of a $0.3 million decrease in stock-based compensation expense, resulting from a decrease in headcount due to our Restructuring Plan.

Total gross margin percentage increased for the three months ended March 31, 2024 compared to the same period in 2023.

The products subscriptions gross margin was consistent year-over-year.

The increase in professional services gross margin for the three months ended March 31, 2024 was primarily due to a decrease in personnel costs.

Operating Expenses

Research and Development Expense

Nine Months Ended September 30, Change

Three Months Ended March 31, Change

2024 2023 $ %

2 unchanged sentences

% of revenue 20.0 % 25.3 %

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.

Research and development expense decreased by $5.4 million in the three months ended three months ended March 31, 2024 compared to the same period in 2023, primarily due to a $5.4 million decrease in personnel costs, inclusive of a $2.9 million decrease in stock-based compensation expense, resulting from a decrease in headcount due to our Restructuring Plan.

Sales and Marketing Expense

Nine Months Ended September 30, Change

Three Months Ended March 31, Change

2024 2023 $ %

2 unchanged sentences

% of revenue 35.4 % 44.0 %

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.

Sales and marketing expense decreased by $7.8 million in the three months ended March 31, 2024 compared to the same period in 2023, primarily due to a $6.3 million decrease in personnel costs, inclusive of a $1.0 million decrease in stock-based compensation expense, resulting from a decrease in headcount due to our Restructuring Plan and a $1.5 million decrease in marketing and advertising expenses.

General and Administrative Expense

Nine Months Ended September 30, Change

Three Months Ended March 31, Change

2024 2023 $ %

2 unchanged sentences

% of revenue 9.7 % 13.2 %

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

Nine Months Ended September 30, Change

2023 2022 $ %

(dollars in thousands)

Impairment of long-lived assets $ 30,784 $ — $ 30,784 100.0 %

% of revenue 5.4 % — %

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.

General and administrative expense decreased by $4.4 million in the three months ended March 31, 2024 compared to the same period in 2023, primarily due to a $2.9 million decrease in personnel costs, inclusive of a $0.3 million decrease in stock-based compensation expense, resulting from a decrease in headcount due to our Restructuring Plan, as well as a $1.5 million decrease in other expenses.

Interest Income

Nine Months Ended September 30, Change

Three Months Ended March 31, Change

2024 2023 $ %

2 unchanged sentences

% of revenue 2.3 % 0.9 %

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 income increased by $3.1 million in the three months ended March 31, 2024 compared to the same period in 2023 primarily due to an increase in interest rates.

Interest Expense

Nine Months Ended September 30, Change

Three Months Ended March 31, Change

2024 2023 $ %

2 unchanged sentences

% of revenue (1.3) % (1.5) %

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.

Interest expense was consistent in the three months ended March 31, 2024 compared to the same period in 2023.

Other Income (Expense), Net

Nine Months Ended September 30, Change

Three Months Ended March 31, Change

2024 2023 $ %

2 unchanged sentences

% of revenue (0.7) % (0.2) %

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.

Other income (expense), net increased by $1.1 million in the three months ended March 31, 2024 compared to the same period in 2023 primarily due to increases in 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

2024 2023 $ %

2 unchanged sentences

% of revenue 4.4 % 0.3 %

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.

Provision for income taxes increased by $8.3 million in the three months ended March 31, 2024 compared to the same period in 2023 primarily due to $6.4 million of tax expense recorded for an intercompany sale of intellectual property as part of post-acquisition strategy related to the acquisition of Minerva Lab Ltd.

and an increase in domestic taxes.

Liquidity and Capital Resources

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.

As of March 31, 2024, we had $198.7 million in cash and cash equivalents, $265.5 million in investments that have maturities ranging from one to sixteen months and an accumulated deficit of $1.0 billion.

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”).

Our principal sources of liquidity are cash and cash equivalents, investments, cash flow provided by operating activities 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.

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”)), restructuring expenses, potential future acquisitions of technology businesses and any election we make to redeem our convertible senior notes.

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.

Our future capital requirements will depend on many factors, including our growth rate, the timing and extent of spending to support research and development efforts, the expansion of sales and marketing activities, particularly internationally, the introduction of new and enhanced products and service offerings, the cost of any future acquisitions of technology or businesses and any election we make to redeem our convertible senior notes.

1 unchanged sentence

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, 2023 and 2022:

Nine Months Ended September 30,

The following table shows a summary of our cash flows for the years ended March 31, 2024 and 2023:

Three Months Ended March 31,

(in thousands)

3 unchanged sentences

Net cash provided by financing activities 4,362 2,838

Effect of exchange rate changes on cash, cash equivalents and restricted cash (2,010) (5,707)

Effects of exchange rates on cash, cash equivalents and restricted cash (1,493) (33)

Cash, cash equivalents and restricted cash at end of period $ 206,375 $ 206,274

2 unchanged sentences

Operating Activities

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 $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.

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 a $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 $31.1 million of cash and cash equivalents in the three months ended March 31, 2024, 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 income of $2.3 million and a decrease in our net operating assets and liabilities of $10.1 million, offset by non-cash charges of $38.9 million related primarily to depreciation and amortization, stock-based compensation expense, deferred income taxes, amortization of debt issuance costs and other non-cash charges.

The change in our net operating assets and liabilities was primarily due to a decrease in deferred revenue and the timing of payments of operating expenses, including payout of annual bonuses and year-end commissions and other compensation costs and accounts payable, partially offset by a decrease in accounts receivable due to an increase in cash collections from our customers.

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.

change in our net operating assets and liabilities was primarily due to a decrease in deferred revenue and the timing of payments of operating expenses, including payout of annual bonuses and year-end commissions and other compensation costs and accounts payable, partially offset by a decrease in accounts receivable due to an increase in cash collections from our customers.

Investing Activities

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.

Investing activities used $41.7 million of cash in the three months ended March 31, 2024, consisting of $38.2 million in purchases of investments, net of sales/maturities, $2.9 million for capitalization of internal-use software costs and $0.6 million in capital expenditures to purchase computer equipment and leasehold improvements.

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.

Financing Activities

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.

Financing activities provided $4.4 million of cash in the three months ended March 31, 2024, which consisted primarily of $5.0 million in proceeds from the issuance of common stock purchased by employees under the Rapid7, Inc.

2015 Employee Stock Purchase Plan (“ESPP”) and $1.1 million in proceeds from the exercise of stock options, partially offset by $1.7 million in withholding taxes paid for the net share settlement of equity awards.

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 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.

Contractual Obligations and Commitments

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”).

As of March 31, 2024, there were no additional material changes from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the SEC on February 26, 2024 (the “Annual Report”).

Off-Balance Sheet Arrangements

3 unchanged sentences

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 our Consolidated Financial Statements for a discussion of recent accounting pronouncements.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”).

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.

Our condensed consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States (“GAAP”).

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

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

3 unchanged sentences

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