What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-11-07 compared with 2024-08-07 · 146 added, 115 removed, 463 unchanged (36% of the section changed)

50 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, 2024, we had over 11,000 customers in 147 countries, including 46% of the Fortune 100.

Our revenue was not concentrated with any individual customer and no customer represented more than 1% of our revenue for three and six months ended June 30, 2024 or 2023.

As of September 30, 2024, we had over 11,000 customers in 146 countries, including 45% of the Fortune 100.

Our revenue was not concentrated with any individual customer and no customer represented more than 2% of our revenue for three and nine months ended September 30, 2024 or 2023.

Recent Developments

On July 3, 2024, the we acquired Noetic Cyber, Inc, (“Noetic”) a provider of cyber asset attack surface management, for consideration of approximately $39.2 million subject to customary working capital adjustments as set forth in the merger agreement, including an aggregate value of $2.3 million of our common stock to be issued to two key employees of Noetic in three installments over a 36-month period following the closing date of the transaction, subject to continued employment requirements (the “Closing Consideration”).

In addition, subject to the terms of the merger agreement, we may also be required to pay additional contingent consideration of up to $20.0 million based on the achievement of certain performance targets (the “Earnout Consideration”), measured annually upon the first, second and third anniversaries of the closing date of the transaction (the “Earnout Period”).

If the full $20.0 million is realized, approximately $6.9 million of the Earnout Consideration will be issued in the form of shares of our common stock subject to continued employment requirements over the Earnout Period, and the remainder will be paid in cash.

On July 3, 2024, we acquired Noetic Cyber, Inc, (“Noetic”) a provider of cyber asset attack surface management, to extend Rapid7’s security operations platform by unlocking more accessible and accurate asset inventory in order to provide customers more comprehensive visibility to their attack surface, for a purchase price with an aggregate fair value of $51.0 million.

The purchase consideration consisted of $38.6 million in cash paid at closing, $12.1 million of contingent consideration and $0.4 million of deferred cash payments.

The deferred cash payments will be held by Rapid7 to satisfy certain post-closing purchase price adjustments.

Subject to the terms of the merger agreement, we are required to pay consideration of up to $20.0 million to Noetic shareholders based on the achievement of certain performance targets (the “Earnout Consideration”), measured annually upon

the first, second and third anniversaries of the closing date of the transaction (the “Earnout Period”).

If all performance targets are achieved, approximately $13.1 million of Earnout Consideration will be paid in cash, and the remaining $6.9 million of Earnout Consideration will be issued to certain employees in the form of shares of our common stock subject to continued employment requirements over the Earnout Period.

The approximate $6.9 million of the Earnout Consideration that is subject to continued employment will be recognized as stock-based compensation expense over the required employment period.

The fair value of the portion of the Earnout Consideration that is not subject to continued employment is included as part of purchase consideration at the date of the acquisition.

As of July 3, 2024, we determined the fair value of the contingent purchase consideration to be $12.1 million.

The fair value of the contingent purchase consideration will be reassessed each reporting period and any required adjustment will be recorded to general and administrative expense.

As of September 30, 2024 , the fair value of the contingent purchase consideration was $12.2 million.

In connection with the acquisition, we will issue an aggregate value of $2.3 million of our common stock to two key employees of Noetic in three installments over a 36-month period following the closing date of the transaction, subject to continued employment requirements.

Our Business Model

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

For the three and six months ended June 30, 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.

For the three months ended September 30, 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.

For the nine months ended September 30, 2024 and 2023, recurring revenue 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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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 June 30, Six Months Ended June 30,

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

2024 2023 2024 2023

5 unchanged sentences

Free cash flow $ 38,502 $ (582) $ 95,241 $ 23,780

As of June 30,

As of September 30,

(dollars in thousands)

33 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.

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, impairment of long-lived assets, change in the fair value of derivative assets, 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.

9 unchanged sentences

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.

• Change in fair value of derivative assets.

3 unchanged sentences

• Restructuring expense.

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.

We exclude non-ordinary course restructuring expenses related to the restructuring plan we announced in August 2023, which was concluded in the first quarter of 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.

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

• Discrete tax items.

3 unchanged sentences

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 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, (9) impairment of long-lived assets and (10) restructuring expense.

We define adjusted EBITDA as net income (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) impairment of long-lived assets and (10) 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 six months ended June 30, 2024, and 2023:

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, 2024, and 2023:

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

2024 2023 2024 2023

4 unchanged sentences

Non-GAAP total gross profit $ 159,048 $ 148,315 $ 464,424 $ 422,787

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

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

2024 2023 2024 2023

4 unchanged sentences

Non-GAAP gross profit – product subscriptions $ 155,914 $ 145,330 $ 456,487 $ 415,077

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

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

2024 2023 2024 2023

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Non-GAAP gross profit – professional services $ 3,134 $ 2,985 $ 7,937 $ 7,710

The following table reconciles GAAP income (loss) from operations to non-GAAP income from operations for the three and six months ended June 30, 2024, and 2023:

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

The following table reconciles GAAP income (loss) from operations to non-GAAP income from operations for the three and nine months ended September 30, 2024, and 2023:

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

2024 2023 2024 2023

4 unchanged sentences

Acquisition-related expenses (1)

290 — 568 363

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

Restructuring expense (2)

— 19,996 (190) 19,996

Non-GAAP income from operations $ 43,952 $ 36,773 $ 123,513 $ 60,723

(1) For the six months ended June 30, 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 and six months ended June 30, 2024, and 2023:

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

(1) For the three and nine months ended September 30, 2024, acquisition-related expenses included $0.2 million of accretion expense related to contingent consideration recorded in connection with our July 2024 acquisition of Noetic.

(2) For the nine months ended September 30, 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 and nine months ended September 30, 2024, and 2023:

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

2024 2023 2024 2023

5 unchanged sentences

Amortization of debt issuance costs 1,217 1,041 3,325 3,061

Induced conversion expense — 53,889 — 53,889

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

14 unchanged sentences

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 six months ended June 30, 2024, the 2025 Notes, the 2027 Notes and the 2029 Notes were dilutive.

On an if-converted basis, for the three and six months ended June 30, 2023, the 2027 Notes were dilutive and the 2025 Notes were anti-dilutive.

On an if-converted basis, for the three and nine months ended September 30, 2024 and 2023, the 2025 Notes, the 2027 Notes and the 2029 Notes were dilutive.

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

The following table reconciles GAAP net income (loss) to adjusted EBITDA for the three and six months ended June 30, 2024, and 2023:

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

The following table reconciles GAAP net income (loss) to adjusted EBITDA for the three and nine months ended September 30, 2024, and 2023:

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

2024 2023 2024 2023

3 unchanged sentences

Interest expense 2,837 56,515 8,180 62,005

Other expense, net 695 13,268 2,130 13,575

Other (income) expense, net (2,811) 4,518 (681) 18,093

Provision for income taxes 2,952 2,082 12,415 3,545

6 unchanged sentences

Adjusted EBITDA $ 50,083 $ 42,925 $ 142,140 $ 78,842

The following table reconciles net cash provided by operating activities to free cash flow for the three and six months ended June 30, 2024, and 2023:

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, 2024, and 2023:

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

2024 2023 2024 2023

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Software license revenue consists of revenues from term licenses.

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

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

Professional Services

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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

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.

Interest Income

10 unchanged sentences

Results of Operations

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

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

2024 2023 2024 2023

13 unchanged sentences

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

Restructuring — 19,996 — 19,996

Total operating expenses 137,676 157,054 411,569 492,111

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

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

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

2024 2023 2024 2023

6 unchanged sentences

Total stock-based compensation expense $ 24,594 $ 23,768 $ 76,896 $ 84,836

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

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

2024 2023 2024 2023

7 unchanged sentences

The following table sets forth our condensed 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,

2024 2023 2024 2023

12 unchanged sentences

Impairment of long-lived assets — 1.8 % — 5.4

Restructuring — 10.1 % — 3.5

Total operating expenses 64.1 79.0 65.6 86.0

2 unchanged sentences

Interest expense (1.3) (28.4) (1.3) (10.8)

Other expense, net (0.3) (7.0) (0.5) (3.6)

Other income (expense), net 1.3 (2.3) 0.1 (3.2)

Income (loss) before income taxes 9.1 (37.5) 6.3 (29.0)

1 unchanged sentence

Net income (loss) 7.7 % (38.5) % 4.3 % (29.6) %

Comparison of the Three Months Ended June 30, 2024 and 2023

Three Months Ended June 30, Change

Comparison of the Three Months Ended September 30, 2024 and 2023

Three Months Ended September 30, Change

2024 2023 $ %

3 unchanged sentences

Total revenue $ 214,654 $ 198,843 $ 15,811 8.0 %

Total revenue increased by $17.6 million in the three months ended June 30, 2024 compared to the same period in 2023.

The $17.6 million increase in revenue consisted of a $1.6 million increase in revenue from new customers and a $16.0 million increase in revenue from existing customers.

Total revenue increased by $15.8 million in the three months ended September 30, 2024 compared to the same period in 2023 and consisted of a $2.4 million increase in revenue from new customers and a $13.4 million increase in revenue from existing customers.

The $13.4 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, 2024 compared to the same period in 2023 was comprised of $9.6 million generated from sales in North America and $8.0 million generated from sales from the rest of the world.

The increase in total revenue in the three months ended September 30, 2024 compared to the same period in 2023 was comprised of $8.5 million generated from sales in North America and $7.3 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

2024 2023 $ %

8 unchanged sentences

Total gross margin % 70.6 % 70.9 %

Total cost of revenue increased by $2.7 million in the three months ended June 30, 2024 compared to the same period in 2023, primarily due to a $5.0 million increase in cloud computing costs related to growing cloud-based subscription and managed services revenue and a $1.0 million increase in amortization expense for capitalized internally-developed software.

These increases were partially offset by a $3.0 million decrease in personnel costs, inclusive of a $0.1 million decrease in stock-based compensation expense, resulting from a decrease in headcount due to our Restructuring Plan, and a $1.0 million decrease in other expenses.

Total gross margin percentage increased for the three months ended June 30, 2024 compared to the same period in 2023.

The increase in product subscriptions gross margin for the three months ended June 30, 2024 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, 2024 was primarily due to a decrease in personnel costs.

Total cost of revenue increased by $5.2 million in the three months ended September 30, 2024 compared to the same period in 2023, primarily due to a $4.7 million increase in cloud computing costs related to growing cloud-based subscription and managed services revenue, a $0.6 million increase in amortization expense for capitalized internally-developed software and a $0.8 million increase in other expenses.

Total gross margin percentage decreased for the three months ended September 30, 2024 compared to the same period in 2023.

The decrease in product subscriptions gross margin for the three months ended September 30, 2024 was primarily due to an increase in cloud computing costs.

The increase in professional services gross margin for the three months ended September 30, 2024 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

2024 2023 $ %

2 unchanged sentences

% of revenue 20.8 % 20.1 %

Research and development expense decreased by $10.7 million in the three months ended June 30, 2024 compared to the same period in 2023, primarily due to a $7.7 million decrease in personnel costs, inclusive of a $3.0 million decrease in stock-based compensation expense, resulting from a decrease in headcount primarily due to our Restructuring Plan, and a $3.0 million decrease due to a write-off of a capitalized internal-use software project in the prior period.

Research and development expense increased by $4.6 million in the three months ended September 30, 2024 compared to the same period in 2023, primarily due to a $2.8 million increase in personnel costs, inclusive of a $1.2 million increase in stock-based compensation expense, resulting from an increase in headcount including the employees acquired in the acquisition of Noetic in July 2024, and a $1.8 million increase in other expenses.

Sales and Marketing Expense

Three Months Ended June 30, Change

Three Months Ended September 30, Change

2024 2023 $ %

2 unchanged sentences

% of revenue 34.7 % 38.2 %

Sales and marketing expense decreased by $5.2 million in the three months ended June 30, 2024 compared to the same period in 2023, primarily due to a $6.2 million decrease in personnel costs, inclusive of a $0.6 million decrease in stock-based compensation expense, resulting from a decrease in headcount primarily due to our Restructuring Plan, and a $0.5 million decrease in marketing and advertising expenses.

These decreases were partially offset by a $1.1 million increase in other expenses.

Sales and marketing expense decreased by $1.2 million in the three months ended September 30, 2024 compared to the same period in 2023, primarily due to a $3.3 million decrease in personnel costs, inclusive of a $0.3 million decrease in stock-based compensation expense, resulting from a decrease in headcount primarily due to our Restructuring Plan, and a $0.2 million decrease in other expenses.

These decreases were partially offset by a $2.3 million increase in commission expense.

General and Administrative Expense

Three Months Ended June 30, Change

Three Months Ended September 30, Change

2024 2023 $ %

2 unchanged sentences

% of revenue 8.6 % 9.0 %

General and administrative expense decreased by $0.5 million in the three months ended June 30, 2024 compared to the same period in 2023, primarily due to a $0.5 million decrease in stock-based compensation expense.

General and administrative expense increased by $0.7 million in the three months ended September 30, 2024 compared to the same period in 2023, primarily due to a $0.7 million increase in professional fees.

Impairment of Long-Lived Assets

Three Months Ended June 30, Change

Three Months Ended September 30, Change

2024 2023 $ %

2 unchanged sentences

% of revenue — % 1.8 %

Impairment of long-lived assets expense of $27.2 million in the three months ended June 30, 2023 was 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 of $3.6 million in the three months ended September 30, 2023 related 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

2024 2023 $ %

(dollars in thousands)

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

% of revenue — % 10.1 %

Restructuring expense of $20.0 million in the three months ended September 30, 2023 was recorded as a result of 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 15, Restructuring , in the Notes to our condensed consolidated financial statements for further details on our Restructuring Plan.

Interest Income

Three Months Ended June 30, Change

Three Months Ended September 30, Change

2024 2023 $ %

2 unchanged sentences

% of revenue 2.6 % 1.3 %

Interest income increased by $3.4 million in the three months ended June 30, 2024 compared to the same period in 2023 primarily due to an increase in interest rates.

Interest income increased by $3.0 million in the three months ended September 30, 2024 compared to the same period in 2023 primarily due to higher interest income as a result of an increase in cash and cash equivalents and investments.

Interest Expense

Three Months Ended June 30, Change

Three Months Ended September 30, Change

2024 2023 $ %

2 unchanged sentences

% of revenue (1.3) % (28.4) %

Interest expense was consistent in the three months ended June 30, 2024 compared to the same period in 2023.

Other Expense, Net

Three Months Ended June 30, Change

Interest expense decreased in the three months ended September 30, 2024 compared to the same period in 2023 primarily due to $53.9 million of induced conversion expense incurred in the third quarter of 2023 in conjunction with the partial repurchase of the 2025 Notes.

Other Income (Expense), Net

Three Months Ended September 30, Change

2024 2023 $ %

(dollars in thousands)

Other expense, net $ (695) $ (13,268) $ 12,573 (94.8) %

Other income (expense), net $ 2,811 $ (4,518) $ 7,329 (162.2) %

% of revenue 1.3 % (2.3) %

Other expense, net decreased by $12.6 million in the three months ended June 30, 2024 compared to the same period in 2023 primarily due to a $12.7 million expense for the change in fair value on derivative assets related to our 2023 capped calls settlement in the prior period 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 $7.3 million in the three months ended September 30, 2024 compared to the same period in 2023 primarily due to increases in realized and unrealized foreign currency gains, primarily related to the Euro and British Pound Sterling, partially offset by $2.9 million of expense for the change in fair value on derivative assets related to our 2023 capped calls settlement in the prior period.

Provision for Income Taxes

Three Months Ended June 30, Change

Three Months Ended September 30, Change

2024 2023 $ %

2 unchanged sentences

% of revenue 1.4 % 1.0 %

Provision for income taxes decreased by $0.3 million in the three months ended June 30, 2024 compared to the same period in 2023 primarily due to a decrease in taxes associated with our international operations.

Comparison of the Six Months Ended June 30, 2024 and 2023

Six Months Ended June 30, Change

Provision for income taxes increased by $0.9 million in the three months ended September 30, 2024 compared to the same period in 2023 primarily due to an increase in taxes associated with our international operations.

Comparison of the Nine Months Ended September 30, 2024 and 2023

Nine Months Ended September 30, Change

2024 2023 $ %

3 unchanged sentences

Total revenue $ 627,746 $ 572,439 $ 55,307 9.7 %

Total revenue increased by $39.5 million in the six months ended June 30, 2024 compared to the same period in 2023 and consisted of a $3.5 million increase in revenue from new customers and a $36.0 million increase in revenue from existing customers.

Total revenue increased by $55.3 million in the nine months ended September 30, 2024 compared to the same period in 2023 and consisted of a $5.9 million increase in revenue from new customers and a $49.4 million increase in revenue from existing customers.

The $49.4 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 six months ended June 30, 2024 compared to the same period in 2023 was comprised of $23.1 million generated from sales in North America and $16.4 million generated from sales from the rest of the world.

The increase in total revenue in the nine months ended September 30, 2024 compared to the same period in 2023 was comprised of $31.6 million generated from sales in North America and $23.7 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

2024 2023 $ %

8 unchanged sentences

Total gross margin % 70.6 % 70.0 %

Total cost of revenue increased by $7.6 million in the six months ended June 30, 2024 compared to the same period in 2023, primarily due to a $11.1 million increase in cloud computing costs related to growing cloud-based subscription and managed services revenue and a $2.4 million increase in amortization expense for capitalized internally-developed software.

These increases were partially offset by a $6.1 million decrease in personnel costs, inclusive of a $0.1 million decrease in stock-based compensation expense, resulting from a decrease in headcount primarily due to our Restructuring Plan, and a $1.2 million decrease in other expenses.

Total gross margin percentage increased in the six months ended June 30, 2024 compared to the same period in 2023.

The increase in product subscriptions gross margin in the six months ended June 30, 2024 was driven by our ability to scale as our

revenue continues to grow.

The increase in professional services gross margin in the six months ended June 30, 2024 was primarily due to a decrease in personnel costs.

Total cost of revenue increased by $12.8 million in the nine months ended September 30, 2024 compared to the same period in 2023, primarily due to a $15.8 million increase in cloud computing costs related to growing cloud-based subscription and managed services revenue, a $3.0 million increase in amortization expense for capitalized internally-developed software and a $0.4 million increase in other expenses.

These increases were partially offset by a $6.4 million decrease in personnel costs resulting from a decrease in headcount primarily due to our Restructuring Plan.

Total gross margin percentage increased in the nine months ended September 30, 2024 compared to the same period in 2023.

The gross margin percentage for product subscriptions was consistent in the nine months ended September 30, 2024 compared to the same period in 2023.

The increase in professional services gross margin in the nine months ended September 30, 2024 was primarily due to a decrease in personnel costs.

Operating Expenses

Research and Development Expense

Six Months Ended June 30, Change

Nine Months Ended September 30, Change

2024 2023 $ %

2 unchanged sentences

% of revenue 20.0 % 23.9 %

Research and development expense decreased by $16.1 million in the six months ended June 30, 2024 compared to the same period in 2023, primarily due to a $13.1 million decrease in personnel costs, inclusive of a $6.0 million decrease in stock-based compensation expense, resulting from a decrease in headcount, primarily due to our Restructuring Plan, and a $3.0 million decrease due to a write-off of a capitalized internal-use software project in the prior period.

Research and development expense decreased by $11.4 million in the nine months ended September 30, 2024 compared to the same period in 2023, primarily due to a $10.8 million decrease in personnel costs, inclusive of a $4.9 million decrease in stock-based compensation expense, resulting from an overall decrease in headcount, primarily due to our Restructuring Plan, and a $3.0 million decrease due to a write-off of a capitalized internal-use software project in the prior period.

These decreases were partially offset by a $2.4 million increase in other expenses.

Sales and Marketing Expense

Six Months Ended June 30, Change

Nine Months Ended September 30, Change

2024 2023 $ %

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% of revenue 35.9 % 41.8 %

Sales and marketing expense decreased by $13.0 million in the six months ended June 30, 2024 compared to the same period in 2023, primarily due to a $12.4 million decrease in personnel costs, inclusive of a $1.6 million decrease in stock-based compensation expense, resulting from a decrease in headcount primarily due to our Restructuring Plan, and a $2.1 million decrease in marketing and advertising expenses.

These decreases were partially offset by a $1.5 million increase in other expenses.

Sales and marketing expense decreased by $14.2 million in the nine months ended September 30, 2024 compared to the same period in 2023, primarily due to a $15.7 million decrease in personnel costs, inclusive of a $1.9 million decrease in stock-based compensation expense, resulting from an overall decrease in headcount primarily due to our Restructuring Plan, a $1.7 million decrease in marketing and advertising expenses and a $3.6 million decrease in other expenses.

These decreases were partially offset by a $6.8 million increase in commission expense.

General and Administrative Expense

Six Months Ended June 30, Change

Nine Months Ended September 30, Change

2024 2023 $ %

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% of revenue 9.7 % 11.3 %

General and administrative expense decreased by $4.8 million in the six months ended June 30, 2024 compared to the same period in 2023, primarily due to a $3.3 million decrease in personnel costs, inclusive of a $1.1 million decrease in stock-based compensation expense, resulting from a decrease in headcount primarily due to our Restructuring Plan, and a $2.4 million decrease in professional fees.

These decreases were partially offset by a $0.9 million increase in other expenses.

General and administrative expense decreased by $4.1 million in the nine months ended September 30, 2024 compared to the same period in 2023, primarily due to a $3.5 million decrease in personnel costs, inclusive of a $1.4 million decrease in stock-based compensation expense, resulting from a decrease in headcount primarily due to our Restructuring Plan, a $1.6 million decrease in professional fees and a $0.4 million decrease in other expenses.

Impairment of Long-Lived Assets

Six Months Ended June 30, Change

Nine Months Ended September 30, Change

2024 2023 $ %

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% of revenue — % 5.4 %

Impairment of long-lived assets expense of $27.2 million in the six months ended June 30, 2023 was 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 of $30.8 million in the nine months ended September 30, 2023 was 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

2024 2023 $ %

(dollars in thousands)

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

% of revenue — % 3.5 %

Restructuring expense of $20.0 million in the nine months ended September 30, 2023 was recorded as a result of 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 15, Restructuring , in the Notes to our condensed consolidated financial statements for further details on our Restructuring Plan.

Interest Income

Six Months Ended June 30, Change

Nine Months Ended September 30, Change

2024 2023 $ %

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% of revenue 2.5 % 1.0 %

Interest income increased by $6.5 million in the six months ended June 30, 2024 compared to the same period in 2023, primarily due to an increase in interest rates.

Interest income increased by $9.5 million in the nine months ended September 30, 2024 compared to the same period in 2023, primarily due to higher interest income as a result of an increase in cash and cash equivalents and investments.

Interest Expense

Six Months Ended June 30, Change

Nine Months Ended September 30, Change

2024 2023 $ %

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% of revenue (1.3) % (10.8) %

Interest expense was consistent in the six months ended June 30, 2024 compared to the same period in 2023.

Other Expense, Net

Six Months Ended June 30, Change

Interest expense decreased in the nine months ended September 30, 2024 compared to the same period in 2023 primarily due to $53.9 million of induced conversion expense incurred in the third quarter of 2023 in conjunction with the partial repurchase of the 2025 Notes.

Other Income (Expense), Net

Nine Months Ended September 30, Change

2024 2023 $ %

(dollars in thousands)

Other expense, net $ (2,130) $ (13,575) $ 11,445 (84.3) %

Other income (expense), net $ 681 $ (18,093) $ 18,774 (103.8) %

% of revenue 0.1 % (3.2) %

Other expense, net decreased by $11.4 million in the six months ended June 30, 2024 compared to the same period in 2023, primarily due to a $12.7 million expense for the change in fair value on derivative assets related to our 2023 capped calls settlement in the prior period 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 $18.8 million in the nine months ended September 30, 2024 compared to the same period in 2023, primarily due to a $15.5 million expense for the change in fair value on derivative assets related to our 2023 capped calls settlement in the prior period as well as increases 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

2024 2023 $ %

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% of revenue 2.0 % 0.6 %

Provision for income taxes increased by $8.0 million in the six months ended June 30, 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.

Provision for income taxes increased by $8.9 million in the nine months ended September 30, 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 a $2.5 million increase in domestic and international taxes.

Liquidity and Capital Resources

As of June 30, 2024, we had $237.0 million in cash and cash equivalents, $257.1 million in investments that have maturities ranging from one to fifteen months and an accumulated deficit of $1.0 billion.

As of September 30, 2024, we had $222.6 million in cash and cash equivalents, $281.5 million in investments that have maturities ranging from one to twenty 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.

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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.

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 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.

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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, 2024 and 2023:

Six Months Ended June 30,

The following table shows a summary of our cash flows for the nine months ended September 30, 2024 and 2023:

Nine Months Ended September 30,

(in thousands)

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Operating Activities

Operating activities provided $63.9 million of cash and cash equivalents in the six months ended June 30, 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 $10.5 million and a decrease in our net operating assets and liabilities of $23.6 million, offset by non-cash charges of $77.1 million related primarily to depreciation and amortization, stock-based compensation expense, deferred income taxes, amortization of debt issuance costs and other non-cash charges.

Operating activities provided $107.9 million of cash and cash equivalents in the nine months ended September 30, 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 $27.0 million and non-cash charges of $111.0 million related primarily to depreciation and amortization, stock-based compensation expense, deferred income taxes, amortization of debt issuance costs and other non-cash charges, partially offset by a decrease in our net operating assets and liabilities of $30.1 million.

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 $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.

Cash provided by operating activities reflected our net loss of $92.7 million and a decrease in our net operating assets and liabilities of $0.4 million, offset by non-cash charges of $130.3 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 $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 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, partially offset by a decrease in our net operating assets and liabilities of $18.1 million.

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.

Investing Activities

Investing activities used $34.8 million of cash in the six months ended June 30, 2024, consisting of $28.0 million in purchases of investments, net of sales/maturities, $6.3 million for capitalization of internal-use software costs, and $0.9 million in capital expenditures to purchase computer equipment and leasehold improvements, partially offset by proceeds of $0.4 million for other 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, and $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 $99.5 million of cash in the nine months ended September 30, 2024, consisting of $49.9 million in purchases of investments, net of sales/maturities, $37.2 million of cash paid for the acquisition of Noetic, $10.4 million for capitalization of internal-use software costs, and $2.2 million in capital expenditures to purchase computer equipment and leasehold improvements, partially offset by proceeds of $0.4 million for other 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.

Financing Activities

Financing activities provided $3.4 million of cash in the six months ended June 30, 2024, which consisted primarily of $5.0 million in proceeds from the issuance of common stock purchased by employees under the Rapid7, Inc.

Financing activities provided $6.8 million of cash in the nine months ended September 30, 2024, which consisted primarily of $9.2 million in proceeds from the issuance of common stock purchased by employees under the Rapid7, Inc.

2015 Employee Stock Purchase Plan (“ESPP”) and $1.4 million in proceeds from the exercise of stock options, partially offset by $3.8 million in withholding taxes paid for the net share settlement of equity awards.

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 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 $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 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.

Contractual Obligations and Commitments

As of June 30, 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”).

As of September 30, 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

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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.

Critical Accounting Policies and Estimates

Critical Accounting Estimates

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

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Our actual results may differ from these estimates.

There have been no material changes in our critical accounting policies from those disclosed in our Annual Report.

There have been no material changes to our critical accounting estimates from those disclosed in our Annual Report.

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