Rapid7, Inc. 10-Q

Item 2. 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 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”. Special Note Regarding Forward-Looking Statements This Quarterly Report on Form 10-Q, including the sections entitled “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Statements that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are often identified by the use of words such as, but not limited to, “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “seek,” “should,” “target,” “will,” “would” and similar expressions or variations intended to identify forward-looking statements. These forward-looking statements include, but are not limited to, statements concerning the following: • our ability to continue to add new customers, maintain existing customers and sell new products and professional services to new and existing customers; • uncertain impacts that changes in overall level of software spending and ongoing volatility in the global economy as well as effects of inflation and increased interest rates may have on our business, strategy, operating results, financial condition and cash flows; • the effects of increased competition as well as innovations by new and existing competitors in our market; • our ability to adapt to technological change and effectively enhance, innovate and scale our solutions; • our ability to effectively manage or sustain our growth and to attain and sustain profitability; • our ability to diversify our sources of revenue; • potential acquisitions and integration of complementary business and technologies; • our expected use of proceeds from future issuances of equity or convertible debt securities; • our ability to maintain, or strengthen awareness of, our brand; • perceived or actual security, integrity, reliability, quality or compatibility problems with our solutions, including related to security breaches in our customers; systems, unscheduled downtime or outages; • statements regarding future revenue, hiring plans, expenses, capital expenditures, capital requirements and stock performance; • our ability to meet publicly announced guidance or other expectations about our business, key metrics and future operating results; • our ability to maintain an adequate annualized recurring revenue growth; • our ability to attract and retain qualified employees and key personnel and further expand our overall headcount; • our ability to grow, both domestically and internationally; • our ability to stay abreast of new or modified laws and regulations that currently apply or become applicable to our business both in the United States and internationally; • our ability to maintain, protect and enhance our intellectual property; • costs associated with defending intellectual property infringement and other claims; and • the future trading prices of our common stock and the impact of securities analysts’ reports on these prices. 21 Table of Contents These statements represent the beliefs and assumptions of our management based on information currently available to us. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” included under Part II, Item 1A. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances that occur after the date of this report. As used in this report, the terms “Rapid7,” the “company,” “we,” “us,” and “our” mean Rapid7, Inc. and its subsidiaries unless the context indicates otherwise. Overview 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, 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, 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 22 Table of Contents 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 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 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 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. 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 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. Key Metrics 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. We believe that both management and investors benefit from referring to these key metrics as supplemental information in assessing our performance and when planning, forecasting, and analyzing future periods. 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 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: 23 Table of Contents Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 (dollars in thousands) Total revenue $ 214,654 $ 198,843 $ 627,746 $ 572,439 Year-over-year growth 8.0 % 13.1 % 9.7 % 14.3 % Non-GAAP income from operations $ 43,952 $ 36,773 $ 123,513 $ 60,723 Non-GAAP operating margin 20.5 % 18.5 % 19.7 % 10.6 % Free cash flow $ 38,502 $ (582) $ 95,241 $ 23,780 As of September 30, 2024 2023 (dollars in thousands) Annualized recurring revenue (“ARR”) $ 823,104 $ 776,760 Year-over-year growth 6.0 % 13.6 % Number of customers 11,619 11,412 Year-over-year growth 2 % 5.8 % ARR per customer $ 70.8 $ 68.1 Year-over-year growth 4.1 % 7.4 % Total Revenue and Growth . We are focused on driving continued revenue growth through increased sales of our products and professional services to new and existing customers. We monitor total revenue and believe it is useful to investors as a measure of the overall success of our business. Non-GAAP Income from Operations and Non-GAAP Operating Margin . We monitor non-GAAP income from operations and non-GAAP operating margin, non-GAAP financial measures, to analyze our financial results. We believe non-GAAP income from operations and non-GAAP operating margin are useful to investors, as supplements to U.S. GAAP measures, in evaluating our ongoing operational performance and enhancing an overall understanding of our past financial performance and allowing for greater transparency with respect to metrics used by our management in its financial and operational decision-making. See Non-GAAP Financial Results below for further information on non-GAAP income from operations and a reconciliation of non-GAAP income from operations to the comparable GAAP financial measure. Free Cash Flow . Free cash flow is a non-GAAP measure that we define as cash provided by operating activities less purchases of property and equipment and capitalization of internal-use software costs. We consider free cash flow to be a liquidity measure that provides useful information to management and investors about the amount of cash generated by the business after necessary capital expenditures. See Non-GAAP Financial Results below for a reconciliation of non-GAAP free cash flow to the comparable GAAP financial measure. Annualized Recurring Revenue and Growth. Annualized Recurring Revenue (“ARR”) is defined as the annual value of all recurring revenue related to contracts in place at the end of the quarter. 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 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. Number of Customers . 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 only InsightOps and Logentries customers with a contract value less than $2,400 per year. ARR per Customer . ARR per customer is defined as ARR divided by the number of customers at the end of the period. 24 Table of Contents 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, 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. We use these non-GAAP financial measures for financial and operational decision-making purposes and as a means to evaluate period-to-period comparisons, and use certain non-GAAP financial measures as performance measures under our executive bonus plan. We believe that these non-GAAP financial measures provide useful information about our operating results, enhance the overall understanding of past financial performance and future prospects and allow for greater transparency with respect to metrics used by our management in its financial and operational decision-making. 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, induced conversion 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: • Stock-based compensation expense. We exclude stock-based compensation expense because of varying available valuation methodologies, subjective assumptions and the variety of equity instruments that can impact our non-cash expense. We believe that providing non-GAAP financial measures that exclude stock-based compensation expense allows for more meaningful comparisons between our operating results from period to period. • Amortization of acquired intangible assets. We believe that excluding the impact of amortization of acquired intangible assets allows for more meaningful comparisons between operating results from period to period as the intangible assets are valued at the time of acquisition and are amortized over several years after the acquisition. • 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. • Amortization of debt issuance costs. The expense for the amortization of debt issuance costs related to our convertible senior notes and revolving credit facility is a non-cash item and we believe the exclusion of this interest expense provides a more useful comparison of our operational performance in different periods. • Induced conversion expense. In conjunction with the third quarter of 2023 partial repurchase of our 2025 Notes, we incurred a non-cash induced conversion expense of $53.9 million. We exclude induced conversion expense because this amount is not indicative of the performance of, or trends in, our business and neither is comparable to the prior period nor predictive of future results. • 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. • Restructuring expense. 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. For further 25 Table of Contents 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. 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. • Anti-dilutive impact of capped call transaction. Our capped calls transactions are intended to offset potential dilution from the conversion features in our convertible senior notes. 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 (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. Our non-GAAP financial measures may not provide information that is directly comparable to that provided by other companies in our industry, as other companies in our industry may calculate non-GAAP financial results differently, particularly related to non-recurring, unusual items. In addition, there are limitations in using non-GAAP financial measures because the non-GAAP financial measures are not prepared in accordance with GAAP, may be different from non-GAAP financial measures used by other companies and exclude expenses that may have a material impact upon our reported financial results. 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, 2024, and 2023: Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 (in thousands) GAAP total gross profit $ 151,637 $ 141,013 $ 442,978 $ 400,446 Stock-based compensation expense 3,001 2,527 8,707 8,348 Amortization of acquired intangible assets 4,410 4,775 12,739 13,993 Non-GAAP total gross profit $ 159,048 $ 148,315 $ 464,424 $ 422,787 Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 (in thousands) GAAP gross profit – product subscriptions $ 148,940 $ 138,615 $ 436,288 $ 394,752 Stock-based compensation expense 2,564 1,940 7,460 6,332 Amortization of acquired intangible assets 4,410 4,775 12,739 13,993 Non-GAAP gross profit – product subscriptions $ 155,914 $ 145,330 $ 456,487 $ 415,077 Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 (in thousands) GAAP gross profit – professional services $ 2,697 $ 2,398 $ 6,690 $ 5,694 Stock-based compensation expense 437 587 1,247 2,016 Non-GAAP gross profit – professional services $ 3,134 $ 2,985 $ 7,937 $ 7,710 26 Table of Contents 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 (in thousands) GAAP income (loss) from operations $ 13,961 $ (16,041) $ 31,409 $ (91,665) Stock-based compensation expense 24,594 23,768 76,896 84,836 Amortization of acquired intangible assets 5,107 5,497 14,830 16,409 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 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. 27 Table of Contents 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 (in thousands, except share and per share data) GAAP net income (loss) $ 16,554 $ (76,611) $ 27,007 $ (169,308) Stock-based compensation expense 24,594 23,768 76,896 84,836 Amortization of acquired intangible assets 5,107 5,497 14,830 16,409 Acquisition-related expenses 290 — 568 363 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 Impairment of long-lived assets — 3,553 — 30,784 Restructuring expense — 19,996 (190) 19,996 Discrete tax items 6,360 Non-GAAP net income $ 47,762 $ 33,984 $ 128,796 $ 55,541 Interest expense of convertible senior notes (1) 1,571 604 4,714 1,354 Numerator for non-GAAP earnings per share calculation $ 49,333 $ 34,588 $ 133,510 $ 56,895 Weighted average shares used in GAAP earnings per share calculation, basic 62,898,078 61,065,157 62,389,482 60,506,082 Dilutive effect of convertible senior notes (1) 11,183,611 6,960,346 11,183,611 6,960,346 Dilutive effect of employee equity incentive plans (2) 455,396 873,718 652,017 1,919,771 Weighted average shares used in non-GAAP earnings per share calculation, diluted 74,537,085 68,899,221 74,225,110 69,386,199 Non-GAAP net income per share: Basic $ 0.76 $ 0.56 $ 2.06 $ 0.92 Diluted $ 0.66 $ 0.50 $ 1.80 $ 0.82 (1) We use the if-converted method to compute diluted earnings per share with respect to our Notes. There was no add-back of interest expense or additional dilutive shares related to the Notes where the effect was anti-dilutive. On an if-converted basis, for the three and nine months ended September 30, 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. 28 Table of Contents 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 (in thousands) GAAP net income (loss) $ 16,554 $ (76,611) $ 27,007 $ (169,308) Interest income (5,571) (2,545) (15,512) (6,000) Interest expense 2,837 56,515 8,180 62,005 Other (income) expense, net (2,811) 4,518 (681) 18,093 Provision for income taxes 2,952 2,082 12,415 3,545 Depreciation expense 2,718 3,343 8,401 10,929 Amortization of intangible assets 8,520 8,306 25,056 23,599 Stock-based compensation expense 24,594 23,768 76,896 84,836 Acquisition-related expenses 290 — 568 363 Impairment of long-lived assets — 3,553 — 30,784 Restructuring expense — 19,996 (190) 19,996 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 nine months ended September 30, 2024, and 2023: Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 (in thousands) Net cash provided by operating activities $ 43,969 $ 3,665 $ 107,897 $ 40,812 Less: Purchases of property and equipment (1,342) (295) (2,242) (3,999) Less: Capitalized internal-use software costs (4,125) (3,952) (10,414) (13,033) Free cash flow $ 38,502 $ (582) $ 95,241 $ 23,780 Components of Results of Operations Revenue 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. 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. When software licenses are purchased, maintenance and support and content subscription, as applicable, are bundled with the license for the term period. Professional Services We generate professional service revenue from the sale of deployment and training services related to our products, incident response services and security advisory services. Cost of Revenue Our total cost of revenue consists of the costs of product subscriptions and professional services, as noted below. In addition, cost of revenue includes overhead costs for depreciation, facilities, IT, information security, and recruiting. Our IT overhead costs include IT personnel compensation costs and costs associated with our IT infrastructure. All overhead costs are allocated based on relative headcount. 29 Table of Contents 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. Cost of Professional Services Cost of professional services consists of personnel and related costs for our professional services team, including salaries and other payroll related costs, bonuses, stock-based compensation, costs of contracted third-party vendors, travel and entertainment expenses and allocated overhead costs. We expect our cost of revenue to increase on an absolute dollar basis as we continue to grow our revenue. Gross Margin Gross margin, or gross profit as a percentage of revenue, has been and will continue to be affected by a variety of factors, including the average sales price of our products and services, transaction volume growth, the mix of revenue between software licenses, cloud-based subscriptions, managed services and professional services and changes in cloud computing costs. We expect our gross margins to fluctuate over time depending on the factors described above. Operating Expenses 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. Our IT overhead costs include IT personnel compensation costs and costs associated with our IT infrastructure. All overhead costs are allocated based on relative headcount. Research and Development Expense Research and development expense consists of personnel costs for our research and development team, including salaries and other payroll related costs, bonuses and stock-based compensation. Additional expenses include third-party infrastructure costs, travel and entertainment, consulting and professional fees for third-party development resources as well as allocated overhead costs. We expect research and development expense to decrease as a percentage of total revenue in the near term. Sales and Marketing Expense Sales and marketing expense consists of personnel costs for our sales and marketing team, including salaries and other payroll related costs, commissions, including amortization of deferred commissions, bonuses and stock-based compensation. Additional expenses include marketing activities and promotional events, travel and entertainment, training costs, amortization of certain intangible assets and allocated overhead costs. We expect sales and marketing expense to decrease as a percentage of total revenue in the near term. General and Administrative Expense General and administrative expense consists of personnel costs for our executive, legal, human resources, and finance and accounting departments, including salaries and other payroll related costs, bonuses and stock-based compensation. Additional expenses include travel and entertainment, professional fees, litigation-related expenses, insurance, acquisition-related expenses, amortization of certain intangible assets and allocated overhead costs. We expect general and administrative expense to decrease as a percentage of total revenue in the 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. 30 Table of Contents Interest Income Interest income consists primarily of interest income on our cash and cash equivalents and our short and long-term investments. Interest Expense Interest expense consists primarily of contractual interest expense, amortization of debt issuance costs related to our convertible senior notes and revolving credit facility and induced conversion expense. We expect interest expense in the near term to represent contractual interest expense and amortization of debt issuance costs related to our convertible senior notes and revolving credit facility. Other Income (Expense), Net Other income (expense), net consists primarily of the change in fair value of derivative assets and unrealized and realized gains and losses related to changes in foreign currency exchange rates. Provision for Income Taxes Provision for income taxes consists of domestic and foreign taxes on income and withholding taxes. 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. 31 Table of Contents Results of Operations Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 (in thousands) Consolidated Statement of Operations Data: Revenue: Product subscriptions $ 205,593 $ 189,876 $ 602,578 $ 545,349 Professional services 9,061 8,967 25,168 27,090 Total revenue 214,654 198,843 627,746 572,439 Cost of revenue: (1) Product subscriptions 56,653 51,261 166,290 150,597 Professional services 6,364 6,569 18,478 21,396 Total cost of revenue 63,017 57,830 184,768 171,993 Operating expenses: (1) Research and development 44,565 39,940 125,611 137,048 Sales and marketing 74,521 75,699 225,121 239,322 General and administrative 18,590 17,866 60,837 64,961 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 Income (loss) from operations 13,961 (16,041) 31,409 (91,665) Interest income 5,571 2,545 15,512 6,000 Interest expense (2,837) (56,515) (8,180) (62,005) Other expense, net 2,811 (4,518) 681 (18,093) Income (loss) before income taxes 19,506 (74,529) 39,422 (165,763) Provision for income taxes 2,952 2,082 12,415 3,545 Net income (loss) $ 16,554 $ (76,611) $ 27,007 $ (169,308) (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, 2024 2023 2024 2023 (in thousands) Stock-based compensation expense: Cost of revenue $ 3,001 $ 2,527 $ 8,707 $ 8,348 Research and development 9,535 8,436 25,698 30,575 Sales and marketing 6,823 7,106 21,182 23,087 General and administrative 5,235 5,699 21,309 22,826 Total stock-based compensation expense $ 24,594 $ 23,768 $ 76,896 $ 84,836 Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 (in thousands) Depreciation and amortization expense: Cost of revenue $ 8,332 $ 8,213 $ 24,558 $ 23,246 Research and development 804 1,010 2,502 3,285 Sales and marketing 1,671 1,889 5,073 6,009 General and administrative 431 537 1,324 1,988 Total depreciation and amortization expense $ 11,238 $ 11,649 $ 33,457 $ 34,528 32 Table of Contents The following table sets forth our condensed consolidated statements of operations data expressed as a percentage of revenue: Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Condensed Consolidated Statement of Operations Data: Revenue: Product subscriptions 95.8 % 95.5 % 96.0 % 95.3 % Professional services 4.2 4.5 4.0 4.7 Total revenue 100.0 100.0 100.0 100.0 Cost of revenue: Product subscriptions 26.4 25.8 26.5 26.3 Professional services 3.0 3.3 2.9 3.8 Total cost of revenue 29.4 29.1 29.4 30.0 % Operating expenses: Research and development 20.8 20.1 20.0 23.9 Sales and marketing 34.7 38.2 35.9 41.8 General and administrative 8.6 9.0 9.7 11.3 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 Income (loss) from operations 6.5 (8.1) 5.0 (16.0) Interest income 2.6 1.3 2.5 1.0 Interest expense (1.3) (28.4) (1.3) (10.8) 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) Provision for income taxes 1.4 1.0 2.0 0.6 Net income (loss) 7.7 % (38.5) % 4.3 % (29.6) % Comparison of the Three Months Ended September 30, 2024 and 2023 Revenue Three Months Ended September 30, Change 2024 2023 $ % (dollars in thousands) Revenue: Product subscriptions $ 205,593 $ 189,876 $ 15,717 8.3 % Professional services 9,061 8,967 94 1.0 % Total revenue $ 214,654 $ 198,843 $ 15,811 8.0 % 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 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. 33 Table of Contents Cost of Revenue Three Months Ended September 30, Change 2024 2023 $ % (dollars in thousands) Cost of revenue: Product subscriptions $ 56,653 $ 51,261 $ 5,392 10.5 % Professional services 6,364 6,569 (205) (3.1) % Total cost of revenue $ 63,017 $ 57,830 $ 5,187 9.0 % Gross margin %: Product subscriptions 72.4 % 73.0 % Professional services 29.8 % 26.7 % Total gross margin % 70.6 % 70.9 % 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 September 30, Change 2024 2023 $ % (dollars in thousands) Research and development $ 44,565 $ 39,940 $ 4,625 11.6 % % of revenue 20.8 % 20.1 % 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 September 30, Change 2024 2023 $ % (dollars in thousands) Sales and marketing $ 74,521 $ 75,699 $ (1,178) (1.6) % % of revenue 34.7 % 38.2 % 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. 34 Table of Contents General and Administrative Expense Three Months Ended September 30, Change 2024 2023 $ % (dollars in thousands) General and administrative $ 18,590 $ 17,866 $ 724 4.1 % % of revenue 8.6 % 9.0 % 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 September 30, Change 2024 2023 $ % (dollars in thousands) Impairment of long-lived assets $ — $ 3,553 $ (3,553) (100.0) % % of revenue — % 1.8 % 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 September 30, Change 2024 2023 $ % (dollars in thousands) Interest income $ 5,571 $ 2,545 $ 3,026 118.9 % % of revenue 2.6 % 1.3 % 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 September 30, Change 2024 2023 $ % (dollars in thousands) Interest expense $ (2,837) $ (56,515) $ 53,678 (95.0) % % of revenue (1.3) % (28.4) % 35 Table of Contents 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 income (expense), net $ 2,811 $ (4,518) $ 7,329 (162.2) % % of revenue 1.3 % (2.3) % 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 September 30, Change 2024 2023 $ % (dollars in thousands) Provision for income taxes $ 2,952 $ 2,082 $ 870 41.8 % % of revenue 1.4 % 1.0 % 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 Revenue Nine Months Ended September 30, Change 2024 2023 $ % (dollars in thousands) Revenue: Product subscriptions $ 602,578 $ 545,349 $ 57,229 10.5 % Professional services 25,168 27,090 (1,922) (7.1) % Total revenue $ 627,746 $ 572,439 $ 55,307 9.7 % 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 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. 36 Table of Contents Cost of Revenue Nine Months Ended September 30, Change 2024 2023 $ % (dollars in thousands) Cost of revenue: Product subscriptions $ 166,290 $ 150,597 $ 15,693 10.4 % Professional services 18,478 21,396 (2,918) (13.6) % Total cost of revenue $ 184,768 $ 171,993 $ 12,775 7.4 % Gross margin %: Products 72.4 % 72.4 % Professional services 26.6 % 21.0 % Total gross margin % 70.6 % 70.0 % 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 Nine Months Ended September 30, Change 2024 2023 $ % (dollars in thousands) Research and development $ 125,611 $ 137,048 $ (11,437) (8.3) % % of revenue 20.0 % 23.9 % 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 Nine Months Ended September 30, Change 2024 2023 $ % (dollars in thousands) Sales and marketing $ 225,121 $ 239,322 $ (14,201) (5.9) % % of revenue 35.9 % 41.8 % 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. 37 Table of Contents General and Administrative Expense Nine Months Ended September 30, Change 2024 2023 $ % (dollars in thousands) General and administrative $ 60,837 $ 64,961 $ (4,124) (6.3) % % of revenue 9.7 % 11.3 % 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 Nine Months Ended September 30, Change 2024 2023 $ % (dollars in thousands) Impairment of long-lived assets $ — $ 30,784 $ (30,784) 100.0 % % of revenue — % 5.4 % 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 Nine Months Ended September 30, Change 2024 2023 $ % (dollars in thousands) Interest income $ 15,512 $ 6,000 $ 9,512 158.5 % % of revenue 2.5 % 1.0 % 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. 38 Table of Contents Interest Expense Nine Months Ended September 30, Change 2024 2023 $ % (dollars in thousands) Interest expense $ (8,180) $ (62,005) $ 53,825 (86.8) % % of revenue (1.3) % (10.8) % 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 income (expense), net $ 681 $ (18,093) $ 18,774 (103.8) % % of revenue 0.1 % (3.2) % 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 Nine Months Ended September 30, Change 2024 2023 $ % (dollars in thousands) Provision for income taxes $ 12,415 $ 3,545 $ 8,870 250.2 % % of revenue 2.0 % 0.6 % 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 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. 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. 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. In the event that additional financing is required from outside sources, we may be unable to raise the funds on acceptable terms, if at all. 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. 39 Table of Contents Cash Flows 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, 2024 2023 (in thousands) Cash, cash equivalents and restricted cash at beginning of period $ 214,130 $ 207,804 Net cash provided by operating activities 107,897 40,812 Net cash used in investing activities (99,488) (145,186) Net cash provided by financing activities 6,799 81,795 Effects of exchange rates on cash, cash equivalents and restricted cash 770 (2,010) Cash, cash equivalents and restricted cash at end of period $ 230,108 $ 183,215 Uses of Funds Our historical uses of cash have primarily consisted of cash used for operating activities such as expansion of our sales and marketing operations, research and development activities and other working capital needs, as well as cash used for business acquisitions and purchases of property and equipment, including leasehold improvements for our facilities. Operating Activities 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 $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 $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. 40 Table of Contents Financing Activities 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 $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 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 We do not have any relationships with unconsolidated entities or financial partnerships, including entities sometimes referred to as structured finance or special purpose entities that were established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. We do not engage in off-balance sheet financing arrangements. In addition, we do not engage in trading activities involving non-exchange traded contracts. We therefore believe that we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships. Critical Accounting Estimates 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. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates. There have been no material changes to our critical accounting estimates from those disclosed in our Annual Report.