Rapid7(RPD) - 2021 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) The unaudited consolidated financial statements for the three months ended March 31, 2021, show a 24.5% year-over-year increase in total revenue to $117.5 million, while net loss widened to $29.8 million from $22.9 million in the prior-year period, driven by increased operating expenses, and the balance sheet reflects a substantial increase in cash and total assets due to new convertible senior notes Consolidated Balance Sheets Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $503,804 | $173,617 | | Goodwill | $253,324 | $213,601 | | Total assets | $1,222,693 | $913,122 | | Liabilities & Equity | | | | Deferred revenue, current portion | $282,245 | $278,585 | | Convertible senior notes, net | $855,709 | $378,586 | | Total liabilities | $1,303,918 | $841,586 | | Total stockholders' equity (deficit) | ($81,225) | $71,536 | - The significant increase in cash and convertible senior notes is primarily due to the issuance of $600.0 million in 0.25% Convertible Senior Notes due 2027 in March 2021[10][72] - Goodwill increased by approximately $39.7 million, mainly from the acquisition of Alcide.IO Ltd. in January 2021[10][46][66] Consolidated Statements of Operations Consolidated Statement of Operations Highlights (in thousands, except per share data) | Account | Three Months Ended Mar 31, 2021 | Three Months Ended Mar 31, 2020 | | :--- | :--- | :--- | | Total revenue | $117,451 | $94,340 | | Total gross profit | $81,162 | $66,626 | | Total operating expenses | $104,278 | $86,446 | | Loss from operations | ($23,116) | ($19,820) | | Net loss | ($29,845) | ($22,924) | | Net loss per share, basic and diluted | ($0.56) | ($0.46) | - Total revenue grew 24.5% year-over-year, driven by a 24.8% increase in Products revenue[12][162] - The net loss widened by 30.2% year-over-year, primarily due to a 20.6% increase in total operating expenses, which outpaced revenue growth[12] Consolidated Statements of Cash Flows Consolidated Statement of Cash Flows Highlights (in thousands) | Activity | Three Months Ended Mar 31, 2021 | Three Months Ended Mar 31, 2020 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $20,595 | ($7,215) | | Net cash (used in) provided by investing activities | ($18,444) | $85,422 | | Net cash provided by financing activities | $328,572 | $3,374 | - Cash from financing activities was primarily driven by $587.1 million in net proceeds from the issuance of convertible senior notes, offset by a $182.6 million repurchase of other notes and a $76.0 million purchase of capped calls[21] - Cash used in investing activities included $49.7 million for a business acquisition (Alcide), net of cash acquired[21] Notes to Consolidated Financial Statements - On January 1, 2021, the company early adopted ASU 2020-06, which simplifies the accounting for convertible instruments, resulting in a cumulative-effect adjustment that reclassified the equity component of existing convertible notes to debt and adjusted additional paid-in capital and accumulated deficit[29][83][84] Revenue by Type (in thousands) | Revenue Type | Q1 2021 | Q1 2020 | | :--- | :--- | :--- | | Subscriptions | $107,167 | $84,548 | | Perpetual software licenses | $2,114 | $2,770 | | Professional services | $8,166 | $6,791 | | Total revenue | $117,451 | $94,340 | - On January 28, 2021, the company acquired Alcide.IO Ltd. for a purchase consideration of $50.5 million in cash, resulting in $39.7 million of goodwill and $10.4 million of intangible assets[46] - In March 2021, the company issued $600.0 million of 0.25% Convertible Senior Notes due 2027, using a portion of the proceeds to repurchase $182.6 million of the 1.25% Convertible Senior Notes due 2023[72][79] Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the 24.5% year-over-year revenue growth to increased sales to both new and existing customers, with recurring revenue making up 91% of total revenue, and despite widening GAAP loss from operations due to increased personnel costs, the company significantly strengthened its liquidity by issuing $600 million in new convertible notes, ending the quarter with $503.8 million in cash and cash equivalents Recent Developments - Acquired Alcide.IO Ltd., a Kubernetes security provider, for $50.5 million on January 28, 2021[120] - Issued $600.0 million of 0.25% convertible senior notes due 2027 on March 16, 2021, with net proceeds of approximately $585.0 million[121] - Used $182.6 million of the proceeds from the new notes, along with 2.2 million shares, to repurchase an equivalent principal amount of its 1.25% convertible senior notes due 2023[123] - The company continues to monitor the impact of the COVID-19 pandemic, having modified business operations like restricting travel and enabling remote work, but has not experienced significant disruptions in Q1 2021[125][126] Key Metrics Key Performance Metrics | Metric | As of/For Three Months Ended March 31, 2021 | As of/For Three Months Ended March 31, 2020 | | :--- | :--- | :--- | | Total revenue | $117,451 thousand | $94,340 thousand | | Year-over-year revenue growth | 24.5% | 28.9% | | Number of customers | 8,945 | 8,075 | | Annualized recurring revenue (ARR) | $455,797 thousand | $350,884 thousand | | Year-over-year ARR growth | 29.9% | 30.8% | - Recurring revenue, defined as revenue from term software licenses, content subscriptions, managed services, cloud-based subscriptions and maintenance and support, was 91% of total revenue for Q1 2021[128] Results of Operations - Total revenue increased by $23.1 million (24.5%) YoY, driven by a $21.9 million increase from existing customers (renewals, upsells, cross-sells) and a $1.2 million increase from new customers[162] - Total cost of revenue increased by $8.6 million (30.9%) YoY, primarily due to a $4.1 million increase in cloud computing costs and a $3.9 million increase in personnel costs[165] - Research and development expense rose by $8.9 million (36.7%) YoY, mainly from an $8.3 million increase in personnel costs, including costs from the DivvyCloud and Alcide acquisitions[167] - Sales and marketing expense increased by $6.8 million (14.2%) YoY, driven by higher personnel and commission costs, partially offset by a $1.3 million decrease in travel expenses due to COVID-19[168][169] Liquidity and Capital Resources - As of March 31, 2021, the company had $503.8 million in cash and cash equivalents and $113.1 million in investments[175] - Net cash provided by operating activities was $20.6 million for Q1 2021, a significant improvement from the $7.2 million used in Q1 2020, reflecting revenue growth and timing of working capital[177][181][182] - Net cash provided by financing activities was $328.6 million, primarily from the net proceeds of the 2027 Notes issuance after accounting for repurchases of the 2023 Notes and the purchase of capped calls[185] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks, primarily from foreign currency exchange rates, interest rate fluctuations, and inflation, managing foreign currency risk with forward contracts and noting that interest rate changes affect income from its cash and investment portfolio and the fair value of its fixed-rate convertible notes, while inflation has not had a material effect on operations - The company's primary market risks are foreign currency exchange risk, interest rate risk, and inflation risk[193][194][198] - A majority of revenue is in U.S. dollars, but expenses are incurred in foreign currencies, and the company uses forward contracts designated as cash flow hedges to mitigate foreign currency exposure[193] - Interest rate changes affect interest income on cash and investments and the fair value of its fixed-rate convertible senior notes, but do not impact the company's financial position or cash flows due to the fixed nature of the debt[195][196] Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures as of March 31, 2021, concluding that these controls were effective at a reasonable assurance level, with no material changes in internal control over financial reporting during the quarter - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of March 31, 2021[201] - No changes to the internal control over financial reporting occurred during the quarter that materially affected or are reasonably likely to materially affect these controls[203] PART II. OTHER INFORMATION Legal Proceedings The company is involved in a patent infringement lawsuit filed by Finjan, Inc. in October 2018, alleging infringement of seven patents and seeking unspecified damages, attorneys' fees, and injunctive relief, which Rapid7 intends to vigorously contest despite the uncertain outcome - In October 2018, Finjan, Inc. filed a patent infringement complaint against Rapid7 and its subsidiary, alleging infringement of seven patents[206] - Rapid7 intends to vigorously contest Finjan's claims, but notes that the outcome is uncertain and litigation can be costly and divert management resources[206] Risk Factors The company identifies numerous risk factors, with the ongoing COVID-19 pandemic highlighted as a significant uncertainty, alongside business risks like variations in quarterly results, challenges of rapid growth, dependency on customer renewals, and intense market competition, operational risks such as security breaches and reliance on third-party infrastructure, and financial risks associated with a history of losses and significant debt from convertible notes - The COVID-19 pandemic is a primary risk, with potential impacts on sales cycles, customer renewals, and overall economic conditions that could adversely affect business and financial results[212][214] - The business is highly dependent on customers renewing their subscriptions, and a decline in renewal rates due to factors like customer satisfaction, pricing, or economic conditions could harm future operating results[228] - The company faces intense competition from established and emerging vendors, some of whom have greater resources and broader product offerings, which could lead to pricing pressure[235][236][237] - A significant amount of debt from convertible notes may decrease business flexibility, and the conditional conversion feature of the 2023 Notes has been triggered, which could affect liquidity if holders choose to convert[327][332] Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities during the period - There were no unregistered sales of equity securities in the quarter[351] Exhibits This section lists the exhibits filed with the Form 10-Q, including the company's amended and restated certificate of incorporation and bylaws, the indenture for the 0.25% Convertible Senior Notes due 2027, and various officer certifications as required by the Sarbanes-Oxley Act - Key exhibits filed include the Indenture for the new 0.25% Convertible Senior Notes due 2027 and related purchase agreements and capped call confirmations[358] - Certifications from the Principal Executive Officer and Principal Financial Officer pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 are included[358]