Rapid7(RPD) - 2021 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements (Unaudited) The unaudited financial statements show significant asset and liability growth driven by acquisitions and debt issuance, alongside a widening net loss despite increased revenue Consolidated Balance Sheets Balance Sheet Highlights (in thousands USD) | Balance Sheet Highlights (in thousands) | September 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $227,104 | $173,617 | | Goodwill | $515,297 | $213,601 | | Total assets | $1,260,880 | $913,122 | | Liabilities & Stockholders' Equity | | | | Deferred revenue, current portion | $316,045 | $278,585 | | Convertible senior notes, non-current | $811,068 | $378,586 | | Total liabilities | $1,365,883 | $841,586 | | Total stockholders' equity (deficit) | ($105,003) | $71,536 | - Total assets increased to $1.26 billion, driven by a Goodwill increase to $515.3 million from recent acquisitions[9] - Total liabilities rose to $1.37 billion due to increased convertible senior notes, resulting in a stockholders' deficit of $105.0 million[9] Consolidated Statements of Operations Statement of Operations (in thousands USD) | Statement of Operations (in thousands) | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Total revenue | $139,894 | $105,075 | $383,766 | $298,327 | | Total gross profit | $96,424 | $74,047 | $264,698 | $210,504 | | Loss from operations | ($34,315) | ($17,916) | ($79,358) | ($53,468) | | Net loss | ($37,700) | ($25,541) | ($101,709) | ($69,931) | | Net loss per share, basic and diluted | ($0.67) | ($0.50) | ($1.86) | ($1.38) | - Q3 2021 revenue grew 33.1% YoY to $139.9 million, while nine-month revenue increased 28.6% YoY to $383.8 million[11] - Q3 2021 operating expenses rose to $130.7 million, increasing the loss from operations to $34.3 million[11] - Net loss for the first nine months widened to $101.7 million, with net loss per share increasing to $1.86[11] Consolidated Statements of Cash Flows Cash Flow Summary (in thousands USD) | Cash Flow Summary (in thousands) | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $49,229 | $4,305 | | Net cash used in investing activities | ($307,887) | ($90,469) | | Net cash provided by financing activities | $313,420 | $202,300 | | Net increase in cash, cash equivalents and restricted cash | $53,913 | $116,296 | - Cash flow from operations significantly improved to $49.2 million for the first nine months of 2021[21] - Investing activities used $307.9 million, primarily for business acquisitions totaling $358.4 million[21] - Financing activities provided $313.4 million, mainly from the issuance of $585.0 million in convertible senior notes[21] Notes to Consolidated Financial Statements - Revenue is primarily generated from subscriptions, perpetual software licenses, and professional services[32] - The company acquired IntSights Cyber Intelligence Ltd. for $322.2 million, adding $260.9 million to goodwill[46][48] - In March 2021, the company issued $600.0 million of 0.25% convertible senior notes due 2027[80][87] Revenue by Type (in thousands USD) | Revenue by Type (in thousands) | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | | Subscriptions | $129,157 | $353,338 | | Perpetual software licenses | $1,840 | $5,990 | | Professional services | $8,745 | $24,185 | | Total revenue | $139,894 | $383,766 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses strong revenue growth driven by organic expansion and acquisitions, alongside increased operating losses from strategic investments in R&D and sales Overview - Rapid7 provides security solutions through its Insight Platform, focusing on visibility, analytics, and automation[125] - The company aims to close the "Security Achievement Gap" by simplifying complex security problems[127] - As of September 30, 2021, Rapid7 served over 9,900 customers in 144 countries, including 39% of the Fortune 100[130] Key Metrics Key Metrics as of September 30 | Key Metric | As of Sep 30, 2021 | As of Sep 30, 2020 | YoY Growth | | :--- | :--- | :--- | :--- | | Number of customers | 9,909 | 8,442 | 17% | | Annualized Recurring Revenue (ARR) | $550,044 thousand | $398,725 thousand | 38.0% | Key Metrics for the Three Months Ended September 30 | Key Metric | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | | :--- | :--- | :--- | | Total revenue | $139,894 thousand | $105,075 thousand | | Year-over-year revenue growth | 33.1% | 26.4% | | Free cash flow | $14,327 thousand | $6,449 thousand | Results of Operations - Q3 2021 revenue increased by $34.8 million (33.1%) YoY, driven by $31.0 million in organic growth and $3.8 million from the IntSights acquisition[174] - Total cost of revenue for Q3 2021 increased by 40.1% YoY, causing total gross margin to decrease from 70.5% to 68.9%[177] - Research and Development expense for Q3 2021 rose 53.9% YoY to $15.4 million, largely due to increased personnel costs[179] - Sales and Marketing expense for Q3 2021 increased 30.1% YoY, driven by higher personnel and commission costs[180] Liquidity and Capital Resources - As of September 30, 2021, the company had $227.1 million in cash and cash equivalents and $82.5 million in investments[200][201] - Key cash flow activities in the first nine months of 2021 include $49.2 million from operations, $307.9 million used in investing, and $313.4 million from financing[202][208][210][212] - In 2021, the company completed three acquisitions: IntSights ($322.2 million), Alcide ($50.5 million), and Velocidex ($3.0 million)[203][204] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks from foreign currency exchange rates, interest rate fluctuations, and inflation, but does not consider the potential impact to be material - The company's primary market risks are foreign currency exchange fluctuations, interest rate changes, and inflation[220][221][225] - While most revenue is in USD, the company uses forward contracts to hedge foreign currency exposure on expenses[220] - A hypothetical 10% change in interest rates is not expected to have a material impact on its financial position[222][224] Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of September 30, 2021, with no material changes identified during the quarter - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of September 30, 2021[228] - No changes in internal control over financial reporting occurred during the quarter that are reasonably likely to materially affect these controls[230] PART II. OTHER INFORMATION Legal Proceedings The company is contesting a patent infringement lawsuit filed by Finjan, Inc, with an uncertain final outcome, and is party to other non-material litigation - In October 2018, Finjan, Inc filed a patent infringement complaint against Rapid7, seeking unspecified damages[233] - Rapid7 intends to vigorously defend against the Finjan lawsuit, but the final outcome and potential liability are uncertain[233] Risk Factors The company faces numerous risks including the COVID-19 pandemic's impact, a history of losses, intense competition, and reliance on customer renewals - The COVID-19 pandemic could materially and adversely affect business operations and financial results[236][239] - The company has a history of net losses and may not achieve or maintain profitability due to continued heavy investment[253] - Business growth is substantially dependent on customers renewing their subscriptions[236][255] - The company faces intense competition and potential reputational harm from security breaches of its own systems[236][261][330] - A significant amount of debt from convertible senior notes may decrease business flexibility and increase borrowing costs[240][355] Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities, use of IPO proceeds, or issuer purchases of equity securities were reported for the period - There were no unregistered sales of equity securities, use of IPO proceeds, or issuer purchases of equity securities reported for the period[378][379][380] Exhibits This section lists exhibits filed with the Form 10-Q, including corporate governance documents, acquisition agreements, and required officer certifications - The exhibits filed include certifications from the Principal Executive Officer and Principal Financial Officer as required by the Sarbanes-Oxley Act[387] - The Stock Purchase Agreement for the acquisition of IntSights Cyber Intelligence Ltd is included by reference as an exhibit[387]