Rapid7, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the fourth quarter 2020 Rapid7 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask the question during that time, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I will now hand the conference over to your speaker today, Sunil Shah, Vice President of Investor Relations.

Thank you, Operator, and good afternoon, everyone. We appreciate you joining us today to discuss Rapid7's fourth quarter and full year 2020 financial and operating results, in addition to our financial outlook for the first quarter and full fiscal year 2021. With me on the call today are Corey Thomas, our CEO, and Jeff Galowski, our CFO. We've distributed our earnings press release over the wire, and it is now posted on our website at investors.rapid7.com, along with the updated company presentation and financial metrics file. This call is being broadcast live via webcast, and following the call, an audio replay will be available at investors.rapid7.com until February 16, 2021. During this call, we may make statements related to our business that are forward-looking under federal securities laws. These statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and include statements related to the company's positioning or future goals and financial guidance for the first quarter and full year 2021, the assumptions underlying such goals and guidance, including the anticipated impact of COVID-19 on our financial guidance, business, financial condition, results of operations, and renewals, and our assumptions on the pace of economic recovery in the global economy on our future results of operations and product strategy. These forward-looking statements are based on our current expectations and beliefs and on information currently available to us. Actual outcomes and results may differ materially from the expectations contained in these statements due to a number of risks and uncertainties, including those contained in our most recent quarterly report on Form 10Q and in the subsequent report that we filed with the SEC. The information provided on this conference call should be considered in light of such risks. Actual results and the timing of certain events may differ materially from the results or timing predicted or implied by such forward-looking statements, and reported results should not be considered as an indication of future performance. Rapid7 does not assume any obligation to update the information presented on this conference call, except to the extent required by applicable law. Our commentary today will primarily be in non-GAAP terms and reconciliations between our historical GAAP and non-GAAP results and guidance can be found in today's earnings press release. At times, in our prepared remarks or in response to your questions, we may offer incremental metrics to provide greater insight into the dynamics of our business or our quarterly results. Please be advised that this additional detail may be one time in nature, and we may or may not provide an update in the future on these metrics. With that, I'd like to turn the call over to our CEO, Corey Thomas. Corey?

Thank you, Sunil, and good afternoon, everyone. Thank you all for joining us today for our fourth quarter and full year 2020 earnings call. I am pleased to report the Rapid7 team delivered a strong finish to 2020 that exceeded our expectations across both security transformation solutions and vulnerability management. Full year ARR growth of 28% to $433 million demonstrates our ability to capture the large and growing opportunity as organizations transform their security operations for the cloud. Rapid7 remains steadfast in our effort to help customers advance securely into the cloud. To further this goal, we began 2021 by expanding and strengthening our cloud security offering with the recently announced acquisition of Owlseat, which I will touch on in a moment. Looking back on 2020, I am proud of our team's resilience and commitment to serving our customers amidst a challenging year for many. I will begin today by sharing some insights on recent customer engagements that provide clarity and confidence into Rapid7's long-term position and prospects. I will then touch briefly on our innovation-focused and enduring goals before turning it to Jeff to detail our financial results and guidance. Over the last 10 months, we have seen organizations respond to unprecedented global disruption by accelerating digital transformation to cope with a more distributed cloud-centric world. Enterprises and mid-market businesses alike are overhauling their systems to build new cloud-native applications to digitally engage with customers, employees, and partners. These investments are happening across industry lines in retail, manufacturing, education, and healthcare, to name a few. But in the midst of this massive increase in digital investment, recent events in the cybersecurity landscape are a sobering reminder that digital risk has never been greater. These events put security squarely back in focus for boards and management teams, solidifying security as a critical component of ongoing transformation investments. Even prior to these events, we saw an escalated security focus amongst our customers and prospects throughout 2020 as security was reprioritized alongside digital initiatives. During the fourth quarter, we saw strong demand for our Insight platform products as customers looked beyond investing to work-from-home enablement to an enduring set of initiatives tied to securing cloud and digital investments. One initiative is that customers expand their technology footprint they are engaging with Rapid7 to upgrade their SOC with modern detection response to better monitor expanding threat vectors. This was the case for an existing Fortune 500 retail customer who was actively transforming their customer experience. They were challenged to consolidate risk visibility across an expanding footprint with an assortment of disconnected security technologies and services. Having a single trusted security partner that they could scale with spoke volumes to them. So this customer centralized their security architecture on the insight platform by adding IDR alongside their existing insight VM deployment. Because our cloud native offering and unified insight agent, this customer was actively monitoring within two weeks of purchase. This time to value is critical to our customer success in today's dynamic threat environment. During 2020, we saw IDR resonate with international customers in part for this reason. For example, in the fourth quarter, we engaged with an international healthcare customer who was seeking improved threat visibility after experiencing a security event. This customer loved the ease of getting IDR up and running along with the visibility it provided across their external attack surface. They also realized the platform value of a unified agent that both detects threats and monitors for vulnerabilities, and as a result, purchase insight VM at the same time. Another enduring security initiative is that as customers accelerate cloud investments, they're grappling with limited insights and are trying to rapid seven for improved visibility and control in their cloud environments. During the fourth quarter, we continue to see growing interest for our cloud security technology across both new and existing customers. A great example of this was a cloud security deal in the quarter with an existing Rapid7 technology customer. Upon evaluating DiviCloud, this customer recognized the power of its automation capabilities and adaptability for their environment, driving them to consolidate onto Rapid7 by replacing their existing cloud security offering. This deal resulted in a greater than tenfold increase in this customer's ARR. These deals clearly validate Rapid7's success and expanded beyond our vulnerability management roots to become a leading cloud native security operations company today. They demonstrate the increasingly strategic nature of Rapid7's best in switch approach to solving the full scope of our customer security operations challenges from VM to detection response to cloud security and automation. The result is that once again, we experienced strong demand for our security transformation solutions in the quarter. which grew over 40% exiting the year. We expect continued momentum as we look ahead to 2021 and are excited about the opportunity to build upon this success. We remain focused on delivering an inside platform experience that combines market leading technology and platform value for differentiated customer experience. One great proof point is the early validation we saw in the fourth quarter with our attached motion. Specifically, we saw strong early customer demand for our capability to attach automation as an add-on to other Insight products purchases, driving a record quarter for Insight Connect. Coupled with the ongoing success of our network traffic analysis and enhanced endpoint telemetry modules, we see a compelling opportunity to drive deeper customer engagement on our Insight platform. A great example of this was a new manufacturing customer we signed in the quarter. This customer was looking to scale security operations and improve visibility in response to a breach. But managing desperate tools was a major pain point for them. They recognized that a single Insight platform experience could improve coverage and make management significantly easier. They purchased Insight VM to remediate risk, Insight IDR with NTA to detect and respond to threats, and Insight Connect for automation across the platform. We remain early in our platform journey, but see tremendous opportunity ahead and will continue to evolve our bundling and packaging opportunities throughout 2021. We expect this will support durable growth in our ARR per customer, which ended the year at $44,500, growth of 18% over the prior year. Turning now to innovation, starting with the cloud. As companies migrate to the cloud, the influence of DevOps is critical to the process. Rapid7 is focused on delivering cloud security that sits at the intersection of dev and DevOps. So I'm excited to share more about our recently announced acquisition of IELTS. As developers rapidly adopt Kubernetes for freedom and flexibility in cloud-native development, security must keep pace. Ouseed's leading cloud workload protection platform is designed to enable organizations to innovate in the cloud without sacrificing security by providing real-time visibility, container runtime monitoring, and threat detection. Adding Ouseed's cloud workload protection to Rapid7's existing cloud posture management and cloud identity capabilities in Divi Cloud positioned us to deliver a market-leading cloud-native security platform. that delivers continuous security to our customers across multi-cloud environments. The acquisition of Owl Seeds puts us another step forward in solving the security stakeholders need to manage risk and compliance while meeting the DevOps teams where they are in the cloud. Shifting to vulnerability management. It is important to note that the cloud is not the only place today where customers lack visibility. As organizations' asset footprints expand, with OT and IoT connected devices, so too does the threat footprint. Security teams are increasingly responsible for protecting and managing risk in these environments, but often lack the visibility and controls to do so. Rapid7's recent strategic partnership with K-Defense, a market leader in industrial cybersecurity, and Medigate, a leading medical device security provider, provide our respective joint customers with a more holistic risk visibility and management across their digitally connected environments. These integrations will enable visibility to OT, IoT, and medical device information directly in Insight VM so that security teams can perform active scans to gain improved visibility into those environments. Wrap it up with a brief update on our goals. Last year, I shared three enduring goals for our business that remain core to our focus today as we look ahead. Our first goal is to be a leader in enabling customers to transform their security operations around the cloud. Over the past year, we have invested in our product capabilities and built a meaningful position in cloud security. We recognize that customer challenges in the cloud are multifaceted, and during 2021, we will continue to innovate as our customers leverage our security transformation solutions to secure their digital experience. Our second goal is to accelerate our platform distribution engine. The early success we have seen with our evolving expand motion in 2020 validates our long-term opportunity to expand ARR per customer. Over the coming year, we will continue to focus on lowering the barriers for our customers to more easily adopt a broader set of our best in class insight platform products and solutions. Finally, our third goal is to drive long-term operating leverage while investing for growth. We're proud to have demonstrated strong execution and operational discipline this past year by maintaining profitability while absorbing our largest ever acquisition and navigating a volatile macro environment. Moreover, we have done so while continuing to invest aggressively behind a large and compelling market opportunity, which positions us to continue driving durable growth as we focus on scaling free cash flow over the long term. In closing, I'm excited about the opportunity that lies ahead and would like to thank our entire Rapid17 for their ongoing efforts to make the best in security operations accessible to all. Before I turn the call over to our CFO, Jeff, I would like to take a moment to invite all of you to our upcoming Virtual Investor Day to be held on the afternoon of March 10, 2021. If you have not yet received an invite, please reach out to our IR team. We hope you can attend. Thank you all.