Rapid7, Inc.

Good afternoon. My name is Rob and I will be your conference operator today. At this time, I would like to welcome everyone to the RAPID 7 third quarter 2023 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number 1 on your telephone keypad. If you would like to withdraw your question, again press the star 1. Thank you. Elizabeth Schwach, Director of Investor Relations, you may begin your conference.

Thank you, Operator, and good afternoon, everyone. We appreciate you joining us today to discuss Rapid7's third quarter 2023 financial and operating results, in addition to our financial outlook for the fourth quarter and full fiscal year 2023. With me on the call today are Corey Thomas, our CEO, and Tim Adams, our CFO. We have distributed our earnings press release over the wire and 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. During this call, we may make statements related to our business that are considered 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, strategy, business plans, restructuring plans, financial guidance for the fourth quarter and full year 2023, financial goals for the full year 2024, and the assumptions underlying such goals and guidance. 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 future results expressed or implied in these statements due to a number of risks and uncertainties, including those contained in our most recent quarterly report on Form 10-2, filed on August 9, 2023, and in the subsequent reports that we file 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 can be found in today's earnings press release and on our website at investors.rapid7.com. At times in our prepared remarks or in responses 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 update these metrics in the future. With that, I'd like to turn the call over to our CEO, Corey Thomas. Corey?

Good afternoon, everyone, and thank you for joining us today on our third quarter 2023 earnings call. Rapid7 ended the third quarter with $777 million in ARR, going 14% over the prior year. while delivering revenue and operating income above our guided ranges. During the third quarter, we continue to see strong demand for integrated security operations solutions across our Insight platform. Our value proposition is resonating with mainstream enterprise customers, particularly with our consolidated offerings. Over 40% of new ARR in the third quarter was from either a threat or cloud risk complete deal, validating our strategic focus around supporting the modern or extended SOC with integrated best-of-breed capabilities across risk management and threat detection. As we sell more of our platform together, we see deal sizes getting larger as ASPs have steadily increased all year. Overall, we saw a customer spending environment that was in line with our expectations and remained stable during the third quarter and into October. Amid the worsening consequences for cybersecurity incidents, and the persistent challenge of proactively securing IT environments in an efficient manner, we consistently hear a set of themes from conversations with customers. There's need for integrated cloud security offerings with insect ops, as well as a desire to upgrade to cloud native detection response programs. And automation and integrated expertise are often critical differentiators in choosing technology partners. While security team leaders are prioritizing spending around these areas, the budget environment remains complex. Consistent with the last 12 months, we continue to see higher levels of approval during extended procurement cycles. The good news is that our sellers have become more adept in navigating this environment, and there is still urgency from customers on projects around cloud security and detection response, the anchors of our successful risk and threat management offerings. Our critical role as a strategic partner to SecOps teams is reflected in the growing number of long-term commitments we're seeing from customers. Our total weighted average contract length in the quarter was up 20% over the prior year, which speaks to the value and confidence our customers have in Rapid7 as a long-term technology partner. Turning now to the restructuring we announced alongside our Q2 earnings results in August. Our efforts to streamline the business are mostly complete, and we are progressing on our areas of strategic reinvestment. I am proud of how well our Rapid7 team has responded to the changes, as we have worked to optimize our organization and underlying cost structure over the past few months. Collectively, our strategic alignment is benefiting profitability as we expected, and we continue to expect the full year 2023 operating margin to expand over 750 basis points from the prior year and to generate free cash flows of approximately $80 million. Regarding our customers, we had an intentional focus during the latter half of the third quarter on ensuring continuity and strong overall customer experience as we executed our transition plan. Our customer-facing teams were heavily focused on spending more time engaging with and messaging to existing customers and prospects. with less relative focus on scaling incremental pipeline. The result is that our changes were widely well received by customers, driving strong conversion rates that fueled solid overall ARR growth in the quarter. Now that we are largely through these changes, our teams are incrementally more focused on engaging broadly to drive strong and improving pipeline momentum as we exit the year. And we believe we remain well positioned to achieve our fourth quarter objectives. Regarding reinvestment into our strategic areas of focus, we're accelerating our leadership in the extended SOC as well as further scaling our ability to offer expertise alongside our technology. While it's still early, we are progressing well in both areas, and I'll give you tangible examples of the positive traction we're seeing in the business. We continue to see strong demand for our integrated consolidation solutions to support the extended SOC. And we continue to innovate by adding end-to-end capabilities to expand our value proposition to mainstream interprocess. In October, we announced the general availability of multi-layered endpoint protection for our managed detection and response customers. By offering integrated next-gen antivirus alongside digital forensics and incident response capabilities onto our inside agent, we are elevating the breadth and holistic visibility of our extended detection and response. we saw a meaningful gap in the market for customers with legacy endpoint solutions that are focused on affordable, highly effective solutions. Our expanded offerings will now enable these MDR customers to benefit from reduced endpoint security cost and complexity within their SOC while freeing up additional budget dollars by consolidating onto our Insight platform. We also continue to see traction cross-selling across our integrated platform of solutions. A good example of this is in the third quarter was a deal with a mid-sized fintech company owned by a large private equity firm. This customer became a Rapid7 vulnerability management customer in 2022, and earlier this year extended their enterprise risk visibility with our cloud security offering. They reached out again in the third quarter to explore our managed direct complete offering after facing additional resource constraints and regulatory requirements. With transfer dollars that weren't part of their initial budget and after a competitive process, the customer chose Rapid7 for our ability to detect and respond to threats across their entire security environment and throughout each phase of the DNR lifecycle. With our inside agent already deployed, the customer is able to implement our robust monitoring capabilities within days of their purchase, allowing a quick return on their security budget dollars. Our ARR with the customer more than tripled to the high six figures over the course of 18 months, highlighting the urgency and the value resource-constrained enterprises placed on best and sweet solutions within strategic areas of security operations. We're also scaling our ability to offer integrated expertise alongside our SecOps solutions by accelerating our strategic managed services partnerships. I am pleased to announce that we signed a partnership deal in the third quarter with a nationwide leader in communication services who chose Rapid7 technology as the foundation for their managed detection and response offering. It was a highly competitive process, and our new partner needed a single provider to help their customers manage security across their entire network, endpoint, server, and cloud infrastructure while helping to contain and disrupt ongoing security breaches. This partnership will combine our best-in-class threat detection and response platform and global SOC presence to help small, medium, and large enterprise customers better manage an ever-evolving and challenging cyber threat landscape. Over time, we'll have the opportunity to expand our partnership to sell other Rapid7 solutions to their substantial customer base. We're excited about this partnership and our ability to leverage similar partnerships in the future as we scale our ability to offer integrated expertise to more customers. RAPID7 remains focused on being the leading provider of integrated security solutions for the extended SOC by providing risk and threat management within the context of overall security alongside expertise tailored to the needs of each customer. We are pleased with our third quarter results and continue to march forward towards our goals. When we updated our ARR guidance in August, alongside the announcement of our restructuring and strategic realignment, we established a high confidence range to account for modest degrees of disruption in the business. As we made progress, we've seen performance track within our range of expectations. Given larger deal cycles, as well as the heavy concentration of large deals in the fourth quarter, we believe it is prudent to reiterate our full year ARR guidance of $800 to $805 million. All in all, we are pleased with our third quarter results and the early progress we are making as we work to re-accelerate growth by reinvesting into strategic areas of strong customer demand within our business. We were able to outperform on our operating income targets in the third quarter and to flow through that upside to our full year guidance range. This speaks to the benefit of our new streamlined cost structure which will allow us to become a more profitable growth company. We expect to generate approximately $80 million of free cash flow this year, and then double that figure to at least $160 million next year in 2024. With that, thank you for joining us on the call today. I will now turn the call over to our CFO, Tim Adams, to share additional detail on our financial results and outlook. Tim?