Rapid7, Inc.

Standing by, my name is Eric and I will be your conference operator today. At this time, I would like to welcome everyone to the RAPID 7 first quarter 2024 earnings 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 one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I would now like to turn the call over to Elizabeth Falk. Please go ahead.

Thank you, Operator, and good afternoon, everyone. We appreciate you joining us today to discuss Rapid7's first quarter 2024 financial and operating results, in addition to our financial outlook for the second quarter and full fiscal year 2024. 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 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. 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 relating to the company's positioning, strategy, business plans, and financial guidance for the second quarter and 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 annual report on Form 10-K, filed on February 26, 2024, 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. 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. Rapid 7 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?

Hello, everyone, and thank you for joining us this afternoon on our first quarter 2024 earnings call. Rapid7 ended the first quarter with $807 million in ARR, representing 11% year-over-year growth. We saw sustained momentum with our direct complete consolidation offerings, which continued ramping nicely. However, our ending ARR result was below expectations. driven by a slower than anticipated shift of our VM base into our integrated risk offering, cloud risk complete. I'll spend some time addressing both of these dynamics on our call today in the context of our long-term investment strategy, which will also include steps that we are actively taking to improve our integrated risk momentum as we progress through the year. As a reminder, we are making deliberate long-term investments to build the strongest stock ecosystem for mainstream enterprises. and to deliver the leading data platform that contextualizes risk across a fragmented complex environment. In 2024, these discrete areas of focus include building on our detection response momentum by leveraging AI to drive improved SOC efficacy and security operations. Expanding beyond VM to accelerate cloud security adoption by improving our integrated risk management offering that contextualizes data across customers' hybrid attack services. and investing further in our substantial services and partner ecosystem to increase our capacity for service delivery, as well as provide a strong source of efficient demand generation. We remain steadfast in our belief that these long-term investments will deliver the best value in economics for our customers. Over the past year, it remains clear that amid the current budgetary environment, customers are deeply focused on one, consolidating, reconciling, and integrating their vast security ecosystems, and two, achieving better outcomes from their security providers at a more compelling value. Detection and response is one area that we're seeing benefit of these trends. RAPID 7's consolidated detection and response value proposition is particularly compelling to these customers in today's landscape because of our unique managed service offering and ecosystem that allows teams to extend their technology capabilities with our deep security expertise. We're actively bolstering this growing business with expanded detection coverage, monitoring of third-party alerts, and AI innovations for speed, accuracy, and scalability. Specifically, our managed detection response analysts are using AI throughout the alert lifecycle from machine learning driven detections, intelligent triage, to AI assisted investigation and remediation guidance. Our analysts are leveraging our internal SOC AI assistant training on proprietary MDR insights to augment our workforce talent and reduce response time for customers. As we continue to invest behind these customer needs, we saw solid performance in the first quarter with our direct complete offering which gives customers integrated detection and response capabilities across their attack surface. Our overall DNR business maintained growth of over 20% year over year in the first quarter, as mainstream enterprise customers continue to prioritize monitoring and detection of threats across their distributed environment. Stipping now to our focus on extending our core customer base beyond traditional vulnerability management and accelerating cloud security adoption with an integrated risk management experience across the complete attack surface. Last year, we launched an integrated risk management package, Cloud Risk Complete, which includes access to both CloudSec and VM capabilities. Although we saw increased attention and demand and accelerated cloud security growth, which validated the clear customer need, Cloud Risk Complete in its current version lacked the depth of integrated experience that drove far stronger momentum in our threat-complete offerings. We entered 2024 with a prioritized plan to innovate and deliver an improved Cloud Risk Complete experience that integrates distributed hybrid data sources with better economics for rapidly evolving cloud security markets. and we remain on track to deliver this improved integrated risk management solution this summer. As it relates to the first quarter, while we had a healthy start to the year with overall results that tracked well to our expectations in January and February, we saw this pace slow as we progressed through March. This is primarily due to a slower than expected transition in the quarter of selling our current integrated risk management package into our traditional VM base, both on new bookings and renewables. We believe we are in a transition period during which customers are not yet able to see the benefit of the compelling foundational work that we're doing to increase customer value by evolving our cloud risk complete package into an improved integrated experience. Another core component of this updated offering is the acceleration of our cloud security capabilities. We are launching significant capabilities, including revamped cloud vulnerability assessment and the general availability of CloudVM across AWS, Azure, and GCP. This updated risk management offering will not only meaningfully improve attack surface visibility and capabilities, but the data integration at the platform level will greatly improve the economics and allow us to be a price leader in this space. Looking forward, we expect this transition to temporarily weigh on our growth outlook through the remainder of the year as we expect to launch the updated cloud risk complete this summer and begin to regain momentum exceeding 2024. Now that we've covered our strength and detection response and the ongoing evolution of our integrated risk management offering, I will touch briefly on how we are increasing both demand generation and service delivery through our partners and channels. We discussed last quarter that we are strategically shifting to more efficient pipeline sources with stronger conversion. For example, our partner ecosystem added over 80% of new AR in the first quarter, and our top partners drove a 20% increase in partner sourced leads over the prior year. We remain focused on the strategic nature of these relationships and scaling both the relative and absolute contributions they deliver to our business on a global basis. As we work to drive efficiency across our organization, this channel is an extremely compelling lever for growth and scale. While we are seeing promising strength in the channel as a primary demand generation driver, we're not yet making up for the pipeline sources that were de-emphasized as we entered the year. Our focus on long-term growth investments and demand generation efficiency led to what we believe is a temporary slowdown in new pipeline generation as we have transitioned away from lower quality, less efficient sources. In addition to the promising channel strength here, we're actively accelerating and seeing early traction with actions around partnerships and marketing campaigns and improved sales enablement. Our updated ARR guidance range assumes that pipeline growth improves modestly in the second half of the year, but not at the rate initially assumed in our February guidance range. Despite these transitional dynamics, we maintain confidence that we are pursuing the right long-term strategy. We firmly believe that providing visibility across a customer's risk environment by integrating traditional vulnerability management with a broad set of cloud security solutions and pairing that with world-class DNR stock efficacy, all in one place, allows customers a more effective solution and better overall security outcomes at the price value customers are seeking. As we build better, more connected customer experiences across our security operations platform, I am happy to welcome Greg Adams to Rapid7 as our Chief Product Officer. He will oversee our product management, operations, and overall user experience and design. Craig has an extensive cybersecurity background in high-growth companies, including spending 20 years at Akamai. We are thrilled to have Craig on board and believe he will provide expertise and structure for our teams to deliver innovative solutions and compelling value propositions to our customers. While we are working through these transitional challenges this year, we are making progress on our overarching strategic plan and are confident that we are pursuing the right strategy for the long-term and value creations. Rapid7 has a compelling opportunity to be a leading platform consolidator in security operations as we build better, more connected customer experiences across our platform. We believe that the foundational work we're doing, while somewhat disruptive in the moment, will position us to drive market share gains and higher doable growth over the medium to long term. Overall, we're focused on responding quickly to address the changes that need to be made in our business to shift more swiftly towards consolidated risk management offerings and to accelerate more efficient sources of pipeline growth. We believe that our integrated risk solutions will address customers' needs and accelerate consolidation on our platform for mainstream enterprises. We believe the changes and strategic investments that we are making in our business today will support better top and bottom line growth and a strong value proposition for customers that need to solve increasingly complex security challenges. At the same time, I'm proud of our team's commitment to drive business efficiency and scaling our free cash flow. As we continue to realign our business to be more efficient overall, we will benefit from the operational flexibility within our cost structure and financial model and remain squarely focused on and are on track to scaling free cash flow and are reiterating our $160 million free cash flow target for the full year 2024. With that, thank you for joining us on the call today. I'll now turn the call over to our CFO, Tim Adams, to share additional detail on our financial results and outlook. Tim?