Rapid7, Inc.

Hello, and thank you for standing by. My name is Bella, and I will be your conference operator today. At this time, I would like to welcome everyone to RAPID's 7th 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 then the number one on your telephone keypad. To draw your question, press star one again. I would now like to turn the conference over to Elizabeth Trach, Head of Investor Relations at Rapid7. You may begin.

Thank you, Operator, and good afternoon, everyone. We appreciate you joining us today to discuss Rapid7's fourth quarter and full year 2024 financial and operating results. In addition to our financial year 2025. 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 related to the company's positioning, strategy, business plans, foundational work in 2024, operational improvements, growth drivers, ability to reaccelerate growth and scale profitability, financial guidance for the first quarter and full year 2025, and the assumptions underlying such goals and guidance and the impact of its product profile and 2025 investments. 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-Q filed on November 7, 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. 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?

Thank you, Elizabeth, and welcome to everyone joining us on the call today. Rapid7 ended 2024 with $840 million in ARR in line with our outlook and going 4% over the prior year. Revenue and operating income exceeded our guided ranges while we generated over $150 million in free cash flow for the year. Customer engagement in the fourth quarter aligned with patterns we observed at the end of Q3. We're seeing encouraging trends in platform adoption, evidenced by expanding deal sizes and longer contract durations. While these factors naturally extend our deal cycles, they underscore the growing strategic value customers see in consolidating their security operations with Rapid7. Our detection response business remained a key pillar of strength, delivering double-digit growth in 2024 and in the year at over $400 million in ARR. The strategic value of our security operations platform is reflected in the average ARR per DNR customer, which is now approximately $100,000. Meanwhile, our risk and exposure management business is showing promising momentum driven by early traction from exposure command. The integrated approach of our command platform resonated strongly with customers, helping drive over 20% year-over-year growth in total risk and exposure management pipeline generation during the fourth quarter. Looking back at 2024, it was a year of critical foundational work across three strategic priorities. First, we focused on innovation within our world-class detection response offering by expanding our coverage of third-party alerts and leveraging AI-driven capabilities for alert triaging and detection accuracy. We significantly improved our customers' ability to respond with the speed and precision that they expect. These advancements strengthened our competitive position and delivered measurable benefits to our customers, solidifying our leadership in a rapidly evolving market. Second, we made substantial progress scaling our partner ecosystem to drive more efficient growth. Today, we're booking between 80 to 90% of our new ARR through the channel. with deeper engagement and stronger pipeline generation from our top strategic partners. The operational improvements we've made in enablement and transaction efficiency provide strong foundations for continued partner momentum in 2025. Third, we achieved a significant milestone in cloud security adoption with the third quarter release of Exposure Command. The early traction we're seeing validates our integrated approach to comprehensive attack surface and exposure management. A recent competitive win illustrates the value proposition of Exposure Command. An existing MDR customer, a regional insurance company, needed to expand their security coverage and manage assets across a multi-cloud environment. Rapid7 distinguished itself through our comprehensive approach, seamless integrations with their existing endpoint security provider, and strong capabilities in identifying security control gaps. This six-figure deal exemplifies both our cross-sell opportunity and the value we deliver as customers consolidate their security operations across our command platform. While we recognize that our recent growth has not kept pace with broader security demand, we strongly believe the foundational work we completed in 2024 positions us well for more consistent execution and sustainable growth. Our strategy is anchored in today's market reality, Organizations with constrained resources need to proactively manage threats across an increasingly complex attack surface. The cornerstone of any security operations program is detecting and stopping threats before they become major incidents. Yet most organizations struggle to cost-effectively process their growing volume of security data. This data challenge results in limited visibility across the attack surface, creating unnecessary exposures that further strain response capabilities. Over the past three years, we have worked to evolve Rapid7 into a leading integrated security operations platform anchored by our managed detection and response program and emerging traction in risk and exposure management. Our expert-led AI-driven MDR enables us not just to monitor the attack surface, but to track what should be monitored as it evolves in real time, allowing our customers to proactively contain likely compromises before they occur. The foundation of effective detection and response must be built on an integrated view of the attack surface. And this is a key differentiator in our approach to MDR. We built a comprehensive exposure management solution that spans from endpoints to cloud across an organization's internal and external attack surface. Our flagship exposure management solution, Exposure Command, integrates traditional VM, cloud security, application security, SOAR, and Chasm capabilities into our command platform. We believe the progress we've made in our strategic transformation now sets the stage for re-accelerated growth in 2025 and 2026. To understand our trajectory, it's important to examine the key drivers of our recent performance. Let me outline why we're now positioned for acceleration and the decisive steps that were taken to improve the growth while improving and scaling profitability over time. Our AI-driven MDR represents the future of security operations, redefining how organizations protect themselves in an evolving threat landscape. We've spent the last three years investing in both technology and service experience to build an MDR product that delivers the scale and accessibility to monitor customer security at a lower total cost of operations. These innovations have improved security outcomes while deepening our partnership with customers. This steadfast commitment to our customers has positioned us as a leader in this space with one of the strongest offerings in the market today. Our DNR business now generates over $400 million in ARR. Managed DNR contributes over three quarters of this total and is growing in the mid-teens. Looking ahead, we see significant opportunities for accelerated growth while maintaining our gross margin structure. This year, we're making targeted investments in MDR growth, as well as incremental R&D for exposure management in order to scale our threat detection capabilities, expedite response times, and provide customers with deeper visibility into their attack surface. We are underway in establishing a new stock and innovation center in India to accelerate these investments, as well as investing in sales and marketing initiatives to support our expansion opportunities. Rapid7's differentiated NVR offering and high product market fit support these investments in expanding our market position, especially given the large growth opportunity that we see ahead. As we've seen success with detection and response, we've recognized shifts in the vulnerability management landscape that required a strategic response. This space has seen intense competition and accelerating cloud migration, leading to secular pressure in standalone VMs. Rather than simply defending this traditional business, we've intentionally shifted toward the more sustainable growth markets of consolidated exposure management and managed detection response. As we built out our integrated offering, Exposure Command, we were less competitive in traditional vulnerability management, a dynamic that included both growth deceleration and moderately increased churn in those markets. We believe that we're entering 2025 equipped with a better product profile that positions us to reverse these trends and capitalize on the market opportunity in front of us. This emerging domain of integrated risk and exposure management positions us to compete more effectively for VM and cloud security budgets going forward until we establish our leadership in the exposure management space. We view exposure management as the consolidation of multiple risk markets, including VM, cloud security, and several ancillary markets. This approach gives customers budget consolidation leverage, as well as a more integrated view of the environment, providing the foundation for an active detection and response practice. As we look forward, our shift towards sustainable security growth and exposure management isn't just underway. It has meaningful scale and momentum. The launch of Exposure Command has exceeded our early expectations. In Q4, we continued to build pipeline momentum while seeing encouraging conversion rates that validate our strategy. We're building on this early success through several key initiatives. Deeper integrations with third-party tools to provide more comprehensive and actual insights, reducing customer workload, and adding better data contexts. Expanded use cases supporting emerging needs in secure AI development and hybrid cloud compliance. focus customer education campaigns, highlighting the ROI of consolidated risk visibility and exposure management. And lastly, competitive pricing models, including surface command as an entry-level option for existing VM customers. Looking ahead, we see two core expansion opportunities for 2025. First, we're evolving our customer engagement model to drive expansion of MDR and exposure command capabilities across our install base, with clear expansion paths for cross-selling threat complete to risk and exposure customers and vice versa. Second, we're in process for FedRAMP authorization for key pillars of our risk and exposure management portfolio. This opens meaningful opportunities as federal agencies increasingly embrace cloud-native SaaS solutions. Turning to our 2025 outlook, we expect ARR growth of 4% to 6% consistent with the preliminary expectations we shared in November. We expect a majority of our 2025 ARR growth to be driven by our detection and response business with a strong contribution from MDR. We're assuming a modest contribution from risk and exposure management and expect to have a better sense of momentum for exposure command and our new sales expansion initiatives through the first half of the year. As we work towards re-accelerating sustainable growth, we remain committed to expanding free cash flow over time. This year, we identified several attractive opportunities to reinvest in our business to accelerate growth while enhancing our midterm cost structure. As a result, we're electing to reinvest up to $30 million into these opportunities with a primary focus on supporting the strategic growth initiatives we've spoken about, including extending our MDR service capabilities and offerings to reach a broader set of customers and accelerate our enterprise progress. Secondly, building upon our exposure command traction by accelerating our exposure management roadmap. And lastly, establishing a new innovation center in India to accelerate future innovation while improving leverage over time. This upfront investment in 2025 positions us to strengthen our competitive position to enhance innovation while improving our go-forward cost structure. We anticipate seeing the benefits of these investments in 2026 and beyond. Later this year, we'll host an analyst day to provide a deeper look at our business, our strategy, product performance, and midterm growth framework. With that, I'll turn the call over to Tim.