Ladies and gentlemen, thank you for standing by and welcome to the Rapid7 Second Quarter Earnings Call. During the presentation all participants will be in a listen-only mode. Afterwards, we will open up the question and answer session. [Operator Instructions] As a reminder, this conference is being recorded today, Monday, August 8, 2016. I would now like to turn the conference over to Mark Donohue. Please go ahead.

Thank you operator, and good afternoon everyone. We appreciate you joining us to discuss our Q2 2016 financial and operating results. I'm Mark Donohue, VP of Treasury and Investor Relations and I'm here today with Corey Thomas, our President and CEO and Steven Gatoff, our CFO. We've distributed our Q2 2016 earnings press release over the wire and have posted it on our website at investors.rapid7.com. We've also posted our Q2 2016 results earnings presentation, along with an updated company presentation on our investor relations website. This call is being webcast and can be accessed at investors.rapid7.com. The webcast of this call will be archived and a telephone replay will be available on our website until August 11, 2016. We would like to bring the following to your attention. The date of this call is August 2016. Our discussion today may contain forward-looking statements about events and circumstances that have not yet occurred, including without limitations, statements regarding our objectives for future performance and future financial and business performance. These forward-looking statements are based on our current expectations and beliefs and on information currently available to us. Statements containing words such as anticipate, believe, continue, estimate, expect, intend, may, will and other similar statements are intended to identify such forward looking statements. 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 the risk factors section of our annual report on form 10K filed with the Securities and Exchange Commission for the fiscal year ended December 31, 2015. As well as subsequent reports that we have filed with the Securities and Exchange Commission as well. 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 intent required by applicable law. On this call we will provide and talk about our results using non-GAAP financial measures and provide non-GAAP guidance. We believe that the use of the non-GAAP financial measures provides an additional tool for investors to use in understanding company performance, but note that the presentation of non-GAAP financial information is not meant to be considered in isolation or as a substitute for the directly comparable financial measures prepared in accordance with GAAP. We have provided a reconciliation of the historical non-GAAP financial measures to the most comparable GAAP measures in the financial statement tables included in the press release announcing our results. The press release announcing our financial results is available on our website at investors.rapid7.com. With that, I'd like to turn the call over to Corey.

Thank you Mark, and good afternoon everyone. I would like to start by thanking all of you for joining us today on our second quarter 2016 earnings conference call. We are pleased with our overall strong financial results and business execution for the quarter. Our billings this quarter were stronger than expected, primarily due to converting more of our large enterprise deal pipeline than we had anticipated. One of our largest deals this quarter was an Intel MVM conversion where we have seen excellent up-sell and cross sale momentum. We're pleased with the size and quality of our large deal pipeline and the increasing commitments customers are making to us. Because of these deals, and they can be lumpy, we continue to manage the timing of when we will close over a multi-quarter basis. I am also happy to report that we reached an important turning point this quarter on our path to profitability as we delivered $1.9 million in positive operating cash flow. While quarterly fluctuations in operating cash flow may occur, we believe we have established a pathway to maintaining annual positive operating cash flow in 2016 and beyond. Steven will cover these areas in more depth in his commentary. As we think about how we will sustain our success, we believe our strategy is best summarized in three main points. First, we see continued revenue growth driven by healthy demand for our differentiated data and analytic solutions and our proven track record of executing on our land and expand go-to-market model. Second, the record we have in running the business is driving overall scale and efficiency. And lastly, we continued innovation of our product portfolio is not only allowing us to attract new customers, but also to maintain high renewal rates and strong customer loyalty. The proliferation…

Thanks Corey. I really appreciate your kind words and our friendship all these years. It's been a great journey together. Good afternoon everyone and good evening. The decision to leave Rapid7 was difficult and not one that I approached lightly. It's been a terrific partnership with Corey and the whole team here and I'm incredibly proud of what we accomplished together. As you may know, I moved to Boston from Palo Alto to join Corey and I think all for having had that opportunity. After nearly 4 years in Boston and some important family milestones for our two daughters now upon us, it's the right time for my wife and I to head back to our home in California. Importantly, I continue to be excited about Rapid7's terrific momentum and strong future. Initially defining and now leading the IT and security data and analytics market, Rapid7 has a terrific team who will continue driving the company forward with great success. With that, let's get into the numbers and provide some color around the business and our Q2 financial results. We'll then provide guidance for Q3 and the full year 2016 and as always, we will wrap up by opening the call to your questions. Reviewing our Q2 performance, three highlights stand out as we continue to drive successes with our customers. First, we delivered another quarter of compelling revenue and deferred revenue growth year-over-year, driven by our high visibility, highly recurring ratable revenue model. Second, we continue to make good progress on our path to profitability with another quarter of improving expense ratios. And third, we delivered a solid quarter of positive operating cash flow and we are very bullish on this dynamic going forward as a leading indicator of GAAP profitability and the value creation in the model. Before…

Certainly. [Operator Instructions] Our first question comes from the line of Saket Kalia with Barclays Capital. Please go ahead.

Hi, guys. Thanks for taking my questions here.

Hey, Saket.

Hey, guys. So first and foremost, Steven, sorry to see you go here, but glad we'll have at least another couple quarters with you.

Thanks.

So you know, just maybe first for you Steven, thanks for the color on the billings beat. Even excluding I think the $3 million-$4 million of earlier closing, you were still nicely ahead maybe duration help a little bit. But excluding this, was there anything from a product perspective that you found resonated better with some of the larger customers? Whether that was the new Nexpose version or perhaps a higher dollar version of MBM conversion? Any additional color with white the extra success in enterprise account this quarter would be helpful.

Sure. And then as always Corey and I will take. It's really two things. One as you said it was more the enterprise impact for the quarter, particularly sequentially we talked about in Q1 that duration, as well as the implied billings was something that did not grow as fast because of the lumpiness of enterprise, and you saw the other side of that year where we had very good traction with enterprise accounts and larger deals. And even better news in that is that it was fairly broad based. In other words, there was no one thing to point to, to say like it was that. When I look through the deals that we did for the quarter, it was pretty broad based on geography between North America and Europe, as well as Asia, Latin America, as well as by product meaning TEM, as well as IDR.

I think foundationally our team had very good execution and we expect that to continue. And secondly, customers are really seen the value of shifting from just providing data into providing information that delivers insight. And its customers are under resourced and constrained they value of the types of analytics that we are able to provide more and more and we definitely saw some momentum from that approach that's differentiated from a number of other different offerings on the market.

Got it. And then maybe for my follow up, maybe harder little for you Corey, can you just talk about the overall spending environment for threat exposure management? You talked about some of the better execution and faster conversions for MBM. But it seems like competitors also seem to have a healthy quarter. So do you think that threat exposure management, the overall market is maybe seeing a little bit of a longer tail for healthy spending the maybe other parts of security?

Yes. I mean, absolutely. If you think about the core value proposition, if you have the right information and you have the right analytics, it is quarter helping you prioritize what risk and what threats matter most to you and the less do that you can't really allocate your spend to actually manage the risk that your business have. And so more and more customers build security programs, they are looking at our technologies and other similar technologies to really help them understand what their biggest exposures are and then how they prioritize their total security spending budget to protect the things that most need protecting.

Got it. Very helpful, guys. Thanks very much.

Thanks, Saket.

Our next question comes from the line of Gregg Moskowitz with Cowen & Company. Please go ahead.

Okay. Thanks very much. And I'd like to go over Saket's comments Steven and I know you be a Rapid7 a little while longer, but best of luck with the move back home and congratulations to all of you in reporting extremely strong billings and accelerating growth. So I wanted to actually focus a bit on MBM. And you initially announced that partnership with Intel of course in Q4 last year. Obviously it take some time to build the pipe and I don't think you so much activity at all frankly in the first couple quarters of that relationship. But this quarter you did reference a large win and I was wondering if I can get a little bit more color around that, for instance is that customer spending a fair amount more with you than they did with Intel and if so, how would that be manifested in terms of Rapid7 products and services?

Steven and I will both talk to this one together. So the first thing is we announced as you mentioned Q4 of last year, we are going in the relationship in Q1 and Q2. Obviously Q2 was where we first started to see incremental momentum. The first half of the year for us is really about identifying the accounts and building the pipe. What I would say at this stage is that we are starting to see momentum ahead of where we originally thought it was going to be and that's an extremely positive thing. There is two factors that we always talk about when you look at this business. One is where we have lots of deals in pipe from existing Intel, MBM customers and we continue to convert those at a steady pace. The deal that Steven alluded to in his prior remarks was an example though of a large customer that looked to move over earlier than we anticipated, and we see several of those in pipe. So in general, we think that the MBM opportunity provides great long-term opportunity for the business we're starting to see it move ahead of our original expectations.

As we've talked about the deal earlier, even on announcement, the customers that are moving over are obviously much larger and have arguably weighted quite a while to do something. And so, the thought process was that there is an expectation of seeing larger deals sizes even on an apples-to-apples existing business basis, like some company has been doing something that maybe just looks at their network and really needs to have a much larger presence across devices and that point and what have you. And so we're seeing a nice multiple effect in our deal size just apples-to-apples not even considering all the good stuff that Corey was talking about on cross selling and all the other up-sell opportunities which are great and drive the economics. But just on apples-to-apples business we're seeing multiples and deal sizes as they do come over, and they help substantially into accounts and provides again another final for us to do that cross sale, up-sell.

Okay. It’s very helpful. And then InsightIDR it sounds like some really good early momentum. What are you seeing so far I guess with respect to net new deployments versus SIEM displacement if you are able to parse that even at a very high level?

We can. So we're seeing very fast conversions on net new deployments, which is very nice. So we're able to expand the market. And we're seeing the pipeline build rapidly on conversions, but as you would expect conversions take a little while longer, they have a longer sales cycle and we just introduced before InsightIDR product offering this year. That said, we've seen some of those conversions and migrations already start to convert.

The growth rate there as Corey was saying Gregg has been triple digit growth on both transaction and dollar size. So all sorts of flavors of goodness.

Okay, terrific. Thanks very much.

Thanks, Gregg.

Our next question comes from the line of Melissa Gorham with Morgan Stanley. Please go ahead.

Great. Hi, guys. Thanks for taking my questions. Corey and Steven, you talked about good strength in enterprise deals this quarter. Maybe if you could just maybe talk about what you are focusing your investments on in terms of moving further into the enterprise particularly as it relates to enterprise sales, what we should expect for the rest of the year and then what you're seeing in terms of sales productivity?

Absolutely. So the first thing is that our enterprise business is not just done field associates, we're also able to officially sell to the enterprise through our inside sales team, which really is key for allowing us to scale the economics of our model over time and we saw great evidence of that across our sales organization in Q2. So that's the first thing I'll say. The second thing is our focus on expanding the enterprise is really one of disciplined expansion of our built [ph] but continuing to leverage the extreme talent that we have on our inside sales team and the product differentiation that we have from our Nexpose now and our InsightIDR platform and what we're finding is that the ability to make customers more productive to deliver them in size that they are looking for allows us to position ourselves and still effectively into that larger part of the market and that's working well for us and we plan to continue to accelerate that.

Okay. That's helpful. And then I just wanted to hit on professional services because it was particularly strong this quarter. So you mentioned managed security, I think you also talked about incident response. I'm just wondering if you can maybe provide a little bit of color on the activity that you are seeing and then where you are out in terms of the capacity of resources there and if you have intentions to continue to invest in heavily in that business?

We have the capacity we continue to expand it. For us, professional services and our advisory services business is about helping our customers be successful as we expand. Steven and I have always stated that it will be less than 20% of the business sustainably. And so we really staff it to actually build the strategic relationship with our customers and that's the focus there. We are not a business that relies on massive staffing, and big growth in the professional service enterprise business of scale. So that's the first thing. So we feel quite comfortable where we are in our ability to be able to grow capacity and grow resource over time in line with our goals. The second thing is that we are seeing traction and interest from customers for our analytic response services and our managed services in general and that's as we expected. We knew and we've always known the customer struggle to properly staff their teams and as core part of our value proposition is allowing customers to either manage our technologies themselves to get the information insight they need or we can help them with that. And that ability to offer both approaches resonates well with customers.

That's helpful. Thanks. Good quarter.

Thank you.

[Operator Instructions] Our next question comes from the line of Jonathan Ho with William Blair and Company. Please go ahead.

Hi. Thank you very much. This is John Weidemoyer for Jonathan. I had a question, on competitive environment, so guys have certainly improved your situation with the two new products Nexpose Now and InsightIDR. Have you noticed a change in the competitive environment whether that's improved your watch [ph] significantly or if anybody else has applied any pricing pressure or exchange their behavior over the last two quarters?

Yes, we haven't seen any material change in the competitive dynamic. The biggest factors that we continue to see lots of opportunity in the market and in the space in more than anything the opportunity itself is what's driving the boat and I suspect it's something that our competitors are able to see also.

Okay. Thank you. And one of other question, your Nexpose Now, is that considered an enhancement of your current Nexpose offering? Does it preclude the need to even have the call the static version of the product, the existing product or is it the kind of thing where someone might want to buy both if for some reason they still wanted to do static VM thinking that maybe if they wanted to double check the dynamic approach might not have caught something. Can you talk a little bit about the coexistence if at all of those two offerings?

Yes, Nexpose Now includes our risk analytics and Threat Analytics, it really helps customers get a handle about their biggest exposures, but also includes the capability to actually manage and manage workflows around remediating. those exposures and analytics to go along with it. That said, there are certain industries and certain countries around the world that can't adopt the analytics, they are increasingly in the minority, but those do exist and there are some of those companies or organizations that choose to actually use the on-premise version of Nexpose and that's just fine with us because they take the great data, unique data that we provided and they put in their own analytics platform.

So for those that can use the newer version, the Nexpose Now, they can do both static and dynamic?

Yes. They can actually do the traditional reporting and analysis that we've always had, but they can also do the dynamic analysis that we now offer.

Okay, great. Thank you very much.

Thank you.

Our next question comes from the line of Michael Turits with Raymond James. Please go ahead.

Hey, guys. Thanks for taking the questions.

Hey, Michael.

And of course congrats to all and Steven all the best of luck it's really been awesome working with you.

Thanks, Mike.

So first on MBM first of all, we had to run out an estimate that kind of we usually, that will be in a kind of low 10s, maybe 15 million of incremental opportunity around MBM going forward, should I think now that it's a bigger opportunity than we might have originally expected based on the early deals what are your thoughts?

Yes. I think that our expectation is that the opportunity has increased over time. I think it still remains to be seen the pace of the movement of accounts. We had very modest originally, and we are seeing those expectations be slightly exceeded. What we're seeing from the early accounts is that it provides great access to a customer base that we haven't had yet, which provides good long-term economics for us.

Okay. On professional services, can you talk a little bit more about what the composition of them was and what did well, in particular because, one of the largest response companies had a weak quarter relatively speaking in incident response and talk about the scale and scope of some of those engagements narrowing. So are you doing certain response a similar types or was your success in other areas?

The nice part Michael is the blend of the work if you will across services has been pretty consistent and strong across the large buckets of that, the base level deployment and training sure okay, but then there's also the high value add, high margin security assessment business, as well as the strategic services around program development, program management. And that's where we've been able to really drive a mix across the last two buckets, the security assessment work and the strategic advisory work that's very high margin. And so, what we've always said is that work for us has not been that kind of knee-jerk I've been breached immediately I need millions of dollars. It's been driven by companies that are taking in more thoughtful approach to building a security program, whether that's the executive team or board or [indiscernible] new director of security. And so we have seen on a nice steady clip of growth. To Corey's point, it is not a body shop. So that's always going to be part of our model, but not the predominant part of it. Is just really driving both two things that are important, stickiness and then usage as it is I dynamic of the more you know the more you use. And so that's been very effective so far.

I would say unique to us is that we are clearly a product and technology company that provides strategic advisory services and so when we think about things like incident response, it really starts about how do we actually make sure that we are building a deeper relationship with our customer base. And so from that perspective, we have pretty consistent visibility and demand but lots at we have a rich set of customers from our for thought business.

Okay, guys. Thanks again and once again Steven all the best.

Thanks, Michael.

Our next question comes from the line of Gregg Moskowitz with Cowen & Company. Please go ahead.

Okay. Thanks very much I guys actually have one follow up. Actually you have some solutions architected for on-prem and others for the cloud, Corey, can you talk about the conversation that you're having with current and prospective customers around cloud and what you think that means for Rapid7 from a growth perspective going forward?

Absolutely. So the first thing is that we collected date all over. We have to my knowledge one of the most pervasive data collection ecosystems out there that looks across asset, inventory configuration, vulnerability, applications and users. And we allowed users to consolidate that data into one place. Because that's a massive volume of data and the complexity of ever customer managing that on-site would be tedious, we've offered a cloud base solution to both consolidates all of that data that customers want in one place and then allows them to do very deep and rich analytics on top of that data. So as we go out and talk to customers, the refreshing and affirming thing is that customers definitely want to consolidate and simplify the information data strategy. And they are quickly realizing that the best approach to do that is the cloud. But because of the data volumes and the cost. But when you combine cloud base source and economics which we've been able to deliver strong economics combined with the type of analytics that we've been able to bring to bear initially with security, then that creates quite a compelling and differentiated platform when you look across both the diverse and large volumes of data and the analytics that we provide. We are seeing that as a big adoption customer environments.

Fantastic. That's really good color, Corey appreciate that and congratulations again.

All right. Thank you very much.

That was our last question. I will turn the call back to Mister Thomas.

Thank you all very much for joining the call and again I want to reiterate Steven thank you for your commitment and everything that you've done and that you all for your time today.

Thanks, everyone.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.