Ladies and gentlemen, thank you for standing by. Welcome to the Fourth Quarter Earnings Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded today, Thursday, February 9th, 2017. I would now like to turn the conference over to Mr. Jeff Bray, Vice President of Investor Relations of Rapid7. Please go ahead.

Thank you, Colin. Thank you and good afternoon everyone. We appreciate you joining us to discuss Rapid7's Q4 2016 financial and operating results in addition to our financial outlook for the first quarter and full fiscal year 2017. I'm Jeff Bray, VP of Investor Relations and I'm here today with Corey Thomas, our President and CEO; and Jeff Kalowski, our CFO. We distributed our Q4 2016 earnings press release over the wire and have posted it on our website at investors.rapid7.com. We have also posted our Q4 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 February 12th, 2017. We would like to bring the following to your attention. The date of this call is February 9th, 2016. Our discussion today contains forward-looking statements about events and circumstances that have not yet occurred, including without limitations, statements regarding our objectives for future operations 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 most recent quarterly report on Form 10-Q filed with the Securities and Exchange Commission and subsequent reports that we file with the Securities and Exchange Commission. The information provided on this conference call should be considered in light of such…

Thank you, Jeff and good afternoon everyone, and thank you all for joining us today on our fourth quarter 2016 earnings conference call. Healthy market and better execution drove Q4 billings growth of 22%, revenue growth of 37%, additional improvement in operating margins and another quarter of positive cash flow from operations. In the fourth quarter and the full year, we saw robust demand for data and analytics solutions. Solutions that provide better visibility and faster response times at lower cost. Our market opportunity is expanding as we continue to deliver IT and security solutions that are accessible to the resource-constrained mass market. Further, as we add more applications to the insight platform, more and more customers are choosing to consolidate their IT and security spending with Rapid7. We're pleased to see improved billing results this quarter across our three main product areas; Threat Exposure Management or TIM; Incident Detection and Response, or IDR; and Strategic Advisory Services. We're especially pleased that our newer products have gained traction in the marketplace, are building scale and becoming meaningful contributors to our results. From a go-to-market perspective, our mid-market and international teams continue to perform well. Results were better for p enterprise teams, but still below what we would expect given the market opportunity. And we continue to implement our plan to improve execution in that segment. We took an important step towards strengthening our enterprise sales effort by hiring Eric Erston as SVP of America Sales. Eric has a great record of experience, selling in the enterprise security market and we believe we now have the leadership in place to scale and grow our go-to-market effort. Looking back on our three main objectives for Rapid7 that I said at the beginning of 2016, I am proud to report that we make…

Thanks Corey. I'm very excited to have joined Rapid7 a month ago as the company's CFO and look forward to meeting our investors and analysts over the coming months. We are pleased with our solid performance in the fourth quarter ending full year 2016 on a strong note. Total Q4 revenue was $45 million, an increase of 37% year-over-year and above the high-end of guidance. Product revenue was $24.7 million, increasing 31% year-over-year, driven by increasing demand across our offerings with particular strengths in InsightIDR. Maintenance and support revenue was $10.4 million and increased 32%. And finally, our professional services revenue was $10 million, and increased 63% year-over-year as a higher than normal percentage of our services bookings converted to revenue during the quarter. We continue to have very high visibility into our revenue forecast with 86% of Q4's revenue having been on the balance sheet as of the first day of the quarter and 63% of our revenue being subscription-based recurring revenue. Total deferred revenue grew 30% year-over-year to $169.1 million at the end of Q4. Billings for the fourth quarter were $64.8 million, or up 22% year-over-year, driven by improved enterprise performance, ongoing strength across mid-market, and a strong quarter for InsightIDR. Our overall IDR offerings contributed greater than 10% of our annual billings in 2016, which represents strong initial adoption. As Corey noted, the steps we are taking to improve execution in the enterprise segments are taking hold and we expect to see further improvements over the next several quarters. Average contract lengths from 24 months for total billings compared to 23 months in the prior year. We saw slightly longer contract lengths in TIM this quarter. However, as more of our billings come from our new subscription products, which tend to have shorter contract lengths, we…

[Operator Instructions] And our first question is from Rob Owens with Pacific Crest Securities. Please proceed.

Great. Thank you. Good afternoon everybody. Want to talk about some of the MVM weakness I guess you saw in this quarter, because you mentioned that the costs were lower than expected. So, what do you think happened here for the fourth quarter? Why not as much conversion as you may have hoped? And then as you as you look at 2017, you mention higher costs associated with that, so obviously expect that to bounce back. What type of visibility do you have built-in relative to that?

Thanks Rob. It's a great question. So, as we mentioned last year, we were seeing positive and we continue to see positive trends in adoption for the MVM business. We also mentioned the fact that we were conservative in how we forecasted because the expenses hit immediately and so we had to be thoughtful. We have great visibility to the overall pipeline of deals. However, it's still a relatively small set of deals and the timing of when those deals close, that's not specific to a specific quarter. And so we were very confident and we felt very good about the momentum that we saw last year. We frankly see escalating pipeline and we expect even higher momentum this year as we go forward. But we don't really look at it on a quarter-by-quarter basis because the expense has an impact to our total OpEx because this is a commission we're slightly more conservative than we forecast the expense on a quarter-by-quarter basis.

Great. And then second I don't know this is the appropriate form or timing, but as you contemplate 11 into 2017 accounting changes, you guys have a difficult model understanding, there's with BSOE and everything else happened. What are some of the major things that we need to think about relative to shifts that should happen in the out year?

Yes, so we're still working on the 606 conversion and we hope to have the more disclosure in the 10-K. But the big difference for us is that we have bundled services with our 10 business and what would happen is that today, we spread them over the contract term where is under the new standard, we would take them on a time and materials basis as delivered. The second point is that we would also have to take the commissions on that and spread that. Today, we expense it all up front as we book them, but we would now have to spread that over the contract term. We're not anticipating a big difference in the revenue because today we're already spreading the contracts ratably. So, there's really no change on when going to the new standard. But as I said the team is still working on that and we hope to have a better disclosure in the 10-K.

Great. Thanks for the color.

We understand that some of the people on the phone line may have lost the connection for a little bit. Most of the stuff I believe that Jeff discussed was information that was disclosed in the press release. So, -- but if you have any questions about that, feel free to follow-up during the Q&A.

Our next question is from Saket Kalia with Barclays Capital. Please proceed.

Hey guys. Thanks for taking my questions and welcome aboard Jeff.

Thanks Saket. Good to be speaking with you again.

Yes, absolutely. Long time no see. So, for my first question, apologies, if it was mentioned in the prepared remarks. I know that you mentioned that billings in 2017 might have a shorter duration year-over-year, which, of course, creates a headwind on billings -- on billings growth. But could you just maybe talk us through the apples-to-apples comparison or said from the ACV comparison just that we can normalize for any of that headwind?

Yes. So, I think Jeff and I will tag team on it. So, at the aggregate level, that we mentioned last year is that we felt very positive adoption -- frankly much stronger than we expected on our new SaaS offerings InsightIDR primarily. And we recently announced that we will be introducing InsightOps this year. Because of that SaaS offerings tend to have a higher annual recurring value and therefore, a shorter total duration. And so part of what we were commenting on this year is that we frankly expect higher growth in our annual recurring amount. And if you think about the prepaid multi-year deals, we expect less of that. In general, we consider that a very, very positive dynamic for business overall because having a higher recurring amount, leads to just stronger economic over the longer term.

Sure, that make sense. And then for my follow-up maybe you Corey. Could you just qualitatively talk about -- and I think you probably answered this [Indiscernible], probably mentioned in your prepared remarks, but could you just qualitatively talk about InsightIDR and how successful that's been in displacing some of the heavier SIM installations that we've talked about in the past?

Yes, I mean we are thrilled with the performance of the InsightIDR offering. As a metric and milestone that I gave in my prepared remarks if you look at our InsightIDR offerings, it was -- exceeded 10% of our total bookings for the year. And so we were quite proud of that and the progress that we've made there. And we're see that both expand Greenfield opportunities where it's been too expensive and too complex both because the cost of storage, but also because of the complexity of the product. And we've also seen teams that have bought and purchased, but not successfully deployed traditional SIMs shift and moved to InsightIDR. And most importantly we had great momentum as we exited the year around those product offerings.

Got it. Very helpful. Thanks guys.

Thank you very much.

Thanks Saket.

Our next question is from Melissa Gorham with Morgan Stanley. Please proceed.

Great. Well, thanks for taking my question. Corey so I just wanted to get your thoughts on the new sales leadership in the Americas. So, you talked about maybe improving some of your [talk] in entropies sales and accelerating customer adds. I'm wondering if you are expecting to see a material change in your sales strategy or your philosophy on sales investment with the new sales leadership that will help you kind of achieve those goals.

So, one, we're thrilled to have Eric Erston join the team. He has experience not just selling to the enterprise, but also in security from his time at RSA. And I would say that it's primarily going to be focused on execution. I want to say there's a big fundamental strategic shift in the business. Eric is bringing in a new level of discipline insight and management that's associated with managing those large deals that we've been talking about. So, I would say it's primarily execution focus in honing and tuning the team, but we're thrilled to have Eric join the team.

Okay. Thank you. And then just one quick follow-up. So, last quarter you talked about elongating sale-cycles and I think you said there were few deals that maybe split in Q3. Two questions, one is, are you still seeing those elongated sales-cycles? And then those deals that slipped in Q3 have they -- did they close in Q4?

I talked partially about this on the Q4 call and making to the guidance that we gave on Q4 is that we were -- we had already seen some momentum when we gave the guidance for Q4. And we did see a number of deals that slipped close. We continue to perform against the guidance that we gave. What I would say is that as we've grown and we continue to grow our larger deal business in the enterprise segment, we really expect normalization. And the way to think about that is that when a business is smaller, it easier to cherry-pick large [Indiscernible] deals, but as it bit bigger, it actually reverts to the norm. And so we now expect larger deals the close in the typical six to 12 month deal cycle. And what we're seeing is performance consistent with that, which is as we see consistent to the rest the market.

That's helpful. Thank you.

And our next question is from the line of Matt Hedberg with RBC Capital Markets. Please proceed.

Hey guy thanks for taking my question. I had another one on InsightIDR. I'm curious obviously, Corey you said 10% of bookings in 2016, which is great. Are you seeing most of that adoption with net new customers and their initial purchase or is this largely being sold back into existing customers at this point?

I mean this is a thing that actually gives me a great confidence. And we're seeing a very healthy mix. It’s roughly half-and-half of the business that comes from net new and from the existing customers. It effectuates quarter-to-quarter, but it averages around half-to-half when you look back over time. And that's really good because we want to be able to cross-sell and up-sell the customer base. But we still see massive opportunity in data analytics for companies that want to solve these problems, but the existing solutions were too complex and too expensive. And so the fact that we're addressing both of those use cases is really important.

That's great. And then you also mentioned there's growing -- you got a growing on recurring revenue SaaS business to your more radical revenue. How does that make you feel about pipeline visibility this year, there were some lumpiness last quarter? Could you characterize how you feel about the visibility as you enter this year versus say last year?

Well, so I think there's a couple of things. We have a very healthy and strong visibility into the overall pipeline. I think one of the things -- and I'll also emphasize one other things. If you look at our mid-market and our international performance, it performed great. The one area where we had challenges was specifically in the very large deals in the enterprise segment and even there I would say the pipeline was good, the visibility on timing was for. And that's one of the things that we really address when we actually looked at our sales leadership is how do we make sure we have the right technique and executioner model, but also the right forecasting methodology to look at how we actually look at the timing of those larger deals. But in general so very good about the pipeline overall and we're really honing how we manage the larger deals in the enterprise segment in the federal sector.

If I could squeeze in maybe one more I guess on that very point.

Sure.

Is there a way to think about what innings we are in terms of building out this enterprise grade sale cycle? I think last quarter you said it could take a few quarters to get right. Maybe give us an update there on how you feel about the cadence?

Yes, absolutely. So, I feel that we're ahead of the game, mostly because we did some great hiring bringing Eric in. We've already brought some additional folks in. We're training the team and focus on training. We have a good set of core people in the company and its really just the execution-oriented stuff around the training, the methodology, and the aligning. And you saw I bit of that in Q4 where we had healthy performance. Again, not where we want to see long-term, but you saw an improvement there and so we [harmed] about that. What I would say is if you think about timing, we're still going to be working through this over the course of this quarter and into next quarter, which is in line with the discussion expectations that we talked about on the last call. But we feel that we're making very good traction on a very good pace to address the issues and really see the benefits of that in the second half of the year.

Thanks Corey. Well done.

Thank you.

Our next question is from Gregg Moskowitz with Cowen & Co. Please proceed.

Okay. Thanks very much and congratulations on a good quarter. Getting back to Melissa's question for a moment, if I could Corey.

Sure.

It's nice to hear more of the enterprise deals having closed in Q4. Although I would assume that the enterprise deals and not yet federal, I guess, is that accurate? And if so, if you could update us on the status of the federal deals that slip out of the Q3 that would be helpful?

It’s a great question. So, I would say the preponderance was on the enterprise side. We did close business in the federal sector. Our expectation -- and we articulated this at the time was that federal would not be just transfer from their year-end, which is our Q3 to their Q1. We really expect that business to come in over the course of this year and we're still watching that and looking at that. There's no major update at that time but I can say that our entire team, including our federal sales team is very focused on that business. We think we have a healthy pipeline, but it's one that we're focused on the execution just as much of the enterprise business.

Okay, great. And what is in the early feedback on your InsightOps product just from your beta customers?

So, the feedback has been great. I mean it's one of the reasons that we're excited by it. If you think about the problems that most companies have is that data is too fragmented and too complex. And that's the same problems that you have in the security and incident detection response space or the risk analytics space, as you have for troubleshooting and managing IT data challenges. And so the ability to actually have all of your log aggregation in one place combined with the endpoint visibility and monitoring allow people to really troubleshoot issues across the entire ecosystem. And that's one of the reasons that we're getting such positive feedback from customers and we see that more and more customers are looking to consolidate the data technology they look at across both IT and security.

Okay, thanks Corey. And then Jeff just a quick one for you. First off, I'd like to extend my welcome to Rapid7 as well and when you are announced as CFO at the end of the year, you talked about in your -- in the press release anyway about driving scale and operational leverage into the business to achieve the company's financial objectives. Does that mean that you think Rapid7 can reach its previously stated long-term operating margin goal of 18 to 20 over the next four to five years? And, if so, how do you get there?

Well, the answer to that is yes I'm excited and which is why I joined the company. Obviously, I've only been on Board a month, but the management team is committed to profitability and I firmly believe that we can achieve those goals.

And if you in general, not only was it one of our top goals last year. It remains a top three goal for this year achieving scale and leverage in the business. You saw we make good progress on that journey in the last year and we're very focused on continuing to make significant progress over the course of the next year.

Very helpful. Thanks guys.

Our next question is from Michael Turits with Raymond James. Please proceed.

Hi, good evening. So, hi Corey and welcome both Jeff and Jeff.

Hey Michael.

Question on the -- you guided because of the shorter duration, you guided both billings to grow below the rate of revenue growth and you guided cash flow to be flat. Is it possible for you to give us kind of a duration equivalents -- duration or the same what those growth rates have been so we have factor that out. But what billings have grown and will cash flow be growing?

I think we'll tag team because I think part of it is trying to get to the apples-to-apples. If you look at the foundational shift, and so I'll just get the high level and then Jeff can actually give the -- whatever detail perspective he can give in line with the guidance that we've given. So, the big one when it comes to understanding both the cash flow dynamics in the billings dynamics is that because we're having more of our SaaS products as a higher percentage in mix this year, what that really means is that the annual recurring amount is going faster and our prepaid multi-year deals is growing less overall. And that actually lowers our annual -- that means we're going to have a lower annual amount contracted term length. And so that's the high level that we want to make sure people understand. Again, we find that to be fundamentally positive for the business to have a higher recurring mix. And it's something that we'll talk more and more about as it becomes more material and relevant to the revenue. We're just not going to that level of detail in that time, but Jeff go ahead.

Yes, I mean clearly we're projecting shorter contract lengths, but we don't want to give you a specific number. It's early and we bake that into our guidance for next year, but your to call out what that would convert you right now we're just not capable of doing that right now. We don't want to do that today.

Nothing, last year when we introduce InsightIDR and we'd say we'd provide more and more visibility over time, it's something that we'll provide more visibility into as we go through and really understand exactly where the mix lands. One way to think about it is that in the past where we’ve had a lower mix of the SaaS products, that's prepayment multi-year deals, went directly to the cash. This year we're actually at the SaaS mix shift, we just have a lot more recurring in that mix.

And I guess there's one way -- I do have another question about professional services, but roughly speaking any reason to think that billings wouldn’t be growing in line with revenue outside of this factor roughly?

Jeff?

So, in other words you want us to give you the number Mike?

Jeff, you've been around the block.

Yes, exactly. So, I mean the thing that I would broadly say is when we've talked about the overall growth before. I think there's two material factors I think that you're trying to get to. It's one we actually feel that the billings that are reflected this year without the SaaS thing, which I think is a healthy and the enterprise issue is in the first half of the year an additional drag. We think the billings growth is actually inherently stronger than we represented the number in the year-over-year comparison. That said as we exit the year, we didn’t have any higher SaaS mix in the business and we didn’t having play through the execution work that we're doing in enterprise. We feel very good about how we actually exit the year from an overall billings growth perspective and again, we'll provide updates to that we go through the year.

I promise next question won't be a wily one, but I just wanted to ask you about professional services which was 22% of revenue this quarter and you mentioned that it was a higher conversion to upfront recognition. I'm just wondering can you just specify -- review exactly what that was and does that go back -- and do we drop back down to the same level kind of 18%, 19% of revenue going forward?

Yes, so I think again Jeff and I will tag team. So, the first thing is that services has a different cyclicality in general. The thing that we've said all along is we expect services to be less than 20% of the total business and that thesis has not changed at all. What you find is that in Q4, we certainly solve it in this Q4. We have lots of customer demand to actually do projects and complete work before the end of the year and what that translates to is our utilization rates of our people was much higher, but therefore, we actually delivered a greater amount of work. So, the percentage as a percentage of total revenue was higher and the gross margins had the same effect. That said we expected as we go forward to be less than 20%. So, I would not take the assumption from a percentage of revenue that you saw in Q4 and actually use that to actually forecast forward. Again, the cyclicality of the differences quarter-to-quarter based on customer demand. But for the full year, we expect that to be lower than 20%.

Thanks guys.

Mike for the full year, it was 19% and if we did have the same contract lengths, clearly, our Billings would be higher obviously. Just didn’t want to call out a specific number, which is I think what you were driving at.

Understand. Thanks a lot and great to see the billings bounce back this quarter.

Thank you, Michael.

Thanks.

And our next question is from Jonathan Ho with William Blair. Please proceed.

Hey, guys congratulations on the strong quarter and welcome on Board to Jeff.

Thanks.

Just start out with sort of your thoughts in terms of the cloud and maybe how customers will use your solution in places like AWS and Azure? And how does this sort of mix sort of play with the existing tools that are on board those platforms?

Yes, I think it's a great question. I think part of what you're saying is that customers have complex environments themselves. Their devices to their own networks to their cloud environment and there's tools that actually preexist. [Indiscernible] environment and Amazon, Azure do a wonderful job of providing tools that provide some visibility into the environment. The core thing that we attract -- and the core thing that we saw though is that every business still needs to be able to have visibility into troubleshoot, diagnose, understand issues that's spraying across their environment and they need to be highly productive doing it. And so the ability to go look at individual tools for every part of their fragmented network, and their fragment environment just isn't very productive and it's also extraordinarily complex. And so what we've seen a strong demand for solutions that consolidate and simplify and make things not just affordable but create an easier more effective user experience. To get directly to your question about what we do to integrate and bring in the cloud data is we've long had a big priority and we're very, very good at actually collecting data from cloud providers both the Microsoft Azure and the Amazon AWS ecosystem. And that's just not the raw located, that's also integrating with lots of the tools that they have available in the environment, the pool date to pool diagnostics and the tie that into the overall enterprise ever structure. There are very few companies that actually have a homogeneous environment where it's just Amazon and they don't have being expelled for. So, they don't have other solutions. So, they don't have on-prem, they don't have email. And so what we find is that customers are really looking at how to the actually get a better handle on their data, so that they can then look at their security, troubleshoot issues, and manage their overall enterprise environment much faster, much more effectively.

Great. Thank you. And a question on channel, I guess relative to the changes that you guys have made in terms of enterprise sales team, how far along are we in terms of the benefits of that that changeover. I mean have we seen sort of the full impact of that or is there more to come particularly as you start to ramp capacity earlier in the year?

No, I mean I think that there's definitely more benefits to come. One of the things that we said is that it'll take a couple quarters. We saw a definitely positive momentum in Q4. I think we'll see some improvement, but we expect Q1 and Q2 to continue to see continuing improvement and the benefits to really fall out for the enterprise large deal segment in the second half of this year and going forward. As far as your question about channel, from my perspective we're at this scale mass and interest. But we're seeing lots of interest from channel partners and we're seeing mutually good agreements with channel partners. I view that as upside over the next several years both to our ability to expand but also to our total economics.

Great. Thank you.

Thank you.

Our next question is from the line of Robert Britton with Northland Capital Markets. Please proceed.

Hi. Thanks for taking my questions. Corey I was wondering if I could touch a little bit, you laid out your three objectives, but in your prepared remarks you mentioned that the international market with not a strong economy out the objectives and how you see improving them that market for you and him how we should maybe think about throughout the FY 2017? Thank you.

Thank you for the question Robert. I just want to clarify that we saw relatively strong performance international from last year and we expect continued strength internationally this year we're very focused on expanding both our cloud footprint internationally and also expanding our enterprise -- our total sales team internationally. So, it's an area that we see strong strength in. I think the area that I was talking about, we expect to see continued improvement in is the enterprise segments and specifically large deal segments of the enterprise market.

Great. Nice quarter guys.

Thank you.

And our next questions is from Marshall Senk with Rosenblatt Security. Please proceed.

Hi, guys. This is Perry in for Marshall. Thanks for taking my question. And I apologize if this was mentioned earlier. But can you talk a little bit about your Insight product that you mentioned, where you are seeing the most traction and is it coming from new or existing customers?

Yes, Perry thanks for the questions. So, we see a pretty healthy mix. I would say over the course of time, we've seen roughly half come from the existing customers and half come from new customers. It’s a mix that we like. When you think about the customer specifically though that we're actually seeing, it’s the customer that frankly has security as a big priority. They have people and resources, but they don't have unlimited people and resources. So, where we would call resource constrained. And by the way this isn't just midmarket companies where we see great success. This is also large energy and utility companies, large hospital companies. So, the way to think about is their IT organization as a percentage of the total organization is relatively small and security team is even smaller percentage. So, these are people that have to do a lot with very little and they really look for solutions that can actually make them productive and help them do their job faster and more efficiently and better and we have great appeal to the audience because really we've taken a really complex problem and we built advanced analytics a great workflow and great user experience and we've allowed them to really manage our security much more efficiently. And we see those customers across the market both in our customer base and outside our customer base. This is why we think that there is a massive large untapped market out there. People that would like to solve the problem, but it's just been too expensive and too complex. And we're really focus on that sort of what we call the mass market in the mainstream buyer.

Thank you, Corey and welcome to both Jeff.

Thanks. So, that's going to be the last question. I just want to point out to people -- I'll remind everyone that we are going to be presenting at the Morgan Stanley Technology Media and Telecom Conference. I will also be at the Pacific Crest Emerging Technology Symposium and the Raymond James Annual Institutional Investor Conferences this quarter. Thank you everyone for joining us today in the call and we look for to seeing you soon.

Thank you all.

That concludes call for today. We thank you for your participation and ask that you please disconnect your line.