Ladies and gentlemen, thank you for standing by. Welcome to the Rapid7 First Quarter 2017 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 Tuesday, May 9th 2017. I would now like to turn the conference over to Mr. Jeff Bray, Vice President, Investor Relations of Rapid7. Please go ahead sir.

Thank you, operator, and good afternoon, everyone. We appreciate you joining us to discuss Rapid7’s Q1 2017 financial and operating results in addition to our financial outlook for the second quarter and the 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 Q1 2017 earnings press release over the wire and have posted it on our website at investors.rapid7.com. We have also posted our 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 May 12th 2017. We would like to bring the following to your attention. The date of this call is May 9th, 2017. 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 annual 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 risks. Actual results and the timing of certain events may…

Thank you, Jeff, and good afternoon, everyone. Thank you all for joining us on our first quarter 2017 earnings conference call. Q1 was a solid start for 2017, and a great step forward to achieving our full year objectives, our growth and profitability. A healthy market and good execution drove Q1 revenue growth of 30%, additional operating leverage, billings growth 21%, and another quarter of positive cash flow from operations. We saw healthy results across all of our product groups with consistent performance in Threat Exposure Management and another strong contribution from Incident Detection and Response or IDR. In April, we announced the evolution of the Rapid7 Insight Platform with the release of InsightVM and the announcement of InsightAppSec. With these latest innovations we’re executing against our vision and delivering the product and platforms that will drive our company’s growth. When we released InsightOps later this quarter, the Rapid7 Insight Platform will be the first to offer all of the three major pillars of security and IT analytics, vulnerability management, UBA powered SIEM, and IT log analytics, all operating on a shared cloud and data collection infrastructure. Our platform uses the same lightweight agent and data collectors across all of its solutions to aggregate data from end points, machine logs, cloud assets, scanners and other sources. Instead of trying to manually integrate a variety of overlapping point products, security and IT professionals can collect data once and use that single source of data across a range of solutions that leverage our threat intelligence and analytics. The Rapid7 Insight Platform dramatically reduces complexity with one consistent simple view of the IT environment and activity taking place inside, helping IT and security quickly solve their most critical issues with their reduced total cost of ownership. The breath of Rapid7 Insight Platform truly…

Thanks, Corey. We are pleased with our strong performance in the first quarter. Total Q1 revenue was $45.2 million, an increase of 30% year-over-year and above the high end of our guidance. Product revenue was $25.9 million, increasing 29% year-over-year, driven by increasing demand across our offerings, with particular strength in IDR and expanding recurring revenue. Maintenance and support revenue was $10.8 million, increasing 29% year-over-year and our professional services revenue was $8.5 million, an increase of 36% year-over-year. We continue to have very high visibility into our revenue forecast with 89% of Q1’s revenue having been on the balance sheet as of the first day of the quarter and 69% of our revenue being subscription-based recurring revenue. We made a change this quarter and how we calculate recurring revenue, and we have updated our history on our website. The main difference is that we now include revenue from term-based licenses. On an apples-to-apples basis, the 69% compares with 67% last year, up 33% in dollars. In Q1 2017, 78% of our product revenue was recurring up from 74% last year. Total deferred revenue grew 27% year-over-year to $167.6 million at the end of Q1. Calculated billings for the first quarter were $43.8 million, or up 21% year-over-year, driven by another strong quarter for IDR, ongoing strength across mid-market and improving momentum in our enterprise segment. Average contract lengths were 23 months this quarter, compared to 22 months in the prior-year period. With the evolution of the Rapid7 Insight Platform and the availability of our two new cloud-based subscription products, InsightVM and InsightAppSec; and as we said in our Q4 call, we continue to expect that more of our billings will come from our new subscription products, which tend to have shorter contract lengths. Therefore, we believe that our average…

Thank you. [Operator Instructions] Our first question comes from the line of Gregg Moskowitz with Cowen & Co. Please go ahead.

Okay, thank you. Good afternoon, guys, and congratulations on a very good Q1. Corey, you mentioned that with the release of InsightVM, the first platform to offer VM, UBA based SIEM, and IT log analytics. But do you think many of your customers currency the world this way as well or is a lot of evangelism required? And then also what kind of cross-selling activity would you expect to see going forward across these three areas?

Great question, Gregg. And we usually see a lot of cross-selling activity. I’ll put customers into two broad buckets; one is very mature customers which are well established. And of course, they buy best-of-breed as you would expect. And great thing there is that even in that set of customers, we already have a strong position in vulnerability management and we are increasing our position Incident Detection and Response with InsightIDR, so we see strong performance there. I think the most important fact though is that the majority of the market is untapped. If you think about successful deployments on any of these metrics, whether you look at vulnerability management or SIEM, there’s just simply too much complexity. And by a large margin, whether you look at the mid-market or the resource-constrained enterprise, people are looking to actually get outcomes and results from their data, and they’re looking to consolidate their data into a single platform. And so if you really think about opening up the market to the full potential that’s there from a IT and security data analytics perspective, we absolutely see strong demand for an integrated offering.

Okay, that’s helpful. Thanks Corey. And then a question I guess either for Corey or for Jeff. You noted that you’re well-positioned to add more customers in 2017 than 2016. Although the net new customer adds did appear to be lower on year-over-year basis, it looks like the expiring renewal rate did tick down very marginally as well. Is there anything that would call out in relation to this?

Well, we set the goal to aggressively add customer at a faster clip this year than last year and we’re still plowing our track for that. The key consideration there though is when we set the goal, we knew that most of our customer expanding offerings that we’re going to reduce friction and increase the affordability, we’re going to be launched in Q2, our current quarter this year that includes InsightVM, which increases the ease and simplicity as well as has additional price points. InsightOps, which provides a new online ramp into the platform and addresses a large market of IT log analytics. And InsightAppSec, if you think about InsightAppSec, our AppSpider product had huge appeal to the large enterprise, but InsightAppSec has much broader appeal. So core part of the exemption behind that goal was that these new offerings would drive increased adoption, and we’re saying good start to that effort.

Gregg, on the renewal rate…

Yes.

Gregg, it was less than 1%, and the difference is really due to rounding. It’s typically been between 88%, 90%, so we had some late renewals that came in in Q2 that affected the renewal rate, but we don’t see a significant change in that going forward or no significant amount of deals lost.

Okay, thanks Jeff. And then just lastly, there was a really nice Fortune 100 retailer win, would love to hear how the MVM business overall in the quarter. Thanks.

Jeff, this is Corey. The MVM business has been solid for us. Being the IT reiterate, it was not a very large business for McAfee and we continue to expect it to perform on pace with our expectations. But as our business continues to grow at a healthy pace, it’s not just a significant part of McAfee’s business, and it’s not going to be a significant part of our business, but it might continues to add nicely to our overall position in the market.

Great, thanks very much.

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

Hey, guys. Jeff, can you just walk through what the impact is right now of the subscription? And then how should we be thinking about it from a 606 perspective and when?

Yes. So with respect to the revenue, the only real significant change is that the bundled services deals will be recognized as delivered on a percent of complete basis. Today, they’re recognized over the contract term. So that’s really the only change and we’re not estimating a significant change on the total revenues right now. The other difference that will happen with 606 is on commissions and we’re going to have to spread that over the economic life. We’re still computing that, but that’s the other change and we are adding disclosure in the 10-Q about that.

Okay. So both your comments are with respect to 606, right? I suppose we’re just going from – move over to subscription itself?

Yes. Well, the old model, there’s really has no change, Mike, because we were spreading it. And even going forward on those perpetual deals if we were to sell them, there’s really no change, still be amortized over the same period.

And there’s a question for you – that’s fine. I think I may have questions about where the break even point is and I thought it’d have an impact, but I understand directly should be about the same. I’m sorry, Jeff, go ahead.

No, no. If the contract lengths comes down as we shift to more subscription, then obviously, that will affect the revenue rate, but we baked that into the guidance.

Got it. And then Corey, just any new thoughts at all in terms of InsightOps; in terms of anticipating the launch? How you’re seeing that competition to shape up? And where you – how you think it’ll be playing out or it will be the same?

Yes. As you mentioned, this is a quarter where we launch, let’s say we are very optimistic. We continue to see an opening in the market for IT log analytics solution that is both affordable and easy to use, and we believe that we have a fairly disruptive solution that we’re introducing to the market.

Okay, thanks.

Michael, as we said on when we pre-released in terms of the pricing or the payback, it’s similar to other deals when you convert from perpetual to SaaS, there’s really no difference. I think if you look at the guidelines, we’re right in line.

Got it. Thank you, Jeff.

Thank you, Michael.

Our next question comes from the line of Matt Hedberg with RBC Capital Markets. Please go ahead.

Thanks. This is actually Matt Swanson on for Matt. Congratulations on the quarter guys. It sounds like Q1 was a good start here for doing the enterprise sales hires. Could you talk a little about where you are in that process, what’s in plan for FY 2017? And then having a quarter with Eric on board as the head of U.S. sales, are there any changes that you’ve seen in that early on or impact he’s making?

Yes. Our strategy was to get out of the gate really building the leadership bench and team, and then improve both the hiring and the process. And we feel that we are on track for that. As we described earlier, it’s going to be a multi-quarter lift. I think we’re off to a great start in Q1. We’re not going to continue to work on that in Q2, and we expect to see ongoing improvement as we go forward, but I would say it’s pretty much at or above expectations for this type of leadership transition in our sales or what you would expect. There has not been any surprises which is always good., and there’s been several positives.

Great. And then in the last two quarters we’ve seen some uptick in the international markets. Do you think you’ll see any impact from GDPR as a catalyst for spending towards the back half of the year?

I would love to think it would be a catalyst. If you think about the spend on security, when you look at the U.S. versus lots of different regions around the world. You’ll still see a lower security spending environment, which will definitely impact us, and GDPR can definitely be a catalyst for that. It remains to be seen on how the implementation will affect the urgency of when we see shifts in company’s behaviors that are going to be impacted by GDPR. The other caveat that I would give is the nice thing about it is that affects and impact lots of global companies and the company’s that operate around the world.

All right. Thanks for the time guys.

Thank you.

Our next question comes from the line of Robert Breza with Northland Capital Markets. Please go ahead.

Hi, thanks for taking my questions. Maybe as a follow-up to Matt’s question on the international side; when you think about it you grew over 55% in the quarter, which is a fantastic selling. How should we think about maybe Jeff for you should we think about the splits between North America and the rest of the world about the same? Or how are you thinking about modeling? If you could just actually talk us through to think about the modeling split between North American and the rest of the world. Thanks.

Yes. The international revenue should grow faster than the North American revenue. It won’t probably be a significant change in the mix shift this year, but overtime it will grow faster, so not a big difference in the 16% overall mix this year.

Great, thank you. Nice quarters guys.

Thank you.

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

Thank you. I just wanted to follow-up on the earlier question on the impact from the move over to subscription. Jeff, when we’re thinking about your outlook for FY 2018, is there any way that you can help quantify what you’re embedding in terms of the headwind to growth this year assuming some level of deceleration in the guidance? Just wondering to what extent is that coming from lower contract durations or more appears as you go description offerings?

Right. So, Melissa, I think that if you look at our second half billings growth based on those implied growth rates, I would think of those as a proxy for 2018 growth, but there’s two more points that you want to consider in that. We do have an easier comp in Q3 in second half versus the first half, so I would consider that. And I’d also consider the contract ranks coming down in the second half. We’re not guiding to 2018 now, but I think you have to take both those elements into consideration and look at the second half billings growth as a proxy, but all that would – you have to consider in that growth rate.

Okay, that’s helpful. And then just one follow-up on InsightOps; I’m wondering what investments do you all need to do in terms of ramping your sales force as well as the channel to sell that solution. And to extend that perhaps maybe selling that to a different end user or a different customer, do you plan on building out any sort of specialty sales team to address the particular use case?

Yes. Thanks Melissa, it’s a great question. Well, we do have some experience selling to that audience with the Logentries, both sales base and customer base, which we actually retained a major part of the talent from the original Logentries acquisition. So we have some experience selling to the audience, so we have some knowledge, understanding and expertise. That say, it is a business that we expect to perform well and we expect to continue to see it scale and grow and become a material contributor over time, and we do have to invest for that to occur. But we’re very comfortable with the investment profile and return when they gotten investment even though it’s early, we have enough experience to have visibility in the Insight about what’s required to grow that business.

Okay. Thank you very much.

Thank you very much.

Our next question comes from the line of Jonathan Ho with William Blair. Please go ahead.

Hi. Congratulations. I just wanted to start out with a question around operating leverage. It’s clear that you guys have made some investments here this year relative to the sales force and log management. How should we think about incremental investments here and incremental margin leverage as we start to look at 2018 and beyond?

Jeff and I will tag team this one. So first we’re seeing – when you talk about the business or the model, we are seeing general leverage in the business from both our customer base, our ability to cross-sell and up-sell. We’re seeing that our international teams are at scale. And we’re in a period now where we’ve been investing heavily in a platform of multiple product strategy. And for the first time, we’re actually really selling a full suite of products on a single platform. We think all of those things contribute to leverage, not to mention the leverage that you get from the fast business that itself. What that really means as you think about the operating expenses and how they scale versus revenue growth. We expect to see ongoing leverage as we move forward across the business and I think that’s one of the things that – when you look at it sort of year-over-year from a full year perspective, I think you continue to see leverage as we go forward, although quarters can vary, you’ll definitely see leverage in the business as we go forward based on our experience to-date.

Yes. Jonathan, I would just add that we are modeling out the next couple of years and I think what we’ve said is that before the years over and probably at our Analyst Day in the second half of the year we’re going to provide more color on our long-term model and also when we do turn profitable. So we are working on that and will inform everyone in the second half.

Excellent. And then just relative to your selling of the InsightOps, InsightVM and InsightIDR, how often are customers requesting sort of the multiple solutions and what’s been the feedback relative to this solution suite? I know it’s still too early, but just want to get a sense about you’re hearing.

Yes, it’s relatively early. I mean, the way that we see it so far, and again, it’s based on limited experience. If customers still buy projects today, but one of the things that we’re addressing is that most customers except for the very, very resource rich are looking to actually get leverage, and most customers view that if you look at IT log analytics, UBA based SIEM or vulnerability management, that these are all mandatory things that they have to do. And their choice has really come down to actually buy three different things, collect data in multiple different silos and try to reconcile it over time or do I buy something that allows me to actually scale my investment over time. And we’re refining is that we think of as the mainstream buyer, that buyer this resource constrained that has to address security, they have to address their IT evolution, is really looking at how they can get more bang for buck, how they can get more leverage, how they can consolidate their spend, and our strategy works well for them. The behavior that we see there specifically is that if you buy one solution, but really they buy that initially with an eye towards adding, and we continue to see customers adding additional product and solutions as they scale. With the caveat that it’s too early, but we’ve seen enough momentum to know that our strategy is pretty good.

Great. Thank you.

Thank you.

And we have no further questions at this time.

Thank you all very much. We appreciate your time.