Rapid7, Inc. (RPD) Q4 2017 Earnings Report, Transcript and Summary

Thank you for standing by. Welcome to the Rapid7 Fourth Quarter and Full Year Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, Monday, February 12, 2018. I would now like to turn the conference over to Jeff Bray. Please go ahead, sir.

Thank you, operator, and good morning, everyone. We appreciate you joining us to discuss Rapid7's Q4 2017 financial and operating results in addition to our financial outlook for the first quarter and full fiscal year 2018. 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 2017 earnings press release over the wire and is now posted on our website at investors.rapid7.com. We have also posted our updated company presentation and financial metrics file 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 19, 2018. We would like to bring the following to your attention. The date of this call is February 12, 2018. 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 upon 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 recently 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 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. Additionally, please note that while all the results that we're reporting today for the fourth quarter 2017 and the full year of 2017 are in accordance with ASC 605, the company is adopting ASC 606 on a modified retrospective basis as of the start of our new fiscal year, beginning January 1, 2018. 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 these non-GAAP financial measures provide an additional tool for investors to use in understanding company performance and trends, but note that the presentation of non-GAAP financial information is not meant to be considered in isolation or as a substitute for 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 today -- issued today announcing our results. The press release announcing our financial results is available on our website at investors.rapid7.com. At times in our prepared comments or in our 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 onetime in nature, and we may not or may provide an update in the future on these metrics. With that, I'd like to turn the call over to Corey.

Thanks, Jeff, and good morning, everyone. Thank you all for joining us today on our fourth quarter 2017 earnings call. Today, we are speaking to you from our Belfast office, where we are attending our annual global research and development team kickoff. Rapid7 finished a strong 2017 with a great fourth quarter. Our end markets are healthy and our SecOps portfolio is resonating with customers. Security and IT teams are finding that they have more suspicious events on their network than they could possibly investigate and more vulnerabilities that they can patch. And Rapid7 we can help provide the visibility, analytics and automation necessary to prioritize and accelerate remediation and reduce risk. In Q4, we delivered ARR growth of 36%, revenue growth of 28%, recurring revenue growth of 36% and calculated billings growth of 44%. For the full year 2017, we delivered revenue growth of 28%, recurring revenue growth of 33% and calculated billings growth of 31%. These strong results were driven across multiple regions and multiple products, and we are especially pleased with the progression of our subscription transition. 2017 was a transformative year for Rapid7 where years of hard work culminated in several significant events. We completed the migration of our products to our analytics and automation cloud and launched subscription solutions across our SecOps portfolio. InsightIDR was recognized as a visionary in the Gartner SIEM Magic Quadrant and has begun to significantly contribute to our financial results. We entered the security orchestration and automation market with acquisition of Komand. We exceeded $200 million in annual revenues, and we improved our annual operating loss and generated positive operating cash flow for the second year in a row. Also in December, we held our first Investor and Analyst Day. And this January, we completed a secondary offering, continuing the process of improving our public float while raising additional capital. As we said in our Investor and Analyst Day, Rapid7 has transformed our product set to address a world where IT and security teams are stretched and complexity is increasing. [Indiscernible] needs solutions that are easy to install and easy to use and help make their teams more efficient and effective. With our historical focus on resource-constrained customers, one of the key tenets of our product development is to make our solutions easy to deploy and easy to adopt, which has proven to be a huge competitive advantage. We are ready to lead the emerging SecOps movement through our multi-product analytics and automation cloud, unify teams and processes across security management, IT operations and DevOps. Let's review our business in the context of our 2017 goals. Looking at our first goal, this quarter, our customer count grew 13% year-over-year to more than 7,000, including 52% of the Fortune 100. We are still adding a significant number of new customers, and we are finding that our new customers are making larger initial commitments to Rapid7, leading to strong growth in new customer ARR. Both our VM and IDR products drove new customer growth in the fourth quarter and full year. While adding new customers is important, we are really focused on the quality of these new customers and the opportunity to up-sell and cross-sell across our expanded platform. Overall, we've been pleased with the quality of our customer growth this year. When we launched InsightVM, we expected that a more attractive total cost of ownership and an even more potent solution will prove a powerful tool for new customer acquisition, and we did see strong acceleration in InsightVM sales in Q4. As an example, in Q4, a Fortune 500 food company was looking to replace their existing VM solution, which was ineffective in providing visibility across their growing complex environment and wasn't helping them prioritize [indiscernible]. The customer was also looking for a comprehensive security management solution that blended the best of security operations and service management and could integrate with ServiceNow. Rapid7 was able to deliver a solution that met all of the technical and operational requirements of their expanded environment with a plan that would allow them to easily extend their coverage over time. They also appreciated our platform vision and purchased our application security solutions to help manage their business-critical applications. Another new customer that we added is a Fortune 500 manufacturer, who was looking to replace their legacy VM solution that has been outsourced to an MSSP due to their internal resource constraint. Their legacy VM had a high total cost of ownership. And they found that managing their remediation workflows via spreadsheets was highly ineffective. In their search for a new solution, they wanted something much more efficient that would also integrate across their existing security and IT operations solutions. They said that they found InsightVM so easy to use, they couldn't see why not to go with Rapid7. They already have plans to leverage our cloud platform for application security. Now on to our second goal, which is to disrupt the SIEM and IT log analytics market. Once again, we saw very strong growth in InsightIDR, which continues to be a significant contributor to our overall growth. InsightIDR is a SIEM that combines our powerful User Behavior Analytics with our broad-based data collection and robust search capability and an easy-to-deploy and easy-to-use interface, designed to quickly identify anomalies and provide the content to allow for speedy, efficient response. In the fourth quarter, Gartner released their SIEM Magic Quadrant. And after being in the market for about 6 quarters, we were excited to be named a visionary. This is the first time Gartner evaluated cloud SIEM providers. And InsightIDR's powerful analytics, broad visibility and ease-of-use are leading the evolution of the SIEM market. We believe this recognition validates that InsightIDR and Rapid7 are now a disruptor and gaining traction in the large and growing SIEM market. InsightIDR has proven to be a great product for both new customer additions and cross-sales. It has become a driver of our growth with ARR for InsightIDR in managed detection and response continuing to increase over 100%. As an example, a Fortune 1000 real estate investment trust with a strong security team is moving their security and IT operations tools to the cloud, and as a result, was looking to replace their existing SIEM. As a Nexpose customer, they naturally considered Rapid7 and chose InsightIDR because of the strength and breadth of our data collection, our advanced search and correlation capabilities, User Behavior Analytics and of course, our ability to integrate with other cloud-based management solutions. This quarter, IDR was also included in 2 of our largest deals and was a contributor to another quarter with cross-selling growth approximately - growing approximately 60%. As for our final goal, we improved our annual operating loss and our annual operating loss margin and we grew operating cash flow for the year. Our investments in our go-to-market teams across development are generating solid revenue and ARR growth, setting the table for growth and scale for years to come. As for our 2018 goals, first, we are committed to growing our ARR about over 30%. We already have momentum in our ARR growth today, driven by a strong market, the introduction of InsightVM and growth in our new products. We're fully committed to shifting our business to subscription. And last week, we announced that all of our products, including our on-premise versions, will now be sold on a subscription basis. Also we have shifted our sales compensation plan so that our sales quotas are based on new ARR. With these changes, everyone at Rapid7 is aligned to grow our annualized recurring revenue. For our second goal, we will leverage the expansion of our SecOps portfolio to keep driving new customer growth and cross-selling into our customer base. As we discussed at our Investor and Analyst Day, we believe we have a meaningful opportunity to expand ARR per customer by growing products per customer and adding new customers with our SaaS solutions. As for our final goal, we remain committed to improve profitability and operating cash flow generation in 2018. And as we mentioned at our Investor and Analyst Day, we expect to generate profit for the full year 2019 as we begin to realize the full leverage of our land and expand model and our shift to subscription partner [ph]. With that, I'd like turn the call over to Jeff to discuss our financial results and our guidance. Jeff?

Thanks, Corey. We're pleased with our strong performance in the fourth quarter with results that exceeded both our original guidance and our preliminary results announced on January 23. Total Q4 revenue was $57.7 million, an increase of 28% year-over-year. Product revenue was $34 million, increasing 38% year-over-year, driven by strong bookings in both VM and IDR with expanding recurring revenue. In addition, we had a onetime benefit from the impact of revenue previously deferred in 2017 that met the criteria for revenue recognition in the fourth quarter. Maintenance and support revenue was $12.5 million, increasing 20% as we saw an ongoing migration of perpetual customers to our cloud products, and our professional services revenue was $11.2 million, an increase of 13% year-over-year. We continue to have high visibility into our revenue forecast with 84% of our Q4 revenue having been on the balance sheet as of the first day of the quarter. And 70% of our Q4 revenue was subscription-based recurring revenue versus 66% in Q4 2016. And our recurring revenue grew 36% year-over-year. Value of our annualized recurring revenue increased to $164.9 million at year-end, a 36% increase year-over-year. You did see that about half of our new VM bookings during Q4 were InsightVM. And with the announcement of our shift to subscription-only for most of our customers, we expect that the majority of our product bookings going forward will be subscription-based. As a reminder, we define ARR as the annualized value of all recurring revenue-related contracts in place at the end of the quarter. During our transition from perpetual to SaaS, we believe this metric is the most relevant when evaluating the health of our business. Total deferred revenue grew 33% year-over-year to $224.5 million at the end of Q4. Calculated billings for the fourth quarter were $93.6 million, up 44% year-over-year with broad-based strength highlighted by another strong quarter from IDR and ongoing strength in the VM market. Average contract lengths were 25 months for total billings, which compares to 24 months in Q4 of the prior year. Consistent with what we experienced in Q3, in Q4, we were again pleased to see the customers for InsightVM, as well as our other SaaS offerings committed to more multiyear deals than we had forecast, resulting in higher contract wins. As we said at our Investor and Analyst Day in December, given the mixed shift from perpetual to SaaS, our billings are resulting in more recurring revenue and greater lifetime customer value. Also as Corey mentioned, 2018 quotas for our sales reps are now based upon ARR. Consequently, billings and contract lengths will no longer be a meaningful comparison to prior periods during this transition as they don't capture the benefit of a higher subscription mix and growth of our annual recurring revenue. Looking at the business geographically, North America revenue in Q4 was $49.5 million, an increase of 30% year-over-year. Rest of world revenue increased 18% year-over-year and contributed 14% of total revenue in the fourth quarter compared to 16% in Q4 2016. While our rest of world revenue growth was a little slower this quarter due to a large services deal recognized in Q4 '16, we had a strong Q4 and 2017 as our bookings outside of North America grew much better than the overall business. And we will continue to invest globally to drive momentum in this under-penetrated market. Our customer count increased by 13% year-over-year. And we ended Q4 with more than 7,000 customers globally. We again experienced higher ASPs through better customer penetration and more product multi-product sales, more large deals and increased recurring revenue, which are important parts of our growth strategy. And overall, we had strong growth in new customer bookings, and as Corey mentioned, we had cross-selling bookings growth of approximately 60%. Our renewal rate increased to 122% in Q4, driven by our strong up-sells and cross-sells. And our expiring renewal rate, which measures the renewal of the prior year's revenue run rate, was 89% in the fourth quarter. Turning back to the P&L. Non-GAAP total gross margin for Q4 was 72% compared with 75% in the prior year period. Non-GAAP product gross margins were 78% in Q4 and as expected, were down from 87% in the prior year period due to increased usage of our SaaS platform and managed services offerings. Our non-GAAP maintenance and support gross margin increased to 84% in Q4 from 83% in the prior period. In aggregate, our product plus maintenance gross margins were 80% in Q4 as compared to 86% in the prior period and 82% in Q3 2017. As we migrate more customers to the platform, we think it is important to continue to look at this gross margin on a combined basis. Our non-GAAP professional services gross margin was 41% in Q4 compared to 40% in the prior year period. Consistent with 2016, Q4 margins benefited due to a higher percentage of stand-alone or unbundled services being performed and recognized within the quarter. As we said at Investor and Analyst Day, going forward, we expect our total gross margin to stay in the low to mid-70s on both a 605 and 606 basis. Reviewing our Q4 non-GAAP operating expenses. R&D expenses were $12.1 million or 21% of total revenue, flat from 21% in the prior year period. In Q4 of this year, R&D expenses were reduced by approximately $400,000 due to capitalized internal-use software costs relating to our SaaS product development. We will continue to invest and innovate to support our SecOps platform. Sales and marketing expenses were $30.3 million or 53% of revenue in Q4 compared to 52% in the prior year period, mainly driven by higher headcount and higher commissions, given the strength of our Q4 billings. We remain focused on investing in our sales team to drive higher recurring revenues as we build scale and leverage in the business and drive to projected non-GAAP operating profitability in 2019. G&A expense was $6.9 million or 12% of revenue in Q4, an improvement compared to 14% of revenue in the prior year period. As a result, Q4 non-GAAP operating loss was $7.6 million or a margin of negative 13% compared to a non-GAAP operating loss of $5.5 million or a margin of negative 12% in Q4 2016. While our operating loss was within our guidance range for Q4, the strong bookings resulted in higher commission expenses, which are booked upfront and exceeded the revenue benefit we realized in the quarter. Otherwise, we would have exceeded the high end of our guidance. Adjusted EBITDA loss was $6.3 million for the fourth quarter compared to a loss of $4.6 million in the fourth quarter of 2016. Non-GAAP net loss per share was $0.17 in Q4 2017 compared to a non-GAAP net loss per share of $0.13 in Q4 2016. Our operating cash flow for Q4 was $8.2 million. We ended Q4 total cash and investments of $92 million compared with $85 million as of September 30, 2017. Cash and investments for the year was approximately flat as we generated $13.3 million of operating cash flow, offset by the $15 million that we paid for the acquisition of Komand. And in January, we raised $31 million from the sale of our stock in our secondary offering. To quickly summarize full year 2017, total revenue was $200.9 million, increasing 28% year-over-year. 2017 non-GAAP operating loss was $26.3 million, an improvement from $29.3 million in 2016. For the full year 2017, our non-GAAP operating loss margin improved to 13.1% from 18.6% in 2016. 2017 non-GAAP net loss per share was $0.60. For the full year 2017, cash flow from operations was $13.3 million. Adjusted EBITDA for the full year was a loss of $21.5 million, an improvement compared to a loss of $25 million in 2016. Moving to our Q1 and full year 2018 guidance. For 2018, we are adopting ASC 606 under the modified retrospective method, which means that we will report under both 606 and 605 each quarter during 2018. In order to provide some additional transparency during this transition, we'll give guidance under both ASC 606 and ASC 605 for revenues and non-GAAP offerings. As we previewed at our Analyst Day, you will see an impact primarily to our revenues and our sales expense as we move to ASC 606. The reduction in 2018 revenue under ASC 606 relative to ASC 605 is due to reduced ratable perpetual revenues caused by the extension of amortization periods from the contract length, which has historically been approximately 2 years to the customers' estimated economic life of 5 years and the loss of bundled services revenues, which were delivered as of December 31, 2017. However, were recorded in deferred revenue recognized ratably over the contract period under ASC 605. As services were already delivered, no revenue will be recognized under ASC 606. These impacts to revenue are anticipated to be greatest in the first quarter of 2018 and to decrease throughout the year. The actual differences in revenue under ASC 606 and ASC 605 is subject to the dollar value of our 2018 bookings, the mix between subscription and perpetual and contract lengths of perpetual deals. Operating expenses under ASC 606 relative to ASC 605 will be reduced by the capitalization and amortization of sales commissions. With that, here's our guidance. For both Q1 and the full year 2018, we anticipate ARR to grow over 30%. For Q1 2018 on a 606 basis, we anticipate total revenue to be in the range of $50.1 million to $52.1 million as the impact of the adoption of ASC 606 will be greatest in Q1. We anticipate non-GAAP operating loss to be in the range of $10.1 million to $8.8 million. We anticipate non-GAAP net loss per share for Q4 2017 to be in the range of $0.22 to $0.19. This is based on an anticipated 45.1 million weighted average shares outstanding. On a 605 basis, we anticipate total revenue to be in the range of $54.6 million to $56 million. This equates to year-over-year growth of 21% to 24%. We anticipate non-GAAP operating loss to be in the range of $7.4 million to $6.5 million. For the full year 2018 on a 606 basis, we anticipate total revenue to be in the range of $225 million to $234 million. This equates to an impact of approximately $11 million to $14 million from ASC 605. We anticipate non-GAAP operating loss to be in the range of $26 million to $20 million. We anticipate non-GAAP net loss per share for Q4 2017 to be in the range of $0.55 to $0.42. This is based on an anticipated 46.4 million weighted average shares outstanding. On a 605 basis, we anticipate total revenue to be in the range of $239 million to $245 million. This equates to year-over-year growth of 19% to 22%. We anticipate non-GAAP operating loss to be in the range of $25 million to $21 million. We also continue to estimate the shift in product mix will impact our growth in operating cash flow. And as a result, we expect 2018 operating cash flow to approximate 2017. As we transition our business to subscription and focus on ARR growth, billings will no longer be a good indicator of the growth in our business. Therefore, we will not be providing guidance for billings for 2018, although we do anticipate slight growth for the year. With that, we appreciate your time and support. And now I will turn the call back to Corey for closing comments. Corey?

Thank you, Jeff. In closing, I'd like to reiterate that we are pleased with our strong results for Q4 and we look forward to an exciting 2018. I'd also like to thank our customers, employees and stockholders for their continued support of and commitment to Rapid7. With that, I'd like to turn the call over for Q&A.

Thank you. [Operator Instructions] Our first question comes from the line of Saket Kalia with Barclays Capital. Please proceed with your question.

Hey, guys. Thanks for taking my questions here. How are you?

Doing well. Thank you.

Hey. Actually, Corey, maybe I'll start with you. You've mentioned during your prepared remarks shifting your on-premise products to subscription-only, I believe. Could you just give us a little bit more detail on that? I guess, the question is does that mean that we're going to be end-of-life-ing perpetual on all products in favor of SaaS? Just any more detail on that change would be helpful.

Yes, absolutely. So the first thing is that in the second half of last year, we saw very positive uptake in InsightVM. And we saw customers really resonating with our subscription offering, and specifically InsightVM. One of the requests that our field had at the time to make things simpler and more aligned was to offer our on-premise solutions, primarily Nexpose, under a subscription model. And we think that will be very well received by customers all over the world. And that is how our sales teams are incentivized as well as that's sort of the way that we're actually selling all over the world. That said, there are limited markets and existing quotes where we will continue to offer perpetual licenses. But we expect that to be very, very limited in nature and [by exception only] [ph].

Got it. That's really helpful. Maybe for my follow-up for you, Jeff Kalowski, understanding that ARR is the metric of focus kind of going forward. I think you just mentioned in your prepared remarks in the guidance section that billings could maybe be slightly up for '18. Just to fully kind of bake that, could you just remind us how you're sort of thinking about duration in 2018 versus '17?

Yes, Saket, as we go through the transition in the first quarter, we would still probably have to honor quotes on a perpetual multiyear basis. But as the year progresses over time, that will diminish. So I would say that the first half, the contract lengths, they're not all going to go to 1 year. But they'll be higher in the first half and less in the second half. As we get through more of that transition, then they'll be closer to the 1-year mark. They're not going to be at the 24 month period that we've historically had under the perpetual model.

Got it. That’s very helpful. Thanks, guys.

Thank you.

Our next question comes from the line of Rob Owens with KeyBanc. Please proceed with your question.

Yeah, good morning. And thank you for taking my question. Corey, on a high level, you're early in this transition, both in the pivot to SaaS as well as arguably selling the broader portfolio. So can you talk about the selling motion, kind of how you've re-tooled your sales force because the change over the last 6 month have been impressive, number one. And number two, maybe broader channel education and how you'll leverage the channel moving forward of kind of the new portfolio, if you will.

No, absolutely. And I'll take it in sort of phases. The first phase is really to acclimate both our sales team and our customers to our cloud-based subscription model. And that started in 2016, where we did two things. One, we introduced InsightIDR to great success and continued momentum. We also introduced Nexpose Now, which provide cloud-based capabilities for vulnerability management and was really a precursor to InsightVM, which we offered in Q2 of last year. As of the end of Q2 of last year, we had all of our technologies cloud-ready and under a subscription model. And our focus then was really enabling our sales team and also management of customers [product] [ph]. And I really emphasize that this was not one that we pushed. It was one that we heavily focused on looking to what customers' response was going to be. And what we found is that customers were highly, highly receptive to our cloud-based subscription offerings. And so as we entered this next phase, which is really to align the compensation model, we're doing that under the situations where our sales team has actually been actively selling and engaged in cloud-based subscription products for well over a year now, where our customers have actually voted with their feet, so to speak, and actually been buying and frankly enhancing their position with Rapid7. And so now we're aligning the compensation models around that. And we think that, that's a natural next step to what we've seen in the momentum so far. You actually nailed the next piece of the equation, Rob, is that now that customers are demonstrating that they want our cloud-based subscription offerings on SecOps. Now that we're selling multiple products under our SecOps platform and our sales alignment is there, it's really starting to really drive the alignment around the channel. And we're early stages there, but we have positive momentum from the channel.

And it seems like customer acquisition was strong last year, adding about 800 customers roughly on a year-over-year basis. Are these competitive displacements? Are they greenfield opportunities? And as you're adding new customers, is it a VM-for-VM type of situation? Or are you selling them the broader portfolio?

Yes, that's a great question. So we're seeing a mix of net new customers that are new to the security or the SecOps and analytics ecosystem altogether. And we're also seeing customers upgrade. By and large, the way to think about the customers that are upgrading or displacing existing solutions, whether that's SIEM solutions or whether it's vulnerability solutions, it's ones that have been used in their existing technologies in relatively limited ways. And they have primarily been compliance-oriented and driven. If you think about the genesis and the focus of SecOps, it's about how to operationalize security. And so as people are thinking about operationalizing and scaling their security program, that's often a good trigger where people will consider an upgrade or a displacement. But that's because their requirements changed, not because the existing technology was failing under their old legacy requirements. It's just they actually introduced new requirements about how they operationalize security, and that where we find our partners and our sellers actually have a good opportunity going then to upgrade those customers.

Great. Thank you very much.

Thank you, Rob.

Our next question comes from the line of Gregg Moskowitz with Cowen and Company. Please proceed with your question.

Okay, thank you very much and good morning guys. Getting back to the 44% billings growth this quarter, and I know billings, of course, will be far less relevant going forward, but it was an impressive growth rate, especially in the context of the increasing mix shift to cloud. But I'm wondering if there was any pull-forward of business that you saw this quarter.

Yes, we didn't see any pull-forward. We spent a lot of time looking at not just the Q4 performance, which we were impressed with, but also what it held for our Q1 pipeline. And our Q1 pipeline continues to be healthy as indicated by both our annual and our Q1 guidance.

And the line disconnected. Our next question comes from the line of Michael Turits with Raymond James. Please proceed with your question.

Hey, guys. Quick one for you Jeff, I think, did you mention what that onetime deferred revenue benefit to revenue was in 4Q, how much that was?

Yes. It has to do with some installations that we couldn't recognize revenue on certain contracts until the customers were installed. So again, these were bookings - this would have been revenue that would have been recognized earlier. But until they achieve that milestone, we couldn't. So we got that onetime benefit. With respect to how significant it was, we still would have exceeded the guidance without that.

Okay. But you didn't quantify it for us?

No.

Okay. And then Corey, can you talk - this is, I think, a little bit of an extension of Rob Owens' question, but a little bit more about on go-to-market relative to InsightOps in particular. How are you doing in terms of cross-training sales to be able to sell something that's outside of security? I know SecOps is increasingly converging but still somewhat of a divergence. And have you found, in terms of who you're selling to and who the buyer is, how smoothly that's gone?

Absolutely. So InsightOps continues to grow. It's sold by the same sales teams that sells InsightIDR. And so what we're finding out is similar to other people that are in this space is that customers are increasingly looking to have broader coverage over their environment with more capabilities. And so what we find is that because InsightIDR is a super set of InsightOps, frankly more customers are opting for the larger purchase that covers more of their environment and has more capabilities. And so even if customers that start off looking at InsightOps or might even make a small purchase, many of them quickly move on to start looking at the full capabilities of InsightIDR, which offers not just the search capability but also the User Behavior Analytics capabilities and also more robust functionality.

Okay. Last quick question. Did you quantify InsightIDR this quarter? I think you have in previous.

Yes, it was - what we said in the past, Mike, was that it was over 20% of total bookings. It was again this quarter.

Yes. And we'll provide updates on that as sort of the milestones change. But again, the growth has been healthy and continues to be healthy.

Perfect. Thanks very much.

Thank you.

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

Hey, guys. Good morning. Thanks for taking my questions. Maybe, Corey, for you from a high level, I'm curious how fast you're seeing ARR growth within InsightVM relative to market peers. And could we see your VM growth, I guess, relative to the overall market remain more durable, just kind of given some of the cross-selling success that you're seeing with other products like IDR?

Yes. No, absolutely. We believe, and as we said on our Investor and Analyst Day, that we see great health in demand for InsightVM and vulnerability management overall. We believe that if you look at our ARR growth that we will continue to grow ahead of the market. And we see durability over there for a good time to come, and we think that there's a couple of key contributors to that. One is that people lack our SecOps vision to operationalize security. So looking at vulnerability management from the context of IT and how you operationalize the security of IT is something that's not just catching on, it's becoming a mainstream concept and idea. The second thing is that the ability that we have with our SecOps vision to establish relationships anywhere along the spectrum and then to expand later gives us great access to customers. So we do expect to actually continue to grow healthily there. We expect to continue to take share in the market. And we are seeing continued evidence of that.

That's great. And then I think in your prepared remarks, you called out InsightAppSec for a win. I'm wondering if you could give a little bit more details on that and who you guys typically see when customers are baking off of that product.

Yes, this is a good example of where InsightAppSec historically has been a sale that we saw both as part of the MDLs [ph] and also standalone. We are increasingly seeing this as a great cross-sell opportunity within the portfolio. As companies think more comprehensively about their security posture, they are looking at not just at their infrastructure, but they're also looking about their customer applications that they are responsible for. And what we're starting to see is more and more customers looking at that as part of larger commitments to Rapid7, either in the initial purchase or in follow-on purchases over time. So we're fairly optimistic about the future of InsightAppSec, and in general, application security. Again, the key thing that we keep pointing back to is that our SecOps vision is really centered around bringing together IT operations security and developers together to actually figure out how to operationalize that security.

Thanks, guys.

Thank you.

Our next question comes from the line of Jonathan Ho with William Blair. Please proceed with your question.

Good morning. Just wanted to get a sense from you in terms of InsightIDR, with the over 100% growth, how should we be thinking about the sustainability of that growth rate for 2018?

So it's a good question. What I would say is that we're seeing strong continued demand. It is a large market of which we view ourselves as having still, with all of our success, a relatively small share today. And so if you think back to our Investor and Analyst Day, we said that, that market could actually grow over 50% in ARR for the next several years. And we continue to believe that, that growth is durable and sustainable.

Got it. And then just as a follow-up, given the 60% cross-sell opportunity that you referenced on billings, could you maybe give us a sense of what products you most often saw on the cross-sell side and how you think about that trend over time?

Yes, if you just think about from our prior descriptions about sort of our -- sort of like top-selling products in terms of growth, we, of course, have vulnerability management. So InsightVM is clearly a strong focus there. InsightIDR is clearly a strong focus. So if you think about those being the lead two products that you see lots of demand, I would say followed by InsightAppSec there, and then you have our other products that are newer in orientation but are further down, including Metasploit, which we've had for a while now, InsightOps and a number of other products. But that's kind of how we think about it. It's heavily weighted towards the InsightVM and the InsightIDR. And then we actually are able to land and expand in either direction.

Great. Thank you.

Thank you.

Our next question comes from the line of Anne Meisner with Susquehanna Financial Group. Please proceed with your question.

Thank you very much. Corey, as you continue to transition towards analytics and SecOps, maybe you can just talk about what the competitive environment looks like now, so who you're seeing competitively that you didn't see when you were more focused on vulnerability management.

Yes. No, it's a great question. So we continue to see the market as one where the SecOps competitors are still selling individuals. So our primary competitor is our customers that have to hobble together 3 or 4 solutions to deliver the SecOps provision that we deliver integrated, comprehensive experience around. And what we're finding is that it's increasingly becoming a competitive advantage for us. There's no company at scale that we're aware of out there that has the comprehensiveness of our SecOps vision that actually brings together all the key critical pieces of SecOps together under one integrated platform and under one integrated user experience. And as customers look to solve this problem, we think that, that will continue to be a net benefit to us.

Okay, great. And then a quick one for Jeff. Jeff, maybe you could elaborate on what the we should expect to see with respect to the operating margin trajectory as you get closer to the 2020 target. It looks like you expect to see a lot more progress in '19 relative to '18. And I assume that will come from a combination of improvements on both the gross margin line as well as just more efficiency with respect to OpEx. Maybe if you can just kind of elaborate there on the operating model transition as you approach these longer-term targets.

Yes. So what we said in '18 is that we'll see some leverage in sales and marketing and G&A, and R&D will stay pretty much in the low 20% range. But the big driver of the leverage in '19 and through 2020 is really the transition to subscription or our SaaS transition. So we're going to get a lot of leverage off lowering our cost of sales with those renewals coming in. And as we said on Analyst Day, our projected margin in 2020 was 4% to 7%, I believe. So the big driver of that will be the conversion to SaaS.

Thank you. That's very helpful.

Yes. And just - we still maintain that gross margins will be in the low to mid-70s. So there's no change there.

Okay, great. Thanks.

Our next question comes from the line of Alex Henderson with Needham & Company. Please proceed with your question.

Thanks very much. So given the broad shift away from perimeter defense towards things like vulnerability management or OPSEC, are you seeing a change in the deal sizes and the scale of your transactions or any change in the time that you closed the process length of transactions? Could you talk a little bit about the sort of the tone of the pipeline? I know you said it was healthy, but a little bit more granularity would be helpful.

Yes, we're not seeing any significant changes in deal cycle. We've always said that it's a wide set of deviation. You have some deals that close fairly quickly, and then some that takes sort of several quarters to actually close. But we're not seeing any significant deviations there. We are seeing larger deal sizes. And that's across segments, so that's not a shift from sort of mid-market to enterprise. That's been relatively consistent. We're seeing customers make larger commitments to Rapid7 to actually get more visibility and operationalization of their overall environment. And so that is the change that aligns with the comments that you made about customers really looking to shift their investment focus.

One other question if I could. So the international business was a little bit difficult for us to look through because of the year-over-year comp. Obviously, you've got a large opportunity over there. Can you give us any more granularity on when you expect that to reassert itself as the faster growth piece of your business? Is it in the first quarter? Or will the change in the reporting architecture impact that timeline?

Yes, I'll talk to the high levels about just the business overall. So international continue to grow and perform well. We saw healthy growth in international last year, especially in EMEA. More broadly, we expect the international to continue to grow faster than the overall business. And that looks like that's continuing on pace for 2018. As far as the impact of 606 or some of the mild changes, Jeff can talk to that.

Yes, Alex, I think what you're referring to is we had a tough comp related to the large services deal. But the bookings are growing faster internationally than in the U.S. So we would expect that the revenue to follow soon. They would go hand-in-hand.

One last question if I could, just a simple quick one. So just to be clear, you only talked about year-over-year customer adds. I assume that your customers were up 3Q to 4Q. Is that -- can you confirm that, that's true?

Yes, that is true.

Perfect. Thanks.

Our next question comes from the line of Melissa Franchi with Morgan Stanley. Please proceed with your question.

Thank you. And good morning. Corey, I'm just wondering if you can maybe talk about your traction moving into the enterprise space relative to maybe more of the mid-market. And are you seeing your customers that are coming on, any of the new customers that are adopting Insights, do they have different characteristics in terms of maybe size or verticals than what you've seen historically?

Yes, we continue to actually make very good traction in the enterprise market. Our goal and our aspiration is to be a broad-based platform that can be used by mid-markets as well as the Fortune 10. And we have our customer base that actually spans that entire segment and that trajectory. What we saw last year specifically was sort of two dynamics. One, the mid-market and mid-sized enterprises continued to be healthy. Last year, we did see sort of like the strength come back in the enterprise segment overall. And that's something that we feel good about. As far as the demand characteristics, it's not outside of the expected. We've had enterprise customers for a long time. And we deliver the scale and manageability that they need. And we find it easier and easier for us to actually compete in those enterprise deals. The one thing I would actually clarify though is our focus continues to be on the -- as we think about the enterprise that actually demands productivity -- and some people call that the resource-constrained enterprise, but we really think about it as enterprise organizations that are really looking for the most bang for buck. And so we can do quite well in specific markets within financial services like insurance. We can do quite well in health care. We can do quite well in the energy sector. We can do quite well in retail, and so -- I mean, we even do quite well in the technology sector, which is one of our strong verticals there. And so we tend to be very focused about how we actually participate in the enterprise segment. What we don't focus on is people that are looking for us just to be a hyper customized technology solution. And so you see us focus less in things like the traditional Wall Street banking sector. But the other segments of the enterprise that are really concerned about how they operationalize their security efficiently and effectively at the most bang for buck, we're doing quite well in those segments.

Okay, that's helpful. And then if you don't mind, I'd like to follow up on the security consulting business. The revenue growth is a little bit slower than the overall revenue growth. And so I'm just wondering if you could comment on what kind of capacity you have in that business, excess capacity with the security consultants. And then at the higher level, how strategic is this business to your overall top line growth? Is it a meaningful kind of channel or driver for the other parts of your business?

So to answer your last question first, it's not strategic from top line growth. In fact, we're doing so well on the product sales front that we actually have the leeway to really make our services about being strategic to our customers and our customer relationship, which is the primary focus on it. And we're afforded that because our products have such healthy demand there. So what we decided that our focus for our services organization was going to be is about really how to help our customers assess and develop and mature their security programs and their security offerings. And that's where we're putting our talent and our investment to work there. We think that, that creates stickier, healthier customer relationships over time. So the strategic focus is really about our customer relationships, not about revenue.

Got it. Thank you.

Thank you very much.

Our next question comes from the line of Sarah Hindlian with Macquarie. Please proceed with your question.

Hi, good morning. This is Fred Havemeyer on for Sarah Hindlian. So I wanted to focus again on international, where you're reporting that bookings growth was ahead of the overall company, and digging to what you expect as we're approaching the May 2018 deadline for GDPR. So how are you seeing GDPR as a driver in your pipeline? And where would you say you stand with the overall opportunity around this new regulatory environment?

Yes, absolutely. Well, clearly last year, we actually had healthy and good performance in EMEA. And so that indicates that we're starting to see some strength in demand there. How much of it is attributed to GDPR is hard to tell. But we see very healthy EMEA and we expect EMEA to be healthy again in 2018. What I would say is most of the opportunity, I believe, is in front of us. I've had lots of time to spend time both here and other places looking at compliance. And typically, you have what I think of as the lawyer and the consultant wave before the product wave fully kicks in. And it's clear that there's lots of assessments being done there. We expect that the product purchases to follow the assessments that are being done there. So we do expect to see some positive impact this year. But we still think we have several years of benefit ahead of us.

And then a follow-up question for Jeff. Under ASC 606 adoption -- and we realize it's early phases of this right now. But do you expect or anticipate any impact to deferred revenues? And if so, have you made any early estimates for this going forward? Thank you.

No. The deferred revenue change as of the end of December 2017, it's about the same. What we pick up by putting back some of the revenues previously recognized is offset by the services that we lose. So the gross amount or the net amount as of the end of the year won't change very much. And we'll report that -- when we report our first quarter's results, you'll see that.

Our next question comes from the line of Michael Romanelli with Cowen and Company. Please proceed with your question.

Hi, guys. It's Gregg Moskowitz again. And apologies, I got disconnected earlier. But just a couple of follow-ups if I could. And first, for Jeff, you reiterated that total gross margins will remain in the low to mid-70s going forward. But your product gross margins have been steadily declining due, of course, to the transition to SaaS. So as it relates to product gross margin specifically, Jeff, does that mean we're nearing the point of stabilization? And how are you looking at that?

Yes, what we've done is we are putting in some efficiencies with scale. And we expect to realize that as the year progresses. So I think your question is are we at the low point of the product gross margins? I would say that we are estimating that we pretty much are. So we don't expect that to degrade much more going forward.

Okay, very helpful. Then just for Corey, curious if you had an update on the Worldwide Head of Sales position. Thanks.

Yes. No, we are continuing -- so our Andrew, our COO, continues to actually make progress in building up the sales org. He has a strong bench under him. We made several key hires. And we'll talk sort of subsequently about sort of what we're doing around the organization. But what I'll say is productivity is doing quite well. The team is performing quite well. And his build-out strategy that we actually started talking about last year is ahead of plan from our perspective. And we'll talk more about the organization later. But I would say we are ahead of where we want to be.

All right. Terrific. Thanks very much, guys.

Thank you.

Mr. Thomas, there are no further questions at this time. I will turn the call back to you. Please continue with your presentation or closing remarks.

Thank you all for joining us this morning. We appreciate your time and effort. And we look forward to chatting with you on the next call. Thank you, and have a wonderful day.

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