Ladies and gentlemen, thank you for standing by and welcome to the Rapid7 First Quarter 2018 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, Tuesday, May 8, 2018. I would now like to turn the call over to Mr. Jeff Bray, VP of Investor Relations. Please go ahead.

Thank you, operator and good afternoon everyone. We appreciate you joining us to discuss Rapid7’s Q1 2018 financial and operating results in addition to our financial outlook for the second quarter and full fiscal year 2018. I am Jeff Bray, Vice President of Investor Relations. I am here today with Corey Thomas, President and CEO and Jeff Kalowski, our CFO. We distributed our Q1 2018 earnings press release over the wire and it’s 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, which includes additional information to help explain the impact of shifting to 606 on our Q1 financials. 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 15, 2018. We would like to bring the following to your attention, the date this call is May 8, 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 on our current expectations and beliefs and on information currently available to us. Statements containing words such as anticipate, believe, continue, estimate, impact, 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-K filed with the Securities and Exchange Commission and subsequent reports that we file with the Securities and Exchange Commission. The information provided on…

Thanks, Jeff and good afternoon everyone. Thank you all for joining us today on our first quarter 2018 earnings call. Rapid7 had a strong start to 2018 putting us in a great position to achieve our 2018 goals, our long-term aspirations and our overall SecOps vision. Enterprises are prioritizing cybersecurity in their IT budgets and products that provide visibility, analytics and automation continue to outgrow the overall market for security software. With a broad set of market leading solutions, our SecOps portfolio and platform are resonating with our customers and it’s a broader market. The highlight of our first quarter was our annualized recurring revenue, which accelerated to 38% year-over-year growth. In addition, in Q1, we delivered ASC 605 recurring revenue growth of 40%, ASC 605 revenue growth of 29% and we also made progress towards hitting our 2018 and 2019 profitability goals. Based on the strength of our business so far this year, we are raising our guidance for growth in both ARR and revenue for 2018 maintaining our guidance for 2018 operating loss and reiterating our goal of achieving profitability in 2019. At the RSA Conference in April, customers, partners and prospects validated our strategy to provide SecOps solutions that are easy to install and easy to use. Today, most security IT and DevOps teams find themselves operating at silos, struggling to work together. This misalignment not only results in poor security practices, it also slows an organization’s ability to innovate. SecOps is the practice of aligning security, IT and DevOps teams through a shared set of data and tools. Share visibility, supported by analytics and automation, creates a common language for teams that breaks down barriers and ultimately accelerates innovation. The Rapid7 Insight platform unifies data collection and delivers the visibility, analytics and automation needed to power…

Thanks, Corey. Before I begin discussing our strong results for the first quarter of 2018, I want to remind everyone that as of January 1, we have adopted ASC 606 on a modified retrospective basis and therefore we will report each quarter’s results under both ASC 606 and ASC 605. We have included all of these details in our earnings press release today. When discussing our year-over-year growth rates and other key trends in our business, we will be comparing our results on an ASC 605 basis as we don’t have prior year operating results under 606 and a comparison would not be meaningful. To summarize Q1, on an ASC 606 basis, total revenue was $54.5 million and non-GAAP operating loss was $8.9 million. On an ASC 605 basis, total revenue was $58.2 million and non-GAAP operating loss was $6.9 million. We are pleased with our strong performance in the first quarter. As I just mentioned, total Q1 revenue on an ASC 606 basis was $54.5 million and above the high end of guidance. Product revenue was $35.3 million, maintenance and support revenue was $10.8 million and our professional services revenue was $8.5 million. I will now discuss our revenue on an ASC 605 basis and all comparisons for the entire year. Total revenue for the first quarter of 2018 was $58.2 million, an increase of 29%. Product revenue was $37.8 million, an increase of 46%. Maintenance and support revenue was $11.7 million, an 8% increase. And our professional services revenue was $8.7 million, a 3% increase. Our product revenue was once again driven by strong bookings in both VM and IDR, with accelerating recurring revenue. As we expected, with the shift towards ARR quotas for our sales force, we did see a slowing and professional services bookings and associated…

Certainly. [Operator Instructions] And our first question comes from the line of Saket Kalia with Barclays. Your line is open. Please go ahead.

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

Good, Saket.

Hey, maybe just to start with you, Jeff. Nice acceleration on the ARR. I think this was really the first quarter where we have the sales force all aligned on ARR and also the first quarter or first full quarter where we introduced a subscription version of the product as well. Maybe qualitatively, how do you think about those different drivers to the acceleration of ARR this quarter? And just to make sure we asked the question, were there any one-timers to call out, because it was a nice acceleration in ARR?

Yes Saket. I think that we were very careful and we spent a lot of time structuring the comp plans to influence the right behavior. We have talked about it a lot is that we want them focused on ARR. And historically, we have been on TCV plan, so we make sure that, that transition could go as smoothly as possible. And I think that what we saw in Q1 is that they really embrace the opportunity to do well and to be compensated appropriately on that shift to ARR and not have to be dependent on multiyear deals and TCV in the past. And I think that was a pretty big driver. Also we saw a nice shift from subscription from our perpetual deals when there are non-cloud products as well that also drives more ARR per transaction. I think its overall enthusiasm for the SecOps platform I will let Corey add some commentary there that he talked about in his prepared comments.

Yes. I think more than the benefits we had back, it was that – our IDR products have been on an ARR-owned and ARR basis for a while. So when you think about the big shift that was really in our [indiscernible] management operates, which had very, very healthy growth for the quarter. I think part of that though was that our sales team is selling to a customer base that was already in a market that was subscription-based and so that lessens the risk for us as a company and that translated through higher productivity and higher growth rates in ARR.

Saket, I am sorry, I forgot to answer your question on the one-timers, no, we didn’t see any one large – excessively large deal that will skewed the results at all.

Got it. That’s all really helpful. Maybe for a follow-up for you, Corey, it’s been a couple of quarters since we brought Komand into the fold, I guess the question is how are you thinking about that product enhancing what we have in VM and SIEM versus that is really a standalone tool to make a bigger place sort into the orchestration market any thoughts on command and future would be helpful?

Absolutely. We have always said the Komand orchestration and automation market is huge and we are seeing more and more customers looking for solutions there and we will be a major player in that market. Our priorities right now are integrating into our platform, we believe that data and analytics driven automation will provide customers a much, much more robust platform and our goal is to be a dominant player in the market and to add lots of innovations to the market, it actually helped make orchestration and automation mainstay. That said you will see both a major product offering in Komand over time and you also see us rollout orchestration and automation capabilities in our products this year that really are focused on solving the customers solve problem as well as differentiated our solutions versus other end markets. So, the answer is both, it’s a massive market, it’s also a core capability of the platform we think is going to drive – help drive continued growth.

Got it. Very helpful guys. Thanks very much.

Thank you.

Our next question comes from the line of Matt Hedberg with RBC Capital Markets. Your line is open.

Thanks. This is actually Matt Swanson on for Matt. Corey, you started off talking about InsightVM, the success you have seen and some of the accolades you have received recently. Could you just talk a little bit more about some of the specific differentiation and the offering and kind of the competitive landscape you are seeing around it?

Yes, no, absolutely. So if you think about vulnerability management, historically, it’s been mentioned much more of a tactical solution. And our observation that really started 4 plus years ago that the problem of how people manage and maintain their IT environments was one of the single biggest calls to take risk. And if we could actually translate what we were doing in vulnerability management, they are hoping customers better manage, maintain, update, configure and control the environment and to solve the IT complexity problem from a security operations perspective, then we would be doing a great service for our customers and make ourselves successful. That is the core of the translation of how vulnerability management, have been setup vision, it is about not just reporting, it’s about taking data about the environment, analyzing the viability state of the environment and then making it easy for people to remediate and shift that state of the environment. And so the big differentiators that we get credit for our analytics, about risk exposure and the environment, our analytics about their remediations in the environment, helping people understand not just what the vulnerabilities are, but how does that relate to their IT operational practices. And then what we are doing as we go forward is translating that remediation analytics and remediation workflows into remediation orchestration and automation that allows people to much more effectively pass control and maintain the environment. What we are seeing is a natural outcome of that is that vulnerability management will just be managed by a very small subset of the security team focused on compliance. For our customers, it’s now becoming a core capability that spends on security and IT and it’s hard that they operate – have made sort of vulnerability management much more operational.

That’s great. And then if I could just ask one more, another really strong quarter for cross-sell. I was just wondering how efficient you feel the go-to-market motion is right now around cross-selling, like, are you firing on all cylinders or is there additional gains to be made in that?

But we are making – so, one we make great gains, we are seeing great momentum at cross-selling. And we believe that there are still greater gains to be made. We still are in the early stages of the ARR per customer that we can achieve the number of products for customers we can achieve and we are getting positive feedback and momentum from our customer base on our overall SecOps portfolio strategy. So we are optimistic that we actually have sustainable growth in cross-selling which leads to much higher rates of ARR.

Alright, great. Thanks for the time.

Thank you very much.

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

This is Eric Keith [ph] on for Michael. Congrats on the quarter. Maybe a couple of questions to follow-up on Matt’s questions, could you maybe talk about how your resources between going after new customers versus expanding the existing customer base just kind of how you allocate those resources? And then further to how the sales force is organized to land new customers versus cross-selling and up-selling existing customers, just kind of the dynamic between those two?

Yes, absolutely. So one, we actually have the luxury to be firing on all cylinders. And so because of that, we actually believe that the best thing keeping it simple and so we are focused on one thing, ARR growth and we achieved ARR growth both by adding new customers but also expanding. So, it is an effort and the way that we structure our sales team is we have a team that actually focuses on customer relationship management and account management and the renewable ecosystem and then we have a team that’s responsible for new ARR growth and that can come from adding new customers or from expanding existing customers. And we, for the stage that we are at right now we are fine with either one. We have massive growth in the number of customers that we are going to add to our platform and we have substantial opportunities to grow the ARR by per customer, by huge multiples. And so because we actually have positive outcomes that we can achieve on either, we have actually left it to our sales team to actually figure out what’s the most efficient way to grow. Now, we are managing it and we are looking at it until we could do split and send them in place to actually keep it balanced, so you should continuously both add new customers and expand the ARR for customers, but right now, we are just focusing on the overall growth of ARR biggest because both of those are going to grow substantially.

Great. That’s helpful. And then maybe similarly on the VM kind of competitive landscape, could you maybe just talk about where you are seeing with competition in terms of endpoint vendors that maybe moving towards VM? It just seems like kind of a little bit of shift there over the trend that we may see going on and just how that impacts you strategically going forward?

Yes, well, it’s not really a shift. There is always I think – since the history of vulnerability – there has always been players and attempt to add VM as a feature. It has always been – even in the days of compliance with all in a while adequate like everyone from IBM to as a whole list of people to the current count of people who look at it as a feature of just saying, hey, I have a small view on the assets and I have a small view of a significant subset of vulnerabilities. If you think about what a modern vulnerability management program which evolves over time, it’s about providing basic visibility into the environment not just the assets where you actually have agents, so it’s about providing visibility to your cloud infrastructure to all of those hidden assets that have no agency solve and have never agency solved in the environment and then understanding every application and service installed known assets and not just what the level or the pass level or the vulnerability level is, but also understanding the configuration level of those assets. At the end of the day, I think what I will analyze what’s the overall risk and exploitability of the environment and then translate that into a remediation and workflow and action plan. Then in the future, we will be able to automate. That is an incredibly difficult piece of engineering and most people wants to actually get into the details of what it takes to actually run a modern VM program and realize that it’s a market differentiator against other influent vendors or whatever other markets that they are in, but none of those things have proven credible and ensure vulnerability against those.

Great. Thanks, Corey.

Our next question comes from the line of Rob Owens with KeyBanc. Your line is open. Please go ahead.

Hi, this is Liz on for Rob. I was curious if you could comment on the underlying market you are seeing in vulnerability management, whether you are seeing kind of a breadth of – if you have seen any change in growth in that market and then whether or not – whether that change is coming from increasing breadth of scans or sort of scanning more of your environment or more frequency of scans? Thanks.

Yes. So we are different than other vulnerability management companies because we are selling to the value proposition of how people operationalize their security and so we are just as much selling into vulnerability management budget as we are – what do you do about it and how do you operationalize security, how do you actually analyze your remediation in your IT processes and then how do you automate those over time and hide those into your workflows. Because we actually have that unique proposition, we are seeing much higher demand because most of the customer that we are talking to on a big part of the growth that we are seeing, they are trying to move past the phase of just having visibility into a place where they can actually really start to operationalize security and operationalize demand for the environment. So, we see incredibly strong demand, but it’s not causing vulnerability management is tied to our approach around SecOps and our focus on the remediation analytics, the remediation on workflows and the upcoming orchestration and automation around that, that it resonates with customers saying, okay, I can actually do something about it, yes.

Okay, that’s really helpful. And then quickly just curious if you had any change in sales attrition or turnover based on change in the comp plans. If there were some changes that need to be made? And clearly, it looks like you didn’t see that in the quarter, but just wondering if there is any change there? Thanks.

We talked earlier we expect that we are able to say it’s confidentiality we expect to have slight higher shareholder, we didn’t see it. We actually have higher retention and higher productivity of our sales teams that was expected and that gives us increasing visibility and confidence as we go through the year, which is one of the outcomes of us raising our guidance both in revenue and ARR.

Our next question comes from the line of Gur Talpaz with Stifel. Your line is open. Please go ahead.

Great. Thanks for taking my question and Corey, Jeff and Jeff congrats on the quarter. So, ARR per customer, interesting metric to offer here, it looks like it accelerated here for the sixth great quarter, I think as far back to the data I have. If we breakdown the components here, you talked about 1.5 solutions per customer, still lot of room there. How much of that growth here is InsightIDR, InsightOps, new solutions versus the growth in VM and then if we could expound upon that. If you think about the VM opportunity, how much – how far do you think you are penetrated right now in your installed base just for VM?

Yes, so multiple questions there. So, the core obviously breaks down about how we think about the expanding ARR growth, so a simple one is that expanding the number of customers and so that clearly has the ARR. When you think about on a per customer basis, they are sort of like three main numbers that I want to. The first number is sort of the amount of coverage of the asset that’s driving the environment and a big part of our growth is that we have more assets per customer in the environment. The second thing is we actually are pointing to is the number of products per customer and what we have there is that we have expanded our product portfolio and our products that we have introduced in the last 2 years have actually done quite well in the market have been well regarded and well received. We are in the very early stages, but we are seeing great adoption on the expansion of the possible customer and that’s actually translated into actual both recurring revenue and they all started translate in revenue as time cross-sell. And so it’s not just something that download and something to actually paying significant amount of money for, so that’s positive. The second part of that sort of aspect of the number of products per customer also has due to the fact that our products have different ASPs, so things like IDR has higher ASPs that vulnerability management has. But you have a number – so what’s happening is our ASP growth is solely introducing products. And then the last aspect is sort of – is a temporary one, but that’s the makeshift as you go from life into perpetual to a subscription basis. That started last year and that’s a positive effect that you actually have, but the date we really focus on sustainably is continue to further increase the customers and then really the big lever is increasing the products per customer there.

Gur, the other point is that the IDR continued to grow triple-digit over 100% again. So to directly answer a question on the mix, but it’s a data point and VM had very strong growth as well this quarter.

That’s helpful. Thanks for that color. And maybe another question here on the shift to recurring, it’s obviously a big emphasis for you guys. Can you talk about the response in the installed base as you made these changes this quarter, particularly the legacy base here perpetual customers now being sold into recurring models. How was the response been thus far from those customers?

It’s been positive and I think part of that positivity is one we didn’t actually – we learn from others. Again, we have the benefit of actually doing this transition later and actually taking the time to study what’s worked and what hasn’t worked. We didn’t force it with the [indiscernible], we actually brought it last year and our cloud-based platform provides really robust capabilities around both analytics and workflow management and we will continue to actually have capabilities that are just possible with the compute power that you have typically have in most environments. And so by taking a benefits approach, we are actually seeing much higher levels of conversion to our platform than we expected.

That’s great. Thanks guys and congrats again.

Thank you.

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

Good afternoon and congrats on the strong quarter. I just wanted to start out with some of the commentary that you had around the Forrester placement and sort of what’s been the reaction from customers and partners? How has this helped you from a win rate perspective? Does this help you address different potions of the market just want to get a little bit of sense of what that’s been so far?

And we talked earlier, we have achieved and we are achieving strong growth and strong pipeline there. I would say that we got the rank in Forrester because of the capabilities that we are positioning. And so it came out somewhat later in the quarter, so it’s too early to tell how much impact that – could we have, but we have been selling that value proposition and it’s been resonating to customers and part of that you saw the outcome of that in the results. And we definitely see that in our competitive win rates which were already high and continue to be high. And so I was thinking we are seeing more opportunities. We are kind of one of those companies that as – when people looking to do something, that people look that they have to do by default. And I think that, that recognition helped us continue on that track ensure that we have more and more deals over time and we have more and more ability in that sort of vulnerability management aspect of our SecOps business.

Got it. And then just in terms of the additional investments in sales, can you give us a sense of maybe where those investments are going to go? Is this is going to be more on the international side? Are there certain segments of the market that you are targeting with those investments? Any color would be appreciated. Thank you.

So, our point of sales investment is really we invest where we actually see productivity and visibility. And if you look at our performance, we see broad-based productivity, we see broad-based visibility and so our investments are across the board, because we are investing behind demand. And because we see the demand and we see that opportunity, we were able to make that investments and it really is happening across all aspects of our business.

Our next question comes from the line of Anne Meisner with Susquehanna Financial Group. Your line is open. Please go ahead.

Hi, thanks for taking the questions. Corey, I just wanted to dig into the new strategy around services a bit more. You have a number of different type of services that you guys offer, are there any that you are deemphasizing more than others if you focus on more strategic customers? I would assume that pen testing and Internet response would remain somewhat strategic for you, so maybe you can just shed some light on how should we be thinking about that?

No, absolutely. It’s a great question especially as we are seeing more demand for ARR and we are seeing – and we are focused ourselves on what we consider more strategic services. The way that we think about more strategic services is services that have a net higher lifetime value for Rapid7, not just in terms of services, but also in terms of ARR. So what we are really looking at is focusing on companies and organizations that are looking to transition and transform their security program and actually really embody that SecOps vision and we are aligning our services around that. Over time, what that means for us is that we are focused on less, I would say, transactionals, whether it’s pen testing our IRR, less of the transaction of finance work and more on the transformative work that will result in larger engagements. We have already seen larger ASPs in our services contracts, but also more strategic relationship with our customers. That’s the focus of what we are doing.

Okay. That’s helpful. Thank you.

Thank you, Anne.

Our next question comes from the line of Melissa Franchi with Morgan Stanley. Your line is open. Please go ahead.

Great, thank you. Corey, you talked a lot about investing in the direct sales force. So I am wondering if you could maybe comment on investments in the channel and how they are being levered to help enable their journey to subscription that they are fully ramped on that?

That’s a great question, Melissa. And so one, we are actually seeing increasing channel demand, the demand for channel partners. I think a big part of that is both the recognition that we are receiving in the market from our technology, but also this traction that we are getting with customers. And so engaging with the channel from a position where the channel wants to engage in deals that has much easier position to engage from. Our strategy – the other we have actually aligned everything on an ARR and a subscription basis, our strategy was the channel is actually the focus on value-added partners that can really help our customers achieve our SecOps vision and the vision that we think customers be more productive. And so we are not indiscriminate towards the channel partners, we are actually taking a very thoughtful approach that combines near-term revenue and ARR, but really with long-term customer transformation that we believe will generate the creative economics both for the channel and for ourselves over time.

Okay, that’s helpful. And then one quick one for Jeff, Jeff, I think last quarter you commented on cash flow for ‘18. I don’t know if I missed it this quarter, but wondering if you could maybe give an updated view on what to expect for cash flow?

Yes, sure. So we did say that the cash flow this year would approximate 2017 levels. We are not seeing any change there, but having said that, if contract lengths go down further, could be, yes – could it be a little bit less sure, still be positive operating cash flow, but it’s all dependent on really the contract mix. For a few quarters, we have been talking – we have been saying that we expected the contract lengths to go down and it really materialized this quarter in Q1 with the focus on ARR, so we have less multiyear billings. But at this point, we are still seeing in the same range of 2017. As I said, it might be a little less if that changes, but we will have to see how it goes over the course of the year.

Thanks.

Our next question comes from the line of Sarah Hindlian with Macquarie. Your line is open. Please go ahead.

Hi, this is Fred Havemeyer on for Sarah Hindlian. I wanted to reiterate firstly, what many others have said already here about very nice acceleration in ARR this quarter. And I wanted to better understand some of the dynamics within ARR. Firstly, so on this, would you be able to describe how much of your ARR is related to purely SaaS subscriptions and how much is relative to say perpetual license we have sold on a subscription or term basis? And then secondly around the ASC 605 and 606 guidance in the presentation, is there anyway that you would be able to help us bridge the difference between ARR reported under 605 and what we should be looking at under 606 as we build our models? Thank you.

Yes. We don’t breakout the components of that ARR, but the SaaS portion is increasing, obviously, as we converted our vulnerability management products to InsightVM in the second quarter of last year. So, it’s becoming a bigger portion, but still, we still have the legacy of over $100 million in that 35% portion from all the perpetual sales still carrying forward. So, it’s still the majority, but what we can’t say is that the SaaS portion is growing with the migrations and of course our IDR product line is all SaaS. And the way we define ARR is the same across the product line. There is no difference under 605 or 606 it’s still the recurring revenue SKUs, not the perpetual SKUs.

Okay, thank you.

There are no further questions over the phone lines at this time.

Thank you all very much for joining us today.

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