Ladies and gentlemen, thank you for standing by and welcome to the Second Quarter Rapid7 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today Sunil Shah, Vice President of Investor Relations. Please go ahead, sir.

Thank you, operator and good afternoon everyone. We appreciate you joining us today to discuss Rapid7 second quarter 2020 financial and operating results, in addition to our financial outlook for the third quarter and full fiscal year 2020. With me on the call today are Corey Thomas our CEO; and Jeff Kalowski our CFO. We have distributed our earnings press release over the wire and it is now posted on our website at investors.rapid7.com along with the updated company presentation and financial metrics file. This call is being broadcast live via webcast and following the call an audio replay will be available at investors.rapid7.com until August 13th 2020. During this call we may make statements related to our business that are forward-looking under federal securities laws. These statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 and include statements related to the company's positioning, our future goals and financial guidance for the third quarter and full year 2020; the assumptions underlying such goals and guidance including the anticipated impact of COVID-19 on our financial guidance; business; financial condition; results of operations and renewals; and our assumptions on the pace of the economic recovery in the global economy on our future results of operations and product strategy. These forward-looking statements are based on current expectations and beliefs and on information currently available to us. 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 our most recent quarterly report on Form 10-Q and in the subsequent reports that we filed with the SEC. 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. Our commentary today will be primarily in non-GAAP terms and reconciliations between our historical GAAP and non-GAAP results and guidance can be found in today's earnings press release. At times in our prepared remarks or in response 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 or may not provide an update in the future on these metrics. With that I'd like to turn the call over to our CEO, Corey Thomas. Corey?

Thank you, Sunil and good afternoon everyone. Thank you all for joining us today for our second quarter 2020 earnings call. We are pleased to report solid execution during the second quarter as our team delivered results that exceeded expectations for both growth and profitability. Q2-ended ARR of $380 million grew 31% over the prior year demonstrating our ability to meet customers' diverse priorities with our Insight platform while operating income of $4 million reflects the underlying leverage in our business. Even amidst an uncertain landscape, our consistent first half execution provides us the confidence to raise full year guidance which Jeff will cover during his remarks. Organizations continue to face a mix of economic and operational uncertainty as they navigate a rapid shift in their technology footprint. While customers are in various states of replanning digital transformation and cloud migration have rocketed up the priority list as companies evolve their business in these dynamic times. During the second quarter, we saw customers return to critical decision-making processes and prioritize security enablement tied to these digital strategies. Security challenges in the cloud are different. So the organizations embrace cloud transformation at a faster pace. CIOs and CISOs need to quickly prioritize security analytics automation and cloud enablement. These priorities align directly with our security transformation solutions IDR, AppSec, Connect and DivvyCloud which positions Rapid7 to capture the cloud security operations opportunity. During the second quarter, we saw better-than-expected momentum led by these security transformation solutions with particular strength in IDR and InsightAppSec. Our vision for the Insight platform was driven by the belief that cloud adoption would spark the need for organizations to transform their security programs. As companies move beyond the initial Phase one of response to the pandemic of operationalizing work from home, we see a fast-follow Phase…

Thanks Corey and good afternoon everyone. Before I begin, a brief reminder that except for revenue all financial results we will discuss today are non-GAAP financial measures. Unless otherwise stated and reconciliations between our GAAP and non-GAAP results can be found in today's earnings press release. We're pleased to report solid performance during the second quarter of 2020, with results that exceeded our guidance, on all metrics. Top line strength was driven by demand for our security transformation solutions, coupled with continued growth in vulnerability management, while underlying leverage on strong expense controls, drove upside to profitability. Total ARR ended the second quarter at $379.9 million, growth of 31% over the prior year, as customers turn to our Insight platform to help facilitate more secure shift to the cloud. Second quarter total revenue of $98.9 million was above the high-end of our guidance and grew 25% year-over-year. This was driven by better-than-expected year-over-year products revenue growth of 27% to $92.4 million. Recurring revenue represented 91% of total revenue in the second quarter, compared with 87% in the prior year period. Looking at the business geographically, North America revenue grew by 25% year-over-year and comprised 83% of total revenue for the second quarter, while rest of world grew by 29% representing 17% of total revenue. We continue to grow our customer base and ended the second quarter, serving over 9,100 customers globally, growth of 9% over the prior year period. At the same time, we are focusing on expanding relationships with existing customers, who are turning to Rapid7 to help transform their security programs, as they work to advance securely into the cloud. As a result, ARR per customer saw a strong year-over-year growth of 20%, in the quarter to approximately $41,600. Turning to margins, total gross margin for the second…

Thank you. [Operator Instructions] Our first question comes from Saket Kalia with Barclays. You may proceed with your question.

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

Pretty good. Glad to have you.

Hey. Awesome. Corey, maybe just to start with you. Helpful commentary on that ARR breakout in terms of a-third of ARR kind of coming from non-VM products, let's call it. And I really want to zero in on the InsightIDR or the SIEM part of that equation. I think, we're all seeing sort of the increased prioritization of VM in these times. But I'm curious how are your customers approaching SIEM in a post-COVID world?

Yes. No, your observation is spot on. And VM was much -- clearly much stronger than we originally anticipated and communicated, which is sort of the backbone of sort of how we think about rating. But, I would say, in that context, SIEM was even stronger and we saw strong, both priority and demand for cloud-based SIEM. And really have a few different things that actually go to that strength, is first and foremost people recognize they need a modern SIEM for these modern times. As you have work from home, as you actually have more cloud-based applications, you actually have a different environment that you're monitoring. And so, we saw our SIEM demand even stronger than the VM demand, which was strong itself.

That's great. That's great. Jeff maybe for my follow-up for you. Can you just remind us what the net revenue retention was this quarter? And maybe just go a little deeper into it. What you're seeing in terms of gross retention versus upsell, cross-sell? Any more of the net revenue return should be helpful.

Sure. First off, on the gross retention, it was good and consistently has been in our historical range. No different this quarter in Q2. On the ORR, we declined a little bit from 106% to 105%. And I just want to remind everyone that, we anticipated that decline. So that came in, in line with what we were forecasting. So both upsells and cross-sells were up year-over-year. In particular, the cross-sells were up. We had strong cross-sells. And that really showed in the growth of ARR per customer, which increased by 20% year-over-year. I mean, I also want to point out that we don't really manage to this metric, but we manage the ARR growth, which is our key metric and which we're guiding to over 20% at the midpoint of our ARR guidance.

Yes. No, absolutely. Definitely, saw it. Thanks very much guys. I’ll get back in queue.

Thank you.

Thanks, Saket.

Thank you. Our next question comes from Matt Hedberg with RBC Capital Markets. You may proceed with your question.

Hey, guys. Thanks for taking my questions and congrats on some really strong results. These are certainly uncertain times, so well done on that front. Corey, in your prepared remarks you noted COVID really changes the conversations with CIOs and really pushes them faster to the cloud than maybe previously they would have moved. I guess at a high level can you talk about the urgency of CIOs' desire for this migration? And which of your emerging products which did well this quarter? Do you think you could see the strongest long-term benefit from really this sort of this paradigm shift?

Yes. It's a great question and, Matt, thank you for joining today. So if you think about what's driving this, its really two fundamental issues. One, CIOs can no longer wait to actually digitize their operations. And so, you said, what's driving to the cloud is that, like, digital commerce has to be front and center, not just digital commerce, digital engagement and digital operations. And so, people will no longer assume that you can actually stand by into a slow transformation. If you want no better example of it, just look at what's happening in the healthcare industry, where somebody who was taking 10 years overnight change to telehealth. And so, you see that same type of urgency across most industries, where there's an urgency to say how do we actually make sure that we can engage our customers and our partners digitally. At the same time, we think one of the great benefits is that, CIOs and even boards are no longer under the illusion that you can actually just shift to digital operations, primarily done through the cloud and ignore security. So security is now part of the conversation and part of the narrative. And so, this is going to be an extensive transformation for most operations that’s starting now. But it's going to be sort of a multiyear effort as people actually really upgrade their core, both business operations and technology for the digital age. And it'll be primarily done in the cloud. Now, as we think about why that's such a big driver and the way we framed it is, sort of, our security transformation solutions and why that's such a big driver there, is there's really a couple of key things. One, everyone knows that those environments and those digital environments are going to be under attack. And people have to protect them on environment. We see a massive demand driver for InsightIDR. In fact, we saw that for this quarter. If you look at the other part of our security transformation solution is, just like DevOps does more with less though automating much of the environment, we see strong going-forward demand for InsightConnect and we actually saw good healthy demand and execution this quarter and we expect that to be durable also. And then, of course, last and probably most importantly, as you think about the cloud is, that people have to manage security differently in the cloud. And that was a big part of the thesis around the DivvyCloud acquisition, is that security management will be absolutely essential in the cloud and we believe that we acquired the best platform for DivvyCloud in that acquisitions. So those are the core lens spans. Its cloud and applications, because remember, people have built the cloud-based application to do this. Detection and response and automation, we see as the core tenants to a cloud-enabled digital transformation.

Super helpful. Thanks Corey. Thanks everybody.

Thank you.

Thank you. Our next question comes from Gur Talpaz with Stifel. You may proceed with your question.

Okay, great. Thanks for taking my questions and congrats on the quarter, guys. Corey, you talked about Phase two of broader security spend. I was hoping you could elaborate a bit on that. How does that correlate to performance in the quarter? And by that, I mean, did you see trends improve as the quarter progressed?

Anyways -- so as you recall from last quarter, we expected things to actually slow that. But we still believe, in general, that the overall -- both security spend and digital spend is tied to the economy, but it's not as tightly tied as we expected. What's quite clear is that people were not as paralyzed around security spend as we expected them to be. And when you really think about the Phase 2, we knew that we were in a moment of this work from home. And what's the span of work from home. What's positive that we didn't expect is people fairly quickly move from the work from home, which lots of people got working quickly. And they start thinking about like what if this whole environment that we're likely to sustain through really mean for our operations. And people started continuing efforts that were aligned with their long-term technology strategy and the security strategy to support that. So efforts that are around improving and enhancing cybersecurity for a modern technology environment, lots of those initiatives continued at a pace much faster. I would also say that a surprising number of new initiatives got started in that same way. And so if you think about how we look at the business both what's happening and also the pipe that we actually see building, it was definitely much better than we expected when we had this discussion last quarter.

That's super helpful. And then Jeff maybe one for you. The acceleration in ARR per customer was really interesting. Maybe you could elaborate a bit on what drove that? Is it the growth in VM workflows were sounded better? Growth in new solutions? Or is it also a reflection of customer sizes perhaps getting bigger here as well? Thank you.

Yes. I think it's across the platform, particularly cross-sells, IDR cross-sells. It's really all across the broad platform. No one specific item, Gur.

Okay. Thank you.

Thank you, Gur.

Thank you. Our next question comes from Brian Essex with Goldman Sachs. You may proceed with your question.

Hi, guys. This is Arindam on here for Bryan Essex. Congratulations on the quarter. Corey, first starting with you, if I could. Last quarter you mentioned the introduction of your Flex program that kind of enables customers to temporarily expand their asset coverage at no extra charge. Just wondering if you could provide some color regarding any increase in overall monetizable asset base per customer because of the program, how customers started deploying more of mostly base deployments for VM solutions going forward? Some color on that would be very helpful. And then maybe a follow-up for Jeff.

Yes. So first and foremost, as we mentioned -- by the way thank you so much for the question. As we mentioned sort of last quarter in the framing is that it was primarily done to actually drop customer satisfaction loyalty and we see a good healthy uptake. Now it is leading to increased pipeline which I think is positive, but our goal, we're not monetizing our goal is to really support our customers. That said, we do expect it to be a positive contribution over time to the business. I would not say that was the primary driver in this specific quarter in and of itself. Because we launched in the quarter and people were responding in the quarter. But it definitely actually helped with actually creating a strong relationship with our customers which if you think about what really sets Rapid7 up for the sustained growth and profitability that we're pursuing, it actually customers -- expanding our ARR per customer which is one of our primary goals.

That's really helpful. Thank you. And for Jeff for you, maybe if you could provide some color on the average contract length that you witnessed this quarter. In general, have you seen kind of a shortening of the contract length, especially as we saw customers kind of constructing their budgets and trying to conserve cash in this period of economic uncertainty? So any color on that would be really helpful? Thank you.

Sure. So let me start off by saying, overall the contract lengths did not meaningfully impact billings this quarter. But having said that, in the bookings we actually saw them a little longer with more payments annually. Since we're focused on ARR, contract lengths really aren't meaningful as they don't really relate to billings and cash flow. So we're not really collecting the money. In other words, if we have a contract like that was 24 months, since we've converted to SaaS, we're not really getting two-years payments upfront. So you really have to look at ARR as the key metric right now. And contract lengths don't correlate to cash anymore. That's really the net of it right now. It used to under the perpetual model because then when we sold multi-years we were paid all upfront. So again, I'll just reiterate that ARR is the key metric.

Perfect guys. Thank you.

Thank you.

And you next question comes from Robin -- Rob Owens with Piper Sandler. You may proceed with your question.

Hey, guys. This is Justin on for Rob. I was just hoping to ask maybe relative to the market landscape what portion of opportunities in VM and the rest of the platform are would you characterize as greenfield opportunities versus competitive wins? I know Corey you talked a little bit about the competitive wins in the quarter. If you could maybe just elaborate a little more on that?

Yes. I would say that I have not heard of a big delta from our team. As you can imagine is that we had strong growth in the cross-sell motion and we'll continue to add net new customers. But I have not heard from our team that we saw a material difference in our greenfield versus the competitive wins there.

All right. Great. And then just for Jeff real quick. I know you mentioned 10% exposure to the heavily impacted verticals in the last quarter. And as maybe if you could dive just back into that relative to what you're seeing trends wise are budgets freer than you expected or still pretty tight there?

We don't see any change in that exposure. I will point out that we again looked at our -- when we provide our guidance, we did look at our verticals and sub-verticals. And we explained in our prepared comments what drove the high-end of our guidance and the low-end of our guidance. But no change in the overall composition of our customer base relative to our guidance.

That said, I would say that we saw stronger-than-expected performance across most of the verticals. And that's both on the security transformation and the -- which includes sort of the things that are helping people transform to the digital enterprise. And on the VM side too so much so that if you think about why we have confidence in our forward sort of like outlook and being back on the model as we actually go into 2021, it's that we see our security transformation portfolio growing over 40% this year. And we actually -- in the VM side, we see that sustaining growth. So earlier in the comments I talked about VM growing over 20% this quarter which was great. Prior I talked about VM growing in the 5% ARR range. We actually think that that's over 10% ARR. And from a revenue perspective, we actually think that in the mid- to high-teens. And so we feel pretty good about what we're seeing from an overall demand. That said, there's companies going bankrupt, so there's got to be issues as people respond to COVID, but we are seeing a higher level of fundamental demand.

That's great. Thanks.

Thanks.

Thank you. Our next question comes from Keith Weiss with Morgan Stanley. You may proceed with your question.

Thanks everyone. Thank you guys. And thank you, a nice quarter. Corey, I want to dig in a little bit in terms of sort of the changes that you're seeing in the industry. We talked about sort of digital transformation pushing more people to the cloud that increased uncertainty, increasing the priority of security analytics in general. But another big part of the story is getting your customers to buy more broadly across the portfolio. Are you seeing any change in that and sort of that traditional security mindset if we buy just only best of breed solutions to guys more willing to say, listen there's real value-add in having this all on one platform to be able to garner the insights across multiple products? Is that starting to resonate more with your end customer?

Yeah. Keith it's a great question. And I would say that keep in mind, our core thesis was that people would only buy an integrated solution if it was best-in-class. So if you remember our core aspiration is to actually be top line in everything that we do. And be one of the top two solutions in every category that we participate in, and we think that we're tracking well on that goal. Being in that space and demonstrating that we're a leader in VM, we're a leader in IDR, and we're a leader in our emerging categories, now positions us to be a space where customers are responding quite positively on our overall platform, packaging bundle distribution model. And in fact we're going to be actually bundling more platform-selling strategies with our sales force over the course of this year, and next year because we're seeing real customer intent and demand. But that's because our customers get the fits and they actually feel that they're not having to make a substantial trade-off. They're getting the benefits of platform, platform economics. They're getting sort of deployed technology wants and manages so they don't have to put a whole bunch of different collectors in their environment. Get tighter integration, which delivers more productivity. But do that all what's best-in-class performance on each individual category. That's what's so unique about what we're pursuing in Rapid7 is best in class in every category but an integrated experience that lowers the cost of operations and get people platform economics, which is especially important in this time as people really focus on total cost of operations.

Got it, got it. And if I could sneak one more in just on the margin side of the equation. So, really nice progress on the profitability side of the equation this year. But I feel like calendar 2020 comes with an abstract because the expense dynamic is so different especially with T&E and nobody is traveling and your events change a lot. So when you guys are talking about going back to the balance of growth and profitability in calendar 2021, is there an explicit step-up that we should be thinking about in terms of expenses when that T&E comes back in, or when these events come back in? And is this possible to quantify that listen because the guys aren't flying all around, we were able to sell say $5 million, $10 million, $15 million in this quarter or anything of that ilk?

Yeah. It's a good question. So we definitely benefited from T&E. I think one thing to keep in mind Keith is that we have and always have had a heavy Insight sales model. So we did not have the same gross T&E level as many companies. So it was a benefit not T&E benefit as some of the other players in the market. That's what you actually see there. The second thing is that we actually focus internally on how do we actually drive our own operating leverage. So we actually -- when we look at this internally, we actually look at something like stripping that out, which is one way to think about that when Jeff and I talk about being back on our model if you think about sort of like the three-year model where we're looking at so how we actually continue to grow and sustain growth but continue to expand the margin each and every year. We're factoring that in. That says like, listen is the margin expansion has to be in place when the T&E benefit goes away. And so that allows us to actually think thoughtfully about how do we actually make investments in the near-term. But the goal is when those T&E benefits go away and things return to more normal, we're still exiting with the same margin strategy that we have laid out. Now frankly it's a year delayed with the whole COVID environment on the margin side. But yet still, we're looking at how we actually improve the core underlying operating margin and that's the primary thing that Jeff and I measure our team on.

Perfect. Thanks a lot. Really nice quarter guys.

Thank you so much, Keith.

Thanks. Our next question comes from Joshua Tilton with Berenberg Capital. You may proceed with your question.

Hi, guys. This is Andrew Smith on for Josh. Could you just remind us what you've experienced in the past when a customer would layoff employees? How long is the lag until it impacts Rapid's business being as you price per asset or app and not necessarily per user? Thanks.

Well, I think it's not a -- so one, it's not something that we look at heavily to be clear because we don't have that many I would say, employee pricing models. And what we find is that the underlying assets that companies have tend to grow in a faster way than the employee base and that's always been true. And I would say that secondly, it's probably even more true in digital cloud era that we're actually in where the cloud technology assets are likely to actually grow at a faster rate than any decline in the employee base. If you think about what we get paid at an underlying level, it's the technology infrastructure that's actually there. And we're trying to make that so unpredictable for our customers. But it's still getting paid for the technology infrastructure whether that's infrastructure in the cloud or whether that's assets that's in the traditional environment.

Great. Thanks guys. Thanks.

Thank you.

Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back over to Corey Thomas for any further remarks.

Well, thank you all for joining us today. I also want to thank our team and our customers. This has been a difficult environment for everyone. But our team and our customers and we're all working well together to actually make sure that we are delivering the technology that helps people really drive in these times. So thank you all for joining us.

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.