Good day and thank you for standing by. Welcome to the First Quarter 2022 Rapid7 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today Sunil Shah, Vice President of Investor Relations. Please go ahead.

Thank you operator and good afternoon everyone. We appreciate you joining us today to discuss Rapid7's first quarter 2022 financial and operating results in addition to our financial outlook for the second quarter and full fiscal year 2022. With me on the call today are Corey Thomas, our CEO; and Tim Adams, our CFO. We have distributed our earnings press release over the Wire and is now posted on our website at investors.rapid7.com along with the updated company presentation and financial metrics. This call is being broadcast live via webcast and following the call an audio replay will be available at investors.rapid7.com until May 11th, 2022. 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. That include statements related to the company's positioning, our future goals, and financial guidance for the second quarter and full year 2022, and the assumptions underlying such goals and guidance. These forward-looking statements are based on our 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 annual report on Form 10-K filed on February 24, 2022 and in the subsequent reports 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 primarily be 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 and on our website at investors.rapid7.com. At times in our prepared comments 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 one-time 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 hello to everyone on the call today. Thank you for joining us for our first quarter 2022 earnings call. Rapid7 kicked off the year with another strong quarter of results as we sustained year-over-year ARR growth of 38%, ending the period with $627 million in ARR, while delivering positive free cash flow to start the year. This ongoing momentum in our business was driven by strength across both our security transformation and vulnerability management solutions. Our Insight platform is resonating with customers as we invest to deliver an integrated experience that enables better security outcomes in today's elevated threat environment. We saw strong upsell and cross-sell engagement with as customers expanded usage drive an accelerated growth in ARR per customer, which eclipsed $60,000 in the quarter. The steady growth in this key metric validates the continued strength and leverage from our customer expansion engine as we remain assessed in helping customers through our productivity and scale in an increasingly tight talent environment. We see a long runway for sustained customer expansion across our best-in-suite Insight platform supporting line of site to $80,000 in ARR per customer over the mid-term. Another huge recent milestone for Rapid7 was the announcement of our 2022 Social Good Report, which we published in early April. It marks the first comprehensive look at our value-focused mindset around ESG and our investments aimed at creating a secure and resilient future where everyone is empowered to enact positive change. It highlights Rapid7's focus on going beyond the foundational work of traditional diversity equity and inclusion requirements and ESG frameworks to work towards realizing our vision of a secure and prosperous digital future for all. Publishing our first collective annual report on these topics, opens the next chapter and building trust, transparency and dialogue with…

Thank you, Corey and good afternoon to everyone. Thank you for joining us on the call today. Before I turn to the results, just a quick reminder that except for revenue, all financial results we discuss today are non-GAAP financial measures unless otherwise stated. Additionally, reconciliations between our GAAP and non-GAAP results can be found in our earnings press release. Rapid7 had an excellent start to the year, ending the first quarter with ARR of $627 million which represents 38% year-over-year growth. Our sustained growth highlights the strong momentum we are seeing, as customers transform their security operations programs around the cloud. In particular, customers are expanding their usage of our platform to more effectively analyze risk across both their traditional and modern IT environments and improve security outcomes. The compelling value proposition of our Insight platform, is driving robust cross-sell and upsell activity with first quarter ARR per customer growing 18% year-over-year to $60,000 a at the same time we continue to see a healthy balance of ARR growth from new customers as we ended the quarter with over 10,400 customers globally, which represents 16% growth from the prior year. Security transformation solutions made up over 60% of new ARR in the quarter and continue to grow at a strong pace. This speaks to the success of our land motion across multiple products, as well as our commitment to providing a best-in-suite experience, across our Insight platform. First quarter revenue of $157 million grew 34% over the prior year and exceeded the high end of our guidance range. This outperformance was driven by broad-based demand for both our security transformation and vulnerability management solutions, which drove product revenue of $149 million representing 36% year-over-year growth and acceleration over the prior quarter. We continue to execute well on our international…

Thank you. [Operator Instructions] Our first question comes from Matt Hedberg with RBC Capital Markets. Your line is open.

Great. Thanks for taking my questions and congrats on a great start to the year here. Corey -- and I think both you and Tim mentioned sort of the strong cyber backdrop here, I think we all see in the headlines every day. I'm just curious, could you talk about the durability of the spend? I think we have time to get questions about like has there been a pull-forward spending or something of that nature as a result of COVID. Just kind of curious, if you could give us some additional data points on the durability of spend that we've seen, especially when we see these increased cyber bridges feels like daily in the headlines?

Yeah, Matt. So a thank you and it's a great question. I think there's two dynamics that we've seen. The one we think is extraordinarily strong in the demand environment. We also think durable. It's driven by two factors. One we actually started talking about last year -- and we know it certainly in the second half of last year that we were seeing and planning point executing for a sustained durable growth in the environment. In fact, we've seen that play out quite well. And that was driven by security becoming an mandatory part of digital transformation. And so we have [indiscernible] at the table. You see that with board you see with executives you see that with the regulators. And that makes it doable working process kind at the moment. There's an additional one that we're actually starting to see the early parts of it only strengthens that momentum and that's what the current state of global conflict around cyber standards are also having to raise and increase. And so not only do you have it as something that's on board or regulatory incentives is I suspect what we're going to see over time we're already seeing that in certain parts of the market is that companies are going to have to increase their standards all across the board of cybersecurity. And that creates another driver of mobile. So again, we can -- all the data that we see indicates that this is going to be a sustained focus for businesses at higher level of standards for the foreseeable future.

Thanks, Corey.

Thank you, Matt.

Thank you. Our next question comes from Matt Horstmann with Morgan Stanley. Your line is open.

Hey, team. This is Matt on for Hamza Fodderwala. Thanks for taking the question. So you've had insights for a few quarters now. So just would love to get a sense on how the integration is going? Is your sales force fully ramped there and if you're seeing any incremental customer interest? Thanks.

Yeah, it's a great question. The integration is going extraordinarily well. The teams are working well together. And it gets a little easier as you actually get to an environment where we can travel and engage more. The second thing is the XDR story is really less mix by customers and we're seeing that the tracking customers who are looking to improve their operations lower the total cost of operations. And the Rapid7 extra story the powerful story that delivers both efficacy and productivity -- and that resonates extraordinarily well with customers and then also provides incremental land emotions and opportunities. And so when you look at it all up, I would say that, we are seeing the ability to not just land not just cross-sell, but it really has been a catalyst for customers and team to look at the leadership of our story out here.

Thank you. Our next question comes from Alex Henderson with Needham. Your line is open.

Great. Thanks. I was looking at the net new ARR and the quarter-to-quarter increase in the customers and the results there obviously are substantially lower in the March quarter than in other quarters. Yeah, you're up 18% year-over-year, but in terms of customer's but if you look at it quarter-to-quarter, it's actually kind of an underwhelming number. I'm pretty sure that is just strictly the mechanics of the seasonality, because I think it did something similar in the first quarter of last year. Can you just talk about the seasonality of that net new ARR and the seasonality of the new customer additions that are typical in the March quarter? Thanks.

It's a great question. We can hit seasonality. I think the bigger issue is the core driver the mix. I'll remind you that, when we did our Analyst Day, we talked about mid-teens growth in ARR per customer, and the 5% to 10% growth. As you will call it, a question and what we described then was that while that was 5% to 10% in aggregate. We were doing an aggressive mix shift to customers that were more strategic value had much higher lifetime value. And we were looking to take share and drive share in what we consider high strategic body customer's lat that's best looked at the lands of customers that are likely to adopt our full platform. And so when you think about that 5% to 10%, we're out executing that metric. And in this quarter, while we don't report the breakdown consistently I would say if you look at our platform customer that is over 25% or roughly 25% in the quarter. So the way that we think about this is that from a long-term perspective 5% to 10% is healthy, but the most important part is actually that we do the mix shift so that we actually have a higher propensity and a higher volume of customers that have high lifetime value and also high profitability. Correspondingly, we're actually defocusing on customers that actually have lower lifetime value and lower profitability and that's been a multi incentive chin. SO that's the driver and the balance. So I would say that the quality of the customers is actually growing. And that's part of why we actually are so bullish not just on the growth but also the ARR per customer potential because we're seeing our strategic execution play out really well. And then you see that this quarter with 25% growth in the platform customers.

Can you – could you just clarify what you mean by 25% growth in platform customers please? What that measuring that.

The platform customers are just customers that are effectively adopting the Insight platform. And so you can think about all of our maintenance. So when we think about -- hat we want to sell to in the past we've had a mix of things that included transactional a was a big part of that. And so you had high volume, but it was much more transactional in nature and had lower lifetime value. When we define strategic customers – this is customers that are actually buying the platform and have the capacity to buy our entire platform suite over time which is a high lifetime value. It also generates higher long-term profitability which is our overall focus. And so we've continued to make steady shifts in that direction overtime. But that's how we divide it, platform customers that are buying only Insight platform that has InsightVM, InsightCloudSec and the InsightIDR portfolios.

Yeah. And Corey, I would just add on the seasonality. First off, I thought we had a very strong quarter when you look at the revenue growth and the ARR growth. And we do expect a similar pattern this year quarter-over-quarter that we saw last year, where you do see a step-up in the net ARR in Q2. Q3 looks a lot like Q2 and then it steps up again in Q4. So we expect a similar pattern this year to what we saw last year.

Thanks for the thoughts. It's very helpful. Thank you very much, great answers.

Thank you very much.

Thank you. Our next question comes from Rob Owens with Piper Sandler. Your line is open.

Great. Good afternoon. Thanks for taking my question. I apologize if I missed it but -- could you impact the Russia impacts, as you talked about suspending activities with both Russia and Belarus, whether it's even significant to revenue or a percent of revenue in ARR? Thanks.

Yeah. Hey Rob, it's Tim. Corey did mention that we are not taking any new business in Russia in Belarus. And we're not renewing any of those customers. It was very immaterial, so it had no impact on the results.

Any impact on net ARR guide, I guess is the question.

You mean that any impact on ARR?

Any impact on the forward ARR guide from suspending activities or it's immaterial.

No. Rob, it's really immaterial. And again, the 730 to 750 full year, ARR guide that we gave you three months ago we feel very confident in that showing a very nice growth on a year-over-year basis, but no impact from those two geographies.

Great. Thanks.

Thank you.

We have a question from Jonathan Ho with William Blair. Your line is open.

Hi. Good afternoon. Let me echo my congratulations as well. In terms of international growth what seems to be making the most difference there in terms of the strong performance of over multiple quarters. And are you making more of your investments sort of outside the U.S. to take advantage of the opportunities there. Thank you.

Great question, Jonathan, our investment strategies remain consistent. I think there's, two core drivers. One the team ran execution is executing quite well. But the second part of it is the international teams are getting the whole benefit of being able to sell the full platform. And keep in mind in a world where you actually have more and more data privacy governance, as we've actually expanded the platform around the world. This has been a driver of shifting the international teams of the traditional more transactional businesses like to those higher ASP, higher subscription businesses, stickier businesses on our platform. And the international teams has been a primary beneficiary. And so you're just getting good execution against that opportunity more than anything else.

Thank you.

Thank you. [Operator Instructions] We have a question from Joshua Tilton with Wolfe Research. Your line is open.

Hey, guys. Thanks for taking my question. I just wanted to confirm that you said 50% of new ARR in the quarter came from existing customers. And if that's the case, I think, it implies that your NRR pretty strong. I know you guys don't disclose it anymore, but is there any additional color you can give us on where the NRR stands today?

Yes. Jonathan, it's Tim. What I can tell you is that we've seen some very nice steady increases in both the net retention and the gross retention. As you know we don't disclose what those numbers are. But we saw a very nice improvement last year and that continues into this year as well.

Right. In terms of [indiscernible]

Can I just confirm that you said 50% of new ARR came from existing customers?

Yes, correct.

Thank you.

Our next question comes from Shebly Seyrafi with FBN Securities. Your line is open.

Yes. So thank you very much. So there was a tick down in your professional services gross margin sequentially. Can you talk to what drove that? And also your product gross margin has been declining on a year-to-year basis. Do you think that's going to stabilize?

Yes. This is Tim. Let me start with the professional services. So we know that the revenue can vary from quarter-to-quarter. We think about it on a full year basis. What we did see in Q1 is some experience with the scheduling challenges, which was really driven by some of the attrition in our team. So that put a little more pressure on the gross margin, because you have to ramp up hire some new staff. And then we do try to supplement that with some third-party labor as well. So that gave us a little pressure on the gross margin that we see in Q1. On an overall basis, though, we still feel very confident with the total gross margin being in the low 70s for the year in the product gross margin being in that mid-70s. We commented similarly last quarter where it really comes down to product mix that can drive that gross margin. And as we've talked about the -- some of these newer services that we have in the marketplace that security transformation solutions are very high growth and they are changing the mix dynamic. And they're still earlier on in that life cycle, scaling and efficiency and driving their own gross margin. But overall we feel very confident with the total gross margin being in the range that we've laid out and with product gross margins staying in that mid-70s range.

Yeah. And the only thing I would add to that is that one the team has done a great job of bringing in some extra talent, and they are -- they have ramps. And so that's a positive in terms of services. And then the second thing when you look at the product mix shift drops. But what we said is that each of our teams are also focused as they actually do that aggressive scale with more customers that they're actually making it more efficient on top. So we're seeing each product also improved its own gross modularities over time. So again it's something that we have lots of visibility into and it can allow our expectations.

Okay. Thanks.

Thank you. We have a question from Brad Reback with Stifel. Your line is open.

That’s great. Thanks very much. Cory just as you look higher level, how is the appetite for M&A this year?

It's a good question. So one I'll remind everyone that we tend to be fairly thoughtful and strategic around how we have to think about it. It has to provide strategic value, be accretive in the mid-term, be good talent and cultural fit. And then what's a little bit unique about us it has to have the capacity to different to our existing products but also patent our cross-selling. But that's a pretty high bar that we actually say. The only thing I would say is this environment that we're actually watching, not all private market prices have actually adjusted. And so I would say that we're alone over to it, but that's something that we're paying a lot of attention to. It's just like how private markets are pricing and trading in general, but we're not moving away from our long-term strategically about how we actually think about these things.

Great. Thank you very much.

Thank you. And I'm showing no other questions in the queue. I'd like to turn the call back to Corey Thomas for closing remarks.

Thank you all so much for joining us today. We really appreciate it and we look forward to chatting with you in next quarter.

This concludes today's conference call. Thank you for participating. You may now disconnect.