Rapid7, Inc. (RPD) Earnings Call Transcript & Summary

And we are working on how do we actually communicate it to you all over time. Look, so here's what we're doing. We have products that we actually have consolidated into platform offerings, and so what used to be a stand-alone product is now a component of an offering that we still monetize because we actually are charging a higher amount for that consolidated offering. You can think about it a little bit like Microsoft has E3 and E5. We actually are taking an approach that actually says we want to make it simple for people to consume enterprise risk management. And so that includes, sort of like at the baseline level, cloud vulnerability assessment, traditional vulnerability assessment and external threat intelligence. At the next level, that adds security posture management and a whole bunch of other cloud services around that. That model is -- the question is, are you talking about the individual components, of which you have a menu of like 15, 20 different things? Or are you talking about sort of like the traditional product categories? We will actually talk more about that right now. I think the thing that we've actually reported on because our investors had such a big focus about like, are you getting traction with your platform consolidation? Are you getting consolidation in budgets? Well, we sort of like provided some indicators on were specifically the platform consolidation offerings and their traction uptake. And what we said is, in Q4, it was 10% of our new ARR; and in Q1, it was at 20% of our new ARR, and so those are just leading indicators. But Sunil and Elizabeth are continuing to work through how they actually describe the overall taxonomy going forward.

Got it. Got it. Super helpful. Maybe on the strategic side, I want to touch on M&A. Can you maybe frame out the rationale behind your recent acquisition of Minerva? What does that bring to your platform? And then I have some follow-ups there.

Yes. And so keep in mind, the backdrop is that we're likely going to enter a phase where the -- you can even argue see somewhat of a low and sort of like big security compromises and attacks. But that will escalate 100% sort of like as you actually go forward if you look at what's happening in the attacker landscape, what's happening from a nation-state perspective. And so there's 2 things that we're focused on, is one, we want to have a highly efficient business model. So we're doing lots of stuff to focus on the efficiency of our overall organization and company. That has benefits to investors, of course, from profitability, but it also has benefits of allowing us to actually invest back in. So that's one. The second thing is we want to make sure that our risk platform and the risk and the threat parts of our security operations platform are relevant for the world that we're going to find ourselves in as we actually go forward, and that is actually a very different world. Now we've talked a lot about the stuff that we're doing on the risk side, where we've made significant investments in cloud security, and we've tied that into an overall enterprise risk strategy. The next area is on the threat side of the equation, where you actually have to actually be able to manage threats from the endpoint to the traditional environment to the cloud. Now I talked about our cloud investments in cloud detection response, which is increasing the tech vector. We've done lots of stuff over the last few years to actually get -- not just get market share but get a leadership position in the traditional SIEM market. But one of the gaps was how do we actually think about the -- how do we actually reduce friction in the endpoint ecosystem. Now I want to be clear upfront. We integrate with partners like CrowdStrike and sitting in one and others. But what we're finding is that around the world, there was lots of customers who could not actually afford, I would say, more advanced things, and they were relying on technologies like BitDefender and Microsoft Defender. But they were hard to manage, and they were not integrated into their response. And so what Minerva allows us to do is -- and we have a partnership with Microsoft. It allows us to actually manage directly Microsoft Defender, add some advanced in-memory protection to Microsoft Defender, also a BitDefender and integrate that into our overall Incident Detection and Response platform. So we're able to go from the endpoint, leveraging Microsoft Defender and BitDefender plus Minerva, manage that seamlessly into our traditional SIEM and extend that into the cloud, providing end-to-end threat detection and response. So what you see is that in a world where attackers can actually attack any piece of the chain, we have end-to-end visibility and the thing that we actually liked about the Minerva strategy is it did not acquire customers to actually go do something net new. It allowed them to leverage their vesting investments. Look, Microsoft put a ton of money into the Microsoft Defender strategy, and so it allowed us to actually leverage that investment that was actually already out there to integrate that data directly into our platform and provide a holistic end-to-end solution while solving customers' problems about how to actually manage that environment.

Got it. Maybe side or adjacent question there is how closely do you work with Microsoft in that regard? And do you have a lot of visibility on what their road map is?

So Microsoft, like maybe the platform is coopetition. I spent a lot of years working at Microsoft, and so I would say that we spend time with and we do work with Microsoft. They compete in some areas. We work together in some areas. This is one of the areas, though, that I would just say is not fraught with tension because it's out there and they want to make their customers successful, and this is part of the integrated sort of like stack. And so this is one area that we actually just work together quite well. And so I just -- I can't comment on the road map.

Yes. Okay. Fair enough. In terms of your M&A aspirations and opportunities that you see in the market, particularly considering some of the headwinds that you've seen recently over the past few quarters, how would you frame your appetite from M&A -- for M&A, the pipeline that you see of potential deals? And what might be more attractive segments that you're looking at?

Yes. So a couple of different things is that the -- I think Minerva was a good interesting thing because we paid a reasonable price for it for the technology. The traction actually. What it got it was -- it was early stage, but [ probably the reason why ]. I have to say that I'm somewhat cheap, and I really can't tolerate sort of like a big disparity between the public market pricing and private markets. Private markets are starting to reconcile down. Right now, I would say that it's the lower quality companies that are affordable, and so I'm sitting on the sidelines right now. But I do think you'll have decent quality over the next 2 years of companies that sort of like just have big valuation gaps. And that could be interesting, but I have patience right now because I think the prices will actually get to a reasonable level over the next couple of years.

Okay. So excellent. Maybe on the execution side, from a sales cycle point of view, I think you touched on a little bit of pressure. We certainly seen it across our coverage and some of the elongation of cycles -- sales cycles. But anything specifically that you're doing to manage deal cycles and return, particularly with regard to that, what seems to be a pretty common approval to procurement type of stage?

I don't try to fight the river, and so this just goes down to fundamentals. So there's a couple of things that we actually do fundamentally. First is that you actually have to -- and we had this debate with our team, they've come around mostly. You actually have to have higher coverage ratios. Like if it took you a 3x coverage to actually close the deal before, you got to have a 4, 5x coverage right now because you should not expect things that are normal to actually not happen. And you're going to have delays, so that means you have to have enough pipe and enough deals that are going to close to actually have 1/4 of those deals not closed and you still hit your number. And that's part of why if you look at our original model, we said it was back-end loaded versus front-end loaded because I'm definitely not going to try to change the -- assume the things are going to close fast in this environment. That means that the pipe that I'm building in the first half of the year really is not going to close to the second half of the year. And so -- but we're building pipe that actually has a higher coverage ratio for the second half of the year, presuming that you're going to actually just need more pipe to close. And that's a little bit -- and by the way, that's what played out in Q1. Like our estimates ended up being quite good, is that you had a little bit of economic pressure with the Silicon Valley Bank, and we actually hit our targets, but primarily because we actually sort of presumed exactly what the ratios are going to be that you actually needed. So that's one. The second thing is a sales discipline and training that anyone can actually sell when things are easy. But in this environment, you actually have to be respectful. And you -- part of it, we actually had to -- this is why our sales force listens to earnings calls. We have to humanize it a little bit because what happens is that historically, security teams and [ CCLs ] could greenlight projects, they could say, "We want to fund it. Go." In this environment, [ CCLs ] get pushed back from their finance on their budget. And I don't know about you. No one really likes to actually have authority taking away from them. And so if our sales force goes out and it actually says that like, "Hey, who's the decision maker on this?" Of course, someone's going to say, "I'm the decision maker on it." And so they've had to get better, and this is where our sales leadership is coming in and actually doing, I would say, friendly investigations. And so they had to get better at sort of like doing things like, hey, who do you need to consult on this deal to get it close? Not do you need approval, but who do you have to consult? What's the time line of consultation? That's the stuff that is being adopted. It's not 100% of our sellers yet. But that's the tools and techniques that we're having to put in place to actually make sure that we have clear line of sight and we can better forecast. It has gotten better, and it will get better still as we actually get them more uniform. But that is probably 1 of the 2 or 3 biggest priority areas that our sales leadership is focused on is, yes, I know that this worked in the past, but just because it worked in the past does not mean it works right now.

Great. I want to sneak one more in, and then I'll open it up to the audience for questions. But I wanted to ask, net new ARR declined over 50% year-over-year as well as sequentially, guidance implies real acceleration of net new ARR through the rest of the year. Maybe help us understand what factors support confidence in better net new ARR.

It's a fair question. I think the important thing is to understand, I always start with why is the question valid and sort of how people think about it. So the thing to look at is we actually had poor sales productivity in Q4, and Q1 was okay. And so why is sort of like sales productivity, which is going to be the primary driver of that, going to be higher this Q4? So let me just be clear. We are not expecting record high productivity or even average productivity for our sales force in Q4. We're expecting sub-average productivity. Okay? And that is still materially higher and last year is higher than Q1, why we actually have confidence in that. There's 3 factors I'd point to that says we don't get to even average productivity, we have to sub-average productivity. The first is that in Q4, our sales team was coming to maturity. That means they were hitting the market where they should be productive right as the economy was turning south. That's just sort of like more unfortunate. But just like we just had that last discussion about how you manage the sales cycle, this Q4 will have the majority, almost all, not all, but like a super majority of our sales team that will actually sort of like be both mature and have over a full year selling in a pressured environment. That's a big difference in terms of experience and expectations. The second thing is that if you look sort of like in the past, our pipe constitute is like 2 classes of things, things that companies should buy but they could delay and things that were must-have. The must-have were the cloud security and Incident Detection and Response. And so if you look at the conversion rates on the things that are must-have, the cloud detection and incident response categories, those conversion rates have stayed fairly consistent. And we're projecting that those conversion rates do not improve at all over the course of the year. Now what we're projecting improves is the percentage of our pipe that makes up those deals in Q4. And we're managing through that, and we're actually tracking the management for that. So again, more mature sales force, consistent conversion rates. It's just the pipe mix, the shift to those must-have areas. The last thing that I'll actually highlight is the thing that we actually talked about earlier, is that do you actually have enough pipe coverage so that like delays, which are inevitable to happen in this environment, don't actually cause you to actually miss and you're fretting about specific things. And again, we've been building up -- and we are. It's not we have. We have to do it every week, building up the pipe over the course of the year to actually have the excess pipe that you actually need in this type of environment. Those are the factors that we're actually looking at.

Got it. Got it. With that, I wanted to give an opportunity if anyone out there who wants to ask a question. All right. I have more. We got one?

All right. No.

No. All right. I guess maybe on that point, a little bit kind of towards execution, progress with the sales transition, and I think you kind of moved from more of a land anywhere to more sell the platform transition that you're currently in the process with through the sales force. How is that going? And how are you tracking progress with your sales force kind of like selling in that motion?

Well, I mean first is to understand why. I mean the reason we had to move from a land anywhere is the land anywhere means that we're indiscriminate about whether we're selling the things I should do versus things that I have to do from a customer project perspective, and so we needed to actually force the shift to make sure our sales force was only selling the stuff that was likely to close and had a higher likelihood to close. So that's part of why the land anywhere strategy doesn't work. And by the way, it's not even that they're not actually valid deals. On Saturday, I actually saw like a fairly large customer, [ Bigbank ], and they have one of the very, very large project that's on the should-have list, and I said, "Hey, what's going on with that, can you give me a little bit of insight?" He said, so like a bunch of dollars, it's going to be one of the -- I'm going to green light it. And that's not a great place to be, and so that was the requirement there. Now how is it going? I would say it's going better than expected. And the reason for that is straightforward is the biggest concern whenever you make a change that impacts the sales force is do you actually have a sales force mutiny where they actually sort of like vote with their feet and they walk away. And by the way, in the last 2 years, that's a very real fear. There's 2 things that have actually worked in our favor. The first is that we close enough of those deals that it created envy, and so people wanted to actually do it because they thought it can actually help them hit their number. And so seeing success actually helps, and so that was a positive thing. The other one that we had to do with, the tech environment has gotten more favorable to companies, and so people are less likely to walk because they're not sure they're going to be able to keep the job. And so that's just an environmental change. But those 2 together actually set it up where we're making traction and we have the time to actually make that change with our sales force.

Got it. Maybe last one I'll hit you with is vendor consolidation is a theme. I think you've touched on it a little bit. Certainly one that we're seeing resonate across the past few -- several quarters across our space. Where do you see the most traction with share consolidation on your platform? Where is it coming from? And is it skewed toward the mid-market or maybe enterprise clients across the world?

Well, that's a great question. It is -- so we see it both on the threat and the risk side. I would just say there's urgency on the threat side, but that's mostly because we can really land sort of like well there. And so from a land perspective, it's happened on the threat side. We expect to see more of the upgrades to the cloud to complete over time. As far as segment of the market, I personally think that Russell 3000 and the private company is an ideal sweet spot right about now. And the reason for that is these are large enterprises, but they have lots of budget dollars and pressures, but they're too big to ignore security. And this is both the private companies and the public companies, and so it's not really the mid-market. It's in that sweet spot of companies that are probably like high hundreds of millions of dollars in revenue to billions of dollars in revenue. Those ones have to do security, but they actually have urgency to actually get some -- they have to do it efficiently. And so we see lots of demand for that right now on the consolidation piece.

Got it. Maybe we're almost just about out of time, but I want to hit you with one last one. Most misunderstood things, particularly with around investors with regard to Rapid7 and message that you're trying to get across.

Look, I think the most misunderstood is, I think, has most to do with understanding the competitive environment because it's just noisy and actually why it's actually most understood. Here's a simple way to think about it, is that if you look at the landscape of customers and if you think about mainstream enterprises, being that Russell 3000, large, mid enterprises and even the margin constraint, the manufacturers of the Fortune 500. Our goal is not to win 100% of them. Our goal is to be dominant and then win all of them that are actually margin constrained and have to do security but need to do it productively. We're uncontested in that market in that space. We are the most productive security platform for security operation on the planet. And our goal -- and we have a lot of growth by being the dominant provider of technology to those customers. And so it is not an apples-to-apples to look at the whole market. It's really when you think about companies that actually are large have to do security and they want to do it at high levels of productivity and efficiency and they want to have good security and not a $1 more, there's no platform that actually compares to what we actually offer there.

Great. Great. With that, I think we're definitely out of time. And so Corey and Sunil, thank you both very much. I really appreciate it, and thank you all for joining us.

Thank you all.

Thanks, Brian.