Rapid7 Inc (RPD) 2015 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Rapid7 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to the Company. Please go ahead.

Thank you, operator, and good afternoon, everyone. Thank you for joining us to discuss our financial and operating results for our third quarter of 2015. This is Anitha Gopalan, Controller and VP of Investor Relations and I'm here today with Corey Thomas, President and CEO of Rapid7; and Steven Gatoff, our CFO.

We have distributed our Q3 earnings press release over the wire and have posted it on our website at www.investor.rapid7.com. We have also posted our Q3 earnings presentation along with an updated Company presentation for our Q3 results on our IR website. This call is being webcast at www.investor.rapid7.com and a replay will be available on our website. We would like to bring the following to your attention. The date of this call is November 12, 2015.

Our discussion today may contain forward-looking statements about events and circumstances that have not yet occurred including, without limitations, statements regarding our objectives for future performance, and future operations for the third quarter and full year of 2015. All statements contained in the presentation other than statements of historical fact are forward-looking statements. Statements containing words such as will, expect, anticipate, believe, plan, intend, should, and other statements in futures tense are intended to identify such forward-looking statements.

Actual results and outcomes may differ materially from expectations contained in the statements due to a number of risks and uncertainties, including those containing in our risk factors section of our Q3 of our quarterly earnings report, on Form 10-Q filed with the Securities and Exchange Commission for the quarterly period ended June 30, 2015 and subsequent reports that we file with the Securities and Exchange Commission.

The information provided on this conference call should be considered in light of such risks. Actual results and 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 information presented on this conference call except to the extent required by applicable law.

On this call we will provide and talk about our results using non-GAAP financial measures and provide non-GAAP guidance. The presentation of non-GAAP financial measures is not meant to be considered in isolation or as a substitute for directly comparable financial measures presented in accordance with GAAP.

And we have provided a reconciliation of non-GAAP financial measures to the most comparable GAAP measures in the financial statement tables included in the press release announcing our results. The press release announcing our financial results is also available on our website.

With that I'd like to turn call over to Corey.

Thank you, Anitha. And good afternoon, everyone. I like to start by thanking all of you for joining us today on our third quarter conference call. This was a tremendous quarter for Rapid7 across several business and operational metrics and as reflected in our strong financial results.

Organizations of all sizes need to shore up their ability to respond and defend themselves from attacks by malicious, well organized, and well-funded attackers. To do so they require mastery of the information and their IT environments to manage down with and respond to attacks. We believe that Rapid7's security and data analytics platform is highly differentiated in its ability to provide this deeper level of insight and knowledge. And it is this fundamental reason that we have experienced strong growth and customer adoption.

In addition, we believe recently announced acquisition of Logentries which provides us with highly scalable, real-time, cloud-based log management and machine data search technology further extends our technology leadership and value proposition and positions us well to capture a greater share of the multi-billion dollar market opportunity we are pursuing.

During the third quarter we generated 39% total revenue growth off a strong comparison quarter in the year ago period. This was the result of continued momentum in adding new customers, increasing adoption in the federal market and increasing overall renewal rates. We are also benefiting from the investment's we've been making in our product portfolio, strategic services, and overall go- to- market efforts. The market is responding to our unique combination of technology and services and we delivered meaningful growth across all of our offerings during the third quarter.

We are continually working to make our platform both more simple to use and compelling to customers as we rise above the noisy security environment. As a result, we are seeing strong adoption in growing interest levels with customers both in the US and internationally.

With diversity across verticals and increasing levels of commitment from our customers, I want to share some terrific -- a terrific example of hour our broad and robust security and data analytics platform solves customers security challenges and enables them to answer three critical security questions. Am I vulnerable? Am I compromised? And is my security program optimized? Our ability to answer these questions with our security, analytics, and risk-based approach is a key differentiator for us.

During the third quarter we added as a new customer a large US healthcare services organization that has been experiencing tremendous growth both organically and via acquisitions. To accommodate this growth they sought to expand their vulnerability management program to encompass a larger, threat exposure management program. While their existing vulnerability management vendor had been a place for more than five years, the team decided it was time to look at additional options. They evaluated a broad array of vendors and ultimately selected Rapid7 due to our technology, superiority, significant performance advantage in large environments and our robust integration ecosystem with key partners in their security stack.

Their initial investment included Nexpose Enterprise, Metasploit Pro as well as our Rapid7 super support offering. In addition, the customer was excited about the broader offerings that Rapid7 brought to the table including UserInsight which they believe showed innovation and a desirable future path for their security program. Over time we believe there's opportunity to bring on board additional products from Rapid7's portfolio.

We ended the third quarter with more than 4,400 customers, an increase of approximate 32% year over year. They represent a cross section of verticals, geographies and mid-market to Fortune 1000 customers.

Our success in the mid-market was a primary contributor to the growth of our customer base and overall strong performance in the quarter. In this segment of the market we benefited from a higher number of sales that began and quickly closed during the quarter when compared to what we normally experience. In addition, while the third quarter is typically seasonally strong for sales into the US federal government, it was even stronger for Rapid7 compared to our expectations coming into the quarter.

Our model is based on our ability to land with any of our solution offerings and expand to other solution offerings. We have seen increased success executing this strategy in the last year as our engineering team both delivered more products and capabilities on our platform. This quarter both our are overall renewal rate and are expiring renewal rates were strong. In particular we saw big increases year over year in our overall renewal rate driven by large customers renewing for longer periods of time as well as increasing penetration across our product offerings.

To support our innovation and cross-sell initiatives in early October we introduced Nexpose 6.0 with adaptive security to help organizations respond more effectively to evolving security risks. The enhanced solution for threat exposure management delivers prioritized insight into changes on a customers network and the impact of newly discovered vulnerabilities quickly identifying critical threats with guidance for fast remediation.

Adaptive security delivers the benefits of continuous monitoring without the noise of unfiltered alerts or network performance tax of continuous scanning. Nexpose 6.0 will help customers and security professionals stay ahead of changes in their environments. In addition, Nexpose 6.0 has a newly streamlined navigation and easy-to-use interface so security staff spend less time in the technology and more time acting on the recommendations and making an impact. The improved user experience for Nexpose is part of our ongoing commitment to make security software easy to use and learn helping LEAN teams achieve greater productivity. Also in October, we launched Analytic Response, a new, fully managed service that gives customers continuous threat detection by identifying known threats, certain unknown threats, and intruder movement from the endpoint to the cloud. The service part of Rapid7 Incident Detection and Response offerings combine threat insight with sophisticated user and attacker behavior analytics.

It is monitored and managed by Rapid7's world-class security analysts, who have web experience in hunting for dynamic threats and containing incidents to protect organizations. When a breach is identified with Analytic Response services, Rapid7 analyst pivot to incident response providing security teams with details, easy-to-follow remediation steps tailored to the customer's environment.

We are also very excited to have added Logentries to the Rapid7 family. The acquisition of which we announced a few weeks ago. There are several key benefits Logentries brings to us as we accelerate adoption of our platform. First, with the addition of search, our customers have better access or will be better able to unlock the robust security data that sits waiting across their organizations. And it is made so valuable from the analytics of our platform.

Second, Logentries' machine data search enables us to provide customers with more robust forensic capabilities in addition to our analytic capabilities. And third, Logentries enables Rapid7 to address log safe compliance leads and make compliant a feature of our Incident Detection and Response offering. Integration is well on its way and we are pleased with the initial feedback across the customer base.

The more than 60 people that we added from Logentries, along with our teams, are already hard at work to bring market solutions that unify detection and investigation from Rapid7 with the new forensics and compliance capability from Logentries. The solution is to deliver a powerful and disruptive combination of attacker expertise, analytics and a much more economic machine data search solution for customers.

We are uniquely positioned with a strategic end-to-end solution for Incident Detection and Response that includes world-class technology based on analytics and search, our recently introduced manage detection services and our incident Response teams deep expertise in forensics. We are also pleased to announce that Rapid7 has been selected as the exclusive transition partner for Intel McAfee's Vulnerability Manager Solution. We will work to transition these customers to our threat exposure management platform and look forward to be partnering with Intel to make security better for both organizations.

In summary, this was a great quarter for Rapid7. We fired on all cylinders, reflected in our out performance across key measures of our business. Which Steven will talk about more in just a moment.

As we look forward we believe the outlook continues to be bright and we see strong fundamental growth underpinning our path forward. We are pleased that our investments in our go-to-market and technology platform are continuing to bear meaningful fruit as we capitalize on our significant market opportunity, with our unique security data and analytics platform.

With that, let me turn it over to Steven.

Thanks, Corey. Good evening everyone. We appreciate you joining us.

As Corey said we are very pleased with the strong performance that we delivered in the third quarter and we see our success across several important business drivers. One, strong demand for our differentiated security data and analytics platform. Two, solid execution of our land and expand strategy that's evident with growth from both new and existing customers. And three, continuing returns from the investments that we have been making in our technology platform and in our go-to-market initiatives. Before we start, we wanted to note that our Q3 2015 financial results do not have any impact from Logentries, as the acquisition closed in October.

With that, let's dive into the Q3 financial results in details, we will then walk through guidance for Q4 and the full-year 2015. Three themes summarize our financial results for the third quarter. First, we delivered another quarter of strong revenue growth. Second, we continue to drive both strong renewal rates and healthy growth in deferred revenue. And third we generated positive operating cash flow.

Diving into the details, total revenue for the third quarter came in at $28.3 million an increase of 39% year over year and $1.5 million above the high-end of our guidance. Products revenue increased 31% year over year driven by broad-based strength across all of our offerings and maintenance and support revenue increased 40% year over year with a similar dynamic. Our highly strategic professional services revenue increased 75% year over year as we continue to benefit from our newer security advisory services. Importantly, we continue to have high visibility into our revenue model with 62% of our revenue being recurring and 84% of Q3 revenue already on the balance sheet as of the first day of the quarter.

In addition to the strong revenue visibility, we had continued success in the third quarter executing on our land and expand strategy and increasing customer adoption across our platform and services. We had another quarter of solid new customer growth with our total customer base increasing by approximately 32% year over year, as we ended Q3 with more than 4,400 customers globally. We are proud to now include 35% of the Fortune 1000 as customers of Rapid7. And in Q3 58% of our revenue came from enterprise accounts defined as customers with greater than $1 billion in revenue or 2,500 employees.

Looking at existing customer economics, our renewal rate in the third quarter increased to 122% compared to 109% in Q3, 2014 and 115% in the previous quarter in Q2, 2015. This was driven by our existing customers buying more of the products that they initially purchased as well as purchasing other Rapid7 products. Our expiring renewal rate, which as a reminder, measures the renewal of the prior year's exiting revenue run rate, increased to 88% in the third quarter with our core enterprise customer base renewal again coming in at greater than 90% for the quarter.

So far as our global presence, North America continues to be our largest market and we are seeing nice growth and continued demand in transactions and customer adoption here, as well as internationally. International contributed about 12% of total revenue in Q3. Our channel partners continue to play a nice part in our ecosystem and contributed a fairly consistent 39% to total revenue in Q3 2015.

Recall that Rapid7's channel partner dynamics are not the typical distributor or reseller relationship. In nearly all cases the Rapid7 sales rep has a relationship with the end customer and the vast majority of the time it is the Rapid7 rep who originates the opportunity and brings it to our a channel partner for ease of close and/or a bundled purchase for the benefit of the customers buying.

Moving down the P&L, non-GAAP gross margin for Q3 was 76%. As we've discussed we've made meaningful investments to build out our new strategic security and incident response services in the first half of 2015. So while gross margin in Q3 was lower by two percentage points versus 2014, we were pleased to see that sequentially gross margin percentage improved for a second quarter in a row and benefited from our executing on our messaged increases in professional services profitability where non-GAAP prop services gross margin grew to 22% in Q3.

Turning to non-GAAP operating expenses for Q3, we continue to invest in our products and platform, grow our direct sales force and increase our marketing efforts to increase awareness and customer adoption. We also incurred an increase in G&A costs in Q3 related to typical expenditures associated with our first quarter operating as a public Company.

To provide some color, looking first at R&D, our investments in our technology platform and product innovation have included expanding our threat exposure management offering with the development of Nexpose 6.0 with adaptive security and continuing to build traction with our intruder analytics solutions. This work was primarily driven out of our high-quality and cost-effective offshore engineering and development center in Belfast, Northern Ireland; such that you see R&D non-GAAP expense to revenue ratio essentially flat year over year at 32%.

In so far as sales and marketing, similar to improvements seen in Q2 over the prior year, we continue to make additional improvements in our overall expense to revenue ratio in Q3 of about 300 basis points year over year to 56% on a non-GAAP basis. Along with a thoughtful approach to our spend, we saw strong improvement in our overall pipeline build and sales rep productivity in Q3, which was slightly offset by the nice problem to have of increased commission expense from the overperformance in the quarter. Lastly on OpEx, we continue to be focused on the scaling operations while driving cost efficiencies. In this regard we were pleased to see our non-GAAP expense to revenue ratio over G&A improved by about a percentage point over Q2. Putting it all together, non-GAAP operating loss was $7.8 million for Q3, $2.1 million better than the high-end of guidance and resulting in a similar better than anticipated over performance on non-GAAP loss per share of $0.27.

Turning to our balance sheet, we ended Q3 with a cash balance of $124 million, this obviously, increased over prior periods as a result of the proceeds from our July 2015 IPO. As well as from the benefit of our generating positive OCF of $2.3 million and which was partially offset by our repayment of our $18 million term loan. As a reminder, our September 30, 2015, cash balance does not reflect the $36 million of cash used for the Logentries acquisitions that closed in October 2015.

So moving on, total deferred revenue came in at $110.2 million at the end of Q3, increasing a solid 52% year over year compared with 37% year-over-year growth in Q3 of 2014 and 45% year-over-year growth in Q2 2015. This solid performance in deferred revenue represents the good traction that we are experiencing with both new and existing customers.

In addition to the core fundamental growth that we are seeing in the business, there were also a few favorable transaction dynamics in Q3 2015 which helped to further drive the strong growth and greater than anticipated overperformance in Q3 that was reflected in higher deferred revenue growth and meaningfully higher implied billings growth. We estimate that the following three favorable dynamics contributed about 6 percentage points of the 52% year-over-year growth in total deferred revenue for Q3 2015 as follows.

The first favorable dynamic was larger and longer customer renewals. While the average contract length for new transactions in Q3 was relatively consistent at 26 months, both year over year and versus Q2 2015. On the renewal side the business we were pleased to have a large enterprise customer, among others, renew their contract with us in Q3 for a longer period of time. This was a driver to our average contract length for renewals increasing from 15 months to 19 months and adding even more to long-term deferred revenue. Net-net, we think it is good to see customers renewing more dollars for longer periods of time.

The second favorable dynamic in Q3 was a large federal deal. While very large enterprise and federal deals are not something that we rely on, on a quarterly basis at this initial stage of our penetration into these sectors, we are seeing them occur more and more. And Q3 2015 was a beneficiary of a large federal sector transaction in comparison to the prior year. It was great to see. We're driving to do more and at the same time we are aware that September was a federal fiscal year end.

The third dynamic contributing to higher than anticipated over performance in deferred revenue growth in Q3 was greater mid-market in quarter deals. As Corey pointed out, our mid-market business benefited from a greater than anticipated number of deals that our sales team generated and closed in quarter during Q3, as compared to what we traditionally experience or had modeled our sales force productivity around.

Greater than anticipated growth in year-over-year volumes was a terrific outcome and a derivative of what we believe is our strong traction with our unique security data and analytics offerings and a well organized go-to-market. While these are all bullish indicators of demand and our execution and happen from time to time, we don't bake this level of over performance into our expectations to be repeated every quarter.

Additionally for those of you who model the growth in deferred revenue and billings for our business, please keep in mind that Q4 2015 has a more challenging comparison versus 2014 as our North America business experienced more than 55% growth in the year ago period.

Now for the final point on our Q3 2015 financial results. We generated positive operating cash flow of $2.3 million in Q3 compared to cash used for operating activities of negative $935,000 in the prior-year quarter on the heels of strong demand and good execution.

With that, let's now turn to our outlook for the rest of 2015. Based on our Q3 performance and good momentum heading into the fourth quarter, we have increased our revenue outlook for Q4 2015 meaningfully taking up guidance for the full-year 2015. Also as a reminder, our Q4 2015 guidance includes the anticipated impact of Logentries acquisition as follows. As we shared on our October 13, 2015 conference call, for Q4 2015 we expect Logentries to drive an incremental $1.5 million in billings, approximately $500,000 in revenue, and to be dilutive non-GAAP operating loss and non-GAAP loss per share by approximately $2.5 million to $3 million and $0.06 to $0.07, respectively.

So pulling this all together, our overall guidance for Q4 2015 is as follows, we anticipate total revenue for Q4 2015 to be in the range of approximately $28.8 million to $30.2 million equating to a year-over-year growth rate at the midpoint of 34%. We anticipate non-GAAP operating loss for Q4 to be in the range of $13.5 million to $14.5 million and we anticipate non-GAAP loss per share for Q4 2015 to be the range of $0.35 to $0.37.

For the full year 2015 therefore, we expect total revenue to be in the range of $106.5 million to $107.9 million. This is up from $102 million to $105 million previously and represents 39% year-over-year growth for 2015 at the midpoint. We anticipate non-GAAP operating loss for the full-year 2015 to be in the range of $34.1 million to $35.1 million. And finally we anticipate non-GAAP loss per share for the full-year 2015 to be in the range of $1.53 to $1.56. Please note that our guidance does not consider any potential impact to our financial results associated with foreign exchange gains or losses.

In closing, we are pleased with the strong results for Q3 and we remain bullish on the core fundamental growth that we see with customers and the road ahead for our unique security data and analytics offerings.

With that, we appreciate your time and support and we are glad to open the call for any questions. Operator?

(Operator Instructions)

Saket Kalia, Barclays Capital.

Hey, guys, thanks a bunch for taking my questions here.

Hey, Saket.

Hey Steve, hey Corey. Steve, thanks a bunch for the detail on the deferred dynamics this quarter.

Realizing that you don't guide on billings, it would feel like this quarter would maybe set up a little bit more of a challenging sequential compare for the fourth quarter. So maybe just to make sure that we are all on the same page, how should we think about billings or deferred next quarter including Logentries?

Yes, I love you for asking, but we were not dividing guidance on billings or on deferred. We had obviously on revenue which includes an element of that, but we are not giving any forward-looking guidance on that.

Yes, totally understand. For my follow-up, nice news on McAfee. Can you just maybe talk about McAfee Vulnerability Manager in terms of when we can expect that product to maybe end-of-life? How many customers they have and how big of a revenue opportunity that could be?

Yes, we are excited that the deal and the partnership with McAfee. We have a dedicated team and they've allocated a dedicated team that's right now has been working on and is actively working on the migration and the upgrade to our threat exposure management suite. That's well underway.

At this stage we are not discussing numbers, targets, the number of customers. What I can say though is that we are working very diligently to make sure that we migrate as many of those customers as possible. We think we have a great integrated solution that we're jointly putting together with McAfee that ties our threat exposure management suite together with their security portfolio and provides a great solution for their customers.

Got it. Thanks very much guys, that's it for me.

Thank you.

Melissa Gorham, Morgan Stanley.

Great, thank you and congrats on a good quarter. So I just have one follow-up on the dynamics related to the stronger deferred. I understand how some of those components may be one-time particularly given the seasonality around federal.

But related to the increased volume in the mid-market I was wondering if maybe you can provide a little bit more color on what was driving that? And why we should assume that dynamic should not sustain moving forward?

Sure, Corey and I will tag team on it. So piggybacking probably a little bit of what Saket was asking about too, obviously we're not leaning in ahead in Q4. But Melissa to the core or it, when you look at the deferred growth of 52% and then to summarize the three items, federal, mid-market and multi-year renewals, adding six points gives you a steady-state for us or a good solid recurring growth what we saw in the mid-40s.

So on the mid-market side it was really relative to the prior-year that we saw higher productivity and higher growth. In other words, year-over-year versus 2014 you saw a more pronounced change then you did for example versus Q2 of 2015. So sequentially if you look at our growth profile this year meaning 2015, you see nice marginal improvement, a little bit in productivity, a little bit for rep, a little bit in volumes, a little bit in execution, quarter over quarter. If you go back and look at the numbers in Q3 that's where you see a big jump in Q3 2015 versus Q3 2014.

The dynamic of okay well why isn't that level of continued productivity in Q4, why won't that produce another outsized quarter in Q4? Apples to apples, because if you look at Q4 2014 you will see that deferred you will see that the business really grew tremendously quarter-over-quarter. Q4 2014 over Q4 2013. So the message is there's been nice sequential growth and productivity in volumes every quarter. And it was much more obvious and pronounced in Q3 because of the performance in Q3 of 2014 and Q4 of 2014 was a really strong quarter.

Absolutely. And to echo that is that we've seen two things that we consider favorable this year. One we see a great demand backdrop.

The way to think about what drives our business is the core of it is the awareness that people have around security. And then their commitment to build a strong security program, which is different than some other folks in the space.

And what we've seen is security awareness has continued to increase but more importantly people are looking to build security programs. We see that more consistently this year. The second thing from an operational perspective, our sales team has done a good job of managing performance and productivity.

So you will see less -- we've seen less swings then we saw last year and we see more consistent execution and productivity quarter-to-quarter this year. We like that dynamic in the business. It gives us more visibility and more consistency and that's why we feel really good about the operating dynamic that we are in today.

Okay, thanks, that's very helpful. Then just one follow-up on the federal business.

Can you remind us how big your federal business is today as just a percentage of the mix? And then that one large deal, can you maybe give us a sense of the size? And then lastly, just on that have you made any changes from a sales organization perspective to better target federal opportunity?

Sure, Melissa, again, we'll tag team.

So we don't break out federal by numbers or percentages. But what we have been fairly transparent with folks about is that it was essentially a new space for us for all intents and purposes. We've had some presence there in the past.

But as Corey's talked about in the past of his re-architecting our sales and go to market strategy when we brought in a new head, a new VP of Enterprise and Federal a touch over a year ago -- year and a half. That was really the effort that you saw more pronounced presence. And so we see some nice fruits coming out of that.

Overall if you were to look at those three items that we talked about to your second question of how should we think about the size of this stuff, the items were fairly I wouldn't say exactly one-third, one-third, one-third that contributed to the difference. But between over performance and really strong performance, but roughly if you use that it will give you a sense of the relative size.

The third part was? Anything else that we are doing differently on federal?

I think this is just one where we built out the team in 2014 and we knew it was going to take a while to build. And we have seen positive momentum frankly ahead of what we expected for this year. But it is the team that we built out in 2014 that we are seeing get productive sooner than we expected and that's a positive development and dynamic.

Great. Thanks, guys.

You bet, thanks.

Gregg Moskowitz, Cowen and Company.

Okay, thanks very much and good afternoon, guys. So inclusive of this quarter's results, it seems that you're continuing to significantly outpace the growth of your market. What would you most attribute that to and do you think that healthy share gains are sustainable going forward?

Yes, we would primarily attribute it to -- if you look at it we really have done three things. One, we've introduced a number of new products and services that frankly have been very well-received in the market. We introduced our IDR portfolio over the last year and we are seeing growth and adoption there.

We introduced a number of new core services in our security advisory services, we've seen adoption there. And at the core of it our Threat Exposure Management portfolio where we focus on analytics and innovation is seeing demand.

So on the products and services front the stuff and innovation that we introduced are catching traction. So that's on the core what are we offering and its relevance is part of it.

The second thing and I think this is a little bit where we are different than the boarder market, is what I talked about a second ago is that our demand is really driven by companies who are building and looking to build sustainable security programs. So there's some people in the market where their demand is driven by compromises or breaches or other things. Our demand has always been driven by people looking to actually have insight and information for the purpose of running and building a Cyber security program.

The favorable tailwind that we see is that more of our companies are looking at how they build and operationalize a security program. That's a positive dynamic and therefore it leads us into more deals, more cycles, and more discussions and we are seeing the fruits of that today.

Okay, thanks, Corey. Then certainly these results don't indicate any change on the surface, but are you seeing any slowdown whatsoever in security spend or prioritization? Or any general changes in customer behavior that you would point to? Just asking the question because there's been an increase discussion over the past couple weeks around that.

We are not seeing any dampening demand for people looking for the analytics about how to build and run security programs. If anything we're seeing people more and more focused on the fundamentals.

We think that's a positive dynamic. Both for our customers -- because it is the financials of how they run and operationalize a security program that's going to have the most impact to their business. And of course that has a positive impact for us since we are providing the core data information insight around that.

So we see less of a focus just on purely compliance solutions on the magic pill of just a control or technology in the environment. And we do see increased focus as we -- well it's hypothesized all along, on the fundamentals of building great security programs based on security, data and analytics.

Very helpful. Thanks very much.

Rob Owens, Pacific Crest.

Great. Good afternoon, guys. Looking for a little bit of color around how UserInsights performed during the quarter? And are you seeing it go hand in glove with the Threat Exposure Management or is it driving new customer acquisition for you?

Our Incident Detection and Response offerings are doing well. And they are growing well in fact, you will see a dynamic where they not only are going along with other exposure management offerings, but over half of them are actually generating new customers which is a positive thing in our dynamic.

Because one of the things that we have is that for our land and expand strategy we don't want that to just be where it is just Threat Exposure Management. That has to be in place before people buy the other products.

What we are seeing, and what we saw last quarter and what we've seen this year overall is that we're able to land with our Incident Detection and Response offerings, we're able to land with our security advisory services offering and that provides a beach head that we're able to go back in later and sell other offerings. That's a very healthy dynamic for us.

That said, is that the Incident Detection and Response offerings we just introduced in 2014. And from a size and scale all of this growth is much, much faster than in our direct social management portfolio, it is off a smaller base.

Okay. Then second, Steven, if I look at the guidance for the fourth quarter and look at the organic guidance so taking out Logentries, it's some of your slowest sequential growth I guess this year. And as I look at the strong deferred revenue build especially during this quarter and given how much of your revenue actually comes from the balance sheet, it seems uber conservative, I guess, if I look at Q4.

So maybe a little color in terms of what colored your guidance there? Thanks.

Yes, sure, Rob. Where to start?

I think the conclusion we would offer is not unfair and it is something that we feel comfortable going out with given what we know and see. We feel good about the quarter as Corey was saying. We feel good about the organic business itself meaning not even considering Logentries positive contribution.

And we feel good obviously as you said about the P&L where we have pretty strong visibility about what's coming in. Roughly 84% of Q4 revenue is already booked. So we do feel good about the numbers and the place we are in right now.

But there should be -- there's nothing indicative of any slowing per your prior question or answer or anything of that nature?

Correct.

Okay. Thank you.

Yes, sure.

Jonathan Ho, William Blair.

Hey, guys, congratulations on the strong quarter. Just wanted to start out with the professional services side. Clearly this is a very strong quarter. You guys are seeing traction.

But I just wanted to get a sense of number one, utilization rates that you are seeing? Particularly in some of the newer opportunities and then also whether you could talk about the sustainability of the professional services run rate?

Yes, I will give a high-level without looking at numbers. We have -- as you indicated we have high demand for our services. And it is frequently a period where we often see an overall market demand outstripping supply. And that is a positive dynamic for us, that's why we are optimistic about our long-term margin profile in that business.

That said, we've been very careful and thoughtful about how we designed our advisory services. We are really focusing on the high-value services that's associated with how people assess, respond, and build their security programs. Because at the core of it building data-driven programs helps the customers and it helps us.

So what you don't see us doing is focusing heavily on the lower margin and also what we consider our lower impact services. So over time you're going to continue to see us focus on high impact services for customers that should have the follow through of a higher-margin profile. Which we think fits the supply and demand dynamic in the market where there's just not enough core expertise.

Just, Jonathan, to add some color to what Corey is saying on the numbers side, on the margin profile Corey just mentioned we've been pretty transparent with folks that we are managing this business to a target model that has a three handle on profitability.

So we feel good about that from a standpoint of where we are now at 22% on a non-GAAP basis and the steady increases that we have made and on the march forward to get there. The focus and the incremental business that we have been driving from the much higher security advisory services, much higher margins that are pulling that up over time is the key data point.

And then the second part and second metric of interest, which you alluded to earlier is what percentage of revenue is the prof services piece of the pie for us. We have been pretty clear and the results have panned out that it is a nice business, having high for example deployment and training attach rates drives for higher renewal rates. So we have seen some really good correlation there.

We've seen some really good stickiness in selling customers the advisory service and then going in with the product. So steady-state, if you will, at a 20% contribution, 20% -- I should say percentage of revenue would be spot on the numbers we are looking at. And that's where it is been hovering and we feel good about that as a good value creation mix.

Got it. Then just as a follow-up, you guys talk about your renewal rate particularly your expiring revenue renewal rate improving this quarter. I just wanted to get a sense of your, number one what's the most effective in terms of driving that? And number two, where do you see that renewal rate heading to just given the steady march upwards on that side?

Sure. We will do the usual Steven and Corey show, I'll tag team on it.

From a numbers and metric standpoint of seeing that, Jonathan, it is really what we're trying to get across the 88% is really a blend that does not occur in nature. It is really a mix of our enterprise and our mid-market. And our enterprise renewal rates are in the low 90%s where you will see enterprise software, everything we think it should be. In the much higher volume, mid-market transaction business that renewal rate is in the mid-80%s, you can peg.

And so when you say what's changed over time? It is probably the most pronounced effect has been what's been going on with the mid-market, which is a combination of little bit more sophisticated customer buying and renewals as well as some just good disciplined math orientation on model, new leadership candidly that we had about a year ago take over our renewals customer success business. And it has just been plugging away a little by little so that's brought up the average.

The enterprise is pretty solid and the mid-market has been doing well since.

Absolutely. To echo Steven's point, a lot of it has come from the operational focus in the mid-market. We increased the investments earlier in the year and that focus on both system and the process is bearing fruit.

Great, thank you.

Michael Turits, Raymond James.

Hey, guys, good evening. So nice obviously on margin and on cash flow, what gross margins have done on operating profitability. Do these change -- it's kind of a [planking effect] toward profitability, how should we think about that -- profitability number might change?

Yes, Michael, we do not see our glide path timing to profitability to breakeven changing. What we basically said actually about a month ago on the Logentries acquisition call was we saw the loss increasing a bit. And so if you will, the curve, the steepness of the curve increased a bit, but we like the profitability profile as you called out, what's going on with margins and cash flow, both sets of metrics. Really to adding greater confidence to our ability to maintain the breakeven both cash flow and on a non-GAAP and candidly GAAP basis.

Okay. I want to take another shot at the question that Gregg started and a few others have pursued with them. Corey, it is clear that the demand continues to be really strong for the stuff that you guys are selling. But I wonder if you feel like you can see anything in the overall security demand profile that is changing and that sense of urgency that one of your -- another CEO in security talked about?

Yes, I think it is very relevant. We do not see a less focus on security in aggregate.

The way that we think about the market is that most of the attention in the market has been focused about how do I actually solve security without actually paying attention to security. So what customers preferred for a very long time was how do I buy a box? How do I buy a single technology that I deploy it, forget about it and not really have to focus on the fundamentals of security?

I think what's changing is customers are more aware that these simplistic strategy of deploying one or two or small set of technologies outside of managing an overall security program tied into IT well is not going to be successful. So what we see is customers being more thoughtful. But we do not see customers actually focusing less on security, we see them being more thoughtful about their security and frankly being more holistic.

I think the net of that is that you will see over time a shift in spending from just the preliminary defensive technologies to a broader sense of spending about how do you build a program, how do actually manage, correct and understand the exposure of the infrastructure? How do you detect if there are attacks in the infrastructures? How do actually protect data in and around the environment?

There's a whole set of things that mature security organizations that are effective and impactful do. And we see customers extremely interested in those, but there is a shift from the mode of originally just buy the latest anti-virus, then buy the latest firewall, then buy the latest malware. Customers are aware that the strategy of just buy X and forget about it has not worked -- its proved it hasn't worked.

And now we see more and more customers where you used to see sophisticated customers looking at how do I build a security program that minimizes my exposures, applies control software in their environment, detects attacks in the environment. And that involves both the people in the process and technology and for us that involves the data to support that. We have not seen any slowdown in people looking to solve the security problem.

That's very helpful, thanks very much.

Thank you.

There are no further questions at this time. Ladies and gentlemen that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.