Rapid7 Inc (RPD) 2016 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the fourth-quarter earnings call.

(Operator Instructions )

I would now like to turn the conference over to Mr. Jeff Bray, Vice President of Investor Relations Rapid7, please go ahead.

Thank you, Colin. Thank you and good afternoon everyone. We appreciate you joining us to discuss Rapid7's Q4 2016 financial and operating results. In addition for financial outlook for the first quarter and FY2017. I'm Jeff Bray, VP of Investor Relations and I'm here today with Corey Thomas, our President and CEO, and Jeff Kalowski, our CFO.

We distributed our Q4 2016 earnings press release over the wire and have posted it on our website at investors.Rapid7.com. We've also posted our Q4 2016 results earnings presentation along with an updated company presentation on our Investor Relations website. This call is being webcast and can be accessed at investors.Rapid7.com. The webcast of this call will be archived and a telephone replay will be available on website until February 12, 2017.

We would like to bring the following to your attention, the date of this call is February 9, 2017. Our discussion today contains forward-looking statements about events and circumstances that have not yet occurred including without limitations statements regarding our objectives for future operations and future financial and business performance.

These forward-looking statements are based on our current expectations and beliefs and on information currently available to us. Statements containing words such as anticipate, believe, continue, estimate, expect, intent, may, will, and other similar statements are intended to identify such forward-looking statements.

Actual outcomes and results may differ materially from the expectations contained these statements due to a number of risks and uncertainties including those contained in the risk factors section of our most recent quarterly report on form 10-Q filed with these Securities and Exchange Commission and subsequent reports that we file with the Securities and Exchange Commission. The information provided on this conference call should be considerate light of such risks.

Actual results and the timing of certain events may differ materially from the results on 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.

On this call we will provide and talk about our results using non-GAAP financial measures and provide non-GAAP guidance. We believe that the use of these non-GAAP financial measures provides additional tool for investors to use in understanding company performance in trends, but note that the presentation of non-GAAP financial information is not a to be considered in isolation or as a substitute for directly comparable financial measures prepared in accordance to GAAP.

We have provided a reconciliation of historical non-GAAP financial measures to the most comparable GAAP measures in the financial statement tables included in the press release issued today announcing our results. The press release announcing our financial results is available 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 Corey.

Thank you, Jeff, and good afternoon, everyone. Thank you all for joining us today on our fourth-quarter 2016 earnings conference call.

A healthy market and better execution drove Q4 billings growth of 22%, revenue growth of 37%, additional improvement in operating margins and another quarter of positive cash flow from operations.

In the fourth quarter and the full-year we saw robust demand for our data and analytics solutions; solutions that provide better visibility and faster response times at lower costs. Our market opportunity is expanding as we continue to deliver IT and security solutions that are accessible to the resource-constrained mass market.

Further, as we add more application to the Insight platform, more and more customers are choosing to consolidate their IT and security spending with Rapid7. We are pleased to see improved building results this quarter across our three main [park] areas: Direct (inaudible) Management, or TIM, Incident Detection and Response, or IDR, and Strategic Advisory services.

We are especially pleased that our newer products have gained traction the marketplace, are building scale and becoming meaningful contributors to our results. From a go-to-market perspective our mid-market and International teams continue to perform well. Results were better for our enterprise teams, but still below what we would expect given the market opportunity and we continue to implement our plan to improve execution in that segment.

We took an important step towards strengthening our enterprise sales effort by hiring Eric Erston as SVP of America sales. Eric has a great record of experience selling in the enterprise security market and we believe we now have the leadership in place to scale and grow our go-to-market effort.

Looking back on our three main objectives for Rapid7 that I set at the beginning of 2016, I am proud to report that we made good progress against them. But we all believe we have areas where we can still improve. Our first goal was to disrupt the traditional SIEM market. InsightIDR has clearly gained traction in the marketplace as customers are eager for a product that combines advanced data science and specialized analytics with the ease of implantation and a simpler pricing model that is not based on data volume.

We not only expect to win more SIEM replacements, but we also expect to further expand the market to companies that have never had access to a SIEM before because of cost and usability. Since InsightIDR's launch in Q1 2016, our IDR products represented over 10% of our annual bookings, driven by strong fourth quarter and we expect this momentum to continue.

Our second goal was to expand our Threat Exposure Management segment. Here we focused on upgrading enterprise customers from traditional compliance-based Vulnerability Management solutions and expanding adoption globally and in the underserved mass-market.

While we had good performance in the mid market internationally, as I mentioned earlier, we have more work to do on our enterprise sales engine. We will continue to enhance our products, market segmentation, and go to market processes to ensure that we continue to take market share and expand the market in Threat Exposure Management.

Our third goal was to drive scale and leverage into our business. We were successful in delivering improved operating margins and solid cash flow for the year.

2016 was our most active year ever from a new product perspective. In the first quarter we officially launched InsightIDR, which we believe expands SIEM capabilities to the underserved mass-market. in the second quarter we launched Nexpose NOW, which put some of the key features of our core SIEM solution into our Cloud allowing Nexpose to provide faster and more reliable results.

Finally, in the fourth quarter we launched the date of InsightOps. a product which leverages our data collection and the search and analytics of our Cloud platform to improve the visibility and productivity of our ITTs. InsightOps provides IT operations teams with asset Management, infrastructure monitoring, Live endpoint visibility, and Log Management and analysis. A natural complement to our security products.

The goal of InsightOps is to provide a Global view of the customers' technology ecosystem allowing for better planning, early identification of bottlenecks, faster root cause analysis, and better collaboration among teams. We expect a fully launch InsightOps in Q2 of this year. These new products reinforce our mantra, collect data once and use it hundreds of times.

We believe Rapid7 has the most comprehensive data collection architecture in the market. With our Insight scan engines, Insight agents, and our machine data collectors, feeding this data into our expanding line of analytics products is changing the way companies address their security and IT challenges.

We are seeing more and more synergy and the combination of our solutions and services. Since most companies don't have the luxury of a large security or IT staff, combining our technology with our world-class services team allows our customers not only to have the right tools in place, but also to ensure that those tools are being leveraged effectively.

As an example, from this past quarter, we had a great replacement win with our Threat Exposure Management offering where a large Global electronics company was looking to upgrade their existing Vulnerability Management application. They chose to partner with Rapid7 partly because of our strategic services team help them design a centralized security program to reduce risk and maximize productivity across a Global security team and network.

They also wanted to partner with the platform Company with best-of-brief solutions, not just in Vulnerability Management but also in application security, penetration testing, and more, another recent example of the value we deliver by combining technology and services within the SIEM market. This was a great example of what we believe the SIEM market is ripe for destruction. As legacy and sometimes even next GEN SIEMs failed to deliver value to customers.

A fortune 1000 energy Company that is an existing Direct Exposure Management customer has had three different SIEMs over the years and is decided, in their words, to stop looking for traditional SIEMs, because none delivered value and all the previous SIEMs were cumbersome to manage and expensive to maintain.

After an in-depth pilot our services team demonstrated how to make InsightIDR work across all their systems giving them the full benefit of tour broad data collection and powerful analytics. They clearly recognize the value in consolidating their security spend on the Insight platform.

Another great example of how the Insight platform is resonating with our clients is from a manufacture of communication components that was looking to upgrade their SIEMs and evaluate Rapid7's products against a managed services provider ecosystem. The customer preferred InsightIDR's powerful Cloud-based analytics platform, our user behavior analytics, and the effectiveness our Universal Insight agents. They also chose to add Nexpose and Metasploit to their arsenal.

Finally, they recognized the strategic knowledge and experience of our services team, and so decided to purchases these products through our managed detection and response and Manage Vulnerability Management services. More of our customers continue to choose products that operate on our Insight Cloud platform. At the end of the fourth-quarter 21% of customers were using either Nexpose NOW or InsightIDR. We expect this trend to continue and we believe it will make it easier for us to cross sell other Cloud-based subscription products to customers already on our Cloud platform and we will continue to drive innovation in the Cloud.

Looking forward, I would like to share our three main objectives for 2017. First, we want to accelerate our customer growth. Given our mass-market opportunity, improved execution in the enterprise space, and the competitiveness and breadth of our product, we believe we should be able to add more new customers this year than in 2016.

Second, we want to begin to disrupt the market for data analytics and IT operations while continuing to disrupt the SIEM market. Third, we want to continue improving the scale and leverage of our business model. By executing against these three objectives I'm confident that Rapid7 will be set up for excellent growth for years to come.

Now, I'd like to introduce and welcome Jeff Kalowski to Rapid7 as our Chief Financial Officer. Jeff will be a key part of executing on our strategic vision and striving the Company to the next Phase of our Global growth.

Additionally, I would like to welcome Jeff Bray who joined us in December as our new VP of Investor Relations. I also want to thank Mark Donohue for all of his work over the past year leading investor relations. Mark will be taking on the role of VP of corporate development and we are excited about the impact we believe he will make in that role in the years to come.

Jeff will now take you through our financial results and guidance. Jeff?

Thanks, Corey. I'm very excited to have joined Rapid7 a month ago as the Company CFO and look forward to meeting our investors and analyst over the coming months.

We are pleased with our solid performance in the fourth quarter ending full-year 2016 on a strong note. Total Q4 revenue was $45 million, an increase of 37% year-over-year and above the high-end of guidance. Product revenue was $24.7 million, increasing 31% year-over-year, driven by increasing demand across our offerings with particular strength in InsightIDR.

Maintenance and support revenue was $10.4 million, and increased 32% and finally, our professional services revenue was $10 million and increased 63% year-over-year, as a higher than normal percentage of our services bookings converted to revenue during the quarter.

We continue to have very high visibility into our revenue forecast with 86% of Q4's revenue having been on the balance sheet as of the first day of the quarter and 63% of our revenue being subscription-based recurring revenue. Total deferred revenue grew 30% year-over-year to $169.1 million at the end of Q4.

Billings for the fourth quarter were $64.8 million, or up 22% year-over-year, driven by improved enterprise performance, ongoing strength across mid-market, and a strong quarter for InsightIDR. Our overall IDR offerings contributed greater than 10% of our annual billings in 2016, which represent strong initial adoption. As Corey noted, the steps are taken to improve execution in the enterprise segment are taking hold, and we expect to see further improvements over the next several quarters.

Average contract lengths were 24 months for total billings compared to 23 months in the prior-year period. we saw slightly longer contract lengths in TEM this quarter. However, as more of our billings come from our new subscription products, which tend to have shorter contract lengths, we believe that our average contract duration will begin to shorten as the year progresses.

(technical difficulties) compared to 13% in Q4 15. We'll continue to enhance our infrastructure globally to drive the momentum in this underpenetrated market. Looking at revenue from a customer segment perspective, revenue from enterprise accounts increased 39% and revenue from the mid market increased 35%.

Our new customer acquisition also exhibited solid growth, with customer count increasing by approximately 21% year-over-year as we ended Q4 with more than 6200 customers globally. We had healthy upsell and cross sell activity and as such are renewal rate was 122% in the fourth quarter.

Our expiring revenue renewal rate, which measures the renewal of the prior year's revenue run rate, increased to 89% in the fourth quarter. Moving back to the P&L, non-GAAP total gross margin for Q4 2016 was 75%. Non-GAAP product gross margins were 87%, down from 89% last year.

As more of our revenue comes from products that are SaaS or managed services, we expect to see modest declines in our product gross margin in 2017, but to stay in the mid-80% range. Our non-GAAP professional services gross margin increased to 40% in Q4, compared to 27% in the year ago period, due to higher utilization as well as a higher percentage of our services bookings coming from stand-alone services, which are recognized as delivered.

We expect our services gross margin in 2017 to remain healthy and in the low to mid-30% range. Net net we expect our overall gross margin to be in the mid-70% range for 2017. Taking a look at our non-GAAP operating expenses for Q4, R&D expenses were $9.6 million, or 21% of total revenue. A meaningful improvement from 31% in the prior-year period.

most of this improvement was due to the shift of engineering expenses to our Belfast and Dublin teams. As Corey mentioned, our R&D was very productive last year and we expect they will continue to drive product innovation while realizing significant leverage. Non-GAAP sales and marketing expenses were $23.6 million, or 52% of revenue in Q4. An improvement from 64% in the prior year ago period.

Our sales and marketing expenses in Q4 reflected less than expected royalty expenses related to Intel MVM customers and lower sales commissions. G&A expensing Q4 2016 was $6.2 million, or 14% of revenue in Q4, an improvement compared to 17% of revenue in the year ago period.

All of these items led to a Q4 non-GAAP operating loss of $5.5 million compared to a non-GAAP operating loss of $12.1 million in Q4 2015. Non-GAAP net loss per share was $0.13 in Q4 2016. We ended Q4 with cash, cash equivalents, and short-term investments of $71.9 million, and our operating cash flow for Q4 was positive $7.1 million.

During the quarter, we diversified our investment portfolio and we moved $20.2 million of cash into long-term investments. To quickly summarize full-year 2016, we delivered billings growth of 26% and total revenue growth of 42%. 2016 non-GAAP operating loss was $29.3 million for a negative 19% margin, compared with a negative 30% margin in 2015 as we realized scale and leverage in the business. 2016 non-GAAP net loss per share for $0.71. For the full-year 2016 cash flow from operations was $9.1 million for 2016 and free cash flow was $4.6 million.

Moving on to our full-year 2017 and Q1 guidance. For 2017 we'll provide guidance on full-year billings. However, we will not be providing quarterly billings guidance, as they can vary, and we are managing the business to an annual target. We hope this will help you and your modeling.

As Corey mentioned, in Q4 we saw significant traction in our InsightIDR products. We are very excited about the growth prospects of this solution and expect strong demand to persist in 2017. I'd like to remind everyone that InsightIDR is a SaaS product and tends to have shorter average contract life than our TEM products. Our upcoming InsightOps product also has the same SaaS model, and we expect this product to be generally available in Q2.

As such, we expect to achieve a higher overall mix of subscription billings, higher recurring revenues, and shorter average contract duration in 2017 relative to 2016. Now for the guidance.

For the full-year 2017 we expect billings to be in the range of $224 million to $234 million representing 14% to 19% year-over-year growth. We expect revenue to be in the range of $192 million-$198 million representing 22% to 26% year-over-year growth. We anticipate non-GAAP operating loss for the full year of 2017 to be in the range of $29 million to $26.5 million.

And we anticipate non-GAAP net loss per share for the full-year 2017 to be in the range of $0.68 to $0.62. This is based on an anticipated $43.2 million weighted average shares outstanding for the full year of 2017. Our billings guidance reflects our expectation that more of our billings will come from our newer products, which are SaaS products and tend to have shorter contract lengths. We believe that our average contract duration will begin to shorten as the year progresses.

We estimate that the shift in product mix will also impact our growth in operating cash flow, and as a result we expect 2017 operating cash flow to approximate 2016 levels. We believe this mix shift combined with strong renewal rates will result in higher annual contract value, more recurring revenue, and better long-term operating profit and cash flow.

For Q1 2017, we anticipate total revenue to be in the range of $42.6 million to $44 million. This equates to year-over-year growth of 22% to 26%. We anticipate non-GAAP operating loss for Q1 to be in the range of $10.9 billion to $9.9 million.

From a comparability standpoint I want to point out that our Q1 2017 loss is projected to increase from the prior year due to two primary factors. We are planning to front load sales hires in the early part of the year and we expect to achieve leverage in our sales expenses for the rest of the year. Additionally, we are forecasting higher MVM business resulting in higher royalties as compared to prior year.

We anticipate non-GAAP net loss per share for Q1 2017 to be in the range of $0.26 to $0.24. This is based on an anticipated $42.4 million weighted average shares outstanding for Q1 2017. Finally, I want to close by thanking Corey for bringing me on at Rapid7. It's a terrific culture and it's been a delight to work with this Management Team over the past month.

I am also looking forward to working with all of our analysts and hopefully meeting many of you at the upcoming RSA conference. With that, we appreciate your time and support and we are glad to open the call for questions. Operator?

(Operator Instructions)

Rob Owens, Pacific Crest Securities

Great, thank you. Good afternoon everybody. I want to talk about some of the MVM weakness you saw in this quarter, because you mentioned that the costs associated were lower than expected. So what you think happened here for the fourth quarter?

Why not as much conversion as you may have hoped? And then as you look at 2017, you mentioned higher costs associated with that, so obviously expect that to bounce back, what type of visibility do have built in relative to that?

Thanks, Rob. A great question. As we mentioned last year, we were seeing positive and we continue to see positive trends in adoption for the MVM business. We also mentioned the fact that we're conservative in how we forecast it, because the expenses hit immediately. So we had to be thoughtful.

We have great visibility into the overall pipeline of deals, however it still relatively small set of deals. And the timing of when those deals close, that is not specific to a specific quarter. And so we are very confident, and we felt very good about the momentum that we saw last year. We frankly see an escalating pipeline.

We expect even higher momentum this year, as we go forward. But we don't really look at it on a quarter by quarter basis. But because the expense has an impact to our total OpEx, because it's a commission, we're slightly more conservative when we forecast expense on a quarter by quarter basis.

Great. Second, I don't know if this is the appropriate forum or timing, but as you contemplate a little bit into 2018, some of the accounting changes. You guys have a difficult model to understand as it is, with BSOE and everything else happened. What are some of the, Jeff, what are some of the major things that we need to think about relative to shifts that should happen in the out year?

We are still working on the 606 conversion, and we hope to have more disclosure in the 10-K. But the big difference for us is that we have bundles services with our 10 business and what would happen is today we spread them over the contract term, whereas under the new standard we would take them on a time and materials basis as delivered.

The second point is that we would also have to take the commissions on that and spread that. Today we expensed it all up front as we booked them. But we would now have to spread that over the contract term.

We're not anticipating a big difference in the revenue, because today we're already spreading the contracts' ratably. So there's really no change when going to the new standard. But as I said, the team is still working on that and we hope to have better disclosure in the 10-K.

Great, thanks for the color.

We understand that some of the people on the phone line may have lost the connection for a little bit. Most of the stuff I believe that Jeff discussed was information that was disclosed in the press release. So if you have any questions about that, feel free to follow up during the Q&A.

Saket Kalia, Barclays Capital

Hi, guys thanks for taking my questions and welcome aboard, Jeff.

Thanks, Saket. Good to be speaking with you again.

Absolutely, long time no speak. So my first question, apologies if it was mentioned in the prepared remarks, but I know you mentioned that billings in 2017 might have a shorter duration year-over-year which of course creates a headwind on billings, on billings growth.

Could you maybe talk us through the apples to apples comparison? Or said differently, the ACV comparison? Just so we can normalize for any of that headwind.

I think Jeff and I will tag team on it. At the aggregate level, one of the things we mentioned last year is that we felt very positive adoption, frankly, much stronger than we expected, on our new SaaS offerings, InsightIDR primarily. We recently announced that we'll be introducing Inside Ops this year.

Because of that, as you know, SaaS offerings tend to have a higher annual recurring value and therefore a shorter total duration. So part of what we were commenting on this year, is that we frankly expect higher growth in our annual recurring amount. And if you think about the prepaid multi-year deals, we expect less of that.

And generally, we consider that a very positive dynamic for our business overall, because having a higher recurring amount leads to stronger economics over the longer term.

Sure, that makes sense. And then for my follow-up, for you, Corey. Could you just qualitatively talk about -- and I think you probably answered this a little bit and probably mentioned [in your prepared remarks]. Could you qualitatively talk about InsightIDR, and how successful that's been in displacing some of the heavier SIM installations that we've talked about in the past?

We are thrilled at the performance of the InsightIDR offering. As a metric and milestone that I gave in my prepared remarks, if you look at our, if you look at our InsightIDR offerings, it exceeded 10% of our total bookings for the year. So we were quite proud of that and the progress that we've made there.

And we are seeing that both expand greenfield opportunities, where it's been too expensive and too complex both because of the cost of storage but also because of the complexity of the products. And we've also seen teams that have balked and purchased but not successfully deployed traditional SIMs shift and move to InsightIDR. Most importantly, we had great momentum as we exited the year around those product offerings.

Got it, very helpful Thanks, guys.

Thank you very much.

Melissa Gorham, Morgan Stanley

Great, thanks for taking my question. Corey, so I just wanted to get your thoughts on the new sales leadership in the Americas, you talked about improving some of your traction in the enterprise space, and accelerating customer adds. I'm wondering if you are expecting to see a material change in your sales strategy or your philosophy on sales investments with the new sales leadership, that will help you achieve those goals?

One, we're thrilled to have Eric Erston join the team. He has experience, not just selling to the enterprise, but also in security from his time at RSA. I would say that it's primarily going to be focused on execution. I wouldn't say there's a big fundamental strategic shift in the business.

Eric is bringing in a new level of discipline, insight, and management that's associated with managing those large deals that we've been talking about So I would say its primarily execution-focus and honing and tuning the team. But we're thrilled to have Eric join the team.

Okay, thank you. One quick follow-up, so last quarter you talked about elongating sale cycles, and I think you said there's a few deals that may be flipped in Q3. Two questions, one, are you still seeing those elongated sale cycles? And then, those deals that slipped in Q3, have they closed in Q4?

I talked partially about this on the Q4 call, and it was basic to the guidance that we gave on Q4. We had already seen some momentum when we gave the guidance for Q4 and we did see a number of deals that slipped, close. And we continued to perform against the guidance that we gave.

What I would say is that as we've grown, and we continue to grow, our larger-deal business in the enterprise segment, we really expect a normalization. And the way to think about that is that when a business is smaller, its easier to cherry pick lower-duration deals.

But as business gets bigger, it actually reverts to the norm. And so we now expect larger deals to close in the typical six- to 12-month deal cycle. And what we're seeing is performance consistent with that, which is as we see it, consistent to the rest of the market

That's helpful, thank you.

Matt Hedberg, RBC Capital Markets

Hello guys, thanks for taking my question. I had another one on InsightIDR. I'm curious, Corey, you said 10% of bookings in 2016, which is great. Are you seeing most of that adoption with net new customers in their initial purchases? Or is this largely being sold back into existing customers at this point?

This is a thing that actually gives me great confidence. We're seeing a very healthy mix. It's roughly half and half of the business that comes from net new and from the existing customers. It fluctuates quarter to quarter, but it averages around half to half, when you look back over time. And that's really good, because we want to be able to cross-sell and upsell the customer base. But we still see maximum opportunity in data analytics for companies that want to solve these problems, but the existing solutions were too complex, and too expensive. And so the fact that we're addressing both of those use cases is really important.

That's great. And then, you also mentioned, you've got a growing recurring revenue, SaaS business here, more ratable revenue. How does that make you feel about pipeline visibility this year? I know there was some lumpiness last quarter, could you characterize how you feel about the visibility entering this year versus say, last year?

I think there's a couple things. We have a very healthy and strong visibility into the overall pipeline. I think one of the things, and also emphasize one of the other things, if you look at our mid-market and our international performance, it performed great. The one area where we had challenges was specifically in the very large deals in the enterprise segment.

And even there, I would say the pipeline was good, the visibility on timing was poor. And that's one of the things that we really addressed when we actually looked at our sales leadership is, how do we make sure we have the right both techniques and executional model, but also the right forecasting methodology to look at how we actually look at the timing of those larger deals.

In general, I feel very good about the pipeline overall. And we're really honing how we manage the larger deals in the enterprise segment and in the federal sector.

If I could squeeze in one more on that very point, is there a way to think about what inning we are in terms of building out this enterprise grade sales cycle? I think last quarter, you said it could take a few quarters to get right. Maybe give us an update there on how you feel about the cadence?

I feel that we're ahead of the game, mostly because we did some great hiring bringing Eric in. We've already brought some additional folks in. We're training the team and focused on training. We have a good set of core people in the Company and it's really just the execution-oriented stuff around the training, the methodology and the aligning.

And you saw bit of that in Q4, where we had healthy performance. Again, not where we want to see long-term, but you saw an improvement there. And so we were heartened by that.

What I would say is if you think about timing, we are still going to be working through this over the course of this quarter and into next quarter. Which is in line with the discussion, the expectations that we talked about on the last call. But we feel that we're making very good traction at a very good pace to address the issues and really see the benefits of that in the second half of the year.

Thanks, Corey, well done.

Thank you.

Gregg Moskowitz, Cowen and Co.

Thanks very much and congratulations on a good quarter. Getting back to Melissa's question for a moment if I could, Corey. Its nice to hear more of the enterprise deals have been closed in Q4, although I would assume that the enterprise deals and not yet federal, is that accurate?

And if so, if you could update us on the status of the federal deals that did slip out of Q3? That would be helpful.

A great question. I would say the preponderance was on the enterprise side. We did close business in the federal sector. Our expectation, we are articulated this at the time, was that federal would not be just transfer from their year-end, which is our Q3, to their Q1.

We really expect that business to come in over the course of this year, and we're still watching that and looking at that. There's no major update at that time, but I can say that our entire team, including our federal sales team, is very focused on that business. We think we have a healthy pipeline. But it's one that we're focused on the execution of that, just as much as the enterprise business.

Okay great. What is in the early feedback on your InsightOps product from your data customers?

The feedback has been great. Its one of the reasons that we're excited by it. If you think about the problems that most Companies have, is that data is too fragmented and too complex.

And that's the same problem that you have in the security in the incident detection response space, or the risk analytics space, as you have for troubleshooting and managing IT data challenges. So the ability to actually have all of your log aggregation in one place, combined with the endpoint visibility and monitoring, allows people to really troubleshoot issues across the entire ecosystem.

And that's one of the reasons that we're getting such positive feedback from customers. And we see that more and more customers are looking to consolidate the data technologies they look at across both IT and security.

Thanks, Corey. And Jeff, just a quick one for you. First off, I'd like to extend my welcome to Rapid7 as well. When you were announced as CFO at the end of the year, you talked about, in the press release anyway, about driving scale and operational leverage into the business to achieve the Company's financial objectives.

Does that mean that you think Rapid7 can reach its previously stated long-term operating margin goal of 18% to 20% over the next four to five years and if so, how do you get there?

The answer that is yes, I'm excited, which is why joined the Company. Obviously, I've only been on board a month, but the management team is committed to profitability and I firmly believe that we can achieve those goals.

If you look in general, not only was it one of our top three goals last year, it remained a top three goal for this year, achieving scale and leverage in the business. You saw we made good progress on that journey in the last year, and we're very focused on continuing to make significant progress over the course of the next year.

Very helpful, thanks guys.

Michael Turits, Raymond James

Hi, good evening, hi Corey and welcome and hello to both Jeff and Jeff.

Hi, Michael.

Question, Jeff, you guided, because of the shorter duration, you guided both billings to grow below the rate of revenue growth and you guided cash flow to be flat. Is it possible for you to give us a duration equivalent, if the duration were the same, what would those growth rates have been so we can factor that out? What would billings have grown and what would cash flow be growing?

I think we will tag team it, because I think part of it is trying to get to the apples to apples as you look at the foundational shift. I'll just give the high level and Jeff can actually give the whatever detailed perspective he can give in line with the guidance that we've given.

So the big one when it comes to understanding both the cash flow dynamics and the billings dynamics, is that because we're having more of our SaaS products with a higher percentage and mix this year, what that really means is that the annual recurring amount is growing faster, and our prepaid multi-year deals is growing less overall. And that's actually lowers our annual -- that means we're going to have a lower annual amount contracted term limit. So that's the high-level that I want to make sure people understand.

Again, we find that to be fundamentally positive for the business to have a high recurring mix. And its something that we'll talk more and more about as it becomes more material and relevant to the revenue. We're just not going to that level of detail at that time, but Jeff, go ahead.

Clearly, we're projecting shorter contract lengths, but we don't want to give you a specific number It's early and we baked that into our guidance for next year. But to call out what that would convert to right now, we're just not capable of doing that right now -- we don't want to do that today.

(multiple speakers)

Last year, when we introduced InsightIDR and we said we provide more and more visibility over time, it's something that will provide more visibility into as we go through and really understand exactly where the mix lands. One way to think about is that in the past where we've had a lower mix of the SaaS products, that's prepayment multi-year deals went directly to the cash. This year we're actually at the SaaS mix shift, we just have a lot more recurring.

One other thing, I do have another question about professional services. But roughly speaking, any reason to think that billings wouldn't be growing in line with revenue outside of this factor, roughly?

Jeff?

So in other words, you want us to give you the number, Mike? (laughter)

Jeff, you've been around the block.

Exactly. The thing that I would broadly say, is when we've talked about the overall growth before, I think there's two material factors I think that you're trying to get to. One, we actually feel that the billings that are reflected this year, without the SaaS thing, which we think is healthy, and the enterprise issue, is in the first half year an additional drag.

We think the billings growth is actually inherently stronger than is being represented in the number in the year-over-year comparison. That said, as we exit the year we think having a higher SaaS mix in the business and we think having played through the execution work that we are doing in enterprise, we feel very good about how we exit the year from an overall billings growth perspective. And again, we will provide updates to that as we go through the year.

I promise next question won't be a wily one, but I just want to ask about professional services, which was 22% of revenues this quarter and you mentioned that it was a higher conversion to upfront recognition. I'm just wondering, can you specify, review exactly what that was? And does that go back, and do we drop back down to the same level of 18%,19% of revenue going forward?

I think again Jeff and I will tag team. The first thing is that services has a different cyclicality, in general. The thing we said all along is we expect services to be less than 20% of the total business. And that thesis has not changed at all.

What you find is that in Q4, and we certainly saw it in this Q4, is we had lots of customer demand to actually do projects and complete work before the end of the year. What that translates to is our utilization rates of our people was much higher, but therefore we actually delivered a greater amount of work for the percentage of total revenue was higher and the gross margins have the same effect.

That said, we expect it as we go forward to be the less than 20%. I would not take the assumption from a percentage of revenue that you saw in Q4 and actually use that actual forecast forward. Again, the cyclicality you'll see differences quarter to quarter based on customer demand. But for the full year we expect that to be lower than 20%.

Michael, the full-year was 19%. And if we did have the same contract lengths, clearly our billings would be higher, obviously. We just don't want to call out a specific number, which is I think what you are driving it.

Understand, thanks a lot and great to see billings bounce back this quarter.

Thank you, Michael.

Jonathan Ho, William Blair

Hello guys, congratulations on the strong quarter and welcome onboard to the two Jeffs. Wanted to start out with your thoughts in terms of the cloud, and maybe how customers will use your solution in places like AWS and Azure. How does this mix play with the existing tools that are onboard those platforms?

I think it's great question. I think part of what you're saying is that customers have complex environments themselves that span their devices to their on-prem networks, to their cloud environment and there's tools that actually preexist. Say I'm looking at my on-prem environments and Amazon/Azure is doing a wonderful job of providing tools that provide some visibility into the environment.

The core thing that we address and the core thing that we solve though is that every business still needs to be able to have visibility and troubleshoot, diagnose, understand, issues that span across their environment. And they need to be highly productive doing it. So the ability to go look at individual tools for every part of their fragmented network in their fragmented environment, just isn't very productive. And it's also extraordinarily complex.

So what we've seen is strong demand for solutions that consolidate and simplify and make things not just affordable, but create an easier, more effective user experience. To get directly to your question about what we do to integrate and bring in the cloud data, is we've long had a big priority and we are very, very good at actually collecting data from top providers, both the Microsoft Azure and the Amazon AWS ecosystem.

And that's just not the raw log data, that's also integrating, with lots of the tools that they have available in the environment to pull data to pull diagnostics, and to tie that in to the overall enterprise infrastructure. There are very few companies that actually have a homogeneous environment where it's just Amazon and they don't have things like Salesforce or they don't have other solutions, or they don't have on-prem, or they don't have email.

So what we find is that customers are really looking at how do they actually get a better handle on their data, so that they can then look at their security, troubleshoot issues and manage their overall enterprise environment much faster and much more effectively.

Great, thank you. A question on channel. I guess relative to the changes that you guys have made in terms of the enterprise sales team, how far along are we in terms of the benefits of that changeover? Have we seen the full impact of that, or is there more to come, particularly as you start to ramp capacity earlier in the year?

I think that there's definitely more benefit to come. One of the things that we've said is that it will take a couple quarters. We saw definitely positive momentum in Q4. I think we'll see some improvement. But we expect Q1 and Q2 to continue to see continued improvement and the benefits to really fall out for the enterprise large deals segment in the second half of this year and going forward.

As far as your question about channel, from my perspective, we are at the scale mass and interest. We're seeing lots of interest from channel partners and we're seeing mutually good agreements with channel partners. I view that as upside over the next several years, both to our ability to expand but also to our total economics.

Great, thank you.

Thank you.

Robert Breza, Northland Capital Markets

Hi, thanks for taking my questions. Corey, I was wondering if you could touch a little bit, you laid out your three objectives, but in your prepared remarks you mentioned that the international market was is not as strong. Could you lay out your objectives, and how you see improving that market for you and how we should maybe think about it throughout FY17? Thank you.

Thank you for the question, Robert. I want to clarify is that we saw relatively strong performance international from last year, and we expect continued strength internationally. This year we are very focused on expanding both our cloud footprint internationally and also expanding our enterprise -- our total sales team internationally.

So its an area that we see strong strength in. I think the area that I was talking about, we expect to see continued improvement in, is the enterprise segment, and specifically a large sales segment of the enterprise market.

Great. Nice quarter, guys.

Thank you.

Marshall Senk, Rosenblatt Securities

This is Perry, in for Marshall. Thanks for taking my question, and I apologize if this was mentioned earlier but can you talk a little bit about your Insight product expansion to where you've seen the most traction, and is it coming from new or existing customers?

Perry, thanks for the question. We see a pretty healthy mix. I'd say over the course of time we've see roughly half come from existing customers and half come from new customers. It's a mix that we like. When you think about the customer specifically though, that we're actually seeing, it's the customer that frankly has security as a big priority.

They have people and resources but they don't have unlimited people and resources. So they're what we would call resource constrained. And by the way, this isn't just mid-market companies where we see great success, this is also large energy utility companies, large hospital companies.

The way to think about it is their IT organization as a percentage of the total organization is relatively small, and the security team is an even smaller percentage. So these are people that have to do a lot with very little and they really look for solutions that can actually make them productive and help them do their job faster and more efficiently and better.

And we have great appeal to that audience because really we've taken a really complex problem and we've built advanced analytics, a great workflow and great user experience, and we've allowed them to really manage their security much more efficiently. And we see those customers across the market both in our customer base and outside our customer base.

This is why we think that there's a massive large untapped market out there of people that would like to solve the problem but it's just been too expensive and too complex. And we're really focused on that sort of, what we call the mass market or mainstream buyer.

Thank you, Corey and welcome to both Jeffs.

That's going to be the last question. I just want to point out to people and remind everyone that we are going to be presenting at the Morgan Stanley technology media and telecom conference. We'll also be at the Pacific Crest emerging technology symposium and the Raymond James annual institutional investor conferences this quarter. Thank you everyone for joining us today on the call and we look forward to seeing you soon.

Thank you all.

That concludes conference call for today we thank you for your participation and it this time you may disconnect your line.