Corey Thomas: Yes, it’s a fair question. I don’t presume that there’s any material change in the environment versus last year. Does it’s not any better even like you still see long sales cycles self high-deal inspection. And so that’s not a change versus last year. We’re still seeing continued momentum on the detection and response side of the house, which is an indicator. And so we are attributed this mostly to actually how we, as quickly as possible, but a family sort of ensure that we get updated price and packaging the customer experience to market and not a fundamental shift in the overall environment. There’s been noise in the cloud environment for a while, but we’ve factored that in. That was part of our assumptions coming into the year about how we’re going to do price and packaging.
So that expectation, I don’t think it’s off at all. I do think that we probably misestimated that once we had thought to pursue this is the slowdown that would occur leading into that change.
Arturo Saavedra: Got it. And maybe as a follow-up, as we think about the ARR guidance, over the past 4 quarters, so the split between land and expand as fiscally and growth. Expand has relatively been stable at 7%, and land has been decreasing. The guidance is 6% to 7% year-over-year growth. So is that assuming that land sort of drops 0 or maybe expand drops a little bit and land still contribute? What’s sort of the lesson to take?
Corey Thomas: Yes, that’s a good question. So the easiest way to look at it is to think about the impact from a product line perspective. We think detection and response will continue. That has, I would just say, a reasonable mix of land and expand associated with it. I would just say, the cloud probably has a bit more of expansion bias, which puts a little bit more pressure on the expansion, and it goes to Fatima’s question early on. And so that puts a little bit more pressure in the near term. We actually think from a pipeline perspective that, that will be quite fine and healthy from a pipeline perspective. We are being, I would just say, cautious about sort of the expectations about deal time. And so if you think about sort of like deals sort of like cycles elongated, if we’re actually launching that in summer, we have some modest expectations of impact this year, but we didn’t want to be out of our skis in terms of the impact in year of something that we’re actually introducing in summer and then we’re trying to equipping our sales team around.
Operator: Your next question comes from the line of Mark Cash with Raymond James. Please go ahead. Yeah, thanks.
Mark Cash: This is Mark on for Adam. So Corey, if I can start with you, these accounts that are taking longer to move to the platform, I mean how would you characterize the delays? Is this a budgetary concern on their end? Or are they willing to see the product features you’re talking about coming out in the summer? Or is there a competitive pricing dynamic going on? And then I have a follow-up, please.
Corey Thomas: So one, keep in mind, we’re selling into a fragmented market. So I think our biggest obstacle overall, keep in mind, is the do-nothing obstacle. When we talk about the mainstream enterprise is you’re talking about like that Russell 3000 mix. You’re talking about the midsized enterprise, of which cloud security is still pretty pricey around sort of that overall being. And so one, I would just say that the need from the security team is still quite high. But in order to get funding, they got to make sure that they can actually meet all their needs. That’s why we think we’re providing an affordable enterprise-wide solution is going to be attracted to the audience. Because I think they are priced out of the market somewhat today.
So we view ourselves as unlocking the market overall there. I think the second part of your question that you actually got to is sort of like is the driver. So I think that’s one part about like is the value proposition and the simplicity and the ability not just to a part, but the overall environment, is that clear. And our goal of our packaging is actually making that clear, simple and compelling. The second part of the question is sort of like what drives the slowdown. And just as much, I think that’s driven by the fact of how we actually focus and incentivize and align our sales team. I think that they are ramping in the back half of the year on the new solution. We had an initiative early last year and mid last year, where we were focused on the CRC.
I would say that we’d probably focus a little bit more heavier on the detection and response later into this year, knowing that we were actually going to be updating the integrated risk strategy in CRC. And we probably should have planned a little bit better about the timing of that transition.
Mark Cash: Okay. And Tim, if I could ask you, so coming into the fiscal year, you expected modest free cash flow contribution in 1Q and then to have a notable ramp in Q2. So just kind of wondering what kind of free cash flow cadence is now expected now that the kind of nitpicky here, but the guidance for free cash adjusted to be about $150 million from previous saying at least $160 million.
Timothy Adams: Yes. So Mark, it’s a good question. We were very pleased with the strength of free cash flow in Q1. And that was really fueled by, what I said earlier on the call, the strong collections in the quarter. We feel very confident in at least $160 million of free cash flow for the full year. Similar to what we saw last year, we expect Q4 also to be a very strong quarter for free cash flow, again, driven by the collections. So what you’ll see in Q2 and Q3 is just a modest step-up sequentially over the previous quarter, starting with $28 million in Q1. But again, strong collections in Q1 and Q4 really driving those two quarters.
Operator: Your next question comes from the line of Shrenik Kothari with Baird. Please go ahead.
Zachary Schneider: This is Zach Schneider on for Shrenik. Thanks for taking the question. It appears that a transition away from stand-alone VM and your overall strategic pivot has brought you into closer competition with some larger players like Microsoft and Palo Alto. Could you just elaborate a little more on how Rapid stacks up against them and sort of the success and strategy going forward as your market — for your market penetration efforts.
Corey Thomas: Yes. I think you were talking about specifically on the integrated risk side of the equation. So yes, I do think we have more exposure, probably more to the Palo Alto, if you just look at from a cloud security perspective overall. If you look last year, we saw healthy growth in the business, as I actually talked about earlier. We did not think, again, what we were looking at is lots of our customer base does not have — it’s not a competitive dynamic. Is that they don’t have any material cloud security adoption, which is the primary thing that we’re looking at about how do we drive adoption. We know they’re adopting cloud. We know that they need it. We know that they’re actually not using the native cloud technologies from a security perspective because of the complexity around that.
And so our primary focus overall is how do we actually sort of deliver a mainstream enterprise solution. Again, this is very similar to what we did in detection and response plays. It takes something that was — SIEM, that was just at the high end of the market and make it mainstream accessible, but with the level of sophistication and ease of use that everyone could use. And so that’s our number one sort of like focus areas, like how do we actually unlock that market? The second thing is when you look at the differentiation that we actually have, our view overall is that we want to provide the best experience of looking at risk end-to-end endpoint to the traditional on-prem environment, to the cloud environment, and have that be integrated across the entire environment and not 3 or 4 different sets of technologies and experiences overall.
Thanks for the question.
Operator: Your next question comes from the line of Patrick Colville with Scotiabank.
Patrick Colville: I want to ask about, I guess, the balance between top line growth and profitability. I mean this quarter, non-GAAP operating margins were 19.5%, which is really impressive, but ARR was a bit soft and guidance was trimmed. So how should we think about the kind of balance between top line and the bottom line in light of the head count reductions we had in 2023?
Corey Thomas: Yes. So I mean, look, you have to actually figure out where you’re going to focus your resources. We thought that the move that we made in 2023 set us up well this year to make sure that we’ve had a healthy amount of free cash flow. And then the second question is just like, okay, where do you invest? And we decided not to actually just split it equally, we just have to make a very focused investment and how do we actually make sure our products and services are actually ready for the next five years, not backwards looking. Yes, that clearly has some implications in the short term. But we believe it’s setting ourselves up to make sure that we’re investing in our products and our technologies and our teams around services is the path for what I would consider long-term healthy growth.
So overall, we think that we’ve gotten our profit margins to a healthy state. Our expectations is that we’re focused on not how we grow in the moment, but how do we actually have healthy growth and frankly, accelerate growth from today’s levels over the next several years. And we think the best strategy to actually do that is actually focused on making sure that our products, strategy, capabilities and pricing are set up for the mid- to long term. And so that was the focus of the decision that we made. Now I would just say, being that close and focusing on the R&D and the services and the customer experience around and not putting all of our money in sales and marketing has some short-term implications. But we actually think that, overall, we can actually add back sales and marketing spend as we actually go forward, build off a much stronger base of technology, a platform pricing strategy that’s actually compelling to customers.
And overall service experience that delivers high-quality service. That’s how we get our messaging.
Patrick Colville: Great. Okay. Okay. And I guess I want to just ask in my follow-up about net new ARR for the year. I mean the commentary you gave in the prepared remarks around the linearity of net new ARR was extremely helpful. What it implies is that this quarter, there’s the kind of the trough. And then we have a decent net new ARR recovery through the year. Can we just circle back, just so I fully understood, just the confidence you have in that kind of recovery in net ARR through the year?
Corey Thomas: Yes. I would just say from — if you look at our guidance, I think we have pretty strong confidence in it. I think that we didn’t get out of our skis. The year tends to be a little bit back-end loaded. We have seen some of the pipeline and some of the deals get larger overall. But our assumptions are that we see only modest benefit from sort of our reorientation and our updated launch of so complete this year. So we didn’t want to be too aggressive on the time line of something that was going to be introduced in the summer. So I think that our expectations are quite modest there. And so I would just say that if you look at what we’ve actually laid out, we have pretty high confidence that we can actually execute against that plan.
And what we really took out, we really sort of based it off of the dynamics that we were seeing in sort of like the first half of the year, and they have very modest assumptions about improvements in the back half of the year. There are some, but I would just say they’re relatively mostly orientation.
Timothy Adams: Yes. And Patrick, it’s Tim. Welcome to the Rapid7 coverage team. And as you’ll see, if you go back to prior year Q4 is that it’s always the strong quarter from a seasonal perspective on the net new adds, and that we expect that again this year, similar to other quarters.
Corey Thomas: But it builds up. I would just say from — Q2, Q3 and year in Q4.
Operator: Your next question comes from the line of Josh Tilton with Wolfe Research.
Patrick O’Neill: This is Patrick on for Josh. You had mentioned the churned customers in the quarter and, for the most part, they weren’t platform customers. Just curious if you could expand more on sort of the broader reasoning for why they churned and how we should think about that going forward? And then maybe how much of an overall impact on expansion opportunities within the base that you foresee have that looking at?
