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What changed in Rapid7, Inc.'s 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of Rapid7, Inc.'s 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+371 added−403 removedSource: 10-K (2024-02-26) vs 10-K (2023-02-24)

Top changes in Rapid7, Inc.'s 2023 10-K

371 paragraphs added · 403 removed · 239 edited across 7 sections

Item 1. Business

Business — how the company describes what it does

43 edited+45 added−91 removed18 unchanged
Biggest changeOur research and development teams are located in our offices in Boston, Massachusetts; Austin, Texas; Los Angeles and San Francisco, California; Arlington, Virginia; Toronto, Canada; Dublin and Galway, Ireland; Belfast, Northern Ireland; Tel Aviv, Israel and Stockholm, Sweden, providing us with a broad, worldwide reach to engineering talent.
Biggest changeOur research and development teams are located in Boston, Massachusetts; Austin, Texas; Arlington, Virginia; Dublin and Galway, Ireland; Belfast, Northern Ireland; and Tel Aviv, Israel, providing us with exposure to worldwide engineering talent. We are also establishing a new development and service center in Prague, Czech Republic that we anticipate will continue to grow over the next year.
We define a customer as any entity that has an active Rapid7 recurring revenue contract as of the specified measurement date, excluding InsightOps and Logentries only customers with a contract value less than $2,400 per year.
We define a customer as any entity that has an active Rapid7 recurring revenue contract as of the specified measurement date, excluding only InsightOps and Logentries customers with a contract value less than $2,400 per year.
We have designed and implemented learning experiences for our employees at every stage of their careers. including personalized leadership development experiences that build capabilities for both non-technical and technical leaders at each stage of the leadership journey.
We have designed and implemented learning experiences for our employees at every stage of their careers. including personalized leadership development experiences that build capabilities for both non-technical and technical leaders and managers at each stage of the leadership journey.
Available Information Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to these reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, are made available free of charge on or through our website at investors.rapid7.com as soon as reasonably practicable after such reports are filed with, or furnished to, the SEC. 13 Table of Contents
Available Information Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to these reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, are made available free of charge on or through our website at investors.rapid7.com as soon as reasonably practicable after such reports are filed with, or furnished to, the SEC. 11 Ta ble of Contents
Additionally, new employees engage in our 90-day onboarding experience, Making the Band , which is intended to support the embodiment of our core values, and shorten their time to create impact.
Additionally, new employees engage in our 90-day onboarding experience which is intended to support the embodiment of our core values, and shorten their time to create impact.
The goal of the interdisciplinary lab at USF is to catalyze new collaborative research efforts in cyber threat detection, track malicious threat actors through an extensive sensor network, support an inclusive approach to diverse talent development in cybersecurity, and serve as a hub for thought leadership and community-engaged programming both locally and within the global cybersecurity industry. 12 Table of Contents Corporate Information Our principal executive offices are located at 120 Causeway Street, Boston, Massachusetts.
The goal of the interdisciplinary lab at USF is to catalyze new collaborative research efforts in cyber threat detection, track malicious threat actors through an extensive sensor network, support an inclusive approach to diverse talent development in cybersecurity, and serve as a hub for thought leadership and community-engaged programming both locally and within the global cybersecurity industry. 10 Ta ble of Contents Corporate Information Our principal executive offices are located at 120 Causeway Street, Boston, Massachusetts.
Additional laws in all of these areas are likely to be passed in the future, which could result in significant limitations on or changes to the ways in which we can collect, use, host, store or transmit the personal information and data of our customers or employees, communicate with our customers, and deliver products and services, which may significantly increase our compliance costs.
Additional laws in all of these areas are likely to be passed in the future, which could result 8 Ta ble of Contents in significant limitations on or changes to the ways in which we can collect, use, host, store or transmit the personal information and data of our customers or employees, communicate with our customers, and deliver products and services, which may significantly increase our compliance costs.
These include investments in infrastructure, sales and marketing, and strategic partnerships. • Strategic M&A: We have and may continue to make acquisitions that enhance the value of our Insight Platform and bolster our ability to solve emerging customer challenges, allowing us to deliver on the vision of becoming the SecOps leader.
These include investments in infrastructure, sales and marketing, and strategic partnerships. 6 Ta ble of Contents • Strategic M&A: We have and may continue to make acquisitions that enhance the value of our Insight Platform and bolster our ability to solve emerging customer challenges, allowing us to deliver on the vision of becoming the SecOps leader.
Our professional services offerings include, but are not limited to, Penetration Testing, Cybersecurity Maturity Assessments, Security & Incident Response Program Development Services, IoT & Internet Embedded Device testing as well as Threat Modeling, TableTop Exercises and Incident Response services.
Professional Services Our professional services offerings include, but are not limited to, Penetration Testing, Cybersecurity Maturity Assessments, Security & Incident Response Program Development Services, Internet of Things & Internet Embedded Device testing as well as Threat Modeling, TableTop Exercises and Incident Response services.
In 2022, 43% of our revenue was generated from enterprises, which we define as organizations that have either annual revenue greater than $1.0 billion or more than 2,500 employees, and the balance was generated from middle-market and small organizations.
In 2023, 45% of our revenue was generated from enterprises, which we define as organizations that have either annual revenue greater than $1.0 billion or more than 2,500 employees, and the balance was generated from middle-market and small organizations.
To supplement our internal learning experiences, as well as provide opportunities for independent study, employees have access to online education tools, including a digital library, to build the necessary skills to pursue additional certifications related to 11 Table of Contents one’s role.
To supplement our internal learning experiences, as well as provide opportunities for independent study, employees have access to online education tools, including a digital library, to build the necessary skills to pursue additional certifications related to one’s role.
We will continue to increase investments in our sales and marketing efforts and foster the growth of our channel relationships to enable acquisition of these customers. • Upsell and cross-sell to our existing customer base: We see significant opportunity to deepen our relationship with our existing customers.
We intend to continue to increase investments in our sales and marketing efforts and foster the growth of our channel relationships to enable acquisition of these customers. • Upsell and cross-sell to our existing customer base: We see significant opportunities to deepen our relationship with our existing customers.
In addition to cash and equity compensation, we also offer employees a wide array of benefits such as life and health (medical, dental and vision) insurance, paid time off and retirement benefits. We also provide emotional well-being services through our Employee Assistance Program.
In addition to cash and equity compensation, we also offer employees a wide array of benefits such as life and health (medical, dental and vision) insurance, travel benefits, paid time off and retirement benefits for all eligible full-time employees, We also provide emotional well-being services through our Employee Assistance Program.
Our customers span a wide variety of industries including technology, energy, financial services, healthcare and life sciences, manufacturing, media and entertainment, retail, education, real estate, transportation, government and professional services, with customers in the services industry representing our largest industry in 2022 at 17% of our revenue.
Our customers span a wide variety of industries including manufacturing, financial services, healthcare and life sciences, retail, technology, government, media and entertainment, energy, education, transportation, real estate, and other professional services, with customers in the manufacturing industry representing our largest industry in 2023 at 15% of our revenue.
Our revenue is not concentrated with any individual customer and no customer represented more than 1% of our revenue in 2022, 2021 or 2020. Our Competition The markets we operate in are highly competitive, fragmented, and subject to technology change and innovation.
Our revenue is not concentrated with any individual customer, with no customers representing more than 1% of our revenue in 2023, 2022 or 2021. Our Competition The markets we operate in are highly competitive, fragmented, and subject to technology change and innovation.
We incurred net losses of $124.7 million, $146.3 million and $98.8 million in 2022, 2021 and 2020, respectively, as we continued to invest for long-term growth.
We incurred net losses of $149.3 million, $124.7 million and $146.3 million in 2023, 2022 and 2021, respectively, as we continued to invest for long-term growth.
As part of these efforts, we strive to offer a competitive compensation and benefits program, foster a community where everyone feels included and empowered to do their best work, and give employees the opportunity to give back to their communities and make a social impact.
As part of these efforts, we strive to offer a competitive compensation and benefits program and foster a community where everyone feels included and empowered to do their best work.
We have experienced strong revenue growth with revenue increasing from $244.1 million in 2018 to $685.1 million in 2022, representing a 29% compound annual growth rate. In 2022, 2021 and 2020 recurring revenue, defined as revenue from term software licenses, content subscriptions, managed services, cloud-based subscriptions and maintenance and support, was 94%, 92% and 90%, respectively, of total revenue.
We have experienced strong revenue growth with revenue increasing from $326.9 million in 2019 to $777.7 million in 2023, representing a 24% compound annual growth rate. In 2023, 2022 and 2021 recurring revenue, defined as revenue from term software licenses, content subscriptions, managed services, cloud-based subscriptions and maintenance and support, was 95%, 94% and 92%, respectively, of total revenue.
The platform was built using our extensive experience in collecting and analyzing data to enable our customers to create and manage analytics-driven cybersecurity risk management programs.
The platform was built using our extensive experience in collecting and analyzing data from diverse sources, including multi-cloud platforms, applications, endpoints and networks, to enable our customers to create and manage analytics-driven cybersecurity risk management programs.
Government Regulations We are subject to various federal, state and international laws and regulations that affect our business, including those relating to the privacy and security of customer and employee personal information and export or import of our products to certain countries, governments or entities.
For further discussion of the risks related to AI, please see below under “Risks Related to Intellectual Property, Litigation and Government Regulation." Government Regulations We are subject to various federal, state and international laws and regulations that affect our business, including those relating to the privacy and security of customer and employee personal information and export or import of our products to certain countries, governments or entities.
In addition, we expect that there is likely to be continued consolidation in our industry that could lead to increased price competition and other forms of competition.
In addition, we expect that there is likely to be continued consolidation in our industry that could lead to increased price competition and other forms of competition. With the introduction of new technologies, the evolution of our offerings and new market entrants, we expect competition to intensify in the future.
As of December 31, 2022, we had 2,623 full-time employees, including 497 in product and service delivery and support, 1,031 in sales and marketing, 780 in research and development and 315 in general and administrative. As of December 31, 2022, we had 1,672 full-time employees in the U.S. and 951 full-time employees internationally.
As of December 31, 2023, we had 2,228 full-time employees, including 418 in product and service delivery and support, 840 in sales and marketing, 692 in research and development and 278 in general and administrative. As of December 31, 2023, we had 1,277 full-time employees in the U.S. and 951 full-time employees internationally.
To safeguard these rights, we rely on a combination of patents, trademarks, copyrights, trade secrets, employee and third-party nondisclosure agreements, licensing arrangements and other contractual protections to protect our intellectual property in the United States and other jurisdictions. 10 Table of Contents We have numerous issued patents and a number of registered and unregistered trademarks.
Intellectual Property Our future success and competitive position depends in part on our ability to protect our intellectual property and proprietary technologies. To safeguard these rights, we rely on a combination of patents, trademarks, copyrights, trade secrets, employee and third-party nondisclosure agreements, licensing arrangements and other contractual protections to protect our intellectual property in the United States and other jurisdictions.
We require our employees, consultants and other third parties to enter into confidentiality and proprietary rights agreements and control access to software, documentation and other proprietary information.
We file patent applications to protect our intellectual property and have a number of patent applications pending. We require our employees, consultants and other third parties to enter into confidentiality and proprietary rights agreements and control access to software, documentation and other proprietary information.
With a strong focus on customer experience, satisfaction, and the value proposition of our Insight Platform, we intend to expand customers' usage of products they own (upsell) and help them adopt additional products (cross-sell). • Further strengthen our customer renewal rate: We intend to continue to drive customer satisfaction and renewals by offering professional services, support, and strong investments in customer success functions.
With a strong focus on customer experience, satisfaction, and the value proposition of our platform, we intend to expand customers' usage of products they own (upsell) and help them adopt additional products (cross-sell).
These include, among others, Hack.Diversity, the Cyber Peace Institute and its program Cyber Peace Builders and Cyversity. After seeding the Foundation with an initial contribution of $1.0 million in 2021, Rapid7 continued its support of the Foundation with an additional investment of $0.5 million in 2022.
After seeding the Foundation with an initial contribution of $1.0 million in 2021, Rapid7 continued its support of the Foundation with an additional investment of $0.5 million in 2022.
Community Involvement & The Rapid7 Cybersecurity Foundation We give back to the communities where we live and work, and believe that this commitment helps in our efforts to attract and retain employees. We partner with a variety of STEM and inclusion-focused programs to promote technology education for all. Beyond contributions of cash, we encourage employee volunteerism at all our locations.
We partner with a variety of STEM and inclusion-focused programs to promote technology education for all. Beyond contributions of cash, we encourage employee volunteerism at all our locations. In 2021, we formed the Rapid7 Cybersecurity Foundation (the “Foundation”).
Finally, to complement our products, we offer a range of managed services based on our software solutions and professional services, including penetration testing services, incident response services, security advisory services, and deployment and training. Insight Platform Our cloud-native Insight Platform is at the core of our product offerings.
To complement our products, we offer a range of standalone managed services, including MDR, MVM, MDRP and Rapid7 Managed Application Security, based on our software solutions, and professional services, including penetration testing services, incident response services, security advisory services, and deployment and training.
Over the course of 2022, we evolved to a hybrid-first model, in which employees who are assigned to an office can divide their work between the office and home. We are actively iterating our approach to support new ways of working and evolving the employee experience.
We have evolved to a hybrid-first model, in which our employees who are assigned to an office can divide their time between the office and home.
By utilizing our powerful, proprietary analytics to assess and understand the context and relationships around users, IT assets and cyber threats within a customer’s environment, our solutions make it easier for teams to identify and remediate vulnerabilities, monitor for misconfigurations and malicious behavior, investigate and shutdown attacks, and automate operations. Our Insight Platform provides a high level of scalability.
By utilizing our powerful proprietary analytics to assess and understand the context and relationships related to users, IT assets and cyber threats within a customer’s environment, our solutions make it easier for teams to identify and remediate vulnerabilities, monitor for misconfigurations and malicious behavior, investigate and shutdown attacks, and automate operations. 4 Ta ble of Contents Endpoint to Cloud Data Collection and Sharing In response to our customers’ expanding digital footprints, we have invested in our capacity to gather, standardize, enrich, and correlate diverse telemetry within our platform.
In 2021, we formed the Rapid7 Cybersecurity Foundation (the “Foundation”). The Foundation’s mission, which aligns closely to that of Rapid7, is to help close the cybersecurity achievement gap by promoting a more diverse and inclusive cyber workforce and advancing security by supporting cybersecurity programs and solutions that are free and open.
The Foundation’s mission, which aligns closely to that of Rapid7, is to promote a more diverse and inclusive cyber workforce and advance security by supporting cybersecurity programs and solutions that are free and open. These include, among others, Hack.Diversity, the Cyber Peace Institute and its program Cyber Peace Builders and Cyversity.
Velociraptor Open Source DFIR: Velociraptor is a unique, advanced open-source endpoint monitoring, digital forensic and cyber response platform. It was developed by Digital Forensic and Incident Response (“DFIR”) professionals who needed a powerful and efficient way to hunt for specific artifacts and monitor activities across fleets of endpoints.
It was developed by DFIR professionals as an efficient way to hunt for specific artifacts and monitor activities across fleets of endpoints.
Metasploit Community: Our Metasploit product has an active community of contributors and users. This online security community provides us with a robust and growing network of active users and influencers who promote the usage of our software. Security researchers contribute modules to the Metasploit Framework that serve as a resource about real-world attacker techniques.
Leveraging threat intelligence from our free and open-source projects, we continuously enhance our products and services to improve the customer experience. • Metasploit: Our Metasploit framework has an active community of contributors and users, including security researchers who contribute modules to the Metasploit Framework that serve as a resource about real-world attacker techniques.
We believe that the duration of our issued patents is sufficient when considering the expected lives of our products. We file patent applications to protect our intellectual property and have a number of patent applications pending.
We have over two hundred issued patents and a number of registered and unregistered trademarks. The standard length of our patents is 20 years and while the grant dates of our patents vary, we believe that the duration of our issued patents is sufficient when considering the expected lives of our products.
In addition, we offer deployment and training services related to our platform, to further help customers operationalize and customize their platform experience. For example, our Cybersecurity Maturity Assessments provide our customers with a view of their current security posture, an objective review of their existing plans, and a guide to their strategic planning.
In addition, we offer deployment and training services related to our platform, to further help customers operationalize and customize their platform experience.
These consolidation offerings are part of the realignment of our sales strategy, and an important step in advancing our platform selling motion. Research and Development Efforts We invest substantial resources in research and development to enhance our core technology platform and products, develop new end market-specific solutions and applications, and conduct product and quality assurance testing.
Research & Development We also invest substantial resources in research and development to enhance our core technology platform and products, develop new end market-specific solutions and applications, and conduct product and quality assurance testing. We partner with leading universities near our key centers to propel research and innovation and build a talent pipeline.
Our Insight Platform products are available globally and reduce the need for customers to manage large, complex, data infrastructure.
In addition to our consolidation offerings, we individually offer each of our platform solutions, including InsightIDR, InsightCloudSec, InsightIVM, InsightsAppSec, InsightConnect and Rapid7 Threat Command. Our platform products are available globally and reduce the need for customers to manage a large, complex, data infrastructure.
We have established strong co-sell relationships with strategic channel partners, who provide additional leverage through customer acquisition, deal execution and providing value in securing renewals. We continue to invest in partner models that enable us to create long term customer value. We generated 57%, 52%, and 47% of sales from channel partners, in 2022, 2021, and 2020, respectively.
We have established strong co-sell relationships with strategic channel partners, who provide additional leverage through customer acquisition, deal execution and providing value in securing renewals. We are focused on expanding our public cloud marketplace motion to support our customers’ move to those models.
By continuously improving our technology, stemming the creation of risk in the community, and making security more usable and accessible, Rapid7 aims to close the security achievement gap. As of December 31, 2022, we had more than 10,000 customers that rely on Rapid7 technology, services, and research to improve security outcomes and securely advance their organizations.
Our focus is to be the leading provider of integrated security solutions for the extended SOC by providing risk and threat management within the context of overall security. As of December 31, 2023, we had more than 11,500 customers that rely on Rapid7 technology, services, and research to improve security outcomes and securely advance their organizations.
Our Customers Our customer base has grown from approximately 8,700 customers at the end of 2020 to more than 10,000 customers as of December 31, 2022, in 146 countries, including 48% of the organizations in the Fortune 100.
By accessing our security talent, we help organizations develop an approach and road map to further mature and strengthen their security programs. 7 Ta ble of Contents Our Customers Our customer base has grown from approximately 10,000 customers at the end of 2021 to more than 11,500 customers as of December 31, 2023, in 151 countries, including 40% of the organizations in the Fortune 100.
Diversity, Equity and Inclusion We believe that a company culture focused on diversity and inclusion is a key driver of creativity and innovation and that diverse and inclusive teams make better business decisions, which ultimately drive better business outcomes. We are committed to recruiting, retaining and developing high-performing, innovative and engaged employees with diverse backgrounds and experiences.
Diversity, equity and inclusion are key drivers of creativity and innovation, and we know that when teams embrace these drivers, they are able to make better business decisions, which ultimately drive better business outcomes.
The main drivers of our growth strategy are: • Continued investments in product development: We intend to continue to invest heavily in our product development to enhance our Insight Platform and deliver additional features, which will allow us to further penetrate and grow our addressable markets. 7 Table of Contents • Grow our customer base: We believe we have a strong opportunity to address the security needs of resource constrained organizations of any size.
The main drivers of our growth strategy are: • Continued investments in product development: We intend to continue to invest in our product development to enhance our platform and deliver additional features to meet customer demand and grow our addressable markets. • Expanding Strategic Partnerships: By expanding our strategic partnerships with system integrators we enable our customers to succeed with our technology and platform in their ecosystem and deliver more value from their security operations program.
Talent Development We believe in investing in the growth and development of all of our employees so they may build the career experience of their lifetime.
Additionally, we believe gathering in person allows our people to foster stronger relationships and trust, and helps to contribute to our great work culture. Talent Development We believe in investing in the growth and development of all of our employees.
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Item 1. Business Overview Rapid7 is on a mission to create a safer digital world by making cybersecurity simpler and more accessible. We empower security professionals to manage a modern attack surface through our best-in-class technology, leading-edge research, and broad, strategic expertise.
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Item 1. Business Overview Rapid7 is a global cybersecurity software and services provider on a mission to offer customers greater clarity and control of their attack surface through our comprehensive and consolidated security offerings.
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Our comprehensive security solutions help our customers unite cloud risk management and threat detection to reduce attack surfaces and eliminate threats with speed and precision. In the over 20 years that Rapid7 has been in business, security companies and trends have come and gone, while broader technology innovation continues to advance rapidly.
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For more than twenty years, Rapid7 has partnered with customers across the globe representing a diverse range of industries and sizes to improve the efficacy and productivity of their security operations (“SecOps”).
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Every company is now a technology company, and rampant innovation inevitably creates security risk. The migration of businesses to the cloud, more distributed workforces, and ubiquitous connected devices present security teams with an increasingly complex, ever-changing, and unpredictable attack surface.
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In today's rapidly evolving IT environment, customers are encountering escalating challenges due to the widening spectrum of attackers and techniques, including the proliferation of cyberattacks leveraging artificial intelligence (“AI”) and targeted automation. To fortify their security posture, organizations will require greater visibility, advanced capabilities leveraging increased expertise, and integrated data to effectively anticipate, identify, and respond to threats.
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We believe as cybersecurity challenges continue to rise exponentially, two key factors can prevent organizations from effectively managing their growing security exposure. First, the tools to manage complex security problems are often equally complicated to use. Second, there is a scarcity of cybersecurity professionals who are qualified to successfully manage these sophisticated tools.
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Through our security operations platform, anchored on our cloud security, security information and event management (“SIEM”), advanced detection and response, and vulnerability management offerings, we believe that Rapid7 is poised to expand the capabilities of today's SecOps teams.
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These two factors compound the difficulties that resource-constrained organizations face when attempting to minimize their security exposure, meet security compliance regulations, and provide visibility to their leadership. We call the expanding divide between risk created through innovation and risk effectively managed by security teams the security achievement gap.
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Rapid7 extends and expands the expertise of the Security Operations Center (“SOC") across information security, cloud operations, development, and IT teams, enabling them to better understand the attacker and leverage that information to take control of their fragmented attack surface.
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We believe Rapid7 is uniquely positioned to improve how security challenges are addressed. Our solutions and services are built with and supported by the expertise of our dedicated team of security researchers, expert SOC analysts and consultants, who bring knowledge of attacker behavior and emerging vulnerabilities directly to customers.
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Enriched by years of managed services expertise, our integrated security operations platform enables SecOps teams to move away from a reactive approach, reduce their attack surface, and enhance response efficiency with a deep contextual understanding of their environment. In the past few years, we have observed the industry undergoing a customer-driven shift to consolidated security platforms.
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We also continue to invest in further simplifying our technology to improve usability, lowering the barrier for teams and organizations who lack resources to manage their security posture. While our security technology is the foundation of our mission to make successful security accessible to all, technology alone will not solve today’s cybersecurity challenges.
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As part of this transition, customers are moving away from cloud security as a specialized function towards cloud security as an integrated capability for SecOps teams.
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Our ongoing commitment to researching and partnering with the technology community helps to curb new security risks born through innovation. We are also investing in under-served, at risk communities, like non-profits and hospitals, to better understand their needs and make security technology and services accessible.
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We view this as a demand driver for integrated SecOps, and believe that we have an opportunity to be a leader in delivering integrated risk and threat management across on-premise, cloud, and external attack surfaces.
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Our Solutions We offer products across multiple pillars on our Insight Platform: • Incident Detection and Response: Our industry-leading Incident Detection and Response (“IDR”) solutions are designed to enable organizations to rapidly detect and respond to cybersecurity incidents and breaches across physical, virtual, and cloud assets.
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As we have shifted our strategic focus to SecOps consolidation, we are focused on continuing to drive innovation across our core products and capabilities to accelerate customer value and provide a frictionless and integrated cloud security experience.
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Equipped with user behavior analytics (“UBA”), attacker behavior analytics (“ABA”), network traffic analysis (“NTA”), end-point detection and response (“EDR”) and deception technology, our Extended Detection and Response (“XDR”) solution is designed to provide comprehensive network visibility and accelerate threat investigation and response. • Cloud Security: Our Cloud Security solutions are designed to effectively manage and protect cloud and container environments.
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As the threat landscape continues to grow in complexity, customers are demonstrating demand for integrated expertise to support them in effectively managing their security technologies. The convergence of these key trends – security consolidation, integrated cloud security, and expertise driven outcomes – are the foundation of what we view as the new extended SOC.
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By combining continuous real-time monitoring with automation, our solutions quickly assess an organization's security and compliance posture and automate remediation of misconfigurations and policy violations to help deliver continuous security and compliance across multi-cloud environments. • Vulnerability Risk Management: Our industry-leading Vulnerability Risk Management (“VRM”) solutions provide clarity into risk across traditional and modern IT environments, and the capabilities and data to influence remediation 3 Table of Contents teams and track progress.
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Our Platform Our extended SOC platform provides a high level of scalability and combines integrated technology, managed services, threat intelligence, and threat-aware risk context, enabling us to anticipate, detect, and promptly respond to threats once identified.
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With built-in risk prioritization, IT-integrated remediation projects, tracking of goals and service level agreements, and pre-built automation workflows, our solutions are designed to not just enumerate risk, but also accelerate risk mitigation. • Application Security: Our Application Security offerings provide dynamic application security testing and run-time application security monitoring and protection solutions that are designed to continuously analyze web applications for security vulnerabilities throughout a customer’s software development life cycle. • Threat Intelligence: Our advanced external threat intelligence tool finds and mitigates threats by proactively monitoring thousands of sources across the clear, deep, and dark web.
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Our cloud architecture utilizes a combination of native collection technologies and application programming interfaces, and third-party event sources, to scale in alignment with the digital transformation occurring within our customers’ organizations. • Rapid7 Insight Agent: Our universal endpoint agent, the Insight Agent, is a lightweight, software-based agent which can be installed on assets across on-premises and cloud environments to centralize and monitor data on our platform.
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By providing actionable, real-time information on threats outside their infrastructure coupled with automated remediation capabilities, customers have visibility to tailored threats and can make informed decisions. • Security Orchestration and Automation Response: Our Security Orchestration and Automation Response (“SOAR”) solutions allow security teams to connect disparate solutions within their cybersecurity, IT and development operations and build automated workflows, without requiring code, to eliminate repetitive, manual and labor-intensive tasks, resulting in measurable time and cost savings.
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This single agent enables a number of impactful use cases across the platform, including next-gen antivirus (“NGAV”), vulnerability scanning, endpoint detections, investigation and forensic search capabilities, and threat containment. • Rapid7 Insight Network Sensor: Our lightweight Insight Network Sensor passively analyzes raw end-to-end network traffic to increase visibility into user activity, pinpoint real threats, and accelerate investigations with granular detail of attacker movement. • Rapid7 Cloud Event Data Harvesting: Given the scale, complexity, and rapid evolution of modern dynamic cloud environments, real-time detection of risks and threats is paramount.
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We leverage cloud technologies to achieve a scalable delivery model with a high degree of redundancy, fault tolerance, and cost-effectiveness. We also designed our Insight Platform to provide a secure environment for our customers' data.
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Our event-driven harvesting offers visibility into changes made to vital cloud resources. • Third-Party Integrations and Ecosystem: We have integrations for hundreds of different technologies and solutions to deliver visibility across a customer’s attack surface customized to their unique ecosystem. • Orchestration and Automation: The connective tissue of our platform is our ability to orchestrate workflows across both our solutions and the customers’ wider security ecosystem.
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We deploy a variety of technologies and practices that are designed to help ensure that the data collected from a customer’s environment remains proprietary, secure and operational.
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This connectivity enables our customers to focus on security outcomes, rather than systems integrations, and accelerates both tasks associated with the normal course of business, as well as time-sensitive containment and remediation activities to minimize exposure and eliminate threats.
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Insight Platform's Features: Visibility: The Insight Platform allows security professionals to collect data once across their IT environment, enabling Security, IT, and development operations (“DevOps”) teams to collaborate effectively as they analyze shared data. • Unified Data Collection: We designed the Insight Platform to allow customers to collect their data once and leverage that same data across multiple solutions, providing shared visibility across teams and reducing time to value for additional solutions.
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Our Offerings Our consolidation offerings combine our compelling platform technology and lean into vendor consolidation as well as the prioritization of security budgets around critical spending areas. • Rapid7 Managed Threat Complete (“MTC”) is our flagship offering and unifies the leading detection and response of Rapid7 Managed Detection and Response (“MDR”) and the robust exposure management of Rapid7 Managed Vulnerability Management (“MVM”) to manage customers’ most imminent risks, pinpoint and eliminate threats as early as possible, and build resiliency for their future.
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Our robust data collection architecture supports gathering a wide swath of operational data from endpoints to the cloud, including key data about assets and user-specific behavior, into a unified, searchable dataset. • Agentless and Agent-Based Architecture: We developed our platform with flexible processing technologies that employ both agentless data collection and our own internally-developed endpoint agent technology, which enables rapid and seamless integration of our products into our customers’ modern IT environments and provides security and IT professionals with instant visibility into their dynamic and rapidly-expanding IT ecosystem.
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In addition to our MDR solution, customers purchasing MTC receive unlimited vulnerability management to minimize the potential of an attack and unlimited incident response which leverages our deep forensics capabilities.
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Our lightweight endpoint Insight Agent is designed to automatically collect data from all endpoints, even those from remote workers and sensitive assets that cannot be actively scanned, or that rarely join the corporate network. • Endpoint Detection and Visibility: With a universal lightweight agent and endpoint scanning, the Insight Platform provides real-time detection and the ability to proactively remediate IT environments, before a potential attack happens. • Network Traffic Analysis: Network flow data illuminates environments and helps accelerate investigations.
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Customers are also able to add NGAV which delivers high-fidelity prevention against both known static threats and suspicious behavior before they execute, or Managed Digital Risk Protection (“MDRP”), which searches for potential threats from stolen or leaked data and phishing attempts. • MDR delivers end-to-end threat detection and response, encompassing 24x7 monitoring to incident containment to breach response. • MVM offloads day-to-day VM operations to experts and extends coverage across the attack surface. • Rapid7 Threat Complete unifies Rapid7 InsightIDR (“InsightIDR”) and Rapid7 InsightVM (“InsightVM”) to provide complete risk and threat coverage in a single offering.
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Our lightweight Network Sensor passively analyzes raw traffic to increase visibility into user activity, pinpoint real threats, and accelerate investigations with granular detail of attacker movement. 4 Table of Contents • Cloud and Virtual Infrastructure Assessment: Modern networks and infrastructures are constantly changing.

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Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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Biggest changeOur operating results, including the levels of our revenue, annualized recurring revenue (“ARR”), cash flow, deferred revenue and gross margins, have historically varied from period to period, and we expect that they will continue to do so as a result of a number of factors, many of which are outside of our control, including: • the level of demand for our products and professional services; • customer renewal rates and ability to attract new customers; • the extent to which customers purchase additional products or professional services; • the mix of our products, as well as professional services, sold during a period; • the ability to successfully grow our sales of our cloud-based solutions, including through the shift to a consolidated platform sales approach; • the level of perceived threats to organizations’ cybersecurity; • network outages, security breaches, technical difficulties or interruptions with our products; • changes in the growth rate of the markets in which we compete; • sales of our products and professional services due to seasonality and customer demand; • the timing and success of new product or service introductions by us or our competitors or any other changes in the competitive landscape of our industry, including consolidation among our competitors; • the introduction or adoption of new technologies that compete with our offerings; • decisions by potential customers to purchase cybersecurity products or professional services from other vendors; • the amount and timing of operating costs and capital expenditures related to the operations and expansion of our business; • price competition; • our ability to successfully manage and integrate any acquired businesses, including IntSights Cyber Intelligence Ltd.
Biggest changeOur operating results, including the levels of our revenue, annualized recurring revenue (“ARR”), cash flow, deferred revenue and gross margins, have historically varied from period to period, and we expect that they will continue to do so as a result of a number of factors, many of which are outside of our control, including: • the level of demand for our products and service offerings; • customer renewal rates and ability to attract new customers; • the extent to which customers purchase additional products or service offerings; • the mix of our products, as well as service offerings, sold during a period; • the ability to successfully grow our sales of our cloud-based solutions, including through the shift to a consolidated platform sales approach; • the level of perceived threats to organizations’ cybersecurity; • network outages, security breaches, technical difficulties or interruptions with our products; • changes in the growth rate of the markets in which we compete; • sales of our products and service offerings due to seasonality and customer demand; • the timing and success of new product or service introductions by us or our competitors or any other changes in the competitive landscape of our industry, including consolidation among our competit ors and initiatives that use artificial intelligence (“AI”); • the introduction or adoption of new technologies that compete with our offerings; • decisions by potential customers to purchase cybersecurity products or service offerings from other vendors; • the amount and timing of operating costs and capital expenditures related to the operations and expansion of our business; • price competition; • our ability to successfully manage and integrate any acquired businesses, including without limitation, the amount and timing of expenses and potential future charges for impairment of goodwill from acquired companies; • business disruptions in regions affecting our operations, stemming from actual, imminent or perceived outbreak or reemergence of contagious disease; • our ability to increase, retain and incentivize the channel partners that market and sell our products and service offerings; • our continued international expansion and associated exposure to changes in foreign currency exchange rates; • the amount and timing of operating expenses related to the maintenance and expansion of our business, operations and infrastructure; • the announcement or adoption of new regulations and policy mandates or changes to existing regulations and policy mandates that impact our business or industry; • the cost or results of existing or unforeseen litigation and intellectual property infringement; • the strength of regional, national and global economies; 12 Ta ble of Contents • the impact of climate change, natural disasters or manmade problems, including terrorism or war (such as the Russia- Ukraine war and the Israel-Hamas conflict); and • future accounting pronouncements or changes in our accounting policies or practices.
For example, the conflict in Ukraine and associated activities in Ukraine and Russia may increase the risk of cyberattacks on various types of infrastructure and operations, and the United States government has warned companies to be prepared for a significant increase in Russian cyberattacks in response to the sanctions on Russia.
For example, the conflict in Ukraine and associated activities in Ukraine and Russia may increase the risk of cyberattacks on various types of infrastructure and operations, and the United States government has warned companies to be prepared for a significant increase in Russian cyberattacks in response to the sanctions on Russia.
Our brand, reputation and ability to attract, retain and serve our customers are dependent in part upon the reliable performance of our products and network infrastructure.
Our brand, reputation and ability to attract, retain and serve our customers are dependent in part upon the reliable performance of our products and network infrastructure. Our brand, reputation and ability to attract, retain and serve our customers are dependent in part upon the reliable performance of our products and network infrastructure.
If we are unable to continue to meet customer demands or to achieve more widespread market acceptance of our Insight Platform solutions, including through evolution of our sales model to a consolidated platform sales approach, our business operations, financial results and growth prospects will be materially and adversely affected.
If we are unable to continue to meet customer demands or to achieve more widespread market acceptance of our platform solutions, including through evolution of our sales model to a consolidated platform sales approach, our business operations, financial results and growth prospects will be materially and adversely affected.
Demand for Insight Platform solutions are affected by a number of factors beyond our control, including continued market acceptance of cloud-based offerings, the timing of development and release of new products by our competitors, technological change, and growth or contraction in our market and the economy in general.
Demand for platform solutions are affected by a number of factors beyond our control, including continued market acceptance of cloud-based offerings, the timing of development and release of new products by our competitors, technological change, and growth or contraction in our market and the economy in general.
Foreign Corrupt Practices Act, import and export control laws, tariffs, trade barriers, economic sanctions and other regulatory or contractual limitations on our ability to sell or provide our solutions in certain foreign markets, and the risks and costs of non-compliance; • heightened risks of unfair or corrupt business practices in certain geographies and of improper or fraudulent sales arrangements that may impact financial results and result in restatements of, and irregularities in, financial statements; • the potential for political unrest, acts of terrorism, hostilities or war; • management communication and integration problems resulting from cultural differences and geographic dispersion; • costs associated with language localization of our products; • increased exposure to climate change, natural disasters, acts of war (including the Russia-Ukraine war), terrorism, epidemics, or pandemics and other health crises, including the ongoing COVID-19 pandemic; and • costs of compliance with multiple and possibly overlapping tax structures.
Foreign Corrupt Practices Act, import and export control laws, tariffs, trade barriers, economic sanctions and other regulatory or contractual limitations on our ability to sell or provide our solutions in certain foreign markets, and the risks and costs of non-compliance; • heightened risks of unfair or corrupt business practices in certain geographies and of improper or fraudulent sales arrangements that may impact financial results and result in restatements of, and irregularities in, financial statements; • the potential for political unrest, acts of terrorism, hostilities or war; • management communication and integration problems resulting from cultural differences and geographic dispersion; • costs associated with language localization of our products; • increased exposure to climate change, natural disasters, acts of war (including the Russia-Ukraine war and the Israel-Hamas conflict), terrorism, epidemics, or pandemics and other health crises, including the ongoing COVID-19 pandemic; and • costs of compliance with multiple and possibly overlapping tax structures.
The Capped Calls cover, subject to customary adjustments, the number of shares of our common stock initially underlying each of the 2023 Notes, the 2025 Notes and the 2027 Notes. The Capped Calls are expected to offset the potential dilution as a result of conversion of such Notes.
The Capped Calls cover, subject to customary adjustments, the number of shares of our common stock initially underlying each of the 2023 Notes, the 2025 Notes, the 2027 Notes and the 2029 Notes. The Capped Calls are expected to offset the potential dilution as a result of conversion of such Notes.
Our new and existing offerings or product enhancements and changes to our existing offerings could fail to attain sufficient market acceptance for many reasons, including: • our failure to predict market demand accurately in terms of product functionality and to supply offerings that meet this demand in a timely fashion, including declines in demand as a result of the broader macroeconomic environment; • the failure of our consolidated platform sales approach in execution or timing or both; • real or perceived defect, errors or failures; • negative publicity about their performance or effectiveness; • delays in releasing to the market our new offerings or enhancements to our existing offerings; • introduction or anticipated introduction of competing products by our competitors; 17 Table of Contents • inability to scale and perform to meet customer demands; • poor business conditions for our customers, causing them to delay IT purchases, including as a result of the COVID-19 pandemic; and • reluctance of customers to purchase cloud-based offerings.
Our new and existing offerings or product enhancements and changes to our existing offerings could fail to attain sufficient market acceptance for many reasons, including: • our failure to predict market demand accurately in terms of product functionality and to supply offerings that meet this demand in a timely fashion, including declines in demand as a result of the broader macroeconomic environment; • the failure of our consolidated platform sales approach in execution or timing or both; • real or perceived defect, errors or failures; • negative publicity about their performance or effectiveness; • delays in releasing to the market our new offerings or enhancements to our existing offerings; • introduction or anticipated introduction of competing products by our competitors; • inability to scale and perform to meet customer demands; • poor business conditions for our customers, causing them to delay IT purchases, including as a result of the COVID-19 pandemic; and • reluctance of customers to purchase cloud-based offerings.
The capped call transactions may affect the value of the Notes and our common stock. In connection with the issuance of the 2023 Notes, the 2025 Notes and the 2027 Notes, we entered into capped call transactions with certain counterparties (the “Capped Calls”).
The capped call transactions may affect the value of the Notes and our common stock. In connection with the issuance of the 2023 Notes, the 2025 Notes, the 2027 Notes and the 2029 Notes, we entered into capped call transactions with certain counterparties (the “Capped Calls”).
Negative conditions in the general economy in either the United States or abroad, including conditions resulting from financial and credit market fluctuations, changes in economic policy, inflation, foreign currency exchange rate fluctuations, trade uncertainty, including changes in tariffs, sanctions, international treaties, and other trade restrictions, the occurrence of a natural disaster, outbreaks of epidemics or pandemics such as COVID-19, political unrest and social strife, including acts of terrorism, armed conflicts, such as the one between Russia and Ukraine, have caused and could continue to cause a decrease in corporate spending on security offerings or information technology in general and negatively affect the rate of growth of our business.
Negative conditions in the general economy in either the United States or abroad, including conditions resulting from financial and credit market fluctuations, changes in economic policy, inflation, foreign currency exchange rate fluctuations, trade uncertainty, including changes in tariffs, sanctions, international treaties, and other trade restrictions, the occurrence of a natural disaster, outbreaks of epidemics or pandemics such as COVID-19, political unrest and social strife, including acts of terrorism, armed conflicts, such as the one between Russia and Ukraine and the Israel-Hamas conflict, have caused and could continue to cause a decrease in corporate spending on security offerings or information technology in general and negatively affect the rate of growth of our business.
Our current international operations and future initiatives will involve a variety of risks, including: • increased management, infrastructure and legal costs associated with having international operations; • reliance on channel partners; • trade and foreign exchange restrictions; • economic or political instability or uncertainty in foreign markets and around the world; • foreign currency exchange rate fluctuations; • greater difficulty in enforcing contracts, accounts receivable collection and longer collection periods; • changes in regulatory requirements, including, but not limited to data privacy, data protection and data security regulations; • difficulties and costs of staffing and managing foreign operations; • the uncertainty and limitation of protection for intellectual property rights in some countries; • costs of compliance with foreign laws and regulations and the risks and costs of non-compliance with such laws and regulations; • costs of compliance with U.S. laws and regulations for foreign operations, including the U.S.
Our current international operations and future initiatives will involve a variety of risks, including: • increased management, infrastructure and legal costs associated with having international operations; • reliance on channel partners; • trade and foreign exchange restrictions; • economic or political instability or uncertainty in foreign markets and around the world; • foreign currency exchange rate fluctuations; • greater difficulty in enforcing contracts, accounts receivable collection and longer collection periods; • changes in regulatory requirements, including, but not limited to data privacy, data protection and data security regulations; 18 Ta ble of Contents • difficulties and costs of staffing and managing foreign operations; • the uncertainty and limitation of protection for intellectual property rights in some countries; • costs of compliance with foreign laws and regulations and the risks and costs of non-compliance with such laws and regulations; • costs of compliance with U.S. laws and regulations for foreign operations, including the U.S.
An adverse outcome of a dispute may require us to: • pay substantial damages, including treble damages, if we are found to have willfully infringed a third party’s patents or copyrights; • cease making, licensing or using solutions that are alleged to infringe or misappropriate the intellectual property of others; • expend additional development resources to attempt to redesign our solutions or otherwise develop non-infringing technology, which may not be successful; • enter into potentially unfavorable royalty or license agreements in order to obtain the right to use necessary technologies or intellectual property rights; and • indemnify our partners and other third parties.
An adverse outcome of a dispute may require us to: • pay substantial damages, including treble damages, if we are found to have willfully infringed a third party’s patents or copyrights; • cease making, licensing or using solutions that are alleged to infringe or misappropriate the intellectual property of others; 24 Ta ble of Contents • expend additional development resources to attempt to redesign our solutions or otherwise develop non-infringing technology, which may not be successful; • enter into potentially unfavorable royalty or license agreements in order to obtain the right to use necessary technologies or intellectual property rights; and • indemnify our partners and other third parties.
In addition, our facilities and those of our third-party data centers and hosting providers are vulnerable to damage or interruption from human error, intentional bad acts, pandemics, earthquakes, hurricanes, floods, fires, war (including the Russia-Ukraine war), terrorist attacks, power losses, hardware failures, systems failures, telecommunications failures and similar events.
In addition, our facilities and those of our third-party data centers and hosting providers are vulnerable to damage or interruption from human error, intentional bad acts, pandemics, earthquakes, hurricanes, floods, fires, war (including the Russia-Ukraine war and the Israel-Hamas conflict), terrorist attacks, power losses, hardware failures, systems failures, telecommunications failures and similar events.
Our indebtedness may: • limit our ability to borrow additional funds for working capital, capital expenditures, acquisitions or other general business purposes; • limit our ability to use our cash flow or obtain additional financing for future working capital, capital expenditures, acquisitions or other general business purposes; • require us to use a substantial portion of our cash flow from operations to make debt service payments; • limit our flexibility to plan for, or react to, changes in our business and industry; • place us at a competitive disadvantage compared to our less leveraged competitors; and • increase our vulnerability to the impact of adverse economic and industry conditions.
Our indebtedness may: • limit our ability to borrow additional funds for working capital, capital expenditures, acquisitions or other general business purposes; • limit our ability to use our cash flow or obtain additional financing for future working capital, capital expenditures, acquisitions or other general business purposes; • require us to use a substantial portion of our cash flow from operations to make debt service payments; 32 Ta ble of Contents • limit our flexibility to plan for, or react to, changes in our business and industry; • place us at a competitive disadvantage compared to our less leveraged competitors; and • increase our vulnerability to the impact of adverse economic and industry conditions.
If an option counterparty becomes subject to insolvency proceedings, we will become an unsecured creditor in those proceedings with a claim equal to our exposure at the time under such transaction. Our exposure will depend on many factors but, generally, 34 Table of Contents our exposure will increase if the market price or the volatility of our common stock increases.
If an option counterparty becomes subject to insolvency proceedings, we will become an unsecured creditor in those proceedings with a claim equal to our exposure at the time under such transaction. Our exposure will depend on many factors but, generally, our exposure will increase if the market price or the volatility of our common stock increases.
In addition, public health crises, climate change, or natural disasters could affect our channel partners’ ability to perform services for us on a timely basis. In the event we or our channel partners are hindered by any of the events discussed above, our ability to provide our products or professional services to customers could be delayed.
In addition, public health crises, climate change, or natural disasters could affect our channel partners’ ability to perform services for us on a timely basis. In the event we or our channel partners are hindered by any of the events discussed above, our ability to provide our products or service offerings to customers could be delayed.
Factors that may affect the market price of our common stock include: • actual or anticipated fluctuations in our financial condition and operating results; • variance in our financial performance from expectations of securities analysts; • changes in our projected operating and financial results; • changes in the prices of our products and professional services; • changes in laws or regulations applicable to our products or professional services; • announcements by us or our competitors of significant business developments, acquisitions or new offerings; • our involvement in any litigation or investigations by regulators; • our sale of our common stock or other securities in the future; • changes in our board of directors, senior management or key personnel; • trading volume of our common stock; • price and volume fluctuations in the overall stock market; • effects of inflation and increased interest rates; • changes in the anticipated future size and growth rate of our market; • sales of shares of our common stock by us or our stockholders, including sales and purchases of any common stock issued upon conversion of our convertible senior notes; and • general economic, regulatory and market conditions and/or market speculation or rumors.
Factors that may affect the market price of our common stock include: • actual or anticipated fluctuations in our financial condition and operating results; • variance in our financial performance from expectations of securities analysts; • changes in our projected operating and financial results; • changes in the prices of our products and service offerings; • changes in laws or regulations applicable to our products or service offerings; • announcements by us or our competitors of significant business developments, acquisitions or new offerings; • our involvement in any litigation or investigations by regulators; • our sale of our common stock or other securities in the future; • changes in our board of directors, senior management or key personnel; • trading volume of our common stock; • price and volume fluctuations in the overall stock market; 31 Ta ble of Contents • effects of inflation and increased interest rates; • changes in the anticipated future size and growth rate of our market; • sales of shares of our common stock by us or our stockholders, including sales and purchases of any common stock issued upon conversion of our convertible senior notes; and • general economic, regulatory and market conditions and/or market speculation or rumors.
The counterparties and/or or their respective affiliates may modify or unwind their hedge positions by entering into or unwinding various derivatives with respect to our common stock and/or purchasing or selling our common stock or other securities of ours in secondary market transactions prior to the maturity of the applicable Notes (and are likely to do so on each exercise date of the capped call transactions, which are scheduled to occur during the applicable observation period relating to any conversion of the 2025 Notes on or after November 1, 2024 or relating to any conversion of the 2027 Notes on or after December 15, 2026, in each case that is not in connection with a redemption).
The counterparties and/or or their respective affiliates may modify or unwind their hedge positions by entering into or unwinding various derivatives with respect to our common stock and/or purchasing or selling our common stock or other securities of ours in secondary market transactions prior to the maturity of the applicable Notes (and are likely to do so on each exercise date of the capped call transactions, which are 33 Ta ble of Contents scheduled to occur during the applicable observation period relating to any conversion of the 2025 Notes on or after November 1, 2024, relating to any conversion of the 2027 Notes on or after December 15, 2026 or relating to any conversion of the 2029 Notes on or after December 15, 2028, in each case that is not in connection with a redemption).
Similarly, supply-chain attacks have increased in frequency and severity, and we cannot guarantee that third parties and infrastructure in our supply chain or our third-party partners’ supply chains have not been compromised or that they do not contain exploitable defects or bugs that could result in a breach of or disruption to our information technology systems (including our products) or the third-party information technology systems that support us and our services.
Similarly, supply-chain attacks have increased in frequency and severity, and we cannot guarantee that third parties and infrastructure in our supply chain or our third-party partners’ supply chains have not been compromised or that they do not contain exploitable defects or bugs that could result in a breach of or 28 Ta ble of Contents disruption to our information technology systems (including our products) or the third-party information technology systems that support us and our services.
Among other things, our amended and restated certificate of incorporation and amended and restated bylaws include provisions that: • authorize our board of directors to issue preferred stock without further stockholder action and with voting liquidation, dividend and other rights superior to our common stock; 36 Table of Contents • require that any action to be taken by our stockholders be effected at a duly called annual or special meeting and not by written consent, and limit the ability of our stockholders to call special meetings; • establish an advance notice procedure for stockholder proposals to be brought before an annual meeting, including proposed nominations of persons for director nominees; • establish that directors elected prior to our 2021 annual meeting serve three-year staggered terms and subsequent to the 2023 annual meeting, each director will hold office for a term of one year; • require the approval of the holders of a majority of the voting power of all of the then-outstanding shares of capital stock of the Company entitled to vote generally at an election of directors, voting together as a single class, to adopt, amend or repeal our amended and restated bylaws or amend or repeal the provisions of our amended and restated certificate of incorporation regarding the election and removal of directors and the ability of stockholders to take action by written consent or call a special meeting; • prohibit cumulative voting in the election of directors; and • provide that vacancies on our board of directors may be filled only by a majority of directors then in office, even though less than a quorum.
Among other things, our amended and restated certificate of incorporation and amended and restated bylaws include provisions that: • authorize our board of directors to issue preferred stock without further stockholder action and with voting liquidation, dividend and other rights superior to our common stock; • require that any action to be taken by our stockholders be effected at a duly called annual or special meeting and not by written consent, and limit the ability of our stockholders to call special meetings; • establish an advance notice procedure for stockholder proposals to be brought before an annual meeting, including proposed nominations of persons for director nominees; • establish that subsequent to the 2023 annual meeting, each director will hold office for a term of one year; • require the approval of the holders of a majority of the voting power of all of the then-outstanding shares of capital stock of the Company entitled to vote generally at an election of directors, voting together as a single class, to adopt, amend or repeal our amended and restated bylaws or amend or repeal the provisions of our amended and restated certificate of incorporation regarding the election and removal of directors and the ability of stockholders to take action by written consent or call a special meeting; • prohibit cumulative voting in the election of directors; and • provide that vacancies on our board of directors may be filled only by a majority of directors then in office, even though less than a quorum.
These false positives, while typical in the industry, may impair the perceived reliability of our offerings and may therefore adversely impact market acceptance of our products and professional services and could result in negative publicity, loss of customers and sales and increased costs to remedy any problem.
These false positives, while typical in the industry, may impair the perceived reliability of our offerings and may therefore adversely impact market acceptance of our products and service offerings and could result in negative publicity, loss of customers and sales and increased costs to remedy any problem.
Since shares of our common stock were sold in our initial public offering (“IPO”), in July 2015 at a price of $16.00 per share, our stock price has ranged from an intraday low of $9.05 to an intraday high of $145.00 through February 17, 2023.
Since shares of our common stock were sold in our initial public offering (“IPO”), in July 2015 at a price of $16.00 per share, our stock price has ranged from an intraday low of $9.05 to an intraday high of $145.00 through February 16, 2024.
Although we expect that our current cash and cash equivalent balances, including the proceeds of our convertible senior notes offering in March 2021, together with cash flows that are generated from operations and availability under our revolving credit facility, will be sufficient to meet our domestic and international working capital needs and other capital and liquidity requirements for at least the next 12 months, if the economic conditions of the general economy or industries in which we operate worsen from present levels, our business operations and financial results could be adversely affected. 16 Table of Contents Macroeconomic events and conditions, such as those discussed above, may also have the effect of heightening many of the other risks described in this “Risk Factors” section, including risks associated with our guidance, our customers, our potential customers, our market opportunity, renewals and sales cycle, among others.
Although we expect that our current cash and cash equivalent balances, including the proceeds of our offering of convertible senior notes in September 2023, together with cash flows that are generated from operations and availability under our revolving credit facility, will be sufficient to meet our domestic and international working capital needs and other capital and liquidity requirements for at least the next 12 months, if the economic conditions of the general economy or industries in which we operate worsen from present levels, our business operations and financial results could be adversely affected. 14 Ta ble of Contents Macroeconomic events and conditions, such as those discussed above, may also have the effect of heightening many of the other risks described in this “Risk Factors” section, including risks associated with our guidance, our customers, our potential customers, our market opportunity, renewals and sales cycle, among others.
The adverse effect on our financial results may be particularly acute because of the significant research, development, marketing, sales and other expenses we will have incurred in connection with the new offerings or enhancements. We face intense competition in our market, which could adversely affect our business, financial condition, and results of operations.
The adverse effect on our financial results may be particularly acute because of the significant research, development, marketing, sales and other expenses we will have incurred in connection with the new offerings or enhancements. 16 Ta ble of Contents We face intense competition in our market, which could adversely affect our business, financial condition, and results of operations.
An actual or perceived security breach or theft of sensitive data of one of our customers, regardless of whether the breach is attributable to the failure of our products or professional services, could adversely affect the market’s perception of our offerings and subject us to legal claims.
An actual or perceived security breach or theft of sensitive data of one of our customers, regardless of whether the breach is attributable to the failure of our products or service offerings, could adversely affect the market’s perception of our offerings and subject us to legal claims.
From time to time, there may be changes in our senior management team resulting from the termination or departure of our executive officers and key employees. Our senior management and key employees are employed on an at-will basis, which means that they could terminate their employment with us at any time.
From time to time, there may be changes in our senior management team resulting from 21 Ta ble of Contents the termination or departure of our executive officers and key employees. Our senior management and key employees are employed on an at-will basis, which means that they could terminate their employment with us at any time.
For example, due to economic volatility as a result of the continued impact of the ongoing COVID-19 pandemic, inflationary pressures and other global events, we have and may continue to see delays in our sales cycle, failures of customers to renew at all or to renew the anticipated scope their subscriptions with us, requests from customers for payment term deferrals as well as pricing or bundling concessions, which, if significant, could materially and adversely affect our business, results of operations and financial condition.
For example, due to economic volatility as a result of inflationary pressures and other global events, we have and may continue to see delays in our sales cycle, failures of customers to renew at all or to renew the anticipated scope their subscriptions with us, requests from customers for payment term deferrals as well as pricing or bundling concessions, which, if significant, could materially and adversely affect our business, results of operations and financial condition.
We face intense competition for these employees from numerous technology, software and other companies, especially in 18 Table of Contents certain geographic areas in which we operate, and we cannot ensure that we will be able to attract, motivate and/or retain sufficient qualified employees in the future particularly in tight labor markets.
We face intense competition for these employees from numerous technology, software and other companies, especially in certain geographic areas in which we operate, and we cannot ensure that we will be able to attract, motivate and/or retain sufficient qualified employees in the future particularly in tight labor markets.
In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any “interested” stockholder for a period of three years following the date on which the stockholder became an “interested” stockholder.
In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any “interested” stockholder for a period of three years following the date on which the stockholder became 36 Ta ble of Contents an “interested” stockholder.
If we do not effectively assist our customers in deploying our products, help our customers quickly resolve post-deployment issues or provide effective ongoing support, our ability to renew or sell additional products or professional services to existing customers would be adversely affected and our reputation with potential customers could be damaged.
If we do not effectively assist our customers in deploying our products, help our customers quickly resolve post-deployment issues or provide effective ongoing support, our ability to renew or sell additional products or service offerings to existing customers would be adversely affected and our reputation with potential customers could be damaged.
We generally conduct our international operations through wholly-owned 27 Table of Contents subsidiaries and report our taxable income in various jurisdictions worldwide based upon our business operations in those jurisdictions. Our intercompany relationships are and will continue to be subject to complex transfer pricing regulations administered by taxing authorities in various jurisdictions.
We generally conduct our international operations through wholly-owned subsidiaries and report our taxable income in various jurisdictions worldwide based upon our business operations in those jurisdictions. Our intercompany relationships are and will continue to be subject to complex transfer pricing regulations administered by taxing authorities in various jurisdictions.
There is no guarantee that our products or professional services will detect all vulnerabilities and threats, especially in light of the rapidly changing security landscape to which we must respond, including the constantly evolving techniques used by attackers to access or sabotage data.
There is no guarantee that our products or service offerings will detect all vulnerabilities and threats, especially in light of the rapidly changing security landscape to which we must respond, including the constantly evolving techniques used by attackers to access or sabotage data.
If our products or professional services fail to detect vulnerabilities or threats for any reason, we may incur significant costs, the attention of our key personnel could be diverted, our customers may delay or withhold payment to us or elect not to renew or other significant customer relations problems may arise.
If our products or service offerings fail to detect vulnerabilities or threats for any reason, we may incur significant costs, the attention of our key personnel could be diverted, our customers may delay or withhold payment to us or elect not to renew or other significant customer relations problems may arise.
As of December 31, 2022, the 2025 Notes and the 2027 Notes were not convertible at the option of the holder. Whether the Notes will be convertible following the year ended December 31, 2022, will depend on the future satisfaction of a conversion condition.
As of December 31, 2023, the 2025 Notes, the 2027 Notes and the 2029 Notes were not convertible at the option of the holder. Whether the Notes will be convertible following the year ended December 31, 2023, will depend on the future satisfaction of a conversion condition.
In developing this guidance, our management must make certain assumptions and judgments about our future performance. Some of those key assumptions relate to the impact of macroeconomic pressures on our business and the timing and scope of economic recovery globally, which are inherently difficult to predict.
In developing this guidance, our management must make certain assumptions and judgments about our future performance. Some of those key assumptions relate to the impact of macroeconomic pressures on our business and the timing 20 Ta ble of Contents and scope of economic recovery globally, which are inherently difficult to predict.
If our channel partners choose to place greater emphasis on products of their own or those offered by our competitors or do not effectively market and sell our products and professional services, our ability to grow our business and sell our products and professional services, particularly in key international markets, may be adversely affected.
If our channel partners choose to place greater emphasis on products of their own or those offered by our competitors or do not effectively market and sell our products and service offerings, our ability to grow our business and sell our products and service offerings, particularly in key international markets, may be adversely affected.
Please also see “ Special Note Regarding Forward-Looking Statements. ” Risks Related to Our Business and Industry Our quarterly operating results may vary from period to period, which could result in our failure to meet expectations with respect to operating results and cause the trading price of our stock to decline.
Please also see “ Special Note Regarding Forward-Looking Statements. ” Our quarterly operating results may vary from period to period, which could result in our failure to meet expectations with respect to operating results and cause the trading price of our stock to decline.
The conversion of some or all of the Notes will dilute the ownership interests of existing stockholders to the extent we deliver shares of our common stock upon conversion of any of the Notes. As disclosed in Note 10, Debt , as of December 31, 2022 the Notes were not convertible at the option of the holder.
The conversion of some or all of the Notes will dilute the ownership interests of existing stockholders to the extent we deliver shares of our common stock upon conversion of any of the Notes. As disclosed in Note 11, Debt , as of December 31, 2023 the Notes were not convertible at the option of the holder.
Additionally, for the years ended December 31, 2022, 2021 and 2020, 10%, 10% and 9%, respectively, of our revenue was generated in foreign currencies. Accordingly, changes in exchange rates may have an adverse effect on our business, operating results and financial condition.
Additionally, for the years ended December 31, 2023, 2022 and 2021, 11%, 10% and 10%, respectively, of our revenue was generated in foreign currencies. Accordingly, changes in exchange rates may have an adverse effect on our business, operating results and financial condition.
If we are unable to adapt our products to changing legal and regulatory standards or other requirements in a timely manner, or if our products fail to assist with, or expedite, our customers’ cybersecurity defense and compliance efforts, our customers may lose confidence in our products and could switch to products offered by our competitors or threaten or bring legal actions against us.
If we are unable to adapt our products to changing legal and regulatory standards or other requirements in a timely manner, or if our products fail to assist with, or expedite, our 22 Ta ble of Contents customers’ cybersecurity defense and compliance efforts, our customers may lose confidence in our products and could switch to products offered by our competitors or threaten or bring legal actions against us.
Our business, including the sales of our products and professional services by us and our channel partners, may be subject to foreign governmental regulations, which vary substantially from country to country and change from time to time. Our failure, or the failure by our channel partners, to comply with these regulations could adversely affect our business.
Our business, including the sales of our products and service offerings by us and our channel partners, may be subject to foreign governmental regulations, which vary substantially from country to country and change from time to time. Our failure, or the failure by our channel partners, to comply with these regulations could adversely affect our business.
Government demand and payment for our products and professional services may also be impacted by public sector budgetary cycles and funding authorizations, with funding reductions or delays adversely affecting public sector demand for our offerings.
Government demand and payment for our products and service offerings may also be impacted by public sector budgetary cycles and funding authorizations, with funding reductions or delays adversely affecting public sector demand for our offerings.
If we are unable to attract new employees and retain our current employees, we may not be able to adequately develop and maintain new products or professional services or market our existing products or professional services at the same levels as our competitors and we may, therefore, lose customers and market share.
If we are unable to attract new employees and retain our current employees, we may not be able to adequately develop and maintain new products or service offerings or market our existing products or service offerings at the same levels as our competitors and we may, therefore, lose customers and market share.
Any debt financing that we may secure in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions.
Any debt financing that we may secure in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it 35 Ta ble of Contents more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions.
While we have experienced significant revenue growth in recent periods, we may not obtain a high enough volume of sales of our products and professional services to sustain or increase our growth or achieve or maintain profitability in the future.
While we have experienced significant revenue growth in recent periods, we may not obtain a high enough volume of sales of our products and service offerings to sustain or increase our growth or achieve or maintain profitability in the future.
Accordingly, increasing sales of our products and professional services to government entities may be more challenging than selling to commercial organizations. Further, in the course of providing our products and professional services to government entities, our employees and those of our channel partners may be exposed to sensitive government information.
Accordingly, increasing sales of our products and service offerings to government entities may be more challenging than selling to commercial organizations. Further, in the course of providing our products and service offerings to government entities, our employees and those of our channel partners may be exposed to sensitive government information.
Our sales cycle may be unpredictable. The timing of sales of our offerings is difficult to forecast because of the length and unpredictability of our sales cycle, particularly with large enterprises and with respect to certain of our products.
The timing of sales of our offerings is difficult to forecast because of the length and unpredictability of our sales cycle, particularly with large enterprises and with respect to certain of our products.
Moreover, despite our efforts, our personnel or third parties upon whom we rely may fail to comply with such obligations. If we (or third parties upon whom we rely) fail, or are perceived to have failed, to address and comply with data privacy and security 30 Table of Contents obligations, we could face significant consequences.
Moreover, despite our efforts, our personnel or third parties upon whom we rely may fail to comply with such obligations. If we (or third 29 Ta ble of Contents parties upon whom we rely) fail, or are perceived to have failed, to address and comply with data privacy and security obligations, we could face significant consequences.
In addition, our failure to recruit additional channel partners, or any reduction or delay in their sales of our products and professional services or conflicts between channel sales and our direct sales and marketing activities may harm our results of operations.
In addition, our failure to recruit additional channel partners, or any reduction or delay in their sales of our products and service offerings or conflicts between channel sales and our direct sales and marketing activities may harm our results of operations.
A significant public health crisis, epidemic or pandemic (including the ongoing COVID-19 pandemic), or climate change, or a natural disaster, such as an earthquake, fire or a flood, or a significant power outage could have a material adverse impact on our business, operating results and financial condition.
A significant public health crisis, epidemic or pandemic, or climate change, or a natural disaster, such as an earthquake, fire or a flood, or a significant power outage could have a material adverse impact on our business, operating results and financial condition.
We cannot assure you that our expansion efforts into international markets will be successful in creating further demand for our products and professional services or in effectively selling our products and professional services in the international markets that we enter.
We cannot assure you that our expansion efforts into international markets will be successful in creating further demand for our products and service offerings or in effectively selling our products and service offerings in the international markets that we enter.
A lack of future taxable income would adversely affect our ability to utilize these NOLs before they expire. Under the provisions of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), substantial changes in our ownership may limit the amount of pre-change NOLs that can be utilized annually in the future to offset taxable income.
A lack of future taxable income would adversely affect our ability to utilize these NOLs before they expire. Under the provisions of the Internal Revenue Code (the “IRC”), substantial changes in our ownership may limit the amount of pre-change NOLs that can be utilized annually in the future to offset taxable income.
If our products or professional services fail to detect vulnerabilities in our customers’ cybersecurity infrastructure, or if our products or professional services fail to identify and respond to new and increasingly complex methods of cyber attacks, our business and reputation may suffer.
If our products or service offerings fail to detect vulnerabilities in our customers’ cybersecurity infrastructure, or if our products or service offerings fail to identify and respond to new and increasingly complex methods of cyber attacks, our business and reputation may suffer.
You should not rely on our prior quarterly or annual periods performance as any indication of our future growth. 15 Table of Contents We have not been profitable historically and may not achieve or maintain profitability in the future.
You should not rely on our prior quarterly or annual periods performance as any indication of our future growth. 13 Ta ble of Contents We have not been profitable historically and may not achieve or maintain profitability in the future.
However, for the years ended December 31, 2022, 2021 and 2020 we incurred 16%, 15% and 12%, respectively, of our expenses outside of the 24 Table of Contents United States in foreign currencies, primarily the British pound sterling and euro, principally with respect to salaries and related personnel expenses associated with our sales and research and development operations.
However, for the years ended December 31, 2023, 2022 and 2021 we incurred 17%, 16% and 15%, respectively, of our expenses outside of the United States in foreign currencies, primarily the British pound sterling and euro, principally with respect to salaries and related personnel expenses associated with our sales and research and development operations.
Technology alliance partnerships require significant coordination between the parties 23 Table of Contents involved, particularly if a partner requires that we integrate its products with our products.
Technology alliance partnerships require significant coordination between the parties involved, particularly if a partner requires that we integrate its products with our products.
Our customers’ renewal rates may decline or fluctuate as a result of a number of factors, including their satisfaction or dissatisfaction with our new or current product offerings, our pricing, the effects of economic conditions, including due to a global economic slowdown, inflation, foreign currency exchange rate fluctuation, the Russia-Ukraine war and the global economic uncertainty and financial market conditions caused by the COVID-19 pandemic, competitive offerings, our customers' perception of their exposure, or alterations or reductions in their spending levels.
Our customers’ renewal rates may decline or fluctuate as a result of a number of factors, including their satisfaction or dissatisfaction with our new or current product offerings, our pricing, the effects of economic conditions, including due to a global economic slowdown, inflation, foreign currency exchange rate fluctuation, the Russia-Ukraine war, the Israel-Hamas conflict and any global economic uncertainty and financial market disruptions, competitive offerings, our customers' perception of their exposure, or alterations or reductions in their spending levels.
Finally, even if we are successful, our relationships with channel partners may not result in greater customer usage of our products and professional services or increased revenue. 22 Table of Contents If we are not able to maintain and enhance our brand, our business and operating results may be adversely affected.
Finally, even if we are successful, our relationships with channel partners may not result in greater customer usage of our products and service offerings or increased revenue. If we are not able to maintain and enhance our brand, our business and operating results may be adversely affected.
The European Data Protection Laws present significantly greater risks, compliance burdens and costs for companies with users and operations in the EU and UK.
The European Data Protection Laws present significantly greater risks, compliance burdens and costs for companies with users and operations in the European Economic Area (“EEA”) and UK.
This may also reduce demand for our services from companies subject to European Data Protection Laws. Loss of our ability to import personal data from the EU and UK may also require us to increase our data processing capabilities in the EEA at significant expense.
This may also reduce demand for our services from companies subject to European Data Protection Laws. Loss of our ability to import personal data from Europe may also require us to increase our data processing capabilities in Europe at significant expense.
The foregoing and other state, federal and international legal and regulatory regimes may affect our customers’ requirements for, and demand for, our products and professional services.
The foregoing and other state, federal and international legal and regulatory regimes may affect our customers’ requirements for, and demand for, our products and service offerings.
The occurrence of a public health crisis, climate change, natural disaster, power failure or an act of terrorism, vandalism or other misconduct, a decision by a third party to close a facility on which we rely without adequate notice, or other unanticipated problems could result in lengthy interruptions in provision or delivery of our products, potentially leaving our customers vulnerable to cyber attacks.
The occurrence of a public health crisis, climate change, natural disaster, power failure, war (including the Russia-Ukraine war and the Israel-Hamas conflict) or an act of terrorism, vandalism or other misconduct, a decision by a third party to close a facility on which we rely without adequate notice, or other unanticipated 34 Ta ble of Contents problems could result in lengthy interruptions in provision or delivery of our products, potentially leaving our customers vulnerable to cyber attacks.
This decline, however, will negatively affect our revenue in future periods. Accordingly, the effect of significant downturns in sales and market acceptance of our products and potential changes in our rate of renewals may not be fully reflected in our results of operations until future periods.
Accordingly, the effect of significant downturns in sales and market acceptance of our products and potential changes in our rate of renewals may not be fully reflected in our results of operations until future periods.
For the years ended December 31, 2022, 2021 and 2020, we derived approximately 57%, 52%, and 47%, respectively, of our revenue from sales of products and professional services through channel partners, and the percentage of revenue derived from channel partners may increase in future periods.
For the years ended December 31, 2023, 2022 and 2021, we derived approximately 62%, 57% and 52%, respectively, of our revenue from sales of products and service offerings through channel partners, and the percentage of revenue derived from channel partners may increase in future periods.
Internationally, virtually every jurisdiction in which we operate has established its own data security and cyberprivacy legal frameworks with which we, and/or our customers, must comply, including the European Union's General Data Protection Regulation, 2016/679 (“GDPR”), laws implemented by European Union (“EU”) member states and, following the withdrawal of the United Kingdom (“UK”) from the EU, the so-called ‘UK GDPR’ (“European Data Protection Laws”).
Internationally, virtually every jurisdiction in which we operate has established its own data security and cyberprivacy legal frameworks with which we, and/or our customers, must comply, including the European Union's General Data Protection Regulation, 2016/679 (“GDPR”), laws implemented by European Union (“EU”) member states and, following the withdrawal of the United Kingdom (“UK”) from the EU, the UK General Data Protection Regulation (i.e. a version of the GDPR as implemented into UK law) (“UK GDPR,” and collectively, the “European Data Protection Laws”).
We have posted a net loss in each year since inception, including net losses of $124.7 million, $146.3 million and $98.8 million in the years ended December 31, 2022, 2021 and 2020, respectively. As of December 31, 2022, we had an accumulated deficit of $860.7 million.
We have posted a net loss in each year since inception, including net losses of $149.3 million, $124.7 million and $146.3 million in the years ended December 31, 2023, 2022 and 2021, respectively. As of December 31, 2023, we had an accumulated deficit of $1.0 billion.
If our financial performance fails to meet analyst estimates or one or more of the analysts who cover us downgrade our shares or change their opinion of our shares, our share price would likely decline.
We do not have any control over these analysts. If our financial performance fails to meet analyst estimates or one or more of the analysts who cover us downgrade our shares or change their opinion of our shares, our share price would likely decline.
Our ability to use net operating losses to offset future taxable income may be subject to certain limitations. As of December 31, 2022, we had federal and state net operating loss carryforwards (“NOLs”) , o f $450.5 million and $345.4 million, respectively, available to offset future taxable income, which expire in various years beginning in 2023 if not utilized.
Our ability to use net operating losses to offset future taxable income may be subject to certain limitations. As of December 31, 2023, we had federal and state net operating loss carryforwards (“NOLs”), of $346.5 million and $293.5 million, respectively, available to offset future taxable income, a portion of which expires in various years beginning in 2024 if not utilized.
In addition, we might devote substantial time and effort to a particular unsuccessful sales effort, and as a result, we could lose other sales opportunities or incur expenses that are not offset by an increase in revenue, which could harm our business. To date, we have derived a significant amount of our revenue from customers using our vulnerability management offerings.
In addition, we might devote substantial time and effort to a particular unsuccessful sales effort, and as a result, we could lose other sales opportunities or incur expenses that are not offset by an increase in revenue, which could harm our business.
Our business and growth depend substantially on customers renewing and expanding their subscriptions with us. Any decline in our customer renewals or failure to convince customers to expand their use of our subscription offerings could adversely affect our future operating results. Our subscription offerings are sold on a term basis.
Any decline in our customer renewals or failure to convince customers to expand their use of our subscription offerings could adversely affect our future operating results. Our subscription offerings are sold on a term basis.
At present, there are few if any viable alternatives to the SCCs. If we cannot implement and maintain a valid mechanism for cross-border personal data transfers, we may face increased exposure to regulatory actions, substantial fines and injunctions against processing (including prohibitions on transferring personal data out of the EU and UK).
If we cannot implement and maintain a valid mechanism for cross-border personal data transfers, we 30 Ta ble of Contents may face increased exposure to regulatory actions, substantial fines and injunctions against processing (including prohibitions on transferring personal data out of the EU and UK).
Third parties may also assert claims against our customers or channel partners, whom we typically indemnify against claims that our solutions infringe, misappropriate or otherwise violate the intellectual property rights of third parties. As the numbers of products and competitors in our market increase and overlaps occur, claims of infringement, misappropriation and other violations of intellectual property rights may increase.
Third parties have in the past and may in the future assert claims of infringement, misappropriation or other violations of intellectual property rights against us. Third parties may also assert claims against our customers or channel partners, whom we typically indemnify against claims that our solutions infringe, misappropriate or otherwise violate the intellectual property rights of third parties.
We may not have sufficient cash flow from our business to pay our substantial debt when due. In May 2020, we issued $230.0 million aggregate principal amount of 2025 Notes and in March 2021, we issued $600.0 million aggregate principal amount of 2027 Notes. In addition, we may also incur indebtedness under our revolving credit facility.
We may not have sufficient cash flow from our business to pay our substantial debt when due. In May 2020, we issued $230.0 million aggregate principal amount of 2025 Notes, in March 2021, we issued $600.0 million aggregate principal amount of 2027 Notes and in September 2023, we issued $300.0 million aggregate principal amount of 2029 Notes.
Like other U.S.-based IT security products, our products are subject to U.S. export control and import laws and regulations, including the U.S. Export Administration Regulations and various economic and trade sanctions regulations administered by the U.S. Treasury Department’s Office of Foreign Assets Control. Exports of these products must be made in compliance with these laws and regulations.
Export Administration Regulations and various economic and trade sanctions regulations administered by the U.S. Treasury Department’s Office of Foreign Assets Control. Exports of these products must be made in compliance with these laws and regulations.
We are likely to recognize the costs associated with these increased investments earlier than some of the anticipated benefits and the return on these investments may be lower, or may develop more slowly, than we expect, which could adversely affect our operating results.
We are likely to recognize the costs associated with these increased investments earlier than some of the anticipated benefits and the return on these investments may be lower, or may develop more slowly, than we expect, which could adversely affect our operating results. 19 Ta ble of Contents We may be unable to rapidly and efficiently adjust our cost structure in response to significant revenue declines, which could adversely affect our operating results.
Any of the foregoing events could seriously harm our business, financial condition and results of operations. Our products contain third-party open source software components, and our failure to comply with the terms of the underlying open source software licenses could restrict our ability to sell our products.
Our products contain third-party open source software components, and our failure to comply with the terms of the underlying open source software licenses could restrict our ability to sell our products.
In particular, government regulators in Europe have found that the United States does not provide an adequate level of data privacy and cybersecurity protection and although there are legal mechanisms to allow for the transfer of personal data from Europe to the United States, uncertainty remains about compliance and such mechanisms may not be available or applicable with respect to our personal data processing activities.
Although there are legal mechanisms to allow for the transfer of personal data from Europe to the United States, uncertainty remains about compliance and such mechanisms may not be available or applicable with respect to our personal data processing activities.
In addition, a substantial number of shares of our common stock is reserved for issuance upon the exercise of stock options, settlement of other equity incentive awards and upon conversion of the 2025 Notes and 2027 Notes (the “Notes”). The indentures for the Notes do not restrict our ability to issue additional common stock or equity-linked securities in the future.
In addition, a substantial number of shares of our common stock is reserved for issuance upon the exercise of stock options, settlement of other equity incentive awards and upon conversion of the 2025 Notes, 2027 Notes and 2029 Notes (the “Notes”).
From the year ended December 31, 2018 to the year ended December 31, 2022, our revenue grew from $244.1 million to $685.1 million and our headcount grew from 1,246 to 2,623 employees. Our future growth is dependent upon our ability to continue to meet the expanding needs of our customers and to attract new customers.
From the year ended December 31, 2019 to the year ended December 31, 2023, our revenue grew from $326.9 million to $777.7 million and our headcount grew from 1,544 to 2,228 employees. Our future growth is dependent upon our ability to continue to meet the expanding needs of our customers and to attract new customers.
If we are unable to generate sufficient cash flow, we may be required to adopt one or more alternatives, such as 33 Table of Contents selling assets, restructuring our debt or obtaining additional equity capital on terms that may be onerous or highly dilutive.
If we are unable to generate sufficient cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring our debt or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time.

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Item 2. Properties

Properties — owned and leased real estate

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Biggest changeWe also lease various international offices including in Toronto, Canada; Reading, United Kingdom; Belfast, Northern Ireland; Dublin and Galway, Ireland; Tel Aviv, Israel; Melbourne, Australia, Germany and Singapore. 37 Table of Contents We believe that our current facilities are suitable and adequate to meet our current needs.
Biggest changeWe have additional U.S. offices including Arlington, Virginia, Austin, Texas, and Tampa, Florida. We also lease various international offices including in Belfast, Northern Ireland; Czech Republic; Dublin and Galway, Ireland; Germany; Melbourne, Australia; Reading, United Kingdom; Tel Aviv, Israel; and Singapore. We believe that our current facilities are suitable and adequate to meet our current needs.
Removed
Item 2. Properties. Our corporate headquarters occupy approximately 214,000 square feet in Boston, Massachusetts under operating leases that expire in November 2029. We have additional U.S. offices including Los Angeles and San Francisco, California; Austin, Texas; Arlington, Virginia and Tampa, Florida.
Added
Item 2. Properties. Our corporate headquarters occupy approximately 147,000 square feet in Boston, Massachusetts under operating leases that expire in November 2029. This excludes approximately 67,000 square feet of certain idle office space that was impaired in 2023. Refer to Note 12, Leases , for further information on the impairment of long-lived assets.

Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

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Biggest changeRegardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors. Item 4. Mine Safety Disclosures. Not applicable. 38 Table of Contents PART II
Biggest changeRegardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.
In addition, from time to time, we are a party to litigation or subject to claims incident to the ordinary course of business.
Item 3. Legal Proceedings. From time to time, we are a party to litigation or subject to claims incident to the ordinary course of business.
Removed
Item 3. Legal Proceedings. In October 2018, Finjan, Inc. (“Finjan”) filed a complaint against us and our wholly-owned subsidiary, Rapid7 LLC, in the United States District Court, District of Delaware, alleging patent infringement of seven patents held by them. In the complaint, Finjan sought unspecified damages, attorneys' fees and injunctive relief. We intend to vigorously contest Finjan's claims.
Removed
The final outcome, including our liability, if any, with respect to Finjan's claims, is uncertain. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changeThe comparisons in the graph below are based upon historical data and are not indicative of, nor intended to forecast, future performance of our common stock. 39 Table of Contents December 31, 2017 December 31, 2018 December 31, 2019 December 31, 2020 December 31, 2021 December 31, 2022 Rapid7, Inc. $ 100.00 $ 166.99 $ 300.21 $ 483.17 $ 630.71 $ 182.10 Nasdaq Global Market Composite 100.00 98.79 132.31 195.39 144.92 68.75 Nasdaq Computer 100.00 96.27 142.73 224.55 285.17 185.29 Recent Sales of Unregistered Securities None.
Biggest changeThe comparisons in the graph below are based upon historical data and are not indicative of, nor intended to forecast, future performance of our common stock. 39 Ta ble of Contents December 31, 2018 December 31, 2019 December 31, 2020 December 31, 2021 December 31, 2022 December 31, 2023 Rapid7, Inc. $ 100.00 $ 179.78 $ 289.35 $ 377.70 $ 109.05 $ 183.25 Nasdaq Global Market Composite 100.00 133.93 197.79 146.70 69.59 68.16 Nasdaq Computer 100.00 148.27 233.26 296.23 192.48 315.60 Recent Sales of Unregistered Securities None.
Market Information Our common stock is listed on the Nasdaq Global Market under the symbol “RPD.” As of December 31, 2022, there were 36 holders of record of our common stock, including Cede & Co., a nominee for The Depository Trust Company (“DTC”), which holds shares of our common stock on behalf of an indeterminate number of beneficial owners.
Market Information Our common stock is listed on the Nasdaq Global Market under the symbol “RPD.” As of December 31, 2023, there were 33 holders of record of our common stock, including Cede & Co., a nominee for The Depository Trust Company (“DTC”), which holds shares of our common stock on behalf of an indeterminate number of beneficial owners.
The following graph shows a comparison from December 31, 2017 through December 31, 2022 of the cumulative total return for an investment of $100 in our common stock, the Nasdaq Global Market and the Nasdaq Computer Index. Data for the Nasdaq Global Market and the Nasdaq Computer Index assume reinvestment of dividends.
The following graph shows a comparison from December 31, 2018 through December 31, 2023 of the cumulative total return for an investment of $100 in our common stock, the Nasdaq Global Market and the Nasdaq Computer Index. Data for the Nasdaq Global Market and the Nasdaq Computer Index assume reinvestment of dividends.
Securities Authorized for Issuance Under Equity Compensation Plans Information about securities authorized for issuance under our equity compensation plan is incorporated herein by reference to Item 12 of Part III of this Annual Report on Form 10-K.
Use of Proceeds from Initial Public Offering of Common Stock None. Purchase of Equity Securities by the Issuer and Affiliated Purchasers None. Securities Authorized for Issuance Under Equity Compensation Plans Information about securities authorized for issuance under our equity compensation plan is incorporated herein by reference to Item 12 of Part III of this Annual Report on Form 10-K.
Removed
Use of Proceeds from Initial Public Offering of Common Stock None. Purchase of Equity Securities by the Issuer and Affiliated Purchasers On July 16, 2021, we acquired IntSights Cyber Intelligence Ltd. (“IntSights”) for a purchase price with an aggregate fair value of $322.3 million (the “IntSights Acquisition”).
Removed
Each of IntSights' founders agreed that the payment of 30% of their portion of the consideration for the IntSights Acquisition (the “Consideration”) would be in the form of an aggregate of 206,608 shares of our common stock.
Removed
The common stock portion of the Consideration was deferred and to be paid over a thirty-month period following the closing of the IntSights Acquisition (the “Holdback”), subject to certain conditions set forth in the Stock Purchase Agreement (the “Purchase Agreement”). On December 31, 2022, two of the IntSights Founders voluntarily terminated their employment with us.
Removed
Pursuant to the Purchase Agreement, upon voluntary termination of employment, we have the right to immediately reacquire any unvested shares that were subject to the Holdback.
Removed
Period Total Number of Shares Purchased Average Price Paid Per Share Total Number of Shares Purchased as Part of Publicly Announced Program Maximum Value of Shares that May Yet be Purchased Under Programs December 1 - December 31, 2022 82,771 $ 0.01 N/A N/A (1) (1) These shares were repurchased pursuant to the Purchase Agreement and not in connection with a share repurchase program.

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

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Biggest changeBased on our history of losses, we expect to maintain this full valuation allowance for the foreseeable future as it is more likely than not that some or all of those deferred tax assets may not be realized. 48 Table of Contents Results of Operations Year Ended December 31, 2022 2021 2020 (in thousands) Consolidated Statement of Operations Data: Revenue: Products $ 647,535 $ 500,843 $ 382,922 Professional services 37,548 34,561 28,564 Total revenue 685,083 535,404 411,486 Cost of revenue: (1) Products 182,212 140,773 96,864 Professional services 32,137 28,175 24,653 Total cost of revenue 214,349 168,948 121,517 Operating expenses: (1) Research and development 189,970 160,779 108,568 Sales and marketing 307,409 247,453 195,981 General and administrative 84,969 78,289 59,519 Total operating expenses 582,348 486,521 364,068 Loss from operations (111,614) (120,065) (74,099) Interest income 1,813 365 1,454 Interest expense (10,982) (14,292) (24,137) Other income (expense), net (1,522) (1,921) (81) Loss before income taxes (122,305) (135,913) (96,863) Provision for income taxes 2,412 10,421 1,986 Net loss (124,717) (146,334) (98,849) (1) Cost of revenue and operating expenses include stock-based compensation expense and depreciation and amortization expense as follows: Year Ended December 31, 2022 2021 2020 (in thousands) Stock-based compensation expense: Cost of revenue $ 10,367 $ 6,491 $ 4,298 Research and development 49,940 46,622 24,423 Sales and marketing 31,217 23,828 16,826 General and administrative 28,378 25,638 18,341 Total stock-based compensation expense $ 119,902 $ 102,579 $ 63,888 Year Ended December 31, 2022 2021 2020 (in thousands) Depreciation and amortization expense: Cost of revenue $ 26,520 $ 21,484 $ 13,218 Research and development 4,133 3,566 2,844 Sales and marketing 7,742 6,277 4,779 General and administrative 2,643 2,174 1,790 Total depreciation and amortization expense $ 41,038 $ 33,501 $ 22,631 49 Table of Contents The following table sets forth our consolidated statements of operations data expressed as a percentage of revenue: Year Ended December 31, 2022 2021 2020 Consolidated Statement of Operations Data: Revenue: Products 94.5 % 93.5 % 93.1 % Professional services 5.5 6.5 6.9 Total revenue 100.0 100.0 100.0 Cost of revenue: Products 26.6 26.3 23.5 Professional services 4.7 5.3 6.0 Total cost of revenue 31.3 31.6 29.5 Operating expenses: Research and development 27.7 30.0 26.4 Sales and marketing 44.9 46.2 47.6 General and administrative 12.4 14.6 14.5 Total operating expenses 85.0 90.8 88.5 Loss from operations (16.3) (22.4) (18.0) Interest income 0.3 0.1 0.4 Interest expense (1.6) (2.7) (5.9) Other income (expense), net (0.2) (0.4) — Loss before income taxes (17.8) (25.4) (23.5) Provision for income taxes 0.4 1.9 0.5 Net loss (18.2) % (27.3) % (24.0) % Year Ended December 31, 2022 Compared to the Year Ended December 31, 2021 Revenue Year Ended December 31, Change 2022 2021 $ % (dollars in thousands) Products $ 647,535 $ 500,843 $ 146,692 29.3 % Professional services 37,548 34,561 2,987 8.6 Total revenue $ 685,083 $ 535,404 $ 149,679 28.0 % Total revenue increased by $149.7 million in 2022 compared to 2021 and consisted of $133.9 million of organic growth and $15.8 million related to the acquisition of IntSights in July 2021.
Biggest changeBased on our history of losses, we expect to maintain this substantially full valuation allowance for the foreseeable future as it is more likely than not that some or all of those deferred tax assets may not be realized. 49 Ta ble of Contents Results of Operations Year Ended December 31, 2023 2022 2021 (in thousands) Consolidated Statement of Operations Data: Revenue: Products $ 740,168 $ 647,535 $ 500,843 Professional services 37,539 37,548 34,561 Total revenue 777,707 685,083 535,404 Cost of revenue: (1) Products 202,904 182,212 140,773 Professional services 28,837 32,137 28,175 Total cost of revenue 231,741 214,349 168,948 Operating expenses: (1) Research and development 176,776 189,970 160,779 Sales and marketing 312,636 307,409 247,453 General and administrative 84,276 84,969 78,289 Impairment of long-lived assets 30,784 — — Restructuring 22,227 — — Total operating expenses 626,699 582,348 486,521 Loss from operations (80,733) (111,614) (120,065) Interest income 10,177 1,813 365 Interest expense (64,700) (10,982) (14,292) Other income (expense), net (14,522) (1,522) (1,921) Loss before income taxes (149,778) (122,305) (135,913) (Benefit from) provision for income taxes (518) 2,412 10,421 Net loss $ (149,260) $ (124,717) (146,334) (1) Cost of revenue and operating expenses include stock-based compensation expense and depreciation and amortization expense as follows: Year Ended December 31, 2023 2022 2021 (in thousands) Stock-based compensation expense: Cost of revenue $ 10,700 $ 10,367 $ 6,491 Research and development 38,022 49,940 46,622 Sales and marketing 29,325 31,217 23,828 General and administrative 30,034 28,378 25,638 Total stock-based compensation expense $ 108,081 $ 119,902 $ 102,579 Year Ended December 31, 2023 2022 2021 (in thousands) Depreciation and amortization expense: Cost of revenue $ 31,447 $ 26,520 $ 21,484 Research and development 4,217 $ 4,133 3,566 Sales and marketing 7,801 $ 7,742 6,277 General and administrative 2,474 $ 2,643 2,174 Total depreciation and amortization expense $ 45,939 $ 41,038 $ 33,501 50 Ta ble of Contents The following table sets forth our consolidated statements of operations data expressed as a percentage of revenue: Year Ended December 31, 2023 2022 2021 Consolidated Statement of Operations Data: Revenue: Products 95.2 % 94.5 % 93.5 % Professional services 4.8 5.5 6.5 Total revenue 100.0 100.0 100.0 Cost of revenue: Products 26.1 26.6 26.3 Professional services 3.7 4.7 5.3 Total cost of revenue 29.8 31.3 31.6 Operating expenses: Research and development 22.7 27.7 30.0 Sales and marketing 40.2 44.9 46.2 General and administrative 10.8 12.4 14.6 Impairment of long-lived assets 4.0 — — Restructuring 2.9 — — Total operating expenses 80.6 85.0 90.8 Loss from operations (10.4) (16.3) (22.4) Interest income 1.3 0.3 0.1 Interest expense (8.3) (1.6) (2.7) Other income (expense), net (1.9) (0.2) (0.4) Loss before income taxes (19.3) (17.8) (25.4) Provision for income taxes (0.1) 0.4 1.9 Net loss (19.2) % (18.2) % (27.3) % Comparison of the Year Ended December 31, 2023 and 2022 Revenue Year Ended December 31, Change 2023 2022 $ % (dollars in thousands) Revenue: Products $ 740,168 $ 647,535 $ 92,633 14.3 % Professional services 37,539 37,548 (9) — % Total revenue $ 777,707 $ 685,083 $ 92,624 13.5 % Total revenue increased by $92.6 million in 2023 compared to 2022 and consisted of a $2.2 million increase in revenue from new customers and a $90.4 million increase in revenue from existing customers.
We define a customer as any entity that has an active Rapid7 recurring revenue contract as of the specified measurement date, excluding InsightOps and Logentries only customers with a contract value less than $2,400 per year. ARR per Customer . ARR per customer is defined as ARR divided by the number of customers at the end of the period.
We define a customer as any entity that has an active Rapid7 recurring revenue contract as of the specified measurement date, excluding only InsightOps and Logentries customers with a contract value less than $2,400 per year. ARR per Customer . ARR per customer is defined as ARR divided by the number of customers at the end of the period.
Operating Activities Operating activities provided $78.2 million of cash in 2022, which reflects continued growth in revenue partially offset by our continued investments in our operations and a net benefit from changes in working capital items.
Operating activities provided $78.2 million of cash in 2022, which reflects continued growth in revenue partially offset by our continued investments in our operations and a net benefit from changes in working capital items.
Investing Activities Investing activities used $40.0 million of cash in 2022, consisting of $20.4 million in capital expenditures to purchase computer equipment and leasehold improvements, $17.1 million for capitalization of internal-use software costs, $1.5 million of investment purchases, net of sales and maturities, and $1.0 million of other investments.
Investing activities used $40.0 million of cash in 2022, consisting of $20.4 million in capital expenditures to purchase computer equipment and leasehold improvements, $17.1 million for capitalization of internal-use software costs, $1.5 million of investment purchases, net of sales and maturities, and $1.0 million of other investments.
Financing Activities Financing activities provided $7.4 million of cash in 2022, which consisted primarily of $11.9 million in proceeds from the issuance of common stock purchased by employees under the Rapid7, Inc. 2015 Employee Stock Purchase Plan (“ESPP”) and $3.3 million in proceeds from the exercise of stock options, partially offset by $7.5 million in withholding taxes paid for the net share settlement of equity awards and $0.3 million in payments related to the acquisition of Velocidex.
Financing activities provided $7.4 million of cash in 2022, which consisted primarily of $11.9 million in proceeds from the issuance of common stock purchased by employees under the Rapid7, Inc. 2015 Employee Stock Purchase Plan (“ESPP”) and $3.3 million in proceeds from the exercise of stock options, partially offset by $7.5 million in withholding taxes paid for the net share settlement of equity awards and $0.3 million in payments related to the acquisition of Velocidex.
The expense for the amortization of debt discount and debt issuance costs related to our convertible senior notes and revolving credit facility is a non-cash item and we believe the exclusion of this interest expense provides a more useful comparison of our operational performance in different periods. • Induced conversion expense.
The expense for the amortization of debt issuance costs related to our convertible senior notes and revolving credit facility is a non-cash item and we believe the exclusion of this interest expense provides a more useful comparison of our operational performance in different periods. • Induced conversion expense.
Revenue Recognition We generate revenue primarily from: (1) subscriptions from the sale of cloud-based subscriptions, managed services, term software licenses, content subscriptions and maintenance and support associated with our software licenses and (2) professional services from the sale of our deployment and training services related to our solutions, incident response services, penetration testing and security advisory services.
Revenue Recognition We generate revenue primarily from: (1) product subscriptions from the sale of cloud-based subscriptions, managed services, term software licenses, content subscriptions and maintenance and support associated with our software licenses and (2) professional services from the sale of our deployment and training services related to our solutions, incident response services, penetration testing and security advisory services.
We maintain a full valuation allowance for domestic and certain foreign deferred tax assets, including net operating loss carryforwards and tax credits.
We maintain a substantially full valuation allowance for domestic and certain foreign deferred tax assets, including net operating loss carryforwards and tax credits.
Annualized Recurring Revenue (“ARR”) is defined as the annual value of all recurring revenue related to contracts in place at the end of the quarter. ARR should be viewed independently of revenue and deferred revenue as ARR is an operating metric and is not intended to be combined with or replace these items.
Annualized Recurring Revenue (“ARR”) is defined as the annual value of all recurring revenue related to contracts in place at the end of the period. ARR should be viewed independently of revenue and deferred revenue, as ARR is an operating metric and is not intended to be combined with or replace these items.
Our foreseeable cash needs, in 55 Table of Contents addition to our recurring operating expenses, include our expected capital expenditures to support expansion of our infrastructure and workforce, office facilities lease obligations, purchase commitments, including our cloud infrastructure services (including with Amazon Web Services (“AWS”)), potential future acquisitions of technology businesses and any election we make to redeem our convertible senior notes.
Our foreseeable cash needs, in addition to our recurring operating expenses, include our expected capital expenditures to support expansion of our infrastructure and workforce, office facilities lease obligations, purchase commitments, including our cloud infrastructure services (including with Amazon Web Services (“AWS”)), potential future acquisitions of technology businesses and any election we make to redeem our convertible senior notes.
We consider free cash flow to be a liquidity measure that provides useful information to management and investors about the amount of cash generated by the 42 Table of Contents business after necessary capital expenditures. See Non-GAAP Financial Results below for a reconciliation of non-GAAP free cash flow to the comparable GAAP financial measure. Annualized Recurring Revenue and Growth.
We consider free cash flow to be a liquidity measure that provides useful information to management and investors about the amount of cash generated by the business after necessary capital expenditures. See Non-GAAP Financial Results below for a reconciliation of non-GAAP free cash flow to the comparable GAAP financial measure. Annualized Recurring Revenue and Growth.
Recent Accounting Pronouncements See Note 2, Summary of Significant Accounting Policies , in the Notes to our Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K for a description of recent accounting pronouncements and our expectation of their impact, if any, on our results of operations and financial conditions. 58 Table of Contents
Recent Accounting Pronouncements See Note 2, Summary of Significant Accounting Policies , in the Notes to our Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K for a description of recent accounting pronouncements and our expectation of their impact, if any, on our results of operations and financial conditions.
Our Nexpose, Metasploit and AppSpider products are offered through term software licenses.
Our Nexpose and Metasploit products are offered through term software licenses.
All overhead costs are allocated based on relative headcount. Cost of Products Cost of products consists of personnel and related costs for our content, support, managed service and cloud operations teams, including salaries and other payroll related costs, bonuses, stock-based compensation and allocated overhead costs.
All overhead costs are allocated based on relative headcount. 47 Ta ble of Contents Cost of Products Cost of products consists of personnel and related costs for our content, support, managed service and cloud operations teams, including salaries and other payroll related costs, bonuses, stock-based compensation and allocated overhead costs.
GAAP measures, in evaluating our ongoing operational performance and enhancing an overall understanding of our past financial performance and allowing for greater transparency with respect to metrics used by our management in its financial and operational decision-making.
GAAP 42 Ta ble of Contents measures, in evaluating our ongoing operational performance and enhancing an overall understanding of our past financial performance and allowing for greater transparency with respect to metrics used by our management in its financial and operational decision-making.
We believe that excluding the impact of amortization of acquired intangible assets allows for more meaningful comparisons between operating results from period to period as the intangible assets are valued at the time of acquisition and are amortized over several years after the acquisition. • Amortization of debt discount and issuance costs.
We believe that excluding the impact of amortization of acquired intangible assets allows for more meaningful comparisons between operating results from period to period as the intangible assets are valued at the time of acquisition and are amortized over several years after the acquisition. 43 Ta ble of Contents • Amortization of debt issuance costs.
We periodically review the carrying amount of deferred contract acquisition costs to determine whether events or changes in circumstances have occurred that could impact the period of benefit.
We periodically review the carrying amount of 56 Ta ble of Contents deferred contract acquisition costs to determine whether events or changes in circumstances have occurred that could impact the period of benefit.
Interest Expense Interest expense consists primarily of contractual interest expense, amortization of debt issuance costs related to our convertible senior notes and revolving credit facility and induced conversion expense. We expect interest expense in the near term to represent contractual interest expense and amortization of debt issuance costs related to our convertible senior notes and revolving credit facility.
We expect interest expense in the near term to represent contractual interest expense and amortization of debt issuance costs related to our convertible senior notes and revolving credit facility.
We define adjusted EBITDA as net loss before (1) interest income, (2) interest expense, (3) other income (expense), net, (4) provision for income taxes, (5) depreciation expense, (6) amortization of intangible assets, (7) stock-based compensation expense, (8) acquisition-related expenses and (9) litigation-related expenses.
We define adjusted EBITDA as net loss before (1) interest income, (2) interest expense, (3) other income (expense), net, (4) provision for income taxes, (5) depreciation expense, (6) amortization of intangible assets, (7) stock-based compensation expense, (8) acquisition-related expenses, (9) litigation-related expenses, (10) impairment of long-lived assets and (11) restructuring expense.
Contract costs relating to contract renewals are deferred and amortized on a straight-line basis over the related renewal period. Contract costs for professional services arrangements are expensed as incurred in accordance with the practical expedient as the contractual period of our professional services arrangements are one year or less.
Contract costs relating to contract renewals are deferred and amortized on a straight-line basis over the weighted average contract length of renewal contracts. Contract costs for professional services arrangements are expensed as incurred in accordance with the practical expedient as the contractual period of our professional services arrangements is one year or less.
Our Managed Vulnerability Management, Managed Application Security and Managed Detection and Response products are offered on a managed service basis, generally pursuant to one-year agreements. 41 Table of Contents • Licensed software consists of term licenses. When licensed software is purchased, maintenance and support and content subscriptions, as applicable, are bundled with the license for the term period.
Our Managed Vulnerability Management, Managed Detection and Response, and Managed Application Security products are offered on a managed service basis, pursuant to one or multi-year agreements. • Licensed on-premise software consists of term licenses. When licensed on-premise software is purchased, maintenance and support and content subscriptions, as applicable, are bundled with the license for the term period.
We offer our products through a variety of delivery models to meet the needs of our diverse customer base, including: • Cloud-based subscriptions, which provide our software capabilities to our customers through cloud access and on a subscription basis.
Our Business Model We offer our products through a variety of delivery models to meet the needs of our diverse customer base, including: 41 Ta ble of Contents • Cloud-based subscriptions, which provide our software capabilities to our customers through cloud access and on a subscription basis.
Our actual results may differ from these estimates. Our significant accounting policies, including those considered to be critical accounting estimates are summarized in Note 2, Summary of Significant Accounting Policies , in the Notes to our Consolidated Financial Statements included in this Annual Report on Form 10-K.
Our significant accounting policies, including those considered to be critical accounting estimates are summarized in Note 2, Summary of Significant Accounting Policies, in the Notes to our Consolidated Financial Statements included in this Annual Report on Form 10-K.
We believe that our existing cash and cash equivalents, our investments, our available borrowings under our Credit Agreement and cash generated by operating activities will be sufficient to meet our operating and capital requirements for at least the next 12 months as well as our longer-term expected future cash requirements and obligations.
We believe that our existing cash and cash equivalents, our investments, our available borrowings under our Credit Agreement and cash generated by operating activities will be sufficient to meet our operating and capital requirements for at least the next 12 months.
We expect our gross margins to fluctuate over time depending on the factors described above. 47 Table of Contents Operating Expenses Operating expenses consist of research and development, sales and marketing, and general and administrative expenses. Operating expenses include overhead costs for depreciation, facilities, IT, information security and recruiting.
We expect our gross margins to fluctuate over time depending on the factors described above. Operating Expenses Operating expenses consist of research and development, sales and marketing, general and administrative expenses, impairment of long-lived assets and restructuring. Operating expenses include overhead costs for depreciation, facilities, IT, information security and recruiting.
We define non-GAAP gross profit, non-GAAP income from operations, non-GAAP operating margin, non-GAAP net income (loss) and non-GAAP net income (loss) per share as the respective GAAP balances excluding the effect of stock-based compensation expense, amortization of acquired intangible assets, amortization of debt discount and issuance costs and certain other items such as acquisition-related expenses, litigation-related expenses and induced conversion expense.
We define non-GAAP gross profit, non-GAAP income from operations, non-GAAP operating margin, non-GAAP net income (loss) and non-GAAP net income (loss) per share as the respective GAAP balances excluding the effect of stock-based compensation expense, amortization of acquired intangible assets, amortization of debt issuance costs and certain other items such as acquisition-related expenses, impairment of long-lived assets, Restructuring Expense, induced conversion expense, change in the fair value of derivative assets and litigation-related expenses.
Our InsightIDR, InsightCloudSec, InsightVM, InsightAppSec, InsightConnect and Threat Intelligence products are offered as cloud-based subscriptions, generally with a one-year term. • Managed services, through which we operate our products and provide our capabilities on behalf of our customers.
Our InsightIDR, InsightCloudSec, InsightVM, InsightAppSec, InsightConnect and Threat Command products are offered as cloud-based subscriptions, with an option for a one or multi-year term. • Managed services, through which we operate our products and provide our capabilities on behalf of our customers.
Our customers span a wide variety of industries such as technology, energy, financial services, healthcare and life sciences, manufacturing, media and entertainment, retail, education, real estate, transportation, government and professional services. As of December 31, 2022, we had over 10,000 customers in 146 countries, including 48% of the Fortune 100.
Our customers span a wide variety of industries such as technology, energy, financial services, healthcare and life sciences, manufacturing, media and entertainment, retail, education, real estate, transportation, government and professional services. As of December 31, 2023, we had over 11,500 customers in 151 countries, including 40% of the Fortune 100.
We believe these key metrics are useful to investors both because they allow for greater transparency with respect to key metrics used by management in its financial and operational decision-making and also because they are used by institutional investors and the analyst community to help evaluate the health of our business: Year Ended December 31, 2022 2021 2020 (dollars in thousands) Total revenue $ 685,083 $ 535,404 $ 411,486 Year-over-year growth 28.0 % 30.1 % 25.9 % Non-GAAP income from operations $ 30,386 $ 7,599 $ 2,032 Non-GAAP operating margin 4.4 % 1.4 % 0.5 % Free cash flow $ 40,677 $ 35,053 $ (15,045) As of December 31, 2022 2021 (dollars in thousands) Annualized recurring revenue (“ARR”) $ 714,231 $ 599,020 Year-over-year growth 19.2 % 38.4 % Number of customers 10,929 10,283 Year-over-year growth 6.3 % 18.0 % ARR per customer $ 65.4 $ 58.3 Year-over-year growth 12.2 % 17.3 % Total Revenue and Growth .
We believe these key metrics are useful to investors both because they allow for greater transparency with respect to key metrics used by management in its financial and operational decision-making and also because they are used by institutional investors and the analyst community to help evaluate the health of our business: Year Ended December 31, 2023 2022 2021 (dollars in thousands) Total revenue $ 777,707 $ 685,083 $ 535,404 Year-over-year growth 13.5 % 28.0 % 30.1 % Non-GAAP income from operations $ 102,221 $ 30,386 $ 7,599 Non-GAAP operating margin 13.1 % 4.4 % 1.4 % Free cash flow $ 84,034 $ 40,677 $ 35,053 As of December 31, 2023 2022 (dollars in thousands) Annualized recurring revenue (“ARR”) $ 805,670 $ 714,231 Year-over-year growth 12.8 % 19.2 % Number of customers 11,526 10,929 Year-over-year growth 5.5 % 6.3 % ARR per customer $ 69.9 $ 65.4 Year-over-year growth 7.0 % 12.2 % Total Revenue and Growth .
The $111.4 million increase in revenue from existing customers was due to an increase in revenue from renewals, upsells and cross-sells as a result of our growing base of existing customers. Revenue from new customers represents the revenue recognized from the customer's initial purchase. All renewals, upsells and cross-sells are considered revenue from existing customers.
The $90.4 million increase in revenue from existing customers was due to an increase in revenue from renewals, upsells and cross-sells as a result of the continued growth of our existing customer base. Revenue from new customers represents the revenue recognized from the customer's initial purchase.
These factors were partially offset by a $25.5 million increase in accounts receivable, a $22.5 million increase in deferred contract acquisition and fulfillment costs, a $3.4 million increase in prepaid expenses and other assets and a $2.1 million decrease in accounts payable, which each had a negative impact on operating cash flow.
These factors were offset by an $18.5 million increase in deferred contract acquisition and fulfillment costs, a $14.0 million increase in accounts receivable, a $4.1 million increase in prepaid expenses and a $1.3 million decrease in other liabilities , which each had a negative impact on operating cash flow.
Interest Income Year Ended December 31, Change 2022 2021 $ % (dollars in thousands) Interest income $ 1,813 $ 365 $ 1,448 396.7 % % of revenue 0.3 % 0.1 % Interest income increased by $1.4 million in 2022 compared to 2021 primarily due to an increase in interest rates.
Interest Income Year Ended December 31, Change 2023 2022 $ % (dollars in thousands) Interest income $ 10,177 $ 1,813 $ 8,364 461.3 % % of revenue 1.3 % 0.3 % Interest income increased by $8.4 million in 2023 compared to 2022, primarily due to an increase in interest rates.
Further, stock-based compensation expense has been and will continue to be for the foreseeable future a significant recurring expense in our business and an important part of the compensation provided to our employees. 44 Table of Contents The following tables reconcile GAAP gross profit to non-GAAP gross profit for the years ended December 31, 2022, 2021 and 2020: Year Ended December 31, 2022 2021 2020 (in thousands) GAAP total gross profit $ 470,734 $ 366,456 $ 289,969 Stock-based compensation expense 10,367 6,491 4,298 Amortization of acquired intangible assets 18,493 15,373 8,700 Non-GAAP total gross profit $ 499,594 $ 388,320 $ 302,967 Year Ended December 31, 2022 2021 2020 (in thousands) GAAP gross profit – products $ 465,323 $ 360,070 $ 286,058 Stock-based compensation expense 7,562 4,357 2,740 Amortization of acquired intangible assets 18,493 15,373 8,700 Non-GAAP gross profit – products $ 491,378 $ 379,800 $ 297,498 Year Ended December 31, 2022 2021 2020 (in thousands) GAAP gross profit – professional services $ 5,411 $ 6,386 $ 3,911 Stock-based compensation expense 2,805 2,134 1,558 Non-GAAP gross profit – professional services $ 8,216 $ 8,520 $ 5,469 The following table reconciles GAAP loss from operations to non-GAAP income from operations for the years ended December 31, 2022, 2021 and 2020: Year Ended December 31, 2022 2021 2020 (in thousands) GAAP loss from operations $ (111,614) $ (120,065) $ (74,099) Stock-based compensation expense 119,902 102,579 63,888 Amortization of acquired intangible assets 21,983 17,305 9,138 Acquisition-related expenses — 7,211 1,343 Litigation-related expenses 115 569 1,762 Non-GAAP income from operations $ 30,386 $ 7,599 $ 2,032 45 Table of Contents The following table reconciles GAAP net loss to non-GAAP net income (loss) for the years ended December 31, 2022, 2021 and 2020: Year Ended December 31, 2022 2021 2020 (in thousands, except share and per share data) GAAP net loss $ (124,717) $ (146,334) $ (98,849) Stock-based compensation expense 119,902 102,579 63,888 Amortization of acquired intangible assets 21,983 17,305 9,138 Acquisition-related expenses — 16,176 1,343 Litigation-related expenses 115 569 1,762 Amortization of debt discount and issuance costs 4,085 3,982 17,518 Induced conversion expense — 2,740 — Non-GAAP net income (loss) $ 21,368 $ (2,983) $ (5,200) Interest expense of convertible senior notes (1) 1,500 — — Numerator for non-GAAP earnings per share calculation $ 22,868 $ (2,983) $ (5,200) Weighted average shares used in GAAP earnings per share calculation, basic 58,552,065 55,270,998 51,036,824 Dilutive effect of convertible senior notes (1) 5,803,831 — — Dilutive effect of employee equity incentive plans (2) 1,251,725 — — Weighted average shares used in non-GAAP earnings per share calculation, diluted 65,607,621 55,270,998 51,036,824 Non-GAAP net income (loss) per share: Basic $ 0.36 $ (0.05) $ (0.10) Diluted $ 0.35 $ (0.05) $ (0.10) (1) We use the if-converted method to compute diluted earnings per share with respect to our convertible senior notes.
Further, stock-based compensation expense has been and will continue to be for the foreseeable future a significant recurring expense in our business and an important part of the compensation provided to our employees. 44 Ta ble of Contents The following tables reconcile GAAP gross profit to non-GAAP gross profit for the years ended December 31, 2023, 2022 and 2021: Year Ended December 31, 2023 2022 2021 (in thousands) GAAP total gross profit $ 545,966 $ 470,734 $ 366,456 Stock-based compensation expense 10,700 10,367 6,491 Amortization of acquired intangible assets 18,386 18,493 15,373 Non-GAAP total gross profit $ 575,052 $ 499,594 $ 388,320 Year Ended December 31, 2023 2022 2021 (in thousands) GAAP gross profit – products $ 537,264 $ 465,323 $ 360,070 Stock-based compensation expense 8,202 7,562 4,357 Amortization of acquired intangible assets 18,386 18,493 15,373 Non-GAAP gross profit – products $ 563,852 $ 491,378 $ 379,800 Year Ended December 31, 2023 2022 2021 (in thousands) GAAP gross profit – professional services $ 8,702 $ 5,411 $ 6,386 Stock-based compensation expense 2,498 2,805 2,134 Non-GAAP gross profit – professional services $ 11,200 $ 8,216 $ 8,520 The following table reconciles GAAP loss from operations to non-GAAP income from operations for the years ended December 31, 2023, 2022 and 2021: Year Ended December 31, 2023 2022 2021 (in thousands) GAAP loss from operations $ (80,733) $ (111,614) $ (120,065) Stock-based compensation expense 108,081 119,902 102,579 Amortization of acquired intangible assets 21,499 21,983 17,305 Acquisition-related expenses 363 — 7,211 Litigation-related expenses — 115 569 Impairment of long-lived assets 30,784 — — Restructuring expense 22,227 — — Non-GAAP income from operations $ 102,221 $ 30,386 $ 7,599 45 Ta ble of Contents The following table reconciles GAAP net loss to non-GAAP net (loss) income for the years ended December 31, 2023, 2022 and 2021: Year Ended December 31, 2023 2022 2021 (in thousands, except share and per share data) GAAP net loss $ (149,260) $ (124,717) $ (146,334) Stock-based compensation expense 108,081 119,902 102,579 Amortization of acquired intangible assets 21,499 21,983 17,305 Acquisition-related expenses 363 — 16,176 Litigation-related expenses — 115 569 Amortization of debt issuance costs 4,138 4,085 3,982 Induced conversion expense 53,889 — 2,740 Change in fair value of derivative assets 15,511 — — Impairment of long-lived assets 30,784 — — Restructuring expense 22,227 — — Non-GAAP net (loss) income $ 107,232 $ 21,368 $ (2,983) Interest expense of convertible senior notes (1) 2,667 1,500 — Numerator for non-GAAP earnings per share calculation $ 109,899 $ 22,868 $ (2,983) Weighted average shares used in GAAP earnings per share calculation, basic 60,756,087 58,552,065 55,270,998 Dilutive effect of convertible senior notes (1) 10,429,891 5,803,831 — Dilutive effect of employee equity incentive plans (2) 916,134 1,251,725 — Weighted average shares used in non-GAAP earnings per share calculation, diluted 72,102,112 65,607,621 55,270,998 Non-GAAP net income (loss) per share: Basic $ 1.76 $ 0.36 $ (0.05) Diluted $ 1.52 $ 0.35 $ (0.05) (1) We use the if-converted method to compute diluted earnings per share with respect to our Notes.
The decrease in our net operating assets was primarily due to a $85.6 million increase in deferred revenue due to increased billings, a $19.2 million increase in accrued expenses and a $3.7 million increase in other liabilities, which each had a positive impact on operating cash flow.
The change in our net operating assets and liabilities was primarily due to a $30.5 million increase in deferred revenue due to increased billings and a $5.4 million increase in accounts payable and a $2.4 million increase in accrued expenses, which each had a positive impact on operating cash flow.
The following table reconciles GAAP net loss to adjusted EBITDA for the years ended December 31, 2022, 2021 and 2020: Year Ended December 31, 2022 2021 2020 (in thousands) GAAP net loss $ (124,717) $ (146,334) $ (98,849) Interest income (1,813) (365) (1,454) Interest expense 10,982 14,292 24,137 Other (income) expense, net 1,522 1,921 81 Provision for income taxes 2,412 10,421 1,986 Depreciation expense 13,571 12,342 11,036 Amortization of intangible assets 27,467 21,159 11,595 Stock-based compensation expense 119,902 102,579 63,888 Acquisition-related expenses — 7,211 1,343 Litigation-related expenses 115 569 1,762 Adjusted EBITDA $ 49,441 $ 23,795 $ 15,525 46 Table of Contents The following table reconciles net cash provided by operating activities to free cash flow for the years ended December 31, 2022, 2021 and 2020: Year Ended December 31, 2022 2021 2020 (in thousands) Net cash provided by operating activities $ 78,204 $ 53,917 $ 4,887 Purchases of property and equipment (20,382) (9,010) (13,802) Capitalized internal-use software costs (17,145) (9,854) (6,130) Free cash flow $ 40,677 $ 35,053 $ (15,045) Components of Results of Operations Revenue We generate revenue primarily from selling products and professional services through a variety of delivery models to meet the needs of our diverse customer base.
(2) We use the treasury method to compute the dilutive effect of employee equity incentive plan awards. 46 Ta ble of Contents The following table reconciles GAAP net loss to adjusted EBITDA for the years ended December 31, 2023, 2022 and 2021: Year Ended December 31, 2023 2022 2021 (in thousands) Net loss $ (149,260) $ (124,717) $ (146,334) Interest income (10,177) (1,813) (365) Interest expense 64,700 10,982 14,292 Other (income) expense, net 14,522 1,522 1,921 (Benefit from) provision for income taxes (518) 2,412 10,421 Depreciation expense 14,047 13,571 12,342 Amortization of intangible assets 31,892 27,467 21,159 Stock-based compensation expense 108,081 119,902 102,579 Acquisition-related expenses 363 — 7,211 Litigation-related expenses — 115 569 Impairment of long-lived assets 30,784 — — Restructuring expense 22,227 — — Adjusted EBITDA $ 126,661 $ 49,441 $ 23,795 The following table reconciles net cash provided by operating activities to free cash flow for the years ended December 31, 2023, 2022 and 2021: Year Ended December 31, 2023 2022 2021 (in thousands) Net cash provided by operating activities $ 104,278 $ 78,204 $ 53,917 Less: Purchases of property and equipment (4,366) (20,382) (9,010) Less: Capitalized internal-use software costs (15,878) (17,145) (9,854) Free cash flow $ 84,034 $ 40,677 $ 35,053 Components of Results of Operations Revenue We generate revenue primarily from selling products and professional services through a variety of delivery models to meet the needs of our diverse customer base.
Cash Flows The following table shows a summary of our cash flows for the years ended December 31, 2022, 2021 and 2020: Year Ended December 31, 2022 2021 2020 (in thousands) Cash, cash equivalents and restricted cash at beginning of period $ 165,017 $ 173,617 $ 123,413 Net cash provided by operating activities 78,204 53,917 4,887 Net cash used in investing activities (39,988) (325,378) (156,287) Net cash provided by financing activities 7,416 264,133 200,925 Effects of exchange rates on cash, cash equivalents and restricted cash (2,845) (1,272) 679 Cash, cash equivalents and restricted cash at end of period $ 207,804 $ 165,017 $ 173,617 Uses of Funds Our historical uses of cash have primarily consisted of cash used for operating activities such as expansion of our sales and marketing operations, research and development activities and other working capital needs, as well as cash used for business acquisitions and purchases of property and equipment, including leasehold improvements for our facilities.
If we are unable to raise additional capital on terms satisfactory to us when we require it, our business, operating results and financial condition could be adversely affected. 54 Ta ble of Contents Cash Flows The following table shows a summary of our cash flows for the years ended December 31, 2023 and 2022: Year Ended December 31, 2023 2022 2021 (in thousands) Cash, cash equivalents and restricted cash at beginning of period $ 207,804 $ 165,017 $ 173,617 Net cash provided by operating activities 104,278 78,204 53,917 Net cash used in investing activities (178,754) (39,988) (325,378) Net cash provided by financing activities 79,597 7,416 264,133 Effects of exchange rates on cash, cash equivalents and restricted cash 1,202 (2,845) (1,272) Cash, cash equivalents and restricted cash at end of period $ 214,127 $ 207,804 $ 165,017 Uses of Funds Our historical uses of cash have primarily consisted of cash used for operating activities such as expansion of our sales and marketing operations, research and development activities and other working capital needs, as well as cash used for business acquisitions and purchases of property and equipment, including leasehold improvements for our facilities.
To date, we have financed our operations primarily through private and public equity financings and issuance of convertible senior notes and through cash generated by operating activities.
Our principal sources of liquidity are cash and cash equivalents, investments and our Credit and Security Agreement (the “Credit Agreement”). To date, we have financed our operations primarily through private and public equity financings, issuance of convertible senior notes and through cash generated by operating activities.
Factors that could cause or contribute to these differences include those under “Risk Factors” included in Part I, Item 1A or in other parts of this Annual Report on Form 10-K. Overview Rapid7 is on a mission to create a safer digital world by making cybersecurity simpler and more accessible.
Factors that could cause or contribute to these differences include those under “Risk Factors” included in Part I, Item 1A or in other parts of this Annual Report on Form 10-K.
Cash provided by operating activities reflected our net loss of $146.3 million, offset by a decrease in our net operating assets of $55.0 million and non-cash charges of $145.2 million related primarily to depreciation and amortization, stock-based compensation expense, deferred income taxes, induced conversion expense, amortization of debt issuance costs and other non-cash charges.
Cash provided by operating activities reflected our net loss of $149.3 million and an increase in our net operating assets and liabilities of $0.4 million, offset by non-cash charges of $253.2 million related primarily to depreciation and amortization, stock-based compensation expense, deferred income taxes, impairment of long-lived assets, change in fair value of derivative assets, amortization of debt issuance costs and other non-cash charges.
We exclude induced conversion expense because this amount is not indicative of the performance of, or trends in, our business and is neither comparable to the prior period nor predictive of future results. 43 Table of Contents • Litigation-related expenses.
In conjunction with the third quarter of 2023 partial repurchase of our 2025 Notes, we incurred a non-cash induced conversion expense of $53.9 million. We exclude induced conversion expense because this amount is not indicative of the performance of, or trends in, our business and neither is comparable to the prior period nor predictive of future results. • Litigation-related expenses.
Other Income (Expense), Net Other income (expense), net consists primarily of unrealized and realized gains and losses related to changes in foreign currency exchange rates. Provision for Income Taxes Provision for income taxes consists of income taxes in foreign jurisdictions where we conduct business, withholding taxes, and state income taxes in the United States.
Other Income (Expense), Net Other income (expense), net consists primarily of the change in fair value of derivative assets and unrealized and realized gains and losses related to changes in foreign currency exchange rates. Provision for Income Taxes Provision for income taxes consists of domestic and foreign taxes on income and withholding taxes.
In the event that additional financing is required from outside sources, we may be unable to raise the funds on acceptable terms, if at all. If we are unable to raise additional capital on terms satisfactory to us when we require it, our business, operating results and financial condition could be adversely affected.
In the event that additional financing is required from outside sources, we may be unable to raise the funds on acceptable terms, if at all.
Additional expenses include third-party infrastructure costs, travel and entertainment, consulting and professional fees for third-party development resources as well as allocated overhead costs.
Additional expenses include third-party infrastructure costs, travel and entertainment, consulting and professional fees for third-party development resources as well as allocated overhead costs. We expect research and development expense to decrease as a percentage of total revenue in the near term.
Operating activities provided $4.9 million of cash in 2020, which reflects continued growth in revenue partially offset by our continued investments in our operations and changes in working capital items.
Operating Activities Operating activities provided $104.3 million of cash and cash equivalents for the year ended December 31, 2023, which reflects continued growth in revenue partially offset by our continued investments in our operations and the timing of working capital adjustments.
We believe that both management and investors benefit from referring to these key metrics as supplemental information in assessing our performance and when planning, forecasting, and analyzing future periods. These key metrics also facilitate management's internal comparisons to our historical performance as well as comparisons to certain competitors' operating results.
Key Metrics We monitor the following key metrics to help us measure and evaluate the effectiveness of our operations and as a means to evaluate period-to-period comparisons. We believe that both management and investors benefit from referring to these key metrics as supplemental information in assessing our performance and when planning, forecasting, and analyzing future periods.
Financing activities provided $200.9 million of cash in 2020, which consisted primarily of $222.8 million in proceeds from the issuance of the 2025 Notes, net of issuance costs paid of $7.2 million, $7.8 million in proceeds from the exercise of stock options and $7.1 million in proceeds from the issuance of common stock purchased by employees under the ESPP, partially offset by $27.3 million for the purchase of 2025 Capped Calls, $8.9 million in withholding taxes paid for the net share settlement of equity awards, $0.4 million of payments of debt issuance costs and $0.2 million of deferred consideration payments.
Financing Activities Financing activities provided $79.6 million for the year ended December 31, 2023, which consisted primarily of $292.1 million in proceeds from the issuance of the 2029 Notes, net of issuance costs paid of $7.9 million, $17.5 million in proceeds from the 55 Ta ble of Contents settlement of the 2023 Capped Calls, $11.3 million in proceeds from the issuance of common stock purchased by employees under the Rapid7, Inc. 2015 Employee Stock Purchase Plan (“ESPP”) and $3.1 million in proceeds from the exercise of stock options, partially offset by $200.0 million for the repurchase and conversion of the 2025 Notes, $36.6 million for the purchase of the 2029 Capped Calls, $5.6 million in withholding taxes paid for the net share settlement of equity awards and $2.3 million in payments related to the acquisition of IntSights.
Investing activities used $325.4 million of cash in 2021, consisting of $358.4 million of cash paid for the acquisitions of IntSights, Alcide and Velocidex, net of cash acquired, $9.9 million for capitalization of internal-use software costs, $9.0 million in capital expenditures to purchase computer equipment, furniture and fixtures and leasehold improvements, $3.0 million for other investing activities, partially offset by $54.9 million of investment sales and maturities, net of purchases.
Investing Activities Investing activities used $178.8 million of cash for the year ended December 31, 2023, consisting of $126.4 million in purchases of investments, net of sales and maturities, $34.8 million of cash paid for the acquisition of Minerva, $15.9 million for capitalization of internal-use software costs, $4.4 million in capital expenditures to purchase computer equipment and leasehold improvements, partially offset by $2.7 million in proceeds from other investments.
There was no add-back of interest expense or additional dilutive shares related to the convertible senior notes where the effect was anti-dilutive. On an if-converted basis, for the year ended December 31, 2022, the 2027 convertible senior notes were dilutive and the 2025 convertible senior notes were anti-dilutive.
There was no add-back of interest expense or additional dilutive shares related to the Notes where the effect was anti-dilutive.
We do not adjust for ordinary course legal expenses, including those expenses resulting from maintaining and enforcing our intellectual property portfolio and license agreements. • Acquisition-related expenses. We exclude acquisition-related expenses that are unrelated to the current operations and neither are comparable to the prior period nor predictive of future results.
We do not adjust for ordinary course legal expenses, including legal costs and settlement fees resulting from maintaining and enforcing our intellectual property portfolio and license agreements. • Acquisition-related expenses.
The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and disclosures. We base our estimates and assumptions on historical experience and other factors that we believe to be reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis.
We base our estimates and assumptions on historical experience and other factors that we believe to be reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates.
The increase in total revenue in 2022 was comprised of $108.7 million generated from sales in North America and $41.0 million generated from sales from the rest of the world. 50 Table of Contents Cost of Revenue Year Ended December 31, Change 2022 2021 $ % (dollars in thousands) Products $ 182,212 $ 140,773 $ 41,439 29.4 % Professional services 32,137 28,175 3,962 14.1 Total cost of revenue $ 214,349 $ 168,948 $ 45,401 26.9 % Gross margin %: Products 71.9 % 71.9 % Professional services 14.4 18.5 Total gross margin % 68.7 % 68.4 % Total cost of revenue increased by $45.4 million in 2022 compared to 2021, primarily due to a $18.2 million increase in personnel costs, inclusive of a $3.9 million increase in stock-based compensation expense, resulting from an increase in headcount to support our growing customer base, as well as $1.5 million of additional costs attributable to the employees acquired in the IntSights acquisition in July 2021.
The increase in total revenue in 2023 compared to 2022 was comprised of $65.6 million generated from sales in North America and $27.0 million generated from sales from the rest of the world. 51 Ta ble of Contents Cost of Revenue Year Ended December 31, Change 2023 2022 $ % (dollars in thousands) Cost of revenue: Products $ 202,904 $ 182,212 $ 20,692 11.4 % Professional services 28,837 32,137 (3,300) (10.3) % Total cost of revenue $ 231,741 $ 214,349 $ 17,392 8.1 % Gross margin %: Products 72.6 % 71.9 % Professional services 23.2 % 14.4 % Total gross margin % 70.2 % 68.7 % Total cost of revenue increased by $17.4 million in 2023 compared to 2022, primarily due to a $10.0 million increase in cloud computing costs related to growing cloud-based subscription and managed services revenue, a $4.9 million increase in amortization expense for capitalized internally-developed software, a $2.3 million increase in personnel costs, inclusive of a $0.3 million increase in stock-based compensation expense, and a $0.1 million increase in other expenses.
General and Administrative Expense General and administrative expense consists of personnel costs for our executive, legal, human resources, and finance and accounting departments, including salaries and other payroll related costs, bonuses and stock-based compensation. Additional expenses include travel and entertainment, professional fees, litigation-related expenses, insurance, acquisition-related expenses, amortization of certain intangible assets and allocated overhead costs.
Additional expenses include travel and entertainment, professional fees, litigation-related expenses, insurance, acquisition-related expenses, amortization of certain intangible assets and allocated overhead costs.
Since our inception, we have generated significant losses and expect to continue to generate losses for the foreseeable future and as of December 31, 2022 have an accumulated deficit of $860.7 million. Our principal sources of liquidity are cash and cash equivalents, investments and our Credit and Security Agreement (“Credit Agreement”).
Liquidity and Capital Resources As of December 31, 2023, we had $213.6 million in cash and cash equivalents, $225.7 million in investments that have maturities ranging from one to thirteen months and an accumulated deficit of $1.0 billion. Since our inception, we have generated significant losses and we may generate losses for the foreseeable future.
By continuously improving our technology, stemming the creation of risk in the community, and making security more usable and accessible, Rapid7 aims to close the security achievement gap. We market and sell our products and professional services to organizations of all sizes globally, including mid-market businesses, enterprises, non-profits, educational institutions and government agencies.
Our focus is to be the leading provider of integrated security solutions for the extended SOC by providing risk and threat management within the context of overall security. We market and sell our products and professional services to organizations of all sizes globally, including mid-market businesses, enterprises, non-profits, educational institutions and government agencies.
Operating Expenses Research and Development Expense Year Ended December 31, Change 2022 2021 $ % (dollars in thousands) Research and development $ 189,970 $ 160,779 $ 29,191 18.2 % % of revenue 27.7 % 30.0 % Research and development expense increased by $29.2 million in 2022 compared to 2021, primarily due to a $18.5 million increase in personnel costs, a $8.1 million increase in allocated overhead driven largely by an increase in IT and facilities costs and a $2.6 million increase in other expenses.
Operating Expenses Research and Development Expense Year Ended December 31, Change 2023 2022 $ % (dollars in thousands) Research and development $ 176,776 $ 189,970 $ (13,194) (6.9) % % of revenue 22.7 % 27.7 % Research and development expense decreased by $13.2 million in 2023 compared to 2022, primarily due to a $14.2 million decrease in personnel costs, inclusive of a $11.9 million decrease in stock-based compensation expense, resulting from a decrease in headcount primarily due to the Restructuring Plan, and a $2.5 million decrease in other expenses.
Total gross margin percentage increased slightly in 2022 compared to 2021 due to a higher mix of products revenue as compared to professional services revenue. The gross margin for products remained consistent. The decrease in professional services gross margin was due to an increase in personnel cost inclusive of stock-based compensation expense.
Total gross margin percentage increased in 2023 compared to 2022. The increase in products gross margin was driven by our ability to scale as our revenue continues to grow. The increase in professional services gross margin in 2023 compared to 2022 was primarily due to a decrease in personnel costs.
In 2022, 2021 and 2020 recurring revenue, defined as revenue from term software licenses, content subscriptions, managed services, cloud-based subscriptions and maintenance and support, was 94%, 92% and 90%, respectively, of total revenue. Key Metrics We monitor the following key metrics to help us measure and evaluate the effectiveness of our operations and as a means to evaluate period-to-period comparisons.
Our Managed Threat Complete Offering is offered on a managed service basis, generally pursuant to one or multi-year agreements. In the years ended December 31, 2023, 2022 and 2021, recurring revenue, defined as revenue from term software licenses, content subscriptions, managed services, cloud-based subscriptions and maintenance and support, was 95%, 94% and 92%, respectively, of total revenue.
We therefore believe that we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships. 57 Table of Contents Critical Accounting Estimates Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States (“GAAP”).
In addition, we do not engage in trading activities involving non-exchange traded contracts. We therefore believe that we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships.
Interest Expense Year Ended December 31, Change 2022 2021 $ % (dollars in thousands) Interest expense $ (10,982) $ (14,292) $ 3,310 (23.2) % % of revenue (1.6) % (2.7) % Interest expense decreased by $3.3 million in 2022 compared to 2021 primarily due to a $2.7 million decrease of induced conversion expense incurred in conjunction with the partial repurchase of the 2023 Notes in March 2021 and a decrease in contractual interest expense related to the 2023 Notes which were partially repurchased in the first quarter of 2021, with the remaining amount repurchased in the fourth quarter of 2021.
Interest Expense Year Ended December 31, Change 2023 2022 $ % (dollars in thousands) Interest expense $ (64,700) $ (10,982) $ (53,718) 489.1 % % of revenue (8.3) % (1.6) % Interest expense increased by $53.7 million in 2023 compared to 2022, primarily due to $53.9 million of induced conversion expense incurred in conjunction with the partial repurchase of the 2025 Notes. 53 Ta ble of Contents Other Income (Expense), Net Year Ended December 31, Change 2023 2022 $ % (dollars in thousands) Other income (expense), net $ (14,522) $ (1,522) $ (13,000) 854.1 % % of revenue (1.9) % (0.2) % Other income (expense), net increased by $13.0 million in 2023 compared to 2022, due to a $15.5 million expense for the change in fair value of derivative assets related to our 2023 Capped Calls settlement and a decrease in realized and unrealized foreign currency gains, primarily related to the euro and British pound sterling.
These increases were partially offset by a $2.8 million decrease in bad debt expense. 54 Table of Contents Interest Income Year Ended December 31, Change 2021 2020 $ % (dollars in thousands) Interest income $ 365 $ 1,454 $ (1,089) (74.9) % % of revenue 0.1 % 0.4 % Interest income decreased by $1.1 million in 2021 compared to 2020 primarily due to a decrease in interest rates.
This increase was partially offset by a decrease of $1.7 million in marketing and advertising expenses and a $0.7 million decrease in other expenses. 52 Ta ble of Contents General and Administrative Expense Year Ended December 31, Change 2023 2022 $ % (dollars in thousands) General and administrative $ 84,276 $ 84,969 $ (693) (0.8) % % of revenue 10.8 % 12.4 % General and administrative expense decreased by $0.7 million in 2023 compared to 2022, primarily due to a $2.8 million increase in professional fees, partially offset by a $1.9 million decrease in other expenses.
Sales and Marketing Expense Year Ended December 31, Change 2022 2021 $ % (dollars in thousands) Sales and marketing $ 307,409 $ 247,453 $ 59,956 24.2 % % of revenue 44.9 % 46.2 % Sales and marketing expense increased by $60.0 million in 2022 compared to 2021, primarily due to a $30.4 million increase in personnel costs, a $10.6 million increase in commission expense, a $10.0 million increase in allocated overhead driven largely by an increase in IT and facilities costs, a $3.2 million increase in marketing and advertising costs, a $1.2 million increase in amortization of acquired intangible assets, a $2.5 million increase in travel and entertainment expense and a $2.1 million increase in other expenses.
Sales and Marketing Expense Year Ended December 31, Change 2023 2022 $ % (dollars in thousands) Sales and marketing $ 312,636 $ 307,409 $ 5,227 1.7 % % of revenue 40.2 % 44.9 % Sales and marketing expense increased by $5.2 million in 2023 compared to 2022, primarily due to a $7.6 million increase in personnel costs, net of a $1.7 million decrease in stock-based compensation expense, resulting from a decrease in headcount primarily due to the Restructuring Plan.
Our acquisition-related expenses for the year ended December 31, 2021 include $9.0 million of tax expense related to the sale of acquired intellectual property through an intercompany transaction related to the Alcide acquisition. • Anti-dilutive impact of capped call transaction. Our capped calls transactions are intended to offset potential dilution from the conversion features in our convertible senior notes.
Our capped calls transactions are intended to offset potential dilution from the conversion features in our convertible senior notes.
Provision for Income Taxes Year Ended December 31, Change 2021 2020 $ % (dollars in thousands) Provision for income taxes $ 10,421 $ 1,986 $ 8,435 NM % of revenue 1.9 % 0.5 % Provision for income taxes increased by $8.4 million in 2021 compared to 2020 primarily due to $9.0 million of tax expense recorded for an intercompany sale of intellectual property as part of post-acquisition tax planning related to the Alcide acquisition.
(Benefit From) Provision for Income Taxes Year Ended December 31, Change 2023 2022 $ % (dollars in thousands) (Benefit from) provision for income taxes $ (518) $ 2,412 $ (2,930) (121.5) % % of revenue (0.1) % 0.4 % In 2023, the benefit from income taxes was $0.5 million, primarily due to changes in valuation allowance related to foreign entity deferred tax assets, compared to a provision for income taxes of $2.4 million in 2022.
We expect sales and marketing expense to increase on an absolute dollar basis in the near term as we continue to increase investments to drive our revenue growth, but to decrease as a percentage of total revenue.
We expect sales and marketing expense to decrease as a percentage of total revenue in the near term. General and Administrative Expense General and administrative expense consists of personnel costs for our executive, legal, human resources, and finance and accounting departments, including salaries and other payroll related costs, bonuses and stock-based compensation.
Our revenue was not concentrated with any individual customer and no customer represented more than 1% of our revenue in 2022, 2021 or 2020. Our Business Model We have offerings in six key areas: (1) Incident Detection and Response, (2) Cloud Security, (3) Vulnerability Risk Management, (4) Application Security, (5) Threat Intelligence and (6) Security Orchestration and Automation Response.
Our revenue was not concentrated with any individual customer and no customer represented more than 1% of our revenue for the years ended December 31, 2023, 2022 or 2021.
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We empower security professionals to manage a modern attack surface through our best-in-class technology, leading-edge research, and broad, strategic expertise. Our comprehensive security solutions help our customers unite cloud risk management and threat detection to reduce attack surfaces and eliminate threats with speed and precision.
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Overview Rapid7 is a global cybersecurity software and services provider on a mission to offer customers greater clarity and control of their attack surface through our comprehensive and consolidated security offerings.
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In the over 20 years that Rapid7 has been in business, security companies and trends have come and gone, while broader technology innovation continues to advance rapidly. Every company is now a technology company, and rampant innovation inevitably creates security risk.
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For more than twenty years, Rapid7 has partnered with customers across the globe representing a diverse range of industries and sizes to improve the efficacy and productivity of their security operations (“SecOps”).
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The migration of businesses to the cloud, more distributed workforces, and ubiquitous connected devices present security teams with an increasingly complex, ever-changing, and unpredictable attack surface. We believe as cybersecurity challenges continue to rise exponentially; two key factors can prevent organizations from effectively managing their growing security exposure.
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In today's rapidly evolving IT environment, customers are encountering escalating challenges due to the proliferation of cyberattacks leveraging artificial intelligence (“AI”), targeted automation, and a widening spectrum of attackers and techniques. To fortify their security posture, organizations will require greater visibility, advanced capabilities leveraging increased expertise, and integrated data to effectively anticipate, identify, and respond to exposure-led threats.
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First, the tools to manage complex security problems are often equally complicated to use. Second, there is a scarcity of cybersecurity professionals who are qualified to successfully manage these sophisticated tools. These two factors compound the difficulties that resource-constrained organizations face when attempting to minimize their security exposure, meet security compliance regulations and provide visibility to their leadership.
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Through our security operations platform, anchored on our cloud security, security information and event management (“SIEM”), advanced detection and response, and vulnerability management offerings, we believe that Rapid7 is poised to expand the capabilities of today's SecOps teams.
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We call the expanding divide between risk created through innovation and risk effectively managed by security teams the security achievement gap. We believe Rapid7 is uniquely positioned to improve how customer security challenges are addressed.
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Rapid7 extends and expands the expertise of the Security Operations Center (“SOC") across information security, cloud operations, development, and IT teams, enabling them to better understand the attacker and leverage that information to take control of their fragmented attack surface.
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All of our solutions and services are built with and supported by the expertise of our dedicated team of security researchers, expert SOC analysts and consultants, who bring knowledge of attacker behavior and emerging vulnerabilities directly to customers.
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Enriched by years of managed services expertise, our integrated security operations platform enables SecOps teams to move away from a reactive approach, reduce their attack surface, and enhance response efficiency with a deep contextual understanding of their environment. In the past few years, we have observed the industry undergoing a customer-driven shift to consolidated security platforms.
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We also continue to invest in further simplifying our technology to improve usability, lowering the barrier for teams and organizations who lack resources to manage their security posture. While our security technology is the foundation of our mission to make successful security accessible to all, technology alone will not solve today’s cybersecurity challenges.
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As part of this transition, customers are moving away from cloud security as a specialized function towards cloud security as an integrated capability for SecOps teams.
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Our ongoing commitment to researching and partnering with the technology community helps to curb new security risks born through innovation. We are also investing in under-served, at risk communities, like non-profits and hospitals, to better understand their needs and make security technology and services accessible.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

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Biggest changeBased upon the quoted market prices as of December 31, 2022, the fair values of our 2025 Notes and 2027 Notes were $220.3 million and $468.6 million, respectively. As of December 31, 2022, the effect of a hypothetical 10% increase or decrease in interest rates would not have had a material impact on our financial statements.
Biggest changeAs of December 31, 2023, the effect of a hypothetical 10% increase or decrease in interest rates would not have had a material impact on our financial statements. Inflation Risk We do not believe that inflation had a material effect on our business, financial condition or results of operations.
The interest and market value changes affect the fair values of the convertible senior notes but does not impact our financial position, cash flows or results of operations due to the fixed nature of the debt obligation.
The interest and market value changes affect the fair values of the convertible senior notes but do not impact our financial position, cash flows or results of operations due to the fixed nature of the debt obligation.
We enter into forward contracts designated as cash flow hedges to manage the foreign currency exchange rate risk associated with our foreign currency denominated expenditures.
We enter into forward contracts designated as cash flow hedges to manage the foreign currency exchange rate risk associated with certain of our foreign currency denominated expenditures.
The fair values of our convertible senior notes are subject to interest rate risk, market risk and other factors due to the conversion feature of the notes.
The fair values of our convertible senior notes are subject to interest rate risk, market risk and other factors due to the conversion features of the notes.
During the years ended December 31, 2022 and 2021, the effect of a hypothetical 10% adverse change in foreign currency exchange rates on monetary assets and liabilities would not have been material to our financial condition or results of operations.
The effect of a hypothetical 10% adverse change in foreign currency exchange rates on monetary assets and liabilities as of December 31, 2023 would not have been material to our financial condition or results of operations.
For further information, see Note 2, Summary of Significant Accounting Policies, in the Notes to our Consolidated Financial Statements included in this Annual Report on Form 10-K. As our international operations grow, we will continue to reassess our approach to manage our risk relating to fluctuations in foreign currency rates.
For further information, see Note 9, Derivatives and Hedging Activities , in the Notes to our Consolidated Financial Statements included in this Quarterly Report on Form 10-Q. As our international operations grow, we will continue to reassess our approach to manage our risk relating to fluctuations in foreign currency rates.
We do not enter into investments for trading or speculative purposes. Our cash and cash equivalents and investments are subject to market risk due to changes in interest rates, which may affect our interest income and the fair value of our investments.
Our cash and cash equivalents and investments are subject to market risk due to changes in interest rates, which may affect our interest income and the fair value of our investments.
Interest Rate Risk As of December 31, 2022, we had cash and cash equivalents of $207.3 million consisting of bank deposits and money market funds and investments of $93.9 million consisting of U.S. Government agencies, corporate bonds, commercial paper and agency bonds. Our investments are made for capital preservation purposes.
Interest Rate Risk As of December 31, 2023, we had cash and cash equivalents of $213.6 million consisting of bank deposits and money market funds and investments of $225.7 million consisting of U.S. government agencies and agency bonds. Our investments are made for capital preservation purposes. We do not enter into investments for trading or speculative purposes.
Inflation Risk We do not believe that inflation had a material effect on our business, financial condition or results of operations in the last three years. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases.
If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition and results of operations. 57 Ta ble of Contents
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Our inability or failure to do so could harm our business, financial condition and results of operations. 59 Table of Contents
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Based upon the quoted market price as of December 31, 2023, the fair values of our 2025 Notes, 2027 Notes and 2029 Notes were $50.5 million, $538.9 million and $333.4 million , respectively.

Other RPD 10-K year-over-year comparisons