10-Q 1 rp-20240331.htm 10-Q rp-20240331
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2024
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number: 001-37496
 
RAPID7, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 35-2423994
(State or other jurisdiction of
incorporation or organization)
 (I.R.S. Employer
Identification No.)
120 Causeway Street 
Boston,MA02114
(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (617247-1717
Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
Title of each classTrading symbol(s)Name of each exchange on which registered
Common Stock, $0.01 par value per shareRPDThe Nasdaq Global Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.


Large Accelerated Filer
Accelerated Filer
Non-accelerated Filer
Small Reporting Company
Emerging Growth Company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes     No  
As of April 30, 2024, there were 62,324,547 shares of the registrant’s common stock, $0.01 par value per share, outstanding.

































Table of Contents
 
  Page
PART I.
Item 1.
Item 2.
   18
Item 3.
Item 4.
PART II.
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.































PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
RAPID7, INC.
Condensed Consolidated Balance Sheets (Unaudited)
(in thousands, except share and per share data) 
March 31, 2024December 31, 2023
Assets
Current assets:
Cash and cash equivalents$198,716 $213,629 
Short-term investments213,001 169,544 
Accounts receivable, net of allowance for credit losses of $970 and $951 at March 31, 2024 and December 31, 2023, respectively
124,595 164,862 
Deferred contract acquisition and fulfillment costs, current portion47,003 45,008 
Prepaid expenses and other current assets42,552 41,407 
Total current assets625,867 634,450 
Long-term investments52,454 56,171 
Property and equipment, net37,266 39,642 
Operating lease right-of-use assets53,036 54,693 
Deferred contract acquisition and fulfillment costs, non-current portion75,287 76,601 
Goodwill536,351 536,351 
Intangible assets, net88,844 94,546 
Other assets19,368 12,894 
Total assets$1,488,473 $1,505,348 
Liabilities and Stockholders’ Deficit
Current liabilities:
Accounts payable$11,516 $15,812 
Accrued expenses and other current liabilities60,605 85,025 
Operating lease liabilities, current portion14,257 13,452 
Deferred revenue, current portion437,687 455,503 
Total current liabilities524,065 569,792 
Convertible senior notes, net931,001 929,996 
Operating lease liabilities, non-current portion77,069 81,130 
Deferred revenue, non-current portion29,207 32,577 
Other long-term liabilities13,580 10,032 
Total liabilities$1,574,922 $1,623,527 
Stockholders’ deficit:
Preferred stock, $0.01 par value per share; 100,000,000 shares authorized at March 31, 2024 and December 31, 2023; 0 shares issued and outstanding at March 31, 2024 and December 31, 2023
$ $ 
Common stock, $0.01 par value per share; 100,000,000 shares authorized at March 31, 2024 and December 31, 2023; 62,838,127 and 62,283,630 shares issued at March 31, 2024 and December 31, 2023, respectively; 62,268,548 and 61,714,051 shares outstanding at March 31, 2024 and December 31, 2023, respectively
623 617 
Treasury stock, at cost, 569,579 shares at March 31, 2024 and December 31, 2023
(4,765)(4,765)
Additional paid-in-capital925,661 894,630 
Accumulated other comprehensive (loss) income(221)1,344 
Accumulated deficit(1,007,747)(1,010,005)
Total stockholders’ deficit(86,449)(118,179)
Total liabilities and stockholders’ deficit$1,488,473 $1,505,348 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
1

RAPID7, INC.
Condensed Consolidated Statements of Operations (Unaudited)
(in thousands, except share and per share data)

 Three Months Ended March 31,
 20242023
Revenue:
Product subscriptions$196,918 $173,772 
Professional services8,183 9,402 
Total revenue205,101 183,174 
Cost of revenue:
Product subscriptions54,655 48,188 
Professional services6,248 7,811 
Total cost of revenue60,903 55,999 
Total gross profit144,198 127,175 
Operating expenses:
Research and development40,990 46,346 
Sales and marketing72,805 80,587 
General and administrative19,835 24,207 
Total operating expenses133,630 151,140 
Income (loss) from operations10,568 (23,965)
Other income (expense), net:
Interest income4,720 1,668 
Interest expense(2,670)(2,717)
Other income (expense), net(1,435)(307)
Income (loss) before income taxes11,183 (25,321)
Provision for income taxes8,925 594 
Net income (loss)$2,258 $(25,915)
Net income (loss) per share, basic$0.04 $(0.43)
Net income (loss) per share, diluted$0.03 $(0.43)
Weighted-average common shares outstanding, basic61,907,808 59,888,119 
Weighted-average common shares outstanding, diluted74,021,704 59,888,119 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2

RAPID7, INC.
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
(in thousands)
 Three Months Ended March 31,
 20242023
Net income (loss)$2,258 $(25,915)
Other comprehensive income (loss):
Change in fair value of cash flow hedges(629)192 
Adjustment for net losses realized on cash flow hedges and included in net income (loss), net of taxes(381)641 
Total change in unrealized (losses) gains on cash flow hedges(1,010)833 
Change unrealized (losses) gains on investments(555)378 
Total other comprehensive (loss) income(1,565)1,211 
Comprehensive income (loss)$693 $(24,704)
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.




















3


RAPID7, INC.
Condensed Consolidated Statements of Changes in Stockholders' Deficit (Unaudited)
Three Months Ended March 31, 2024 and 2023
(in thousands)
 Common stockTreasury stockAdditional
paid-in-capital
Accumulated
other
comprehensive
loss
Accumulated
deficit
Total
stockholders’
deficit
 SharesAmountSharesAmount
Balance, December 31, 202361,714 $617 570 $(4,765)$894,630 $1,344 $(1,010,005)$(118,179)
Stock-based compensation expense— — — — 26,487 — — 26,487 
Issuance of common stock under employee stock purchase plan148 2 — — 5,044 — — 5,046 
Vesting of restricted stock units325 3 — — (3)— —  
Shares withheld for employee taxes(29)— — — (1,764)— — (1,764)
Issuance of common stock upon exercise of stock options111 1 — — 1,267 — — 1,268 
Other comprehensive loss— — — — — (1,565)— (1,565)
Net income— — — — — — 2,258 2,258 
Balance, March 31, 202462,269 $623 570 $(4,765)$925,661 $(221)$(1,007,747)$(86,449)

 Common stockTreasury stockAdditional
paid-in-capital
Accumulated
other
comprehensive
loss
Accumulated
deficit
Total
stockholders’
deficit
 SharesAmountSharesAmount
Balance, December 31, 202259,720 $597 487 $(4,764)$746,249 $(1,411)$(860,745)$(120,074)
Stock-based compensation expense— — — — 29,518 — — 29,518 
Issuance of common stock under employee stock purchase plan178 2 — — 6,172 — — 6,174 
Vesting of restricted stock units359 3 — — (3)— —  
Shares withheld for employee taxes(25)— — — (1,267)— — (1,267)
Issuance of common stock upon exercise of stock options16 — — — 181 — — 181 
Issuance of common stock in relation to an acquisition74 1 — — (1)— —  
Repurchase of common stock issued in relation to acquisition— — 83 (1)1 — —  
Other comprehensive gain— — — — — 1,211 — 1,211 
Net loss— — — — — — (25,915)(25,915)
Balance, March 31, 202360,322 $603 570 $(4,765)$780,850 $(200)$(886,660)$(110,172)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.





















4

RAPID7, INC.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
 Three Months Ended March 31,
 20242023
Cash flows from operating activities:
Net income (loss)$2,258 $(25,915)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization11,348 11,050 
Amortization of debt issuance costs1,053 994 
Stock-based compensation expense24,893 29,373 
Deferred income taxes1,840  
Other(203)995 
Changes in assets and liabilities:
Accounts receivable39,529 35,805 
Deferred contract acquisition and fulfillment costs(679)(2,240)
Prepaid expenses and other assets(1,223)(5,567)
Accounts payable(4,190)(2,744)
Accrued expenses(24,890)(23,951)
Deferred revenue(21,186)(12,062)
Other liabilities2,520 104 
Net cash provided by operating activities31,070 5,842 
Cash flows from investing activities:
Business acquisitions, net of cash acquired (34,033)
Purchases of property and equipment(620)(2,285)
Capitalization of internal-use software(2,916)(4,776)
Purchases of investments(93,158)(4,883)
Sales and maturities of investments55,000 35,800 
Net cash used in investing activities(41,694)(10,177)
Cash flows from financing activities:
Payments related to business acquisitions (2,250)
Taxes paid related to net share settlement of equity awards(1,764)(1,267)
Proceeds from employee stock purchase plan5,046 6,174 
Proceeds from stock option exercises1,080 181 
Net cash provided by financing activities4,362 2,838 
Effect of exchange rate changes on cash ,cash equivalents and restricted cash(1,493)(33)
Net decrease in cash, cash equivalents and restricted cash(7,755)(1,530)
Cash, cash equivalents and restricted cash, beginning of period214,130 207,804 
Cash, cash equivalents and restricted cash, end of period$206,375 $206,274 
Supplemental cash flow information:
Cash paid for interest on convertible senior notes$2,698 $750 
Cash paid for income taxes, net of refunds$2,352 $166 
Reconciliation of cash, cash equivalents and restricted cash:
Cash and cash equivalents$198,716 $205,757 
Restricted cash included in other assets and prepaid expenses and other current assets7,659 517 
Total cash, cash equivalents and restricted cash$206,375 $206,274 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5

RAPID7, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)

Note 1. Description of Business, Basis of Presentation and Consolidation and Significant Accounting Policies
Description of Business
Rapid7, Inc. and subsidiaries (“we,” “us” or “our”) are advancing security with visibility, analytics, and automation delivered through our platform solutions. Our solutions simplify the complex, allowing security teams to work more effectively with IT and development to reduce vulnerabilities, monitor for malicious behavior, investigate and shut down attacks, and automate routine tasks.
Basis of Presentation and Consolidation
The accompanying unaudited condensed consolidated financial statements have been prepared by us in accordance with accounting principles generally accepted in the United States of America (“GAAP”), as well as pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), regarding interim financial reporting. Accordingly, certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2023 filed with the SEC on February 26, 2024.
The consolidated financial statements include our results of operations and those of our wholly-owned subsidiaries and reflect all adjustments (consisting solely of normal, recurring adjustments) which are, in the opinion of management, necessary for a fair statement of results for the interim periods presented. All intercompany transactions and balances have been eliminated in consolidation. The results of operations for the three months ended March 31, 2024 are not necessarily indicative of the results to be expected for any future period or the entire fiscal year.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates, judgments and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The management estimates include, but are not limited to the determination of standalone selling prices in revenue transactions with multiple performance obligations, the estimated period of benefit for deferred contract acquisition costs, the useful lives and recoverability of long-lived assets, the valuation for credit losses, the valuation of stock-based compensation, the fair value of assets acquired and liabilities assumed in business combinations, the incremental borrowing rate for operating leases and the valuation for deferred tax assets. We base our estimates on historical experience and on various other assumptions that we believe are reasonable. Actual results could differ from those estimates.
Significant Accounting Policies
Our significant accounting policies are described in Note 2, Summary of Significant Accounting Policies, to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2023.
Restricted Cash
As of March 31, 2024, we had $7.7 million of restricted cash recorded on our condensed consolidated balance sheet in prepaid expenses and other current assets and other assets in letters of credit outstanding as collateral for certain office space leases.
Recent Accounting Pronouncements
We have not identified any recently issued accounting pronouncements that would have a material impact to our consolidated financial statements.
Note 2. Revenue from Contracts with Customers
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.

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Product Subscriptions
Product subscriptions consists primarily of revenue from our cloud-based subscription, managed services offerings, term software licenses, content subscriptions and maintenance and support associated with our software licenses.
We generate cloud-based subscription revenue primarily from sales of subscriptions to access our cloud platform, together with related support services to our customers. These arrangements do not provide the customer with the right to take possession of our software operating on our cloud platform at any time. Instead, customers are granted continuous access to our cloud platform over the contractual period. Revenue is recognized over time on a ratable basis over the contract term beginning on the date that our service is made available to the customer. Our cloud-based subscription contracts generally have annual or multi-year contractual terms which are billed in advance of the annual subscription period and are non-cancellable.
Managed services offerings consist of fees generated when we operate our software and provide our capabilities on behalf of our customers. Revenue is recognized on a ratable basis over the contract term beginning on the date that our service is made available to the customer. Our managed services offerings generally have annual or multi-year contractual terms which are billed in advance of the annual subscription period and are non-cancellable.
For our term software licenses where the utility to the customer is dependent on the continued delivery of content subscriptions, we recognize the license revenue over the contractual term of the content subscription.
Content subscriptions and our maintenance and support services are sold with our term software licenses. Revenue related to our content subscriptions associated with our software licenses is recognized ratably over the contractual period.
Professional Services
All of our professional services are considered distinct performance obligations when sold stand alone or with other products. The majority of our professional services contracts have terms of one year or less. For the majority of these contracts, revenue is recognized over time based upon the proportion of work performed to date.
Contract Balances
Contract liabilities consist of deferred revenue and include payments received in advance of performance under the contract. Such amounts are recognized as revenue over the contractual period consistent with the above methodology. For the three months ended March 31, 2024 and 2023, we recognized revenue of $179.3 million and $163.4 million, respectively, that was included in the corresponding contract liability balance at the beginning of the periods presented. Deferred revenue that will be realized during the succeeding 12-month period is recorded as current, and the remaining deferred revenue is recorded as non-current.
We receive payments from customers based upon contractual billing schedules. Accounts receivable are recorded when the right to consideration becomes unconditional. Unbilled receivables include amounts related to our contractual right to consideration for both completed and partially completed performance obligations that have not been invoiced. If the right to consideration is based on satisfaction of another performance obligation in the contract other than the passage of time, we record a contract asset. As of March 31, 2024 and December 31, 2023, unbilled receivables of $2.5 million and $1.1 million, respectively, are included in prepaid expenses and other current assets in our consolidated balance sheet. As of March 31, 2024 and December 31, 2023, we had no contract assets recorded on our condensed consolidated balance sheet.
Transaction Price Allocated to the Remaining Performance Obligations
The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied or partially unsatisfied as of March 31, 2024. The estimated revenues do not include unexercised contract renewals.
Next Twelve MonthsThereafter
 (in thousands)
Product subscriptions$554,573 $271,822 
Professional services16,414 8,302 
Total$570,987 $280,124 

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Note 3. Business Combinations
Minerva Labs Ltd.
On March 14, 2023, we acquired Minerva Labs Ltd. (“Minerva”), a leading provider of anti-evasion and ransomware prevention technology, for a purchase price with an aggregate fair value of $34.6 million. The purchase consideration consisted of $35.0 million paid in cash at closing and a $0.4 million receivable for purchase price adjustments.
The assets acquired and liabilities assumed were recorded at their estimated fair values as of the acquisition date. The excess of the purchase price over the assets acquired and liabilities assumed was recorded as goodwill. The fair value of net assets acquired, goodwill and intangible assets were $13.9 million, $20.7 million and $12.8 million, respectively. The goodwill was allocated to our one reporting unit. The acquired goodwill and intangible assets were not deductible for tax purposes.
In the first quarter of 2024, we sold acquired intellectual property through a non-cash intercompany transaction, which resulted in $4.6 million of current tax expense and $1.8 million of deferred tax expense in Israel.
Note 4. Investments
Our investments, which are all classified as available-for-sale, consisted of the following:
 As of March 31, 2024
 Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
 (in thousands)
Description:
U.S government agencies$265,617 $60 $(222)$265,455 
Total$265,617 $60 $(222)$265,455 
 As of December 31, 2023
 Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
 (in thousands)
Description:
U.S government agencies$222,820 $467 $(65)$223,222 
Agency bonds2,500  (7)2,493 
Total$225,320 $467 $(72)$225,715 
As of March 31, 2024, our available-for-sale investments had maturities ranging from 1 to 16 months. As of December 31, 2023, our available-for-sale investments had maturities ranging from 1 to 18 months.
For all of our investments for which the amortized cost basis was greater than the fair value at March 31, 2024 and December 31, 2023, we have concluded that there is no plan to sell the security nor is it more likely than not that we would be required to sell the security before its anticipated maturity. In making the determination as to whether the unrealized loss is other-than-temporary, we considered the length of time and extent the investment has been in an unrealized loss position, the financial condition and near-term prospects of the issuers, the issuers’ credit rating and the time to maturity.
Note 5. Fair Value Measurements
We measure certain financial assets and liabilities at fair value. Fair value is determined based upon the exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants, as determined by either the principal market or the most advantageous market. Inputs used in the valuation techniques to derive fair values are classified based on a three-level hierarchy, as follows:
Level 1: Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2: Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.
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Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the asset or liability.
We consider an active market to be one in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis, and consider an inactive market to be one in which there are infrequent or few transactions for the asset or liability, the prices are not current, or price quotations vary substantially either over time or among market makers.
The following table presents our financial assets and liabilities measured and recorded at fair value on a recurring basis using the above input categories:
 As of March 31, 2024
 Level 1Level 2Level 3Total
 (in thousands)
Description:
Assets:
Money market funds$116,710 $ $ $116,710 
U.S. government agencies265,455   265,455 
Foreign currency forward contracts designated as cash flow hedges (prepaid expenses and other current assets and other assets) 499  499 
Total assets$382,165 $499 $ $382,664 
Liabilities:
Foreign currency forward contracts designated as cash flow hedges (other current liabilities) 242  242 
Total liabilities$ $242 $ $242 
 As of December 31, 2023
 Level 1Level 2Level 3Total
 (in thousands)
Description:
Assets:
Money market funds$124,506 $ $ $124,506 
U.S. government agencies223,222   223,222 
Agency bonds 2,493  2,493 
Foreign currency forward contracts designated as cash flow hedges (prepaid expenses and other current assets and other assets) 1,322  1,322 
Total assets$347,728 $3,815 $ $351,543 
Liabilities:
Foreign currency forward contracts designated as cash flow hedges (other current liabilities) 55  55 
Total liabilities$ $55 $ $55 
As of March 31, 2024, the fair value of our 2.25%, 0.25% and 1.25% convertible senior notes due 2025, 2027 and 2029, as further described in Note 10, Debt, was $47.1 million, $525.3 million and $304.2 million, respectively, based upon quoted market prices. We consider the fair value of the Notes (as defined in Note 10, Debt) to be a Level 2 measurement due to limited trading activity of the Notes.
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Note 6. Property and Equipment
Property and equipment are recorded at cost and consist of the following:
 March 31,December 31,
 20242023
 (in thousands)
Computer equipment and software$26,955 $26,442 
Furniture and fixtures 10,852 10,850 
Leasehold improvements56,158 56,151 
Total93,965 93,443 
Less accumulated depreciation(56,699)(53,801)
Property and equipment, net$37,266 $39,642 
We recorded depreciation expense of $2.9 million and $3.8 million for the three months ended March 31, 2024 and 2023, respectively.
Note 7. Goodwill and Intangibles
Goodwill was $536.4 million as of March 31, 2024 and December 31, 2023.
The following table presents details of our intangible assets which include acquired identifiable intangible assets and capitalized internal-use software costs:
 Weighted-
Average Estimated Useful Life (years)
As of March 31, 2024As of December 31, 2023
 Gross Carrying
Amount
Accumulated
Amortization
Net Book ValueGross Carrying
Amount
Accumulated
Amortization
Net Book Value
  (in thousands)
Intangible assets subject to amortization:
Developed technology5.4$135,355 $(81,347)$54,008 $135,355 $(77,031)$58,324 
Customer relationships4.512,000 (8,407)3,593 12,000 (7,755)4,245 
Trade names3.12,619 (2,424)195 2,619 (2,379)240 
Total acquired intangible assets149,974 (92,178)57,796 149,974 (87,164)62,810 
Internal-use software3.058,109 (27,061)31,048 55,371 (23,635)31,736 
Total intangible assets$208,083 $(119,239)$88,844 $205,345 $(110,799)$94,546 
Amortization expense was $8.4 million and $7.2 million and for the three months ended March 31, 2024 and 2023, respectively.
Estimated future amortization expense of the acquired identifiable intangible assets and completed capitalized internal-use software costs as of March 31, 2024 was as follows (in thousands):
2024 (for the remaining nine months)$23,643 
202527,957 
202618,077 
20276,836 
20281,600 
2029 and thereafter3,531 
Total$81,644 
The table above excludes the impact of $7.0 million of capitalized internal-use software costs for projects that have not been completed as of March 31, 2024, and therefore, all the costs associated with these projects have not been incurred.
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Note 8. Deferred Contract Acquisitions and Fulfillment Costs
The following table summarizes the activity of the deferred contract acquisition and fulfillment costs for the three months ended March 31, 2024 and 2023:
Three Months Ended March 31,
20242023
(in thousands)
Beginning balance$121,609 $103,075 
Capitalization of contract acquisition and fulfillment costs12,967 11,666 
Amortization of deferred contract acquisition and fulfillment costs(12,287)(9,426)
Ending balance$122,289 $105,315 

Note 9. Derivative and Hedging Activities
To mitigate our exposure to foreign currency fluctuations resulting from certain expenses denominated in certain foreign currencies, we enter into forward contracts that are designated as cash flow hedging instruments. These forward contracts have contractual maturities of seventeen months or less, and as of March 31, 2024 and December 31, 2023, outstanding forward contracts had a total notional value of $46.8 million and $44.9 million, respectively. The notional value represents the gross amount of foreign currency that will be bought or sold upon maturity of the forward contract. During the three months ended March 31, 2024, all cash flow hedges were considered effective. Refer to Note 5, Fair Value Measurements, for the fair values of our outstanding derivative instruments.
Note 10. Debt
Convertible Senior Notes
In May 2020, we issued $230.0 million aggregate principal amount of convertible senior notes due May 1, 2025 (the “2025 Notes”) in March 2021, we issued $600.0 million aggregate principal amount of convertible senior notes due March 15, 2027 (the “2027 Notes”) and in September 2023, we issued $300.0 million aggregate principal amount of convertible senior notes due March 15, 2029 (the “2029 Notes”) (collectively, the “Notes”). In September 2023, we used $201.0 million of the proceeds from the issuance of the 2029 Notes to repurchase and retire $184.0 million aggregate principal amount of the 2025 Notes and paid accrued and unpaid interest thereon. Further details of the Notes are as follows:
IssuanceMaturity DateInterest RateFirst Interest Payment DateEffective Interest RateSemi-Annual Interest Payment DatesInitial Conversion Rate per $1,000 PrincipalInitial Conversion PriceNumber of Shares (in millions)
2025 NotesMay 1, 20252.25%November 1, 20202.88%May 1 and November 116.3875$61.02 0.8
2027 NotesMarch 15, 20270.25%September 15, 20210.67%March 15 and September 159.6734$103.38 5.8
2029 NotesMarch 15, 20291.25%March 15, 20241.69%March 15 and September 1515.4213$64.85 4.6
The 2025 Notes, the 2027 Notes and the 2029 Notes are senior unsecured obligations, do not contain any financial covenants and are governed by indentures between the Company, as issuer, and U.S. Trust Company, Bank National Association, as trustee (the “Indentures”). The total net proceeds from the 2025 Notes, the 2027 Notes and the 2029 Notes offerings, after deducting initial purchase discounts and debt issuance costs, were $222.8 million, $585.0 million and $292.0 million, respectively.
For additional details on the terms of our Notes, see Note 11, Debt, to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2023.
As of March 31, 2024, the 2025 Notes, the 2027 Notes and the 2029 Notes were not convertible at the option of the holders.
The holders may convert the 2025 Notes, the 2027 Notes and the 2029 Notes at any time on or after November 1, 2024, December 15, 2026 and December 15, 2028, respectively, until the close of business on the second scheduled trading day immediately preceding the maturity date, regardless of the circumstances set forth above. Upon conversion, we will pay or deliver, as the case may be, cash, shares of our common stock or a combination of cash and shares of our common stock, at our election, in the manner and subject to the terms and conditions provided in the Indentures.
If we undergo a fundamental change (as set forth in the Indentures) at any time prior to the maturity date, holders of the Notes will have the right, at their option, to require us to repurchase for cash all or any portion of their Notes at a repurchase price
11

equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. In addition, following certain corporate events that occur prior to the maturity date or following our issuance of a notice of redemption, in each case as described in the Indentures, we will increase the conversion rate for a holder of the Notes who elects to convert its Notes in connection with such a corporate event or during the related redemption period in certain circumstances.
Accounting for the Notes
In accounting for the issuance of the Notes, the principal less debt issuance costs are recorded as debt on our condensed consolidated balance sheet. The debt issuance costs are amortized to interest expense using the effective interest method over the contractual term of the Notes.
The net carrying amount of the Notes as of March 31, 2024 and December 31, 2023 was as follows (in thousands):
2025 Notes2027 Notes2029 Notes
PrincipalUnamortized debt issuance costsTotalPrincipalUnamortized debt issuance costsTotalPrincipalUnamortized debt issuance costsTotal
Balance at December 31, 2023$45,992 $(404)$45,588 $600,000 $(8,077)$591,923 $300,000 $(7,515)$292,485 
Amortization of debt issuance costs— 75 75 — 620 620 — 310 310 
Balance at March 31, 2024$45,992 $(329)$45,663 $600,000 $(7,457)$592,543 $300,000 $(7,205)$292,795 
Interest expense related to the Notes was as follows (in thousands):
Three Months Ended March 31,
20242023
2025 Notes2027 Notes2029 NotesTotal2025 Notes2027 NotesTotal
Contractual interest expense$259 $375 $937 $1,571 $1,294 $375 $1,669 
Amortization of debt issuance costs75 620 310 1,005 340 606 946 
Total interest expense$334 $995 $1,247 $2,576 $1,634 $981 $2,615 
Capped Calls
In connection with the offering of the 2025 Notes, the 2027 Notes and the 2029 Notes, we entered into privately negotiated capped call transactions with certain counterparties (the “2025 Capped Calls”, “2027 Capped Calls” and “2029 Capped Calls”) (collectively, the “Capped Calls”).
The Capped Calls are expected to reduce potential dilution to our common stock upon conversion of a given series of notes and/or offset any cash payments that we are required to make in excess of the principal amount of converted notes of such series, as the case may be, with such reduction and/or offset subject to a cap. The Capped Calls are subject to adjustment upon the occurrence of certain specified extraordinary events affecting us, including merger events, tender offers and announcement events. In addition, the Capped Calls are subject to certain specified additional disruption events that may give rise to a termination of the Capped Calls, including nationalization, insolvency or delisting, changes in law, failures to deliver, insolvency filings and hedging disruptions.
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The following table sets forth other key terms and premiums paid for the Capped Calls related to each series of Notes:
Capped Calls Entered into in Connection with the Issuance of the 2025 NotesCapped Calls Entered into in Connection with the Issuance of the 2027 NotesCapped Calls Entered into in Connection with the Issuance of the 2029 Notes
Initial strike price, subject to certain adjustments$61.02 $103.38 $64.85 
Cap price, subject to certain adjustments$93.88 $159.04 $97.88 
Total premium paid (in thousands)$27,255 $76,020 $36,570 
Expiration datesMarch 4, 2025 - April 29, 2025January 1, 2027 - March 11, 2027February 13, 2029 - March 13, 2029
For accounting purposes, the 2025 Capped Calls, the 2027 Capped Calls and the 2029 Capped Calls are separate transactions, and not part of the terms of the 2025 Notes, the 2027 Notes and the 2029 Notes. The 2025 Capped Calls, 2027 Capped Calls and 2029 Capped Calls are recorded in stockholders' equity and are not accounted for as derivatives.
Credit Agreement
In April 2020, we entered into a Credit and Security Agreement (the Credit Agreement), with KeyBank National Association (as amended, in December 2021) that provides for a $100.0 million revolving credit facility, with a letter of credit sublimit of $15.0 million and an accordion feature under which we can increase the credit facility to up to $150.0 million. We incurred fees of $0.4 million in connection with entering into the Credit Agreement. The fees are recorded in other current assets on the condensed consolidated balance sheet and are amortized on a straight-line basis over the contractual term of the arrangement. The commitment fee of 0.2% per annum on the unused portion of the credit facility is expensed as incurred and included within interest expense on the condensed consolidated statement of operations. The Credit Agreement contains certain financial covenants including a requirement that we maintain specified minimum recurring revenue and liquidity amounts.
The borrowings under the Credit Agreement bear interest, at our option, at a rate equal to either (i) term SOFR plus a credit spread adjustment of 0.10% per annum plus a margin of 2.50% per annum or (ii) the alternate base rate (subject to a floor), plus an applicable margin equal to 0% per annum.
As of March 31, 2024, we did not have any outstanding borrowings under the Credit Agreement.
As of March 31, 2024, we had a total of $7.4 million in letters of credit outstanding as collateral for certain office space leases which reduce the amount of borrowing available under our Credit Agreement.
Note 11. Stock-Based Compensation Expense
(a)    General
Stock-based compensation expense for restricted stock units (“RSUs”), performance-based restricted stock units (“PSUs”), stock options and purchase rights issued under our employee stock purchase plan was classified in the accompanying condensed consolidated statements of operations as follows:
 Three Months Ended March 31,
 20242023
 (in thousands)
Stock-based compensation expense:
Cost of revenue2,580 2,837 
Research and development7,566 10,505 
Sales and marketing6,847 7,843 
General and administrative7,900 8,188 
Total stock-based compensation expense$24,893 $29,373 
We recognize compensation cost of all awards on a straight-line basis over the applicable vesting period, which is generally three to four years.
Our Compensation Committee adopted and approved the performance goals, targets and payout formulas for our 2024 and 2023 bonus plans, including permitting our executive officers and certain other employees the opportunity to receive payment of their earned bonuses in the form of common stock (in lieu of cash). During the three months ended March 31, 2024 and 2023, we recognized stock-based compensation expense related to such bonuses in the amount of
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$0.1 million, and $0.7 million, based on the probable expected performance against the pre-established corporate financial objectives as of March 31, 2024 and 2023. For employees, including executive officers, who elect to receive their bonuses in the form of common stock (in lieu of cash), the payouts are expected to be made in the form of fully vested stock awards in the first quarter of the following year pursuant to our 2015 Equity Incentive Plan, as amended. The number of shares underlying such awards is determined by dividing the dollar value of the actual bonus award payment by the closing price per share of our common stock on the date of grant.
(b)Restricted Stock, Restricted Stock Units and Performance-Based Restricted Stock Units
RSUs and PSUs activity during the three months ended March 31, 2024 was as follows:
 Shares        Weighted-
Average Grant
Date Fair
Value
Unvested balance as of December 31, 20232,714,426 63.02 
Granted1,840,322 55.22 
Vested(325,113)61.01 
Forfeited(245,501)66.14 
Unvested balance as of March 31, 20243,984,134 $59.52 
As of March 31, 2024, the unrecognized compensation expense related to our unvested RSUs and PSUs was $214.7 million. This unrecognized compensation expense will be recognized over an estimated weighted-average amortization period of 2.3 years.
In January 2024, our Compensation Committee awarded 279,570 PSUs that required the achievement of net annualized recurring revenue (“Net ARR”) and Adjusted EBITDA targets for the 2024 full-year to earn any payout. Net ARR is defined as the change in the annual value of all recurring revenue related to contracts in place at year end. In addition, the portion of the PSUs that are earned would be capped at a maximum of 200% of the target level payout and if certain net ARR or Adjusted EBITDA goals were not met, no PSUs will be earned. The PSUs have a performance period of one year and the earned PSUs will vest in three equal installments following each of the first, second and third anniversary of the vesting commencement date, subject to the participant’s continuous service as of each such date. In the three months ended March 31, 2024, we recorded $0.9 million of stock-based compensation expense related to these PSUs based on estimated achievement of the performance criteria.
(c)Stock Options
The following tables summarizes information about stock option activity during the reporting periods:
Shares        Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual Life
(in years)
Aggregate
Intrinsic
Value
(in thousands)
Outstanding as of December 31, 2023716,270 12.26 1.97$32,115 
Granted  
Exercised(111,034)11.42 $4,450 
Forfeited/cancelled(450)7.73 
Outstanding as of March 31, 2024604,786 12.42 1.95$22,146 
Vested and exercisable as of March 31, 2024604,786 12.42 1.95$22,146 
(d)Employee Stock Purchase Plan
Under the Rapid7, Inc. 2015 Employee Stock Purchase Plan (“ESPP”), employees may set aside up to 15% of their gross earnings, on an after-tax basis, to purchase our common stock at a discounted price, which is calculated at 85% of the lesser of: (i) the market value of our common stock at the beginning of each offering period and (ii) the market value of our common stock on the applicable purchase date.
On March 15, 2024, we issued shares of common stock to employees, with a purchase price of either $33.78 or $39.78 per share, for aggregate proceeds of $5.0 million.
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Note 12. Net Income (Loss) per Share
The following table summarizes the computation of basic and diluted net income (loss) per share of our common stock for the three months March 31, 2024 and 2023:
 Three Months Ended March 31,
 20242023
 (in thousands, except share and per share data)
Numerator:
Net income (loss)$2,258 $(25,915)
Denominator:
Weighted-average common shares outstanding, basic61,907,808 59,888,119 
Weighted-average common shares outstanding, diluted74,021,704 59,888,119 
Net income (loss) per share, basic$0.04 $(0.43)
Net income (loss) per share, diluted$0.03 $(0.43)
We intend to settle any conversion of our 2025 Notes, 2027 Notes and 2029 Notes in cash, shares, or a combination thereof. The dilutive impact of the Notes for our calculation of diluted net income (loss) per share is considered using the if-converted method. For the three months ended March 31, 2024 and 2023, the shares underlying the Notes were not considered in the calculation of diluted net income (loss) per share as the effect would have been anti-dilutive.
In connection with the issuance of the 2025 Notes, the 2027 Notes and the 2029 Notes, we entered into 2025 Capped Calls, 2027 Capped Calls and 2029 Capped Calls, which were not included for the purpose of calculating the number of diluted shares outstanding, as their effect would have been anti-dilutive. As further described in Note 10, Debt, the 2025 Capped Calls were not redeemed with the partial repurchase of the 2025 Notes and remain outstanding.
As of March 31, 2024 and 2023, the 2025 Notes, the 2027 Notes and the 2029 Notes were not convertible at the option of the holder. We had not received any conversion notices through the issuance date of our unaudited condensed consolidated financial statements. For disclosure purposes, we have calculated the potentially dilutive effect of the conversion spread, which is included in the table below. The following potentially dilutive securities outstanding have been excluded from the computation of diluted weighted-average shares outstanding for the respective periods below because they would have been anti-dilutive:
 Three Months Ended March 31,
 20242023
Options to purchase common stock604,786 915,314 
Unvested restricted stock units3,984,134 4,246,259 
Common stock issued in conjunction to acquisitions36,923 148,473 
Shares to be issued under ESPP15,902 31,793 
Convertible senior notes11,183,611 9,572,955 
Total15,825,356 14,914,794 

Note 13. Commitments and Contingencies
(a)Warranty
We provide limited product warranties. Historically, any payments made under these provisions have been immaterial.
(b)Litigation and Claims
From time to time, we may be a party to litigation or subject to claims incident to the ordinary course of business. Although the results of litigation and claims cannot be predicted with certainty, we currently believe that the final outcome of these ordinary course matters will not have a material adverse effect on our business. Regardless of the
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outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.
(c)Indemnification Obligations
We agree to standard indemnification provisions in the ordinary course of business. Pursuant to these provisions, we agree to indemnify, hold harmless and reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally our customers, in connection with any United States patent, copyright or other intellectual property infringement claim by any third party arising from the use of our products or services in accordance with the agreement or arising from our gross negligence, willful misconduct or violation of the law (provided that there is not gross or willful misconduct on the part of the other party) with respect to our products or services. The term of these indemnification provisions is generally perpetual from the time of execution of the agreement. We carry insurance that covers certain third-party claims relating to our services and limits our exposure. We have never incurred costs to defend lawsuits or settle claims related to these indemnification provisions.
As permitted under Delaware law, we have entered into indemnification agreements with our officers and directors, indemnifying them for certain events or occurrences while they serve as officers or directors of the company.
Note 14. Segment Information and Information about Geographic Areas
We operate in one segment. Our chief operating decision maker is our Chief Executive Officer, who makes operating decisions, assesses performance and allocates resources on a consolidated basis.
Net revenues by geographic area presented based upon the location of the customer are as follows:
 Three Months Ended March 31,
 20242023
 (in thousands)
North America$157,340 $137,111 
Rest of world47,761 46,063 
Total$205,101 $183,174 
Property and equipment, net by geographic area was as follows:
 As of March 31, 2024As of December 31, 2023
 (in thousands)
North America$25,949 $27,609 
Rest of world11,317 12,033 
Total$37,266 $39,642 

Note 15. Restructuring
On August 7, 2023, our board of directors approved a restructuring plan that was designed to improve operational efficiencies, reduce operating costs and better align the Company’s workforce with current business needs, top strategic priorities and key growth opportunities (collectively, the “Restructuring Plan”). The Restructuring Plan included a reduction of the Company’s workforce by approximately 16%.
In the three months ended March 31, 2024, the execution of the Restructuring Plan was completed and we recorded $(0.2) million of restructuring charges within general and administrative expense in the condensed consolidated statements of operations.
As of March 31, 2024, the restructuring liability accrued but not paid totaled $0.1 million, which is included within accrued expenses in the condensed consolidated balance sheets.
The following table presents the activity of the restructuring liability for the year ended March 31, 2024:
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Restructuring Liability
 (in thousands)
Balance at December 31, 2023$3,764 
Charges(190)
Payments(3,441)
Balance at March 31, 2024$133 
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with (1) our unaudited condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and (2) the audited consolidated financial statements and the related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations for the fiscal year ended December 31, 2023 included in our Annual Report on Form 10-K, filed with the SEC on February 26, 2024. Forward-looking statements in this review are qualified by the cautionary statement included under the next sub-heading, “Special Note Regarding Forward-Looking Statements”.
Special Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q, including the sections entitled “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Statements that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are often identified by the use of words such as, but not limited to, “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “seek,” “should,” “target,” “will,” “would” and similar expressions or variations intended to identify forward-looking statements. These forward-looking statements include, but are not limited to, statements concerning the following:
• our ability to continue to add new customers, maintain existing customers and sell new products and professional services to new and existing customers;
• uncertain impacts that changes in overall level of software spending and ongoing volatility in the global economy as well as effects of inflation and increased interest rates may have on our business, strategy, operating results, financial condition and cash flows;
• the effects of increased competition as well as innovations by new and existing competitors in our market;
• our ability to adapt to technological change and effectively enhance, innovate and scale our solutions;
• our ability to effectively manage or sustain our growth and to attain and sustain profitability;
• our ability to diversify our sources of revenue;
• potential acquisitions and integration of complementary business and technologies;
• our expected use of proceeds from future issuances of equity or convertible debt securities;
• our ability to maintain, or strengthen awareness of, our brand;
• perceived or actual security, integrity, reliability, quality or compatibility problems with our solutions, including related to security breaches in our customers; systems, unscheduled downtime or outages;
• statements regarding future revenue, hiring plans, expenses, capital expenditures, capital requirements and stock performance;
• our ability to meet publicly announced guidance or other expectations about our business, key metrics and future operating results;
• our ability to maintain an adequate annualized recurring revenue growth;
• our ability to attract and retain qualified employees and key personnel and further expand our overall headcount;
• our ability to grow, both domestically and internationally;
• our ability to stay abreast of new or modified laws and regulations that currently apply or become applicable to our business both in the United States and internationally;
• our ability to maintain, protect and enhance our intellectual property;
• costs associated with defending intellectual property infringement and other claims; and
• the future trading prices of our common stock and the impact of securities analysts’ reports on these prices.
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These statements represent the beliefs and assumptions of our management based on information currently available to us. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” included under Part II, Item 1A. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances that occur after the date of this report.
As used in this report, the terms “Rapid7,” the “company,” “we,” “us,” and “our” mean Rapid7, Inc. and its subsidiaries unless the context indicates otherwise.
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. 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”). 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.
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. 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. 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. 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. 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. 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.
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. 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. 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 March 31, 2024, we had over 11,000 customers in 148 countries, including 47% of the Fortune 100. Our revenue was not concentrated with any individual customer and no customer represented more than 1% of our revenue for the three months ended March 31, 2024 or 2023.
Our Business Model
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 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 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.
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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. Our Nexpose and Metasploit products are offered through term software licenses with an option for one or multi-year terms. Our maintenance and support provides our customers with telephone and web-based support and ongoing bug fixes and repairs during the term of the maintenance and support agreement, and our customers who purchase our Nexpose and Metasploit products also purchase content subscriptions, which provide them with real-time access to the latest vulnerabilities and exploits.
Additionally, we offer our products through our consolidation offerings, which unify our products and services to our customers in a single package. Our Threat Complete and Cloud Risk Complete packages are offered as cloud based subscriptions, with an option for a one or multi-year term. Our Managed Threat Complete Offering is offered on a managed service basis, generally pursuant to one or multi-year agreements.
For the three months ended March 31, 2024 and 2023, recurring revenue, defined as revenue from term software licenses, content subscriptions, managed services, cloud-based subscriptions and maintenance and support, was 96%, and 95%, 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. 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. 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:
 Three Months Ended March 31,
 20242023
 (dollars in thousands)
Total revenue$205,101 $183,174 
Year-over-year growth12.0 %16.4 %
Non-GAAP income from operations$40,285 $10,993 
Non-GAAP operating margin19.6 %6.0 %
Free cash flow$27,534 $(1,219)
 As of March 31,
 20242023
(dollars in thousands)
Annualized recurring revenue (“ARR”)$807,196 $727,853 
Year-over-year growth10.9 %16.1 %
Number of customers11,462 11,034 
Year-over-year growth3.9 %6.0 %
ARR per customer$70.4 $66.0 
Year-over-year growth6.8 %9.5 %
Total Revenue and Growth. We are focused on driving continued revenue growth through increased sales of our products and professional services to new and existing customers. We monitor total revenue and believe it is useful to investors as a measure of the overall success of our business.
Non-GAAP Income from Operations and Non-GAAP Operating Margin. We monitor non-GAAP income from operations and non-GAAP operating margin, non-GAAP financial measures, to analyze our financial results. We believe non-GAAP income from operations and non-GAAP operating margin are useful to investors, as supplements to U.S. 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. See Non-GAAP Financial Results below for further information on non-GAAP income from operations and a reconciliation of non-GAAP income from operations to the comparable GAAP financial measure.
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Free Cash Flow. Free cash flow is a non-GAAP measure that we define as cash provided by operating activities less purchases of property and equipment and capitalization of internal-use software costs. 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. 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. ARR is not a forecast of future revenue, which can be impacted by contract start and end dates and renewal rates and does not include revenue reported as professional services revenue in our consolidated statement of operations. We use ARR and believe it is useful to investors as a measure of the overall success of our business.
Number of Customers. We believe that the size of our customer base is an indicator of our global market penetration and that our net customer additions are an indicator of the growth of our business. 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.
Non-GAAP Financial Results
To supplement our consolidated financial statements, which are prepared and presented in accordance with GAAP, we provide investors with certain non-GAAP financial measures, including non-GAAP gross profit, non-GAAP income from operations, non-GAAP operating margin, non-GAAP net income, non-GAAP net income per share, adjusted EBITDA and free cash flow. The presentation of the non-GAAP financial measures is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. We use these non-GAAP financial measures for financial and operational decision-making purposes and as a means to evaluate period-to-period comparisons, and use certain non-GAAP financial measures as performance measures under our executive bonus plan. We believe that these non-GAAP financial measures provide useful information about our operating results, enhance the overall understanding of past financial performance and future prospects and allow for greater transparency with respect to metrics used by our management in its financial and operational decision-making. While our non-GAAP financial measures are an important tool for financial and operational decision-making and for evaluating our own operating results over different periods of time, you should review the reconciliation of our non-GAAP financial measures to the comparable GAAP financial measures included below, and not rely on any single financial measure to evaluate our business.
We define non-GAAP gross profit, non-GAAP income from operations, non-GAAP operating margin, non-GAAP net income and non-GAAP net income 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, restructuring expense and discrete tax items. Non-GAAP net income per basic and diluted share is calculated as non-GAAP net income divided by the weighted average shares used to compute net income per share, with the number of weighted average shares decreased, when applicable, to reflect the anti-dilutive impact of the capped call transactions entered into in connection with our convertible senior notes.
We believe these non-GAAP financial measures are useful to investors in assessing our operating performance due to the following factors:
Stock-based compensation expense. We exclude stock-based compensation expense because of varying available valuation methodologies, subjective assumptions and the variety of equity instruments that can impact our non-cash expense. We believe that providing non-GAAP financial measures that exclude stock-based compensation expense allows for more meaningful comparisons between our operating results from period to period.
Amortization of acquired intangible assets. 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 issuance costs. 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.
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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.
Discrete tax items. We exclude certain discrete tax items such as income tax expenses or benefits that are not related to ongoing business operations in the current year and adjustments to uncertain tax position reserves as these charges are not indicative of our ongoing operating results, and they are not considered when we are forecasting our future results.
Restructuring expense. We exclude non-ordinary course restructuring expenses related to the restructuring plan we announced in August 2023, which was concluded in the three months ended March 31, 2024 (the "Restructuring Plan") because we do not believe these charges are indicative of our core operating performance and we believe the exclusion of the restructuring expense provides a more useful comparison of our performance in different periods. For further information see Note 15, Restructuring, in the Notes to our Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.
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. Although we cannot reflect the anti-dilutive impact of the capped call transactions under GAAP, we do reflect the anti-dilutive impact of the capped call transactions in non-GAAP net income (loss) per diluted share, when applicable, to provide investors with useful information in evaluating our financial performance on a per share basis.
We define adjusted EBITDA as net income 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) restructuring expense. We believe that the use of adjusted EBITDA is useful to investors and other users of our financial statements in evaluating our operating performance because it provides them with an additional tool to compare business performance across companies and across periods.
Our non-GAAP financial measures may not provide information that is directly comparable to that provided by other companies in our industry, as other companies in our industry may calculate non-GAAP financial results differently, particularly related to non-recurring, unusual items. In addition, there are limitations in using non-GAAP financial measures because the non-GAAP financial measures are not prepared in accordance with GAAP, may be different from non-GAAP financial measures used by other companies and exclude expenses that may have a material impact upon our reported financial results. 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.
The following tables reconcile GAAP gross profit to non-GAAP gross profit for the three months ended March 31, 2024, and 2023:
 Three Months Ended March 31,
 20242023
 (in thousands)
GAAP total gross profit$144,198 $127,175 
Stock-based compensation expense2,580 2,837 
Amortization of acquired intangible assets4,317 4,375 
Non-GAAP total gross profit$151,095 $134,387 

 Three Months Ended March 31,
 20242023
 (in thousands)
GAAP gross profit – product subscriptions$142,263 $125,584 
Stock-based compensation expense2,219 2,123 
Amortization of acquired intangible assets4,317 4,375 
Non-GAAP gross profit – product subscriptions$148,799 $132,082 

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 Three Months Ended March 31,
 20242023
 (in thousands)
GAAP gross profit – professional services$1,935 $1,591 
Stock-based compensation expense361 714 
Non-GAAP gross profit – professional services$2,296 $2,305 
The following table reconciles GAAP income (loss) from operations to non-GAAP income from operations for the three months ended March 31, 2024, and 2023:
 Three Months Ended March 31,
 20242023
 (in thousands)
GAAP income (loss) from operations$10,568 $(23,965)
Stock-based compensation expense24,893 29,373 
Amortization of acquired intangible assets5,014 5,222 
Acquisition-related expenses— 363 
Restructuring expense(1)
(190)— 
Non-GAAP income from operations$40,285 $10,993 
(1) For the three months ended March 31, 2024, restructuring expense was recorded within general and administrative expense in our condensed consolidated statement of operations.

















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The following table reconciles GAAP net income (loss) to non-GAAP net income for the three months ended March 31, 2024, and 2023:
 Three Months Ended March 31,
 20242023
 (in thousands, except share and per share data)
GAAP net income (loss)$2,258 $(25,915)
Stock-based compensation expense24,893 29,373 
Amortization of acquired intangible assets5,014 5,222 
Acquisition-related expenses— 363 
Amortization of debt issuance costs1,053 994 
Restructuring expense(190)— 
Discrete tax items6,360 — 
Non-GAAP net income$39,388 $10,037 
Interest expense of convertible senior notes (1)1,571 375 
Numerator for non-GAAP earnings per share calculation$40,959 $10,412 
Weighted average shares used in GAAP earnings per share calculation, basic61,907,898 59,888,119 
Dilutive effect of convertible senior notes (1)11,183,611 5,803,831 
Dilutive effect of employee equity incentive plans (2)930,195 708,176 
Weighted average shares used in non-GAAP earnings per share calculation, diluted74,021,704 66,400,126 
Non-GAAP net income per share:
Basic$0.64 $0.17 
Diluted$0.55 $0.16 
(1) We use the if-converted method to compute diluted earnings per share with respect to our Notes. There was no add-back of interest expense or additional dilutive shares related to the Notes where the effect was anti-dilutive. On an if-converted basis, for the three months ended March 31, 2024, the 2025 Notes, the 2027 Notes and the 2029 Notes were dilutive. On an if-converted basis, for the three months ended March 31, 2023, the 2027 Notes were dilutive and the 2025 Notes were anti-dilutive.
(2) We use the treasury method to compute the dilutive effect of employee equity incentive plan awards.
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The following table reconciles GAAP net income (loss) to adjusted EBITDA for the three months ended March 31, 2024, and 2023:
 Three Months Ended March 31,
 20242023
 (in thousands)
GAAP net income (loss)$2,258 $(25,915)
Interest income(4,720)(1,668)
Interest expense2,670 2,717 
Other (income) expense, net1,435 307 
Provision for income taxes8,925 594 
Depreciation expense2,908 3,837 
Amortization of intangible assets8,440 7,213 
Stock-based compensation expense24,893 29,373 
Acquisition-related expenses— 363 
Restructuring expense(190)— 
Adjusted EBITDA$46,619 $16,821 
The following table reconciles net cash provided by operating activities to free cash flow for the three months ended March 31, 2024, and 2023:
 Three Months Ended March 31,
 20242023
 (in thousands)
Net cash provided by operating activities$31,070 $5,842 
Less: Purchases of property and equipment(620)(2,285)
Less: Capitalized internal-use software costs(2,916)(4,776)
Free cash flow$27,534 $(1,219)
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.
Product subscriptions
We generate product subscriptions revenue from the sale of (1) cloud-based subscriptions, (2) managed services offerings, which utilize our products and (3) software licenses with related maintenance and support and content subscription, as applicable. Software license revenue consists of revenues from term licenses. When software licenses are purchased, maintenance and support and content subscription, as applicable, is bundled with the license for the term period.
Professional Services
We generate professional service revenue from the sale of deployment and training services related to our products, incident response services and security advisory services.
Cost of Revenue
Our total cost of revenue consists of the costs of products and professional services, as noted below. In addition, cost of revenue includes overhead costs for depreciation, facilities, IT, information security, and recruiting. Our IT overhead costs include IT personnel compensation costs and costs associated with our IT infrastructure. All overhead costs are allocated based on relative headcount.
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Cost of Product Subscriptions
Cost of product subscriptions 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. Also included in cost of products are software license fees, cloud computing costs and internet connectivity expenses directly related to delivering our products, amortization of contract fulfillment costs, as well as amortization of certain intangible assets including internally developed software.
Cost of Professional Services
Cost of professional services consists of personnel and related costs for our professional services team, including salaries and other payroll related costs, bonuses, stock-based compensation, costs of contracted third-party vendors, travel and entertainment expenses and allocated overhead costs.
We expect our cost of revenue to increase on an absolute dollar basis as we continue to grow our revenue.
Gross Margin
Gross margin, or gross profit as a percentage of revenue, has been and will continue to be affected by a variety of factors, including the average sales price of our products and services, transaction volume growth, the mix of revenue between software licenses, cloud-based subscriptions, managed services and professional services and changes in cloud computing costs.
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 and restructuring. Operating expenses include overhead costs for depreciation, facilities, IT, information security and recruiting. Our IT overhead costs include IT personnel compensation costs and costs associated with our IT infrastructure. All overhead costs are allocated based on relative headcount.
Research and Development Expense
Research and development expense consists of personnel costs for our research and development team, including salaries and other payroll related costs, bonuses and stock-based compensation. 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.
Sales and Marketing Expense
Sales and marketing expense consists of personnel