10-Q 1 rp-20230930.htm 10-Q rp-20230930
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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 September 30, 2023
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: (617) 247-1717
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 October 31, 2023, there were 61,446,973 shares of the registrant’s common stock, $0.01 par value per share, outstanding.


Table of Contents

i
PART I—FINANCIAL INFORMATION
Item 1.Financial Statements.

RAPID7, INC.
Consolidated Balance Sheets (Unaudited)
(in thousands, except share and per share data) 
September 30, 2023December 31, 2022
Assets
Current assets:
Cash and cash equivalents$182,727 $207,287 
Short-term investments139,434 84,162 
Accounts receivable, net of allowance for credit losses of $789 and $2,299 at September 30, 2023 and December 31, 2022, respectively
137,690 152,045 
Deferred contract acquisition and fulfillment costs, current portion40,909 34,906 
Prepaid expenses and other current assets35,087 31,907 
Total current assets535,847 510,307 
Long-term investments50,603 9,756 
Property and equipment, net42,449 57,891 
Operating lease right-of-use assets53,275 79,342 
Deferred contract acquisition and fulfillment costs, non-current portion71,654 68,169 
Goodwill536,305 515,631 
Intangible assets, net99,993 101,269 
Other assets9,174 16,626 
Total assets$1,399,300 $1,358,991 
Liabilities and Stockholders’ Deficit
Current liabilities:
Accounts payable$8,951 $10,255 
Accrued expenses63,388 80,306 
Operating lease liabilities, current portion12,472 12,444 
Deferred revenue, current portion421,898 426,599 
Other current liabilities888 1,663 
Total current liabilities507,597 531,267 
Convertible senior notes, non-current portion, net928,892 815,948 
Operating lease liabilities, non-current portion81,065 85,946 
Deferred revenue, non-current portion29,344 31,040 
Other long-term liabilities14,047 14,864 
Total liabilities1,560,945 1,479,065 
Stockholders’ deficit:
Preferred stock, $0.01 par value per share; 10,000,000 shares authorized at September 30, 2023 and December 31, 2022; 0 shares issued at September 30, 2023 and December 31, 2022
— — 
Common stock, $0.01 par value per share; 100,000,000 shares authorized at September 30, 2023 and December 31, 2022; 61,991,937 and 60,206,277 shares issued at September 30, 2023 and December 31, 2022, respectively; 61,422,358 and 59,719,469 shares outstanding at September 30. 2023 and December 31, 2022, respectively
614 597 
Treasury stock, at cost, 569,579 and 486,808 shares at September 30, 2023 and December 31, 2022, respectively
(4,765)(4,764)
Additional paid-in-capital873,381 746,249 
Accumulated other comprehensive loss(822)(1,411)
Accumulated deficit(1,030,053)(860,745)
Total stockholders’ deficit(161,645)(120,074)
Total liabilities and stockholders’ deficit$1,399,300 $1,358,991 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
1
RAPID7, INC.
Consolidated Statements of Operations (Unaudited)
(in thousands, except share and per share data)
 
 Three Months Ended September 30,Nine Months Ended September 30,
 2023202220232022
Revenue:
Products$189,876 $166,496 $545,349 $474,643 
Professional services8,967 9,269 27,090 25,961 
Total revenue198,843 175,765 572,439 500,604 
Cost of revenue:
Products51,261 45,957 150,597 135,296 
Professional services6,569 7,893 21,396 24,118 
Total cost of revenue57,830 53,850 171,993 159,414 
Total gross profit141,013 121,915 400,446 341,190 
Operating expenses:
Research and development39,940 48,622 137,048 147,341 
Sales and marketing75,699 75,968 239,322 229,148 
General and administrative17,866 20,561 64,961 62,967 
Impairment of long-lived assets3,553 — 30,784 — 
Restructuring19,996 — 19,996 — 
Total operating expenses157,054 145,151 492,111 439,456 
Loss from operations(16,041)(23,236)(91,665)(98,266)
Other income (expense), net:
Interest income2,545 498 6,000 853 
Interest expense(56,515)(2,749)(62,005)(8,200)
Other income (expense), net(4,518)(2,205)(18,093)(5,211)
Loss before income taxes(74,529)(27,692)(165,763)(110,824)
Provision for income taxes2,082 1,035 3,545 2,508 
Net loss$(76,611)$(28,727)$(169,308)$(113,332)
Net loss per share, basic and diluted$(1.25)$(0.49)$(2.80)$(1.95)
Weighted-average common shares outstanding, basic and diluted61,065,157 58,730,651 60,506,082 58,229,872 
The accompanying notes are an integral part of these unaudited consolidated financial statements.

2
RAPID7, INC.
Consolidated Statements of Comprehensive Loss (Unaudited)
(in thousands)
 Three Months Ended September 30,Nine Months Ended September 30,
 2023202220232022
Net loss$(76,611)$(28,727)$(169,308)$(113,332)
Other comprehensive income (loss):
Change in fair value of cash flow hedges(1,120)(3,355)(481)(7,280)
Adjustments for net (gains) losses realized on cash flow hedges and included in net loss(49)1,361 531 2,438 
Total change in unrealized (losses) gains on cash flow hedges(1,169)(1,994)50 (4,842)
Change in unrealized gains (losses) on investments97 (166)539 (1,044)
Total other comprehensive (loss) income(1,072)(2,160)589 (5,886)
Comprehensive loss$(77,683)$(30,887)$(168,719)$(119,218)

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


3
RAPID7, INC.
Consolidated Statements of Changes in Stockholders' Deficit (Unaudited)
(in thousands)
 Common stockTreasury stockAdditional
paid-in-capital		Accumulated
other
comprehensive
loss		Accumulated
deficit		Total
stockholders’
deficit
 SharesAmountSharesAmount
Balance, June 30, 202360,940 $609 570 $(4,765)$846,326 $250 $(953,442)$(111,022)
Stock-based compensation expense— — — — 23,719 — — 23,719 
Issuance of common stock under employee stock purchase plan152 2 — — 5,147 — — 5,149 
Vesting of restricted stock units338 3 — — (3)— — — 
Shares withheld for employee taxes(29)— — — (1,421)— — (1,421)
Issuance of common stock upon exercise of stock options21 — — — 302 — — 302 
Purchase of capped calls related to convertible senior notes— — — — (36,570)— — (36,570)
Repurchase and inducement of convertible senior notes— — — — 35,881 — — 35,881 
Other comprehensive loss— — — — — (1,072)— (1,072)
Net loss— — — — — — (76,611)(76,611)
Balance, September 30, 202361,422 $614 570 $(4,765)$873,381 $(822)$(1,030,053)$(161,645)

 Common stockTreasury stockAdditional
paid-in-capital		Accumulated
other
comprehensive
loss		Accumulated
deficit		Total
stockholders’
deficit
 SharesAmountSharesAmount
Balance, June 30, 202258,636 $586 487 $(4,764)$681,194 $(4,538)$(820,633)$(148,155)
Stock-based compensation expense— — — — 31,746 — — 31,746 
Issuance of common stock under employee stock purchase plan137 1 — — 6,232 — — 6,233 
Vesting of restricted stock units381 4 — — (4)— — — 
Shares withheld for employee taxes(23)— — — (1,637)— — (1,637)
Issuance of common stock upon exercise of stock options73 1 — — 415 — — 416 
Other comprehensive loss— — — — — (2,160)— (2,160)
Net loss— — — — — — (28,727)(28,727)
Balance, September 30, 202259,204 $592 487 $(4,764)$717,946 $(6,698)$(849,360)$(142,284)


4

 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— — — — 84,513 — — 84,513 
Issuance of common stock under employee stock purchase plan330 4 — — 11,319 — — 11,323 
Vesting of restricted stock units1,139 10 — — (10)— — — 
Shares withheld for employee taxes(82)— — — (4,012)— — (4,012)
Issuance of common stock upon exercise of stock options208 2 — — 2,982 — — 2,984 
Issuance of common stock in relation to an acquisition107 1 — — (1)— — — 
Repurchase of common stock in relation to acquisition— — 83 (1)1 — — — 
Reclassification of 2023 capped calls from equity to derivative asset— — — — 33,029 — — 33,029 
Purchase of capped calls related to convertible senior notes— — — — (36,570)— — (36,570)
Repurchase and inducement of convertible senior notes— — — — 35,881 — — 35,881 
Other comprehensive gain— — — — — 589 — 589 
Net loss— — — — — — (169,308)(169,308)
Balance, September 30, 202361,422 $614 570 $(4,765)$873,381 $(822)$(1,030,053)$(161,645)

 Common stockTreasury stockAdditional
paid-in-capital		Accumulated
other
comprehensive
loss		Accumulated
deficit		Total
stockholders’
deficit
 SharesAmountSharesAmount
Balance, December 31, 202157,695 $577 487 $(4,764)$615,032 $(812)$(736,028)$(125,995)
Stock-based compensation expense— — — — 96,111 — — 96,111 
Issuance of common stock under employee stock purchase plan218 2 — — 11,941 — — 11,943 
Vesting of restricted stock units1,147 11 — — (11)— — — 
Shares withheld for employee taxes(82)— — — (6,743)— — (6,743)
Issuance of common stock upon exercise of stock options193 2 — — 1,619 — — 1,621 
Issuance of common stock in connection with conversion of convertible senior notes— — — — (3)— — (3)
Issuance of common stock related to acquisition33 — — — — — — — 
Other comprehensive loss— — — — — (5,886)— (5,886)
Net loss— — — — — — (113,332)(113,332)
Balance, September 30, 202259,204 $592 487 $(4,764)$717,946 $(6,698)$(849,360)$(142,284)

The accompanying notes are an integral part of these unaudited consolidated financial statements.
5
RAPID7, INC.
Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
 Nine Months Ended September 30,
 20232022
Cash flows from operating activities:
Net loss$(169,308)$(113,332)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization34,528 30,587 
Amortization of debt issuance costs3,061 3,036 
Stock-based compensation expense84,836 92,304 
Impairment of long-lived assets30,784 — 
Change in fair value of derivative assets15,511 — 
Induced conversion expense53,889 — 
Other5,626 3,828 
Changes in operating assets and liabilities:
Accounts receivable12,428 21,425 
Deferred contract acquisition and fulfillment costs(9,488)(7,999)
Prepaid expenses and other assets5,433 (5,303)
Accounts payable(1,255)8,504 
Accrued expenses(17,968)(12,241)
Deferred revenue(6,367)18,297 
Other liabilities(898)(1,144)
Net cash provided by operating activities40,812 37,962 
Cash flows from investing activities:
Business acquisition, net of cash acquired(34,841)— 
Purchases of property and equipment(3,999)(13,087)
Capitalization of internal-use software costs(13,033)(12,648)
Purchases of investments(194,013)(94,486)
Sales/maturities of investments100,700 86,379 
Other investments— (1,000)
Net cash used in investing activities(145,186)(34,842)
Cash flows from financing activities:
Proceeds from issuance of convertible senior notes, net of issuance costs paid of $7,200
292,800 — 
Purchase of capped calls related to convertible senior notes(36,570)— 
Payments of debt issuance costs— (71)
Payments for repurchase of convertible senior notes(199,998)(12)
Payments related to business acquisitions(2,250)(300)
Proceeds from capped call settlement17,518 — 
Taxes paid related to net share settlement of equity awards(4,012)(6,743)
Proceeds from employee stock purchase plan11,323 11,943 
Proceeds from stock option exercises2,984 1,621 
Net cash provided by financing activities81,795 6,438 
Effect of exchange rate changes on cash, cash equivalents and restricted cash(2,010)(5,707)
Net (decrease) increase in cash, cash equivalents and restricted cash(24,589)3,851 
Cash, cash equivalents and restricted cash, beginning of period207,804 165,017 
Cash, cash equivalents and restricted cash, end of period$183,215 $168,868 
Supplemental cash flow information:
Cash paid for interest on convertible senior notes$4,087 $4,087 
Cash paid for income taxes, net of refunds$1,165 $1,503 
Reconciliation of cash, cash equivalents and restricted cash:
Cash and cash equivalents$182,727 $168,353 
Restricted cash included in prepaid expenses and other assets488 $515 
Total cash, cash equivalents and restricted cash$183,215 $168,868 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
6
RAPID7, INC.
Notes to 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 Insight Platform. 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 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 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, 2022 filed with the SEC on February 24, 2023.
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 and nine months ended September 30, 2023 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, 2022. There have been no changes to the significant accounting policies, other than restructuring expense noted below, during the three and nine-month periods ended September 30, 2023.
Restructuring Expense
We record restructuring expense when management commits to and approves a restructuring plan, the restructuring plan identifies all significant actions, the period of time to complete the restructuring plan indicates that significant changes to the restructuring plan are not likely to occur, and employees who are impacted have been notified of the pending involuntary termination. A restructuring plan generally includes significant actions involving employee-related severance charges, employee-related benefits, and other charges associated with the restructuring (collectively, “restructuring expense”). Restructuring expense is recorded within restructuring in the condensed consolidated statement of operations. The restructuring liability accrued but not paid at the end of the reporting period is included within accrued expenses in the condensed consolidated balance sheet.
Recent Accounting Pronouncements
We have not identified any recently issued accounting pronouncements that would have a material impact to our consolidated financial statements.
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Note 2. Revenue from Contracts with Customers
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.
The following table summarizes revenue from contracts with customers for the three and nine months ended September 30, 2023 and 2022:
Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
(in thousands)
Subscriptions$189,596 $165,687 $544,391 $470,925 
Professional services8,967 9,269 27,090 25,961 
Other280 809 958 3,718 
Total revenue$198,843 $175,765 $572,439 $500,604 
Subscriptions
Subscriptions consists 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. For our term software licenses which are not dependent on the continued delivery of content subscriptions, the license is considered distinct from the maintenance and support, and we therefore recognize revenue attributable to the license at the time of delivery.
•Content subscriptions and our maintenance and support services are sold with our perpetual and term software licenses. Revenue related to our content subscriptions associated with our software licenses is recognized ratably over the contractual period. Maintenance and support services are distinct from the perpetual and term software license and revenue attributable to maintenance and support services 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. These contracts generally 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 September 30, 2023 and 2022, we recognized revenue of $174.3 million and $153.8 million, respectively, and for the nine months ended September 30, 2023 and 2022, we recognized $366.5 million and $308.3 million, respectively, that was included in the corresponding contract liability balance at the beginning of the periods presented. Deferred revenue that will be
8
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 September 30, 2023 and December 31, 2022, unbilled receivables of $2.4 million and $1.1 million, respectively, are included in prepaid expenses and other current assets in our consolidated balance sheet. As of September 30, 2023 and December 31, 2022, we had no contract assets recorded on our 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 September 30, 2023. The estimated revenues do not include unexercised contract renewals.
Next Twelve MonthsThereafter
 (in thousands)
Subscriptions$507,807 $234,563 
Professional services19,729 7,520 
Other1,255 428 
Total$528,791 $242,511 
Note 3. Business Combinations
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. Additionally, we issued an aggregate of 73,846 shares of our common stock to the founders of Minerva with a fair value of $3.6 million. The 73,846 shares of common stock will be accounted for as stock-based compensation expense over a 24-month period as continued service is required for the founders to receive their full amount of common stock. In the three and nine months ended September 30, 2023, we recognized stock-based compensation expense related to such shares in the amount of $0.4 million and $1.0 million, respectively.
The following table summarizes the preliminary allocation of purchase price to the estimated fair value of the assets acquired and liabilities assumed at the acquisition date (in thousands):
Consideration
Cash$34,977 
Estimated purchase price receivable adjustment(365)
Fair value of total consideration transferred$34,612 
Recognized amount of identifiable assets acquired and liabilities assumed:
Cash and cash equivalents$136 
Other current assets1,792 
Other assets43 
Accounts payable and other current liabilities(438)
Other long-term liabilities(395)
Intangible asset12,800 
Total identifiable net assets assumed$13,938 
Goodwill20,674 
Total purchase price allocation$34,612 
9
These preliminary amounts are subject to subsequent adjustment as we obtain additional information to finalize certain components of working capital and deferred income taxes.
We identified developed technology as the sole acquired intangible asset. The estimated fair value of the developed technology intangible asset was $12.8 million which was based on a valuation using the income approach. The estimated useful life of the developed technology is 8 years.
The excess of the purchase price over the tangible assets acquired, the identifiable intangible asset acquired and assumed liabilities was recorded as goodwill. We believe that the amount of goodwill reflects the expected synergistic benefits of being able to leverage the integration of the technology acquired with our existing product offerings and being able to successfully market and sell these new features to our customer base. The goodwill was allocated to our one reporting unit. The acquired goodwill and intangible asset were not deductible for tax purposes.
In the nine months ended September 30, 2023, we recorded $0.4 million of acquisition-related transaction costs related to the acquisition of Minerva to general and administrative expense.
Our revenue and net loss attributable to the Minerva business for the three and nine months ended September 30, 2023 was not material.
Pro forma results of operations have not been included, as the acquisition of Minerva was not material to our results of operations for any periods presented.
Note 4. Investments
Our investments, which are all classified as available-for-sale, consisted of the following:
 As of September 30, 2023
 Amortized CostGross Unrealized GainsGross Unrealized LossesFair Value
 (in thousands)
Description:
U.S. government agencies$185,587 $— $(265)$185,322 
Corporate bonds1,501 — (10)1,491 
Agency bonds3,250 — (26)3,224 
Total$190,338 $— $(301)$190,037 
 As of December 31, 2022
 Amortized CostGross Unrealized GainsGross Unrealized LossesFair Value
 (in thousands)
Description:
U.S government agencies$66,234 $4 $(545)$65,693 
Corporate bonds14,351 — (230)14,121 
Commercial paper7,944 — — 7,944 
Agency bonds6,231 — (71)6,160 
Total$94,760 $4 $(846)$93,918 
As of September 30, 2023, our available-for-sale investments had maturities ranging from 1 to 18 months. As of December 31, 2022, our available-for-sale investments had maturities ranging from 2 to 19 months.
For all of our investments for which the amortized cost basis was greater than the fair value at September 30, 2023 and December 31, 2022, 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.
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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.
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 we 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 September 30, 2023
 Level 1Level 2Level 3Total
 (in thousands)
Description:
Assets:
U.S. Government agencies$185,322 $— $— $185,322 
Money market funds65,592 — — 65,592 
Agency bonds— 3,224 — 3,224 
Corporate bonds— 1,491 — 1,491 
Total$250,914 $4,715 $— $255,629 
Liabilities:
Foreign currency forward contracts designated as cash flow hedges (other current liabilities and other liabilities)$— $817 $— $817 
Total$— $817 $— $817 

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 As of December 31, 2022
 Level 1Level 2Level 3Total
 (in thousands)
Description:
Assets:
Money market funds$88,039 $— $— $88,039 
U.S. Government agencies65,693 — — 65,693 
Corporate bonds— 14,121 — 14,121 
Commercial paper— 7,944 — 7,944 
Agency bonds— 6,160 — 6,160 
Foreign currency forward contracts designated as cash flow hedges (prepaid expenses and other current assets)— 988 — 988 
Total assets$153,732 $29,213 $— $182,945 
Liabilities:
Foreign currency forward contracts designated as cash flow hedges (other current liabilities and other liabilities)$— $1,559 $— $1,559 
Total liabilities$— $1,559 $— $1,559 
As of September 30, 2023, 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, $511.1 million and $290.7 million, respectively, based upon quoted market prices. We consider the fair value of the Notes to be a Level 2 measurement due to limited trading activity of the Notes.
Note 6. Property and Equipment
Property and equipment are recorded at cost and consist of the following:
As of September 30, 2023As of December 31, 2022
 (in thousands)
Computer equipment and software$26,103 $24,568 
Furniture and fixtures 11,090 11,823 
Leasehold improvements (1)
56,037 66,180 
Total93,230 102,571 
Less accumulated depreciation(50,781)(44,680)
Property and equipment, net$42,449 $57,891 
(1) As of September 30, 2023, leasehold improvements with a net book value of $8.6 million were recorded as an impairment of long-lived assets related to certain idle office space at our corporate headquarters in Boston, Massachusetts and idle office space in Los Angeles, California, and Toronto, Canada. Refer to Note 11, Leases, for further details on the impairment of long-lived assets.
Depreciation expense was $3.3 million and $3.5 million for the three months ended September 30, 2023 and 2022, respectively, and $10.9 million and $10.0 million for the nine months ended September 30, 2023 and 2022, respectively.
Note 7. Goodwill and Intangible Assets
Goodwill was $536.3 million and $515.6 million as of September 30, 2023 and December 31, 2022, respectively. The following table displays the changes in the gross carrying amount of goodwill:
Amount
 (in thousands)
Balance at December 31, 2022$515,631 
Minerva acquisition20,674 
Balance at September 30, 2023$536,305 
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The following table presents details of our intangible assets, which include acquired identifiable intangible assets and capitalized internal-use software costs:
  As of September 30, 2023As of December 31, 2022
 Weighted-
Average
Life (years)		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 $(72,638)$62,717 $122,555 $(58,645)$63,910 
Customer relationships4.512,000 (7,102)4,898 12,000 (5,146)6,854 
Trade names3.12,619 (2,334)285 2,619 (1,874)745 
Total acquired intangible assets149,974 (82,074)67,900 137,174 (65,665)71,509 
Internal-use software3.052,525 (20,432)32,093 43,002 (13,242)29,760 
Total intangible assets$202,499 $(102,506)$99,993 $180,176 $(78,907)$101,269 
Amortization expense was $8.3 million and $6.7 million for the three months ended September 30, 2023 and 2022, respectively and $23.6 million and $20.6 million for the nine months ended September 30, 2023 and 2022, respectively.
Estimated future amortization expense of the acquired identifiable intangible assets and completed capitalized internal-use software costs as of September 30, 2023 was as follows (in thousands):
2023 (for the remaining three months)$7,777 
202428,913 
202524,940 
202615,903 
20276,806 
2028 and thereafter5,131 
Total$89,470 
The table above excludes the impact of $10.5 million of capitalized internal-use software costs for projects that have not been completed as of September 30, 2023, and therefore, we have not determined the useful life of the software, nor have all the costs associated with these projects been incurred. For the nine months ended September 30, 2023, we recorded a $3.5 million impairment of capitalized internal-use software costs to research and development expense in our consolidated statement of operations for projects that have been discontinued and will not be placed into service.
Note 8. Deferred Contract Acquisition and Fulfillment Costs
The following table summarizes the activity of the deferred contract acquisition and fulfillment costs for the nine months ended September 30, 2023 and 2022:
Nine Months Ended September 30,
20232022
 (in thousands)
Beginning balance$103,075 $87,165 
Capitalization of contract acquisition and fulfillment costs39,904 33,948 
Amortization of deferred contract acquisition and fulfillment costs(30,416)(25,949)
Ending balance$112,563 $95,164 

Note 9. Derivatives 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 nineteen months or less, and as of September 30, 2023 and December 31, 2022, outstanding forward contracts had a total notional value of $50.3 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 and nine months ended September 30, 2023, all cash flow hedges were considered effective.
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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”). 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 estimated debt issuance costs, were $222.8 million, $585.0 million and $292.0 million, respectively.
Terms of the Notes
The holders of the Notes may convert their respective Notes at their option at any time prior to the close of business on the business day immediately preceding their respective convertible dates only under the following circumstances:
•during any calendar quarter commencing after the calendar quarter ending on September 30, 2020 for the 2025 Notes, March 20, 2024 for the 2027 Notes and September 21, 2026 for the 2029 Notes (and only during such calendar quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price of the respective Notes on each applicable trading day;
•during the five business day period after any five consecutive trading day period for the 2025 Notes and any ten consecutive trading day period for the 2027 Notes and the 2029 Notes (the “measurement periods”) in which the trading price (as defined in the Indentures) per $1,000 principal amount of the applicable series of Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate of the respective Notes on each such trading day;
•if we call any or all of the respective Notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the respective redemption date; or
•upon the occurrence of specified corporate events (as set forth in the Indentures).
As of September 30, 2023, the 2025 Notes, the 2027 Notes and the 2029 Notes were not convertible at the option of the holder.
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 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
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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.
The 2025 Notes, the 2027 Notes and the 2029 Notes are redeemable after May 6, 2023, March 20, 2024 and September 21, 2026 (the “Redemption Dates”), respectively. On or after the respective Redemption Dates, we may redeem for cash all or any portion of the 2025 Notes, the 2027 Notes or the 2029 Notes, at our option, if the last reported sale price of our common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including the trading day immediately preceding, the date on which we provide the redemption notice at a redemption price equal to 100% principal amount of the 2025 Notes, the 2027 Notes or the 2029 Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.
Partial Repurchase and Conversion of the 2025 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. As a result of the induced conversion, we recorded $53.9 million in non-cash induced conversion expense which is included in interest expense in our consolidated statement of operations. The induced conversion expense represents the fair value of the consideration issued upon conversion in excess of the fair value of the securities issuable under the original terms of the 2025 Notes.
Accounting for the Notes
In accounting for the issuance of the Notes, the principal less debt issuance costs are recorded as debt on our 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 September 30, 2023 and December 31, 2022 was as follows (in thousands):
2025 Notes2027 Notes2029 Notes
PrincipalUnamortized debt issuance costsTotalPrincipalUnamortized debt issuance costsTotalPrincipalUnamortized debt issuance costsTotal
Balance at December 31, 2022$229,992 $(3,480)$226,512 $600,000 $(10,564)$589,436 $— $— $— 
Issuance— — — — — — 300,000 (7,984)$292,016 
Partial repurchase(184,000)2,010 (181,990)— — — — — 
Amortization of debt issuance costs— 990 990 — 1,855 1,855 — 73 73 
Balance at September 30, 2023$45,992 $(480)$45,512 $600,000 $(8,709)$591,291 $300,000 $(7,911)$292,089 
Interest expense related to the Notes was as follows (in thousands):
Three Months Ended September 30,
20232022
2025 Notes2027 Notes2029 NotesTotal2025 Notes2027 NotesTotal
Contractual interest expense$948 $375 $229 $1,552 $1,292 $377 $1,669 
Amortization of debt issuance costs289 631 73 993 371 626 997 
Total interest expense$1,237 $1,006 $302 $2,545 $1,663 $1,003 $2,666 
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Nine Months Ended September 30,
20232022
2025 Notes2027 Notes2029 NotesTotal2025 Notes2027 NotesTotal
Contractual interest expense$3,536 $1,125 $229 $4,890 $3,880 $1,127 $5,007 
Amortization of debt issuance costs990 1,855 73 2,918 1,052 1,840 2,892 
Total interest expense$4,526 $2,980 $302 $7,808 $4,932 $2,967 $