Earnings Call: Q3 2020

Nov 4, 2020

Ladies and gentlemen, thank you for standing by, and welcome to the Third Quarter 2020 Rapid7 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Sunil Shah, VP of Investor Relations. Please go ahead, sir. Thank you, operator, and good afternoon, everyone. We appreciate you joining us today to discuss Rapid7's Q3 2020 financial and operating results in addition to our financial outlook for the Q4 and full fiscal year 2020. With me on the call today are Corey Thomas, our CEO and Jeff Kalowski, our CFO. We've distributed our earnings press release over the wire, and it is now posted on our website at investors. Rapid7.com, along with the updated company presentation and financial metrics file. This call is being broadcast live via webcast and following the call an audio replay will be available at investors. Rapid7.com until November 11, 2020. During this call, we may make statements related to our business that are forward looking under federal securities laws. These statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 and include statements related to the company's positioning, our future goals and financial guidance for the Q4 and full year 2020, the assumptions underlying such goals and guidance, including the anticipated impact of COVID-nineteen on our financial guidance, business, financial condition, results of operations and renewals and our assumptions on the pace of economic recovery in the global economy on our future results of operations and product strategy. These forward looking statements are based on our current expectations and beliefs and on information currently available to us. Actual outcomes and results may differ materially from the expectations contained in these statements due to a number of risks and uncertainties, including those contained in our most recent quarterly report on Form 10 Q and in the subsequent reports that we filed with the SEC. The information provided on this conference call should be considered in light of such risks. Actual results and the timing of certain events may differ materially from the results or timing predicted or implied by such forward looking statements, and reported results should not be considered as an indication of future performance. Rapid7 does not assume any obligation to update the information presented on this conference call, except to the extent required by applicable law. Our commentary today will be primarily in non GAAP terms, and reconciliations between our historical GAAP and non GAAP results and guidance can be found in today's earnings press release. At times, in our prepared remarks or in response to your questions, we may offer incremental metrics to provide greater insight into the dynamics of our business or our quarterly results. Please be advised that this is additional detail and may be one time in nature, and we may or may not provide an update in the future on these metrics. With that, I'd like to turn the call over to our CEO, Corey Thomas. Corey? Thank you, Sunil, and good afternoon, everyone. We hope that you and your families are staying safe and healthy and appreciate you joining us today for our Q3 2020 earnings call. We are pleased to report strong Q3 performance that exceeded growth and profit expectations, thanks to solid execution by our Rapid 'seventeen. Security fundamentals continue to improve during the 3rd quarters as customers modernize their security architectures for the cloud. We saw strong demand for our security transformation solutions, which again grew over 40%. Coupled with healthy VM performance, Rapid7 delivered year over year ARR growth of approximately 29%. Current market trends and our results reinforce our expanding opportunity and bolster our confidence in raising full year 2020 ARR growth and cash flow targets and investing for durable growth and margin expansion. I would like to start today with the perspective on what we are seeing in the market as we engage with our customers. I will then share a brief update on our product innovation before closing with our goals and turning it over to Jeff to cover our financials. Security teams face unprecedented challenges securing their organizations today as COVID upends the traditional operating model for businesses. Remote engagement has been a catalyst for companies to transform the digital experience, accelerating their cloud strategies in the midst of an escalating threat landscape. As organizations lean into the cloud, they are engaging with Rapid7 to modernize and extend their security architectures in the cloud with our Insight platform. What we are seeing today is companies focused on answering the question, how do we upgrade our core operations to be more digital? This effort drives a growing need to invest in monitoring and securing a more distributed environment and new cloud based applications. Our thesis for the Insight platform was built on the view that organizations of all sizes will undergo digital transformation, driving the need to upgrade their SOC with enhanced monitoring, automation and cloud security. We see this coming to fruition as more customers leverage our security transformation solution. In particular, we saw 3rd quarter strength led by IDR, application security and cloud. Organizations are increasingly turning to a best in suite approach to solve their security operations challenges. A great example of this was our largest deal in the quarter, a competitive enterprise win with a well known consumer goods brand. This customer struggling with a myriad of tools and service providers to manage their complex environment. We initially turned to Rapid7 for our best in class IDR technology. We quickly saw differentiated value and increased efficiency of leveraging integrated SIEM, vulnerability and automation under one roof. This customer chose a unified Insight platform experience over a piecemeal set of alternatives. We remain focused on investing behind this platform to deliver industry leading customer experiences in the cloud. This is evidence of our ongoing integration of Divvy Cloud. COVID has forced companies to reevaluate their cloud strategy, accelerating the need for cloud enabling security that bridges the gap between dev and SecOps. We are seeing continued success with Divvy Cloud, which once again drove significant competitive wins in the quarter. I'll highlight 2 large deals that included 1 new land and 1 cross sell to an existing customer. Key differentiators in these deals included our product adaptability, multi cloud visibility and integrated automation. We're excited about the growing cloud security capabilities DiviCloud will bring to our Insight platform as we continue the integration process. While we remain early in our SecOps platform customer journey, our investments in an integrated cloud native offering are bearing fruit. This is driving deeper customer engagement. A great proof point is our continued strong growth in ARR per customer, which grew 19% year over year to approximately $42,700 Our holistic approach to security visibility, automation and cloud enablement is resonating with customers who today must focus on delivering both greater efficiency and efficacy of their security program spend. This was the case for a 6 figure competitive SIEM displacement deal in the quarter with an enterprise retail customer. This customer consolidated their SIEM, network traffic analysis and vulnerability management solutions on our Insight platform and gained improved functionality. In addition to getting more reliable detection through IDR, the consolidation added huge value by enabling the customer security team to spend less time balancing from tool to tool and more time focusing on real threats. This is another great example of how Rapid7's platform breadth and our ability to roll out an integrated combination of VM, IDR, cloud, AppSec and automation is becoming more prevalent in discussions with our customers. It's important to note, however, that true best in suite still requires industry leading products that don't force customers to compromise product functionality for platform value. In addition to our existing leadership status across vulnerability management, SIEM and application security, I am pleased to announce yet another industry recognition for our team. In August, Rapid7 was named a leader in the force to wave for midsized managed security service providers. This is a great acknowledgment of our ongoing effort to make our cloud native SecOps platform accessible to all. This recognition also serves as a critical validation point as we engage with our channel partner ecosystem and manage this partners to extend the reach of our Insight platform. The ongoing recognition of Rapid7's technology leadership is a function of our core strategy to disciplined investments in innovation. Let me take a moment to highlight some of our most recent product innovations. In October, we announced the availability of our Cloud Identity and Access Management Governance module for DimiCloud. We believe this will be a key differentiator for our cloud security offering going forward. As companies move towards 0 trust and least privilege access frameworks in a cloud world, reducing cloud identity risk becomes crucial. The traditional focus on user access is insufficient for managing identity risk in the cloud. Today's access is far more complicated, extended beyond users to include applications and resources in the cloud. This drives an order of magnitude change in the complexity of determining effective access. With Cloud IAM Governance, our customers gain deeper visibility into their cloud resources to assess, prioritize and remediate unintended access no matter how many different cloud providers, users or resources they have in place. All the reception to cloud IAM has been positive with a handful of customers already having licenses and more customers and prospects beginning to trial the module. We also recently announced the availability of our enhanced endpoint telemetry add on for InsightIDR. As COVID drives a massive increase in the remote workforce, the distributed nature of endpoints creates an ever expanding threat metric. EET enables customers to bring endpoint activity into InsightIDR, unifying it with network, user and cloud data to provide holistic visibility of their environment. The result is that security teams are able to better monitor their attack surface and drive accelerated investigations and response from a single interface. EET extends the core threat hunting capabilities of InsightIDR and since our official launch just a few weeks ago, we have seen a number of customers activate trials for EEG. Turning now to a brief update on our 2020 goals as we close the year. Our first goal is to be a leader in enabling customers to transform their security operations practices around the cloud. This starts with our unified cloud native Insight platform and continues with the recent innovations like Cloud IAM Governance and our strategic AppSec partnership with Snyk. As I look at our innovation pipeline, I'm excited about our opportunity to raise the bar for cloud native security operations. Our second goal is to accelerate our platform distribution engine. We remain in early days with our add on and bundle opportunities, but with a growing set of capabilities like network traffic analysis and enhanced endpoint telemetry among others, we see line of sight to increasing our customer lifetime value by expanding ARR per customer from roughly $40,000 to over $60,000 over the near term. Finally, our third goal is to drive long term operating leverage while investing for growth. We continue to focus on disciplined innovation and believe that our investments in technology and customer experience can drive increasing penetration across our Insight platform. This should support improved efficiency and leverage in our go to market motion over time. With that, I would like to close today by sharing my appreciation for the hard work and commitment of our entire Rapid7 team. We remain focused on building and delivering the most sophisticated and accessible security operations platform on behalf of our customers. Thank you all. And I will now turn the call over to our CFO, Jeff Galaski. Jeff? Thanks, Corey, and good afternoon, everyone. Before I begin, a brief reminder that except for revenue, all financial results we'll discuss today are non GAAP financial measures, unless otherwise stated, and reconciliations between our GAAP and non GAAP results can be found in today's earnings press release. We're pleased to report that Rapid7 delivered milestone results during the Q3 with revenue exceeding $100,000,000 on a quarterly basis for the first time and strong cash flow from operations in the quarter. Total revenue of $105,100,000 came in above the high end of our guidance range, reflecting year over year growth of 26%. This result was driven by better than expected products revenue of 98 point $6,000,000 which grew 29% over the prior year period. Revenue outperformance was a function of solid execution by our team as we ended the Q3 with total ARR of $398,700,000 up 29% year over year, led by strong demand for our security transformation solutions and continued healthy growth in VM. Looking at the business geographically, during the Q3, North America revenue grew by 25% year over year and comprised 83% of total revenue, while rest of world grew by 30 2% year over year and represented 17% of total revenue. We experienced healthy engagement with new customers in the quarter, ending the period with over 9,300 customers globally, growth of 8% over the prior year. New customers contributed over 50% of our new ARR in the quarter, reflecting a continued pace of demand improvement as the year has progressed. The differentiated value of our Insight platform is customer of approximately $42,700 a growth of 19% year over year. We continue to see runway for sustained long term growth in this metric. Turning now to margins and operating results. Total gross margin for the 3rd quarter was 74 percent consistent with Q2 as well as the year ago period. Sales and marketing expenses grew 19% year over year, reflecting growth in headcount and improved to 42% of revenue compared to 44% in Q3 2019, driven in part by lower up compared to 19% of revenue last year, reflecting a full quarter of DiviCloud contribution and continued investments in product development. G and A expenses grew 15% and were 9% of revenue, down from 10% in Q3 2019. 3rd quarter operating profit of $2,400,000 was ahead of our guidance range, driven primarily by overachievement on revenues. Adjusted EBITDA for the 3rd quarter was $5,800,000 and net income per share was $0.00 also ahead of our guidance. Moving to our balance sheet and cash flows. We ended Q3 with cash, cash equivalents and investments of 331 $400,000 compared to $321,000,000 at the end of Q2 2020. This sequential increase was driven predominantly by our positive cash generation in the quarter. Operating cash flow of $11,100,000 was driven by strong billings and collections activity in the quarter and improved from $1,800,000 in the year ago period. Shifting now to guidance. Amidst an uncertain backdrop, our 3rd quarter results demonstrate that companies are investing in soft modernization to keep up with the rapid pace of digital and cloud transformation. Customers are engaging with us as part of a best in suite security strategy, leveraging our combination of market leading technology and platform value. Looking ahead, Rapid7 is positioned to capture the fast growing cloud SecOps opportunity with best in class VM and security transformation solutions on our Insight platform. Our strong Q3 execution reinforces confidence in driving durable growth and margin expansion as we raise full year 2020 targets for AR growth and cash flow while reinvesting outperformance to pursue our expanding market opportunity. We are conscious, however, that we must balance healthy customer demand for transformational security with an uneven macroeconomic recovery as we look to the rest of the year. With that in mind, let me start by sharing our guidance for the full year. Building off our solid Q3 performance, we are raising and tightening our ARR guidance range and now anticipate full year ARR to be in the range of $418,000,000 to $422,000,000 an $8,000,000 increase at the midpoint of growth of 23% to 25% year over year. This range assumes a continuation of the gradual demand recovery we have experienced to date through the 2nd and third quarters. We continue to see our security transformation solutions ARR growing over 40% this year with VM sustaining double digit ARR growth. Given our increased expectations, we are raising full year revenue guidance and now anticipate 2020 revenue to be in the range of 406 point $2,000,000 to $407,800,000 or growth of 24% to 25% year over year. We are raising full year non GAAP operating profit to be in the upper half of our prior range or approximately $1,000,000 to 2,000,000 This guidance reflects investments for sustained future growth and margin expansion. And as a reminder, we expect that we will return to our profitability framework for 2021 assuming a continued recovery trajectory. We are tightening our full year non GAAP loss per share toward the upper end of our prior range and now anticipate a range of a loss of $0.12 to a loss of $0.10 This is based on 51,000,000 weighted average shares the full year to approximately breakeven compared to our prior expectation for a loss of $15,000,000 Turning to quarterly guidance. We anticipate total revenue for the Q4 of 2020 to be in the range of $107,900,000 to $109,500,000 growth of 18% to 20% year over year. We anticipate non GAAP operating loss for the Q4 to be in the range of negative $1,800,000 to negative $800,000 reflecting reinvestment of some of our outperformance to date. Non GAAP net loss per share is anticipated to be in the range of a loss of $0.09 to a loss of $0.07 which is based on an anticipated 52,100,000 basic weighted average shares outstanding. In conclusion, we continue to execute against our vision to provide a leading cloud native SecOps platform to our customers as they transform their digital experiences in the cloud. With that, we appreciate your time and support And we'll now open the call for any questions. Operator? Our first question comes from the line of Rob Owens with Piper Sandler. Your line is open. Yes. Good afternoon, guys. Corey, building on some of your comments about the unprecedented challenges that security and future are facing nowadays, and you talked about SOC modernization as well. Where do you think folks are in terms of kind of tactical response to digital transformation work from home versus getting more strategic? And as those conversations are playing out, where do you see kind of not asking if we guide next year, but I would think that as we get into 2021, we should see really a tailwind because of all this modernization and how it translates into opportunities like yours. So if you could comment, that would be great. Absolutely, Rob. And I'll just repeat it, since it came in a little bit muffled is that, it sounds like the core question is, where are we in the phase of people sort of like really thinking about work from home versus the more strategic aspects of digital transformation and how does that play out over the course of this year, but also in the 4 years? Is there a tailwind? And I would say, yes, we actually do see a positive tailwind into the future. In our discussions with most customers, there was this big crisis early on that was really fundamentally around can we even be functional in this COVID work from home world. I think many organizations were quite surprised about how functional they could get quickly. And while there's still some work to be done, some aspects of maturing those work from home security programs, Lots of the organizations that we're talking to are really addressing the imperative of how do they really replace and upgrade their digital systems so that they can actually support their customers, engage with their customers, sell to new customers in a world where digital is just much more critical and much more strategic. And so we see customers that are actually moving at a very fast pace, which has given us some of the confidence that we've actually seen reflected over the course of this year. We see a lot of customers that are in planning and we actually think that provides some upside. What I would say in the mid to longer term, the feedback that we're getting from a lot of our customers is that they're making the moves. They're just trying to figure out the ordering and the steps around the budgeting. And so they don't know whether they're going to actually be aggressive in the first half or the second half of next year. But they do know that they are moving and they're doing their planning now and they're working through budgeting with their finance departments and teams. And then second, you mentioned your largest deal in the quarter with a well known consumer brand with consolidation of SIEM vulnerability automation. Are you seeing more of these consolidation opportunities as you bring a more holistic suite? And is this customer somewhat uncharacteristic relative to, I guess, the perception of what you've articulated as resource constrained in mid market customers historically? Yes. So I would it's a great question. I would say, no, the customer is not atypical because they are resource constrained. One of the things that we continue to find is resource constrained cuts across segments. So we've always treated as that over half of the Fortune 500 is resource constrained. You talk to large some of our largest customers, you talk to one of the largest manufacturing organizations in the world, they feel very resource constrained. You talk to some of our large retail customers that are Fortune 500, they feel resource constrained. And so what I would say is that, no, it's not all in terms of the resource constrained nature. And in fact, we expect to see lots more of that over time. And we actually are seeing customers have a bias towards and again, how we emphasize it, what we just did a new study this quarter. Customers are not interested in buying a suite for the purpose of buying a suite. But what they're very interested in, if they can get best in class performance and quality and they can actually get a highly productive cost effective platform that actually allows them to have best in class capability, they're absolutely 100% interested. Now to your questions about what's the traction progress, well, I would say it's steadily increasing. I think that we still have more upside in front of us. I think we're just starting to tap the edge of that surface, and we see that as a building momentum over the next several years. Great, thank you. Thank you so much. Thank you. And our next question comes from the line of Saket Talvayo with Barclays. Your line is open. Okay. Hey, guys. Thanks for taking my questions here. Can you hear me okay? Yes, I can. Just fine. Thank you. Okay. Excellent. Excellent. Hey, Corey, maybe first for you, I kind of want to build off that last line of questioning, but maybe weave in something you talked about last quarter, which is some of the experiments the team has done with bundling. Can you just dig into that, what bundling means for Rapid7? What the opportunity could be? And maybe as part of that, maybe touch on how that sort of factors into what sounds like a higher ARR target per customer. Does that make sense? It's a great framing. And I'll start with your last frame about the ARR per customer. So that's one of our big goals is to drive up the ARR per customer. We've moved from the high teens to the 30s and now the 40s, and we actually see very clear line of sight to 60 ks plus ARR per customer. And where we think a lot of that actually comes from is a combination of customers adopting more of their environment and also adopting multiple products. And we're well on the path there. The fundamental experiments that we I would say both the research and the experiments that we actually did really fall to a couple of categories. One is that we now have the capability to do add ons. And you can think about sort of the add ons, whether that's the NTA add on for the network traffic analysis in IDR or the EET for the endpoint telemetry add on for IDR or the SOAR as an add on to our products in addition to sort of a landing fill. That is a capability that we're actually have been doing lots of piloting and lots of exploring and customers really like that model to actually provide the flexibility. And our goal is to have the simplest possible pricing and packaging, but we also want customers to have the flexibility to actually get some of this economical for where they are in their journey. And that's really what we were trying to do in lots of our research and say that we have customers that are looking at a single solution. We have customers that are looking at a single solution, but they think they want to move very fast, so they may want to have some extensions to it. And then we have customers that want to tackle multiple problems at And so when you think about our focus of these things is that we want to make sure it's as easy and as cost effective as possible for customers to say, listen, I want to build out my entire security program quickly and I want to actually look at multiple packages together. That's a simple value proposition. Customers say, listen, I want to start here, but I actually want to actually build up my sort of like solutions in my SecOps platform over time. We want to make it as easy as possible for them to start and then to expand over time. And so that's where we actually did the research. What I would say is that the research has absolutely validated customer interest. We're in the process right now of consolidating that, honing a few more of the trial experiments, and we will start running that out over the course of 2021. What I would say is that from a benefits perspective, we expect the largest benefit of that to hit 2022 forward, but we will see some positive benefits in 2021, primarily because we're just seeing positive interest from customers in our best of breed platform. That's very helpful. Maybe for my follow-up for you, Jeff. I think the net revenue retention came in at about 103%. I think we've seen this from other security companies as well, whether it's a combination of sort of lower employee counts, lower upsell amidst the pandemic, etcetera. But can you just maybe touch on what drove the downtick in net revenue retention from last quarter? And just as importantly, where do you think that bottoms? Yes. I'll make a couple of points. One of the primary factors is that we've seen a mix shift in our new ARR going to IDR customers versus VM. And they tend to buy more of their environment upfront and resulting in larger deal sizes as opposed to buying in pieces unlike the VM products. Also, renewal rates are still healthy. And this quarter, we also had more than 50% of our new ARR coming from net new customers as opposed to the base. So we do have a healthy balance from new ARR base as well as new customers. We do manage to total ARR, which was solid in Q3. And to your last question as to where it might go, we did forecast a decline over the course of the year. And while we might see a modest decline, we would still expect ARR customer ARR per customer to continue to grow and that's a primary metric. Got it. Very helpful. Thanks guys. Thank you. Our next question is from the line of Matt Hedberg with RBC Capital Markets. Your line is open. Hey, Matt, are you there? Sorry, guys. Yes, thanks for taking the question. It was really good to hear of the growth in your transformational offerings. I think that to me, it feels like there's a large sort of correlation to your increased ARR guide for the year. But I guess my question following up on Saket's question, when we look at new customers, I think they grew 8% this quarter. And I guess either for Jeff or Corey, when you think about ARR growth, how do you think about sort of new customer adds selling more into what looks like even larger customers and larger initial deal sizes? And then on the flip side, sort of through kind of your expectations on quarter rep additions into Q4 as you kind of think about 2021? I'm happy to jump in, Dussar. I think it's a great question. So the first thing is, when we think about customers, our primary focus is really sort of 2 distinct areas. 1, we of course is growing AR for customer, but we're still actually very, very focused on growing customers overall. Now I'll add 2 sort of important characteristics to that. The first is our focus in the organization is going platform customers. We think platform customers have the highest ARR potential overall the highest customer lifetime value. So we have a high focus on growing the platform customers and that has actually grown at a much higher way. And that comes at the expense of some of the transaction customers that may have just done metasploit and one off projects over time. We're happy with that trade off all day long. So internally, I managed for platform customer growth versus just the sort of like the total customer growth. That said, we still plan to grow total customer growth over time. As for your second question about sort of how we think about these sales investments, clearly the market demand in the near term, you can think about we have good visibility into this year, was higher than we expected a few quarters ago and that's a good thing. And we actually are very confident in the market demand in the long term. In the middle about like when do people get budgets, whether it's Q1, Q2, Q3, we're not worried about that. We're looking at some of the long term demand characteristics. And so therefore, we are making some investments this quarter to actually right size our sales force and we expect productivity to go up next year, but we are making some investments to right size the sales force for the demand that we're also seeing in the market. Even while we continue to show improved profitability this year and as we committed before, we expect to continue to get ongoing leverage as we go into 'twenty one. That's great. Super helpful, Corey. Congrats again, guys. Matt, one point I'll make on the platform customers, our net in terms of just platform customers, the net increase was a little over 300 customers. So you can see that it's overall those are growing much faster than our overall customer growth. So what we're churning are low ARR customers, non strategic customers. Super helpful. Thanks guys. Thank you. And our next question is from Gur Talpaz with Stifel. Your line is open. Okay, great. Thanks for taking my questions. Corey, in terms of the threat environment, we've seen a pretty sharp rise here in ransomware attacks over the past few months. When you sort of think about your installed base and your broader engagement, has this created a broader shift in urgency for either VM or the I'll just comment on both of those. One, I would say, I'll just comment on both of those. One, I would say VM remains healthy, and it remains in line with some of the expectation that we set last quarter of that sort of like mid teens plus revenue growth. So we think the VM demand is actually better than we actually done a couple of quarters ago, and we see that continuing throughout. I would say lots of the demand that we're seeing, if you want to tie it directly to ransomware, probably goes into this whole category of do I have the right monitoring solution in place to actually monitor my overall environment and security operations. And so I'd say that's one of the catalysts of IDR adoption and growth. I don't think it's a primary driver necessarily of our cloud growth. I think that comes from more digital initiatives. But I do think it's one of the contributors to some of the strong and healthy demand that we're seeing in our IDR practice. That's helpful. And you talked about a midterm pathway to 60 ks in ARR per customer. In the past, you talked about a potential take of around 200 ks. Is it still fair to think about the long term viewpoint in that threshold? Or should we adjust our lens here? Well, it's actually gone up. We haven't updated the numbers since we actually really expanded and went deeper on our cloud offerings since we got more visibility into some of the automation stuff. So that's something we'll update at the Analyst Day. I think Sunil is working on getting that data out, but it will be in Q1, I expect, at some point. And I think we'll talk more about it there. But the number is higher than $200,000 right now, but it just didn't make sense to actually update that before we go into the Analyst Day. Okay, that's helpful. Thank you. Thank you. Our next question comes from the line of Jonathan Ho with William Blair. Your line is open. Hi, good afternoon. I just wanted to first of all get a sense of how much contribution Derek was from DiviCloud and if you can maybe give us a sense of what that ARR contribution was as well? Thanks. Yes. So in terms of revenue, it was about $2,300,000 in the quarter. We're not breaking out the specific contribution of giving ARR in the quarter. It's doing well. And I'll just remind you that at the time of the acquisition, we brought on $10,000,000 of ARR at closing. Got it. And then just in terms of the digital transformation maybe opening up some of these new opportunities, Can you give us a sense of what this means around both Divi Cloud and your cloud solutions? And is this like the number one priority that you're seeing for customers? I just want to get a sense of how big of a driver digital transformation is? Well, I don't know if it's number 1, I'd say it's definitely top 3. I mean, it's definitely something that most of our customers are talking about and looking at in some material way and planning around. And there are different levels of maturity there, but I would say we see lots of momentum in customers trying to sort through how they become relevant as the world moves more and more to cloud. I mean that is something that's on lots and lots of customers' mind. As Jeff pointed out, like DevCloud is doing great, but it's still coming off a small base. That's actually there, but I think it's well exceeded our expectation. And we have other cloud capabilities that we've actually added into DiviCloud internally. And the DiviCloud team has continued to innovate with some really impressive technologies around identity, governance and some other areas. So I would describe it as lots of customers that I see are actively looking at how they actually think about taking their operations more digital. Security is front and center in the conversations. So we're seeing plenty of opportunity over the next several years to actually grow and expand in that direction. Great. Thank you. Thank you so much. Our next question comes from the line of Brian Essex with Goldman Sachs. Your line is open. Hi, this is Arun Amorn here for Brian and thank you for taking the question. So thank you for the color on the traction that you're witnessing with Debit Cloud. And probably following up on Jonathan's question, just wanted to understand the mix of opportunities for ARR expansion you are actually seeing coming from the cloud in terms of, let's say, better overall platform penetration or uptick from potential module launches going forward like cloud I'm Governance that you announced this quarter? And also as you highlighted with large deal wins with Devic Cloud, is it more of a greater greenfield opportunity compared to competitive displacements or do you strike balance here? Well, I'll start with the last question. The overall cloud market is very early to devolution, so it's mostly greenfield. And yes, there's competitors there, but it's a mostly greenfield market, which we view as positive. I think if I go back to some of your earlier questions, I would describe it as there's 2 select growth drivers. There's 1 customer expanding their cloud environments. And so, Divvy Cloud had natural growth that's actually built into the expansion. 2nd, Divvy Cloud team has some great expansion capability and modules that we're actually adding on that allow additional sort of value to customers over time, that also provide incremental ARR for customer over time. And so I would say it's a 3 pronged sort of like thing, lots of new customers and greenfield opportunities, customers expanding, which is super positive, and they have the ability to actually provide incremental capability of functionality that's valuable to customers that allows us to continue to expand in ARR for customers. Our next question comes from the line of Hamzah Fodderwala with Morgan Stanley. Your line is open. Hey, guys. Thank you for taking my question. Corey, my first question for you was just around the recent announcement of the cloud IAM module for the Divi cloud. Just wondering if you could give us any color as to what sort of drove your decision to get into the governance identity governance space, kind of what you're offering versus maybe some of the existing solutions out there and kind of what the early response there has been? Yes. The response was positive, but I do want to actually add a couple of applications. So this is not us entering the IAM market as you would typically think about it. In fact, our primary competition is sort of like a similar offering as I think we introduced by Palo Alto here and a couple of very real estate startups. So let me just talk about what it is to make sure that everyone's clear. If you think about cloud environments, you have the users that we actually think about, but you also have a mass of applications and rights, privileges and roles and entitlements that actually go along with that. And that can actually get very, very complex very fast. You can think about it as its own form of configuration management, but it also introduces massive risk. And so the way that I really think about it is that there's so many aspects of the cloud that has its own set of rights, privileges and entitlement and understanding what things like effective access mean is an analytics problem and the solution to that is also an automation problem. So this is really about sort of like how do you think about analytics and automation in a cloud context that happens to be around identity, which is very core to what sort of our both cloud and DIVITY initiatives have focused on. Rapid7 is an analytics and automation platform. So of course, we would tackle the analytics and automation problem as it relates to the cloud. And we think that in this space, we think about as cloud identity entitlement management, I think other people use that terminology. We think in this space it's both extraordinarily strategic for our customers and the feedback that they've given us so far has been that this is the right path and they want to see us continue to invest here and we've already got some early traction. Got it. That's helpful. And then a follow-up question for Jeff. Just curious on how did the gross renewal rates trend in Q3 versus maybe some recent quarters? And how are you thinking about renewal rates going forward as we were likely to remain in a more uncertain macro environment for the time being? And that's it for me. Thank you. Yes. I mean, at the beginning of the year, we did say that the renewal rates would decline over the course of this year, which they've done. Are you asking not the overall renewal rate, you're asking our expiring renewal rate? The churn rates essentially, yes. Yes. That's been very consistent. It stayed in our historical range and we've seen nothing no changes there at all. It's still healthy. Yes. We are doing a what I'll comment, I think our team and our customers, we're doing a very effective job of retaining customers with a special focus frankly on like we see very good rates around our platform customers, which I think is important. When you think about sort of how we look at it going forward, if you take out, I would say, mix shift of the fact that from an ORR perspective, we're having to be doing more IDR deals, which are larger upfront deals. Our focus as we actually go forward again is to really grow and retain platform customers because that's where all the value comes from and that's where all of the, I would say, the scale and the leverage where you get both growth and profitability over time. So looking at both grow and retain that mix of customers over time and then really leverage our packaging and pricing strategy to actually drive cross sell and up sell as we actually go along. And again, we'll talk more about that in our Analyst Day, but I would say that strategy is playing out quite well. And I think we have good visibility. Now, mix shift will call some puts and takes as we actually go into the future. But I would say the if you think about the core of the strategy is always doing an effective job of growing and retaining platform customers. And what does that do to the economic engine over the next couple of years? I say that's going extraordinarily well. Our next question comes from the line of Adam Tindle with Raymond James. Your line is open. Hi, thanks. This is actually Alex on for Adam. I was just curious, just speaking with some of your customers, we've noticed that one of your competitors may actually becoming a shared donor due to a lack of innovation and kind of being slow responding to customer requests, potentially leaving some share on the table for the grabbing. Have you noticed that? Have you how does the current competitive environment sort of stack up in your core VM market? Okay. So this is a question about the core VM market. I would say as I said earlier, I think you may recall is that I think the dynamics of VM are much healthier than we expected expected as we go out. And so really it's the combination of I think the innovation that you're seeing astuteum. Customers really like our focus on productivity, scale and ease. So we're continuing to make investments and drive innovation in the VM market, and that's resonating well with customers overall, which gave us the confidence last quarter to actually sort of increase our expectations around VM and frankly talk about the durability of that. And then to your question, I agree that customers long term are actually looking at like who are the strategic players in the vulnerability management market, and we see that as an opportunity. And so our team internally is very, very much focused about how do we continue to grow our share of the overall vulnerability management market, and we see ourselves as a sustainable share taker in that market. Okay, perfect. Thanks. And then just a follow-up if I may. Do you have any color on ARR growth? It looks like there's a slight deceleration in this quarter and guidance kind of implies a deceleration into the end of the year. Do you any commentary on that? I mean, when we think about our overall IRR growth, we think that 29% is extraordinarily healthy, especially in this macroeconomic environment. And when we see it going forward, our real focus is on sort of like sustainable doable aspects of the ARR, especially around our platform customers. You'll also note that I talked earlier about some of the investments that we're actually making to increase back our sales capacity because we actually paused some of those as we were going through periods of the pandemic. And a lot of that has to do with what we see a very, very healthy demand environment over the midterm. Okay, perfect. Thank you so much. Thank you. Our next question comes from the line of Alex Henderson with Needham. Your line is open. Thank you very much. Can you hear me okay? I can hear you just fine. Thank you. Perfect. You've talked about rightsizing your sales force multiple times over the course of the call. It is clear to me that you've got a great product suite and that you're getting great uptake on it. Can you give us some idea of what the rate of expansion of your sales force is going to look like and what your targets are? Do you expect to increase your sales staffing capacity faster than your top line? Or do you expect to continue to drive to margin expansion within that specific line or is margin expansion coming from R and D or G and A leverage? That's a good question. It seems like there's an opportunity here to drive your competitive edge. Yes, it's a great question. So what I would say is that we do see very, very healthy demand, but we expect to continue to get leverage in the overall business. What I would the way I would describe it is that we expect 2021 to be back on the growth profitability model that we actually gave last year. We'll continue to get ongoing leverage while we actually really focus on sustainable growth in the overall business. So the leverage is across all operating lines or across the sales and marketing specifically? Yes, I would say it's a so we're looking at generalized leverage across. I would say sales and marketing is to ask you a core question is that are we planning to make sales more inefficient to drive growth and the answer is no. Now I think that just put it in practical terms is that, sorry, put it in practical terms is COVID year was sort of somewhat special. We do expect sort of like improved productivity off of this year and we actually see enough demand to actually improve the productivity for this year. So I would expect sales to be part of that improved efficiency. And then the second question if I could follow-up. You're clearly increasing revenue per customer, but I was wondering if there if you were to look at your customers, are the size of the customers that you're now on average moving up as well? Is that also part of the equation that you're penetrating into higher accounts, larger accounts and more strategic accounts? Yes, I would say yes, that's definitely an element of the equation. I don't want to imply that it's the only element of the equation, but I would say it's one of the elements of the equation that's happening. We also are growing the ARR customer of even our midsized customers. So, you know, the way we think about it is that you have different size cohorts of customers and we're looking at the dynamics of that. And so what we really want to see is increased adoption, which we've actually talked about, especially the platform, but we also want to see ARR expansion within different sized cohorts. But to answer your question, yes, we are having greater success in penetrating some of the larger enterprise customers. Great. Thank you very much for taking my questions. Thank you so much. Our next question comes from the line of Gregg Moskowitz with Mizuho. Your line is open. Okay. Thank you very much and good afternoon or good evening guys. So Corey, there are a lot of SIEM vendors out there and yet you continue to execute at a very high level with IDR. I know you don't compete head to head all that often for SIEM deals, but you did call out one displacement this quarter. And so I'm curious if you're seeing any changes competitively speaking that you would also point to? No, I would say when we start off on our SIEM journey, we really were doing lots of greenfield. It actually started off with a small slight mid market, so like bias. Well, I'd say now we're competing effectively across the board. And we definitely we win a lot, we lose a few, but what I would say is that we are becoming a mainstream film leader across the board. And I think that gives us lots of upside potential over the next couple of years. And when you really look at the underlying foundation of that, it's that it should be one of these enduring platforms that is still continuing to provide scale both in leverage and satisfy our customers in the both not just the short term, but also in the mid to long term. Okay, that's very helpful. And then just maybe as a follow-up, we've been hearing about some improvement in your federal business. Know that has not been a particularly strong area for Rapid7 historically. Is that something that you're seeing as well? And if so, just wondering if you could update us on why you may be getting traction in the federal vertical? Thank you. Yes. I would describe the federal vertical as stable. I think we have a strong public sector practice. When you look at both the state and federal together. I think that really one of the aspects of the federal is remember we've actually moved a lot to our cloud infrastructure and our platform infrastructure. And that's just a while it's stable, it is a different road to toe to actually have a primarily SaaS platform in the federal. Now we're seeing inroads. We expect that to grow over time, but we're actually patient about how that works its way through the system. Okay, got it. Thanks Corey. Thanks, Patrick. And I'm not showing any further questions. So I'll now turn the call back over to Corey Bonis, CEO for closing remarks. Well, I just want to thank you all so much again for joining us today, and I hope you and your family stay safe during this time. Thank you. Ladies and gentlemen, this does conclude the program. Thank you for participating. You may now disconnect. Everyone have a great day.