Earnings Call: Q3 2019

Nov 5, 2019

Good day, ladies and gentlemen. Thank you for standing by, and welcome to the Third Quarter 2019 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 I would now like to hand the conference over to your speaker today, Niraj Mahajan with Rapid7. Please go ahead, sir. Thank you, operator, and good morning, everyone. We appreciate you joining us today to discuss Rapid7's Q3 financial and operating results in addition to our financial outlook for the Q4 and full fiscal year 2019. With me on the call today are Corey Thomas, our CEO and Jeff Kalosky, our CFO. We have 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 filed. This call is being broadcast live via webcast and following the call an audio replay will be available at investors. Rapid7.com until November 12, 2019. As a reminder, our discussion today contains forward looking statements about events and circumstances that have not yet occurred, including, without limitations, statements regarding our objectives for future operations and future financial and business performance. These forward looking statements are based on our current expectations and beliefs and on our information currently available to us. Actual outcomes and results may differ materially from expectations contained in these statements due to a number of risks and uncertainties, including those contained in our most recent quarterly report on Form 10Q and 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 as 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 primarily be in non GAAP terms and reconciliations between our GAAP and non GAAP results and guidance can be found in today's earnings press release. At times, in our prepared comments or in response to your questions, we may offer incremental metrics to provide greater insights into the dynamics of our business or our quarterly results. Please be advised that this additional detail 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, Neeraj, and good morning, everyone. Thank you all for joining us today on our Q3 2019 earnings call. I am pleased to announce that Rapid7 had a great 3rd quarter. Year over year, our ARR grew by 43%, and again, we exceeded the high end of our guidance with revenue growth of 33% and a non GAAP operating profit of $500,000 The main highlight this quarter is that we want to get accelerated our customer growth with all of our platform products contributing. We grew customers by 17% and ended Q3 with more than 8,600 customers. Average ARR per customer increased by 22% year over year to $36,000 and recurring revenue expanded to 88% in the Q3. These results reflect a good demand environment, great expense control and excellent execution across the board With a strong focus on product innovation and a well diversified product portfolio, we see a large opportunity in front of us and are well positioned for future growth. As a result, we are raising our total revenue and non GAAP operating income guidance for the full year 2019. Now let's review the 3rd quarter results. We delivered strong growth in the 3rd quarter with ARR growth of 43% and revenue growth of 33%. We have continued to make investments in our business and focus our teams on driving customer adoption, which has resulted in exceptional customer growth. In addition, our team has done a good job of maintaining strong retention rates, resulting in strong ARR and top line growth. We believe customer growth today is key to our long term sustainable growth because every customer we add today generates significant opportunities over time. Our results reflect consistent strong performance across our Insight platform. We are gaining market share vulnerability management as customers appreciate our platform roadmap and tightly knit integration with the broader security ecosystem. In addition, our results are driven by the significant strength of InsightIDR. As our SecOps vision resonates with resource constrained organizations of all sizes. Most organizations are trying to scale the management of their security practice with limited resources. The task of finding potential threats is difficult, but when combined with the efforts of prioritizing these tasks and responding to them efficiently in partnership with IT, security practitioners are overwhelmed. We believe our unrelenting focus on our customers' productivity and our strong product roadmap truly differentiates Rapid7 from the competition. As our customers' IT infrastructure moves away from an on premise to a hybrid environment, we are helping identify, prioritize, remediate and automate vulnerabilities and attacks across their evolving digital environment. This focus led Forrester to yet again name InsightVM a leader in its Q4 2019 vulnerability risk management Forrester wave. In Forrester's words, Rapid7 is focused on helping clients understand the vulnerability risk their business face and Rapid7 is a strong choice for any company looking for a VM tool that can streamline their decision making processes. Our results and momentum are driven by strong technical innovation that focuses not just on delivering insights, but leveraging those insights to drive collaboration and operational productivity. In InsightVM customers see this in our remediation management workflows with goals, SLAs and automation. In InsightIDR, our customers see this with our integrated investigations and automated containment. In the cloud, we have a significant focus on not just analyzing cloud environments, but also driving the scale and productivity of cloud security management. Our platform strategy allows us to collect customer insights more holistically, but what customers are really demanding is that these insights returned into operational excellence and productivity, which we achieved both through integrations and our platform automation capabilities. An example of our focus on innovation and customer productivity is our recent win with 1 of the largest discount store operators in Europe. This customer understood their potential risk exposure from the very beginning, but had limited security resources and hence needed a highly efficient VM solution and incident detection and response capability. This customer decided to build a new security program around both InsightVM and InsightIDR, leveraging our out of the box seamless product integration. Finally, we continue to drive leverage in our business. In the Q3, we generated another quarter of non GAAP operating profit of approximately $500,000 We remain confident about our path to durable growth and profitability and intend to continue investing our resources to add long term value to our customers. In conclusion, 2019 is shaping up to be a great year for Rapid7. Our continuous focus on innovation has allowed us to grow top line in excess of 30%, while significantly improving profitability. With that, let me turn the call over to our CFO, Jeff Golowski. Jeff? Thanks, Corey, and good morning, everyone. We're very pleased with our strong performance in the 3rd quarter with results that again exceeded our guidance on all metrics. Total revenue for the Q3 was $83,200,000 above the high end of our guidance and an increase of 33% year over year. This strong revenue growth was driven by better than expected product revenue growth. Total ARR grew to $310,000,000 at the end of the 3rd quarter, a 43% increase year over year. As Corey mentioned, ARR growth was primarily driven by strong customer growth. Our customer count increased by 17% year over year and we ended Q3 with over 8,600 customers globally. The quality of our customer base continues to improve as higher growth in our product customers more than offset the decline in our service only customers. Our customer economics remain strong with average ARR per customer increasing to $36,000 up 22% year over year. Strong growth in ARR over the past year drove 44% growth in recurring revenue and recurring revenue now constitutes 88% of total revenue compared to 82% a year ago. Our focus on recurring revenue drove a 54% increase in our product revenue year over year. This was partially offset by a decline in maintenance and support revenue as Nexpo's customers migrate to the Insight platform, resulting in reclassification of maintenance revenue to product revenue. Therefore, similar to prior quarters, we believe it's more useful to look at product and maintenance and support revenue together, which collectively grew 40% year over year. In line with our expectations and consistent with our commentary on previous earnings calls, our renewal rate declined in the quarter by 2%. I also want to mention that we adjusted our renewal rate calculation in Q1 2018 to exclude certain upsells and cross sells where the customer was less than a year old and therefore not directly attributable to the renewal customers. While this slightly lowers our historical renewal rate by between 1% and 3%, it is important to note that the year over year trends are largely the same as the previous calculation and our underlying retention rates remain strong. Our professional services business declined by 16% year over year and is now 8% of our total revenue. For Q4 2019, we expect professional services revenue to continue to decline on a year over year basis. Looking at the business geographically, revenue from North America grew by 31% year over year and comprised 84% of total revenue. Rest of the world revenue grew by 45% year over year and comprised 16% of total revenue in the 3rd quarter. Turning to margins. Total non GAAP gross margin was 74%, similar to Q3 last year, and our combined product and maintenance non GAAP gross margin was flat year over year at 80%. During the Q3, sales and marketing expense improved to 44% of revenue when compared to Q3 2018 expense of 46%. R and D expenses were 19% of revenue in Q3 2019, down compared to 23% in Q3 twenty eighteen, but similar to that of Q2 twenty nineteen. G and A expenses in Q3 twenty nineteen were stable at 10 percent of revenue when compared to Q3 last year. For Q3 twenty nineteen, we generated non GAAP operating profit of approximately $500,000 well ahead of our guidance. Non GAAP operating margin was 1% compared to a margin of negative 5% in Q3 2018. Adjusted EBITDA for the Q3 was $3,400,000 and diluted non GAAP net income per share was $0.01 also well ahead of our guidance. We ended Q3 with cash, cash equivalents and investments of $258,000,000 compared to $264,000,000 as of Q2 2019. The decrease was mainly driven by the ongoing investments in our global headquarters. Contract length for Q3 2019 was 15 months, down from 17 months a year ago, but increased by a month from Q2 2019. During the quarter, operating cash flow was $1,800,000 as compared to negative $4,100,000 in the prior year. As we outlined throughout 2019, we have continued to reinvest our excess profits to drive sustainable growth and profitability. The timing of these investments has resulted in a revised cash flow from operations estimate of approximately negative $5,000,000 for 2019. Now moving on to the guidance. For Q4 2019, we anticipate total revenue to be in the range of $87,400,000 to 89,000,000 dollars This guidance reflects the strength of product revenue growth despite the decline in professional services revenue. We anticipate non GAAP operating loss in Q4 2019 to be in the range of $1,600,000 to $600,000 We anticipate non GAAP net loss per share for Q4 to be in the range of $0.02 to 0 point 0 $0 which is based on an anticipated 49,600,000 weighted average shares outstanding. For the full year 2019, we are raising our guidance and now anticipate total revenue to be in the range of $322,700,000 to $324,300,000 which is 33% growth over 2018 at the midpoint. Given our significant outperformance in operating profit year to date, we are now projecting our full year non GAAP operating income to be in the range of $0 to $1,000,000 We anticipate non GAAP net income per share to be in the range of $0.03 to $0.05 which is based on an estimated 52,100,000 diluted weighted average shares outstanding. The weighted average shares outstanding for the Q4 of 2019 represent basic shares outstanding given our projected non GAAP net loss. The weighted average shares outstanding for full year 2019 represent the diluted shares outstanding given our projected non GAAP net income. Non GAAP income for full year 2019 largely represents interest income of projected cash and investments. On a GAAP basis, we expect a full year net loss for 2019. In conclusion, Rapid7 had a strong 3rd quarter and we look forward to delivering a strong 4th quarter. With that, we appreciate your time and support and we'll now open the call for any questions. Operator? Thank you. And our first question comes from Saket Kalia of Barclays Capital. Your line is now open. Hi, guys. Thanks for taking my questions here. Apologies for the background noise. Can you hear me okay? Yes. We can hear you just fine. Okay. Excellent. Excellent. Well, hey, maybe first for you, Corey. Just zooming out a little bit, can you just talk about the overall health of spending on vulnerability management tools, especially with some of the macro concerns out there? What are customers telling you about the willingness to invest here and in areas like SIEM just broadly? Yes. So we feel very positive about the overall spend environment and dynamics. And that's primarily because when we look at the broad customer base, we still see plenty of greenfield opportunities. We see lots of customers upgrading their programs, and we see the priority really about how they operationalize their overall security programs. So people want not just data and insights and analytics prioritizations, but they also want to figure out how to translate that data into action and collaboration across their security and IT and DevOps teams. And so we see a fairly strong demand for that. Got it. Makes sense. Jeff, maybe just my follow-up for you. It's been a really solid year thus far on ARR. ARR. Last year's strength is obviously this year's tough comparable. And I think we all see the tough comparable on ARR in Q4. So I guess the question is, are there any guardrails that you want to give us just in terms of how you think about that tough comp in ARR here in Q4 in particular? Yes. So remember last year we grew 53% in Q4. It's our largest quarter of the year. And remember that the 2 year transition started in Q2 2017. So Q4 2018 to Q4 2017 had a favorable comp with respect to the model shift because we were still we still had a lot of perpetual in Q4 'seventeen. So the ARR year over year change was greater in 2018. Having said that, we it is an annual metric and we don't change it quarter over quarter. We don't want to guide to a specific ARR number, but we're comfortable with where we are on saying over 30%. But I would keep in mind that's some color on really the difference between Q4 this year and Q4 of a year ago. That's very helpful. Thanks guys. Thank you. Thank you. And our next question comes from Matt Hedberg of RBC Capital Markets. Your line is now open. Hey, guys. Great. Thanks for taking my questions. I guess, first of all, congrats on the acceleration in new customer growth. That was pretty impressive. And I guess, Corey, digging into that a little bit, when we think about the variables for customer adds, how can you help us with how quickly you think about growing sales capacity relative to customer growth? It's a very good question. So at the top line, what we've talked about is that clearly our sales and marketing over time is going continue to get more and more productive. And so we're always looking about how do we actually add productive capacity. And really, the way to think about that is because we're a platform, we have existing businesses that are scaled like VM, which still has very healthy growth dynamics, especially around the world and SIEM, which is both a scale business, but also a massive growth in front of it. And the productivity, especially in our SIM business, is continuing to escalate as we actually scale. And then we're actually bringing on new technologies and offerings that allow us to actually continue to scale the business over the next several years. And so what we're really managing to is a model that actually says, how do we actually increase our productivity and our contribution and our profitability from our sales and marketing engine each and every year. And what that ends up translating to is that we're adding new customers for new segments and new offerings. And for existing businesses, we're actually adding more and more customers and ARR for sales reps. That's how you actually get to the acceleration there. Got it. And then, I guess even with the strong customer adds, ARR per customer saw a nice uptick. When you think about average mods per customer, I mean, I assume you're getting a lot of upsell, but it even seems like maybe newer customers are making large initial purchases with you. Can you talk a little bit about that dynamic? Yes. So early, we are seeing very good growth dynamics in customers that are actually, if not buying multiple products up front, they're actually starting to plan for a multi product platform strategy. And that's the qualitative feedback that we're actually giving to our sales teams overall. I would say the one thing that we're actually managing to is that we have a strong focus on just adding customers now because we're at the stage where we have very high confidence that we'll be able to cross sell and do more upsell over time. So our core focus today with our sales teams is just incentivizing the focus on adding new customers, mapping out future sales. So we really don't care whether the future sales happen in the at the time of the initial deal, within 6 months or within 18 months or within 2 years. We are just looking to add a customer today and that gives us a multiple of the initial deal over the next several years and that's the way we sort of plan for and operationalize our model. Got it. Thanks a lot guys. Thank you very much, Aaron. Thank you. And our next question comes from Gur Talpaz of Stifel. Your line is now open. Hey, thanks for taking my question. Corey, as you're pushing to 2020 and beyond, you've made a lot of investments here in products like AppSec and Connect. How should we think about your comfort with the pipeline for those solutions? And how do you think about their potential to be contributors in the future 2020 and looking and even beyond that? Yes. So the way that we actually set up our dynamic is, you can think about it as a rolling pipeline, is clearly we have VM, which is our strongest, most established offering, which has a very healthy overall market dynamics. SIEM, we have incredible, increasing brand recognition. We have a great market opportunity. And we're also not just building pipeline, but we're on that. So you see the growth of that, but the opportunity of that is massive in time. And then what we've actually put stakes in the ground around is application and SOAR, which we've started to ramp up this year, we'll be ramping even more next year, but we look at those as primary contributors in the 2020 to 2024 timeframe that allows us to continue maintain growth over longer term time horizon. If you take a step back to when we actually did our original sort of like Analyst Day in '17, we actually had the offerings. And the big question was when we ended, what position will we end in and how would that affect our growth and our opportunity in 2020 to 2024? Well, the great position that we're in today is that we're clearly going strong. I believe and our team believes we have strong growth opportunities and a strong demand environment over the next 3 to 4 years, and we have excellent expense controls. And so as we actually look forward, it's really we are in this really unique position with a strong demand environment and great expense controls where we're investing at the pace of growth and the opportunity that we actually see. And right now, we see a significant opportunity, We're going to be investing in that opportunity and we're going to be growing and scaling. And the position that we put ourselves in is that we'll be both expanding margin and growing, but we are going to be investing to actually maximize the growth opportunity over that time even as we are actually expanding margin. And you can think about our margin expansion being highly tied to basically the rate of overall top line growth, which is then tied to basically how much traction we're getting from our core offerings over time. That's really helpful. Thanks for that. And then Jeff, maybe just one for you. Recurring revenue here as a percentage of total, it's starting to level out. Obviously been growing really nicely. How should we think about that going forward? I think in the past, you've talked about sort of certain dynamics with the ProServe business as you push into future periods. But as you sort of look at the overall business mix, how do you think about the leveling out of recurring revenues as a percentage of total mix? Thanks a lot. Yes. So, Gur, professional services will probably be flattish next year to where it is now. So that's kind of leveled out. I believe it was less than 10% of total revenues right now. We are 88% this quarter. Next quarter, we'll probably be about the same and should tick up to over 90% next year, sometime next year. And it's really the real big change is the professional services revenue. There's the perpetual is declining each quarter. It's just rolling out based on the amortization. That's helpful. Thank you. Thank you. Thank you. And our next question comes from Rob Owens of Piper Jaffray. Your line is now open. Yes. Good morning, guys. I guess building on that question, Jeff, how long should we see this perpetual tail last here? I know it's got a couple of years left, maybe just a little more color because it is rolling off and probably not rolling off as fast as I might have thought. Yes. So we have to spread that over 5 years. So we recast everything as of January 1, 2018. So it will still roll off. Most of the roll off will the material amount of the roll off will be through 2020. After 2020, it will be essentially insignificant. Right now, it's anywhere from about $2,500,000 to $3,000,000 a quarter that's rolling off. So that should tail off pretty much after 2020. Okay, great. And then shifting gears a little bit, Corey, maybe you can touch on your competitive position in SIEM. It's become quite the noisy space across the space, whether it's cloud SIEM, on prem SIEM, it seems like there's SIM offerings from quite a few vendors out there. So what you see relative to competition, why you win and where you're differentiated? Thanks. Yes. No, it's a great question. I would say it's noisy. I think one thing to keep in mind is that Rapid7 has always thrived in noisy competitive markets. And it's really because our value proposition is relatively straightforward is we allow people to do incredibly sophisticated things with extraordinary ease of use, which allows us to both expand and open up markets, but also serve the largest companies who are actually productivity and resource constrained. That's our primary differentiator across all of our products. And it's just something that's incredibly hard to do. Doing something that's complex and sophisticated and making it easy and accessible is incredibly hard to do, but that is our core capability and it allows us to actually differentiate. That said in SIEM, you're seeing really a win win, I think, in terms of what I think is going to be the long term players. Of course, you have Splunk. We're continuing to gain more and more ground every day, and we are invited into more and more opportunities every day. And we have an amazing partner demand for our SIEM technology that we're building capacity to really expand that into partners that are actually coming to us and asking for that opportunity. You see Microsoft enter the space, which will have a great offering. But again, they're really, as far as my awareness, the only other cloud based SIEM in the market today. And it's a massive market opportunity. And I think most of this, if you just look at the core dynamics around SIEM, will shift to cloud based SIEM offerings. And so the setup that you actually see today is Rapid7 is incredibly well positioned, in the market and our value proposition, both resonates, allows us to expand the market, is incredibly difficult for our competitors to emulate. Thank you. Thank you. Thank you. And our next question comes from Michael Turits of Raymond James. Your line is now open. Guys. Good morning. First few, I want to come back to where Saket started on vulnerability management. Can you give us a sense of where you think the growth rate is for VM overall? If you think you're gaining share and how there if anything else besides that value prop around resource constraint? Yes. So the value proposition I hit the value proposition in 1st and foremost is, look, all of us in this space are making investments in analytics, prioritization, visualization. Those are table stakes. Where Rapid7 really differentiated itself is we have an intense focus on workflow and automation. And for most of our customers, they're really concerned about we hear from customers all the time, I have more vulnerabilities than I know what to do with. And before I can even explain my coverage, I got to figure out how to actually work through the vulnerabilities that I have today. And this is where the workflow focus, the IT collaboration focus and the automation and orchestration focus really comes into play and drives preference for Rapid7 because our proposition isn't just that you can actually analyze and prioritize these things, it's that we will actually help you drive the velocity of how you operationalize and remediate these vulnerabilities. And that just stands out to our customers more than anything. So that's the differentiation piece. On the overall market, the data clearly suggests that we're taking share in the overall market. We're growing well above the overall market. We have high confidence in our position. As far as the market growth rates, that's more about detailed understanding about how others are doing. And we're not situated to actually look at the competitor by competitor. But if you look at our growth rates for not just rapid stuff in general, but for vulnerability management and you compare that to the overall market, the data that we have internally says that we're continuing to take substantive share in the broader market. And again, that's driven by what the Greenfield opportunity is also driven because people are upgrading their systems, what they focus on how they actually operationalize with workflow, the IT integration, the collaborations and the automation are core contributors to that ability. Thanks, Corey. And then Jeff, I wonder if you could bridge for us the growth rates between billings, both total and current, which were 25% -ish versus revenue and ARR. As we get through this transition, shouldn't we start to see billings converging with some of these other metrics? Yes. So Michael, I know the calculation you're doing on short term billings, you're basically taking the revenue plus the change in short term deferred. The problem in that calculation is it doesn't capture the reclass of long term to short term deferred. So that 24%, 25% is actually higher. If you go back to Q3 of a year ago, from Q2 to Q3 in 2018, you had more long term reclassifying to short term. Remember, we had more perpetual back then. So, it's really not the same apples to apples comparison. So, with respect to you're right that they should converge. So with respect to how to look at it going forward, so our ARR guidance is really on an annual basis year over year. So if you look at if you back out the services and you take our guidance of the growth rate in ARR, that should translate to the growth in billings. Okay. Thanks, Jeff. Thank you. And our next question comes from Gregg Moskowitz of Mizuho. Your line is now open. Okay, great. Thank you very much and good morning guys. I guess first question, so the net retention of 111%, I did want to ask Jeff, do you continue to expect net retention to stabilize around the 110% level? Or is there any change just in light of the modest adjustment in methodology around upsells and cross sells? Yes. On the previous call, we said it would end around 110% by the end of the year. So, on an apples to apples basis, we saw a change in the calculation of between 1% and 3%. So, that rate could that 110% could be affected by that 1% to 3%. That's what we're seeing right now. Okay. That makes sense. Thanks, Jeff. And then just on the Q2 call, you did an answer to a question, I think provide a high level overview of revenue and ARR growth in 2020. I realize, of course, there's no specific guidance for next year at point. I'm just wondering if you had any update from to your comments from last quarter? Yes. I think I was the one that made a passing comment about it. Really the focus of the comment there and the view hasn't changed now is that if you think back to what we had said before, one of the things we were aware of is the question about like how we exit the year and what does that mean for the future. Well, we're exiting the year as a growth company and we see ourselves as a growth company in the future. So we're primarily about the fact that we have a massive demand environment. And so the way that I think about and the way that our team thinks about things going forward is we have a great demand environment. We have great expense controls. And so as we go into next year and as we go to our analysts say, we're in the good position to have a model that says as we grow faster and as we actually continue to actually expand the market and take market share, we will actually be investing more. If the growth is lower, you can expect a much faster growth in the overall profit that we're going to be generating. But we're in a great position because we have great expense control as a demand environment to say, investment growth as long as we're growing. And if the growth is sort of not as high as we believe it can be, then we actually invest in growing our profit margins. We are uniquely positioned to really have this balance. And right now, we've been investing in an investment that actually generated substantial growth while we're growing margin. And so our commitment is we're going to continue to actually both grow focus on growth and expand margin. And it's really what's the rate of one versus the other and keeping that in balance is our core focus area. But again, we'll walk through everyone in the model next year. But what I wanted to do was be extraordinarily clear is that, we are exiting not just a much higher level, we're exiting at higher growth rates than what we originally had socialized several years ago. And so we're really focused on this balanced position, investing in growth, while still actually growing profitability at the commensurate rate. Okay. That's helpful. Thanks, Corey. Thank you. And our next question comes from Jonathan Ho of William Blair. Your line is now open. Hi, good morning. Can we maybe start with the international growth opportunity? And are you guys seeing any macro challenges regionally? What are sort of the opportunities to invest in? Just want to understand a little bit better the dynamics there. I guess, Jeff, I can say. I think my observation is that we're not seeing challenges outside geopolitical challenges is that we're a thought based company. And so we've had to really focus in on areas and regions where we've made cloud infrastructure investments as everyone wants their data in their own regions. So that's been sort of like one overall change. But that's it. We're having very healthy growth continue internationally and overall, and that's continuing to scale at the overall business scales. Got it. And then just as a follow-up, how did your U. S. Federal government business do this quarter? And what opportunities are you seeing there? Any concerns over potential shutdown? Just wanted to get a sense there. Thank you. Yes. So I think it did well. Just keep in mind that federal government is still a small part of our business and it's not one that we're heavily dependent on. It's one that we'll continue to invest in and expand over time. But if you think about our 2 public sector practices, we have a massive investment in SLED, which is performing well. And then we have a federal practice, which is early stages, but we have an incredible team there and they're doing quite well. And over the multi year horizon, we expect that to grow and do healthy and contribute more over time. But it performed in line, but I just want to be clear, it's sort of like it's still a relatively small business for us. Thank you. And our next question comes from Nick Yackel of Cowen and Company. Your line is now open. Great. Thanks for taking my question. Maybe building on a prior question, you're clearly tracking well ahead of your expectations of $350,000,000 of ARR by the end of 2020. But could you highlight the areas or products where you've seen the most upside relative to your initial expectations? Basically both VM and IDR are the largest dollar contributions to the upside, and from the strong demand environment. So that's the primary contributions. And then we're seeing good adoption and expansion in the application security and the SOAR areas. But if you think about like our sales focus, we have so much demand in both the VM and the IDR side that that consumed lots of our sales resources. So some of our incubations in some of the other areas are rolling out both this year, but we'll be accelerating the expansion next year. Okay, great. And I think you guys are clearly building more automation into the core offerings like VM and IDR. How do you find the right balance between the automation functionality you embed into those products for selling as a separate product like InsightConnect? Yes, it's a great question. I mean, the simple way that we actually think about it is the we're building integrations, any integrations into our core platform products, so into InsightIDR and to InsightVM, you can connect any other security tool or IT tool into those tools for workflows. We see the InsightConnect value proposition as allowing the other tools to actually connect with one another and to drive overall workflow and processes. Said another way is that we look at the overall per customer environment and we see hundreds of potential workflows and we're seeding and making it easy for our customer to see the benefit and say we're giving away 10% to 15% of those workflows, yes, absolutely. But that allows customers to experience it. But we still think we have a massive upsell and cross sell opportunity because as customers experience those workflows what they can do with the power of automation, it allows them to automate all the other core processes inside the operation. Makes sense. Thank you. Thank you. Thank you. And our next question comes from Melissa Franchi of Morgan Stanley. Your line is now open. Thanks for taking my question. I wanted to follow-up on that line of conversation on orchestration and InsightConnect. I know it's very early days and you're expecting it to ramp next year. But based on your conversations then are you telling it kind of an ROI type value proposition that helps garner budget from those customers? And how is that resonating? Yes, it's a great question. So on the first part of the question is, we think it's going to ramp similar to the Incyte IDR from the time that we actually made the investment. I would say that things to keep in mind this year is that because we were focused on getting to profitability, we had to make some hard choices about where we put our sales and marketing investments, and we clearly invested more heavily into the InsightIDR area versus some of our emerging. That shifts next year. So from the place where we're investing, we expect right now a similar cycle to what we saw from the IDR investment cycle. And that's primarily because the feedback that we've gotten so far, even for the limited investment, has been quite positive on the overall demand environment. See a pretty strong use case right now around SOC automation, but we see that even expanded from there to broader security automation and then into aspects of IT automation. To your second question, I think you nailed it, is that part of the reason that we're so bullish is that this is one of the few areas in security where you can show an ROI and it's more critical than ever because almost every organization regardless of size is still feels like they're resource constrained. So even very sophisticated organizations feel the need to figure out how they accelerate their productivity. And many organizations are looking at automation as a key way to actually drive productivity up in their organization. Very helpful. And then I just wanted to follow-up on the discussion on ARR per customer, the growth in ARR per customer. To what extent is that coming from the fact that you're garnering larger customers and maybe getting some traction in the enterprise space versus more your traditional mid market customers just coming in and buying more products from you all? I think right now it's fairly evenly split if you zoom out and look at it over like a 12 month basis. We're still growing our traction and our presence in the enterprise and large enterprise accounts, and we're still growing the mid market customer base. It will be split because if you think about it, we incentivize all of our sales teams, of which we have midsized sellers and large enterprise sellers, to really focus on new customer adds, which allows us to sustain growth for the long term. So it makes sense that you would actually see the new customer contributions coming in from both of those areas. Now, I mean, you could also do the math the other way and say that customers, mid market customers, there's more of them at smaller ASPs. And so from a dollar basis, adding you may have fewer large enterprise customers because there are fewer of them. But what I would say is those customers that we're adding, they have significant upsell and cross sell and ARR expansion opportunities into the future. And so it's worthwhile to actually focus on the expansion in both areas. Great. Thank you very much. Thank you very much. Thank you. And our next question comes from Chris Eberle with Nomura Instinet. Your line is now open. Hey guys, great job on the quarter. Could you guys just give us some insight into what percentage of total ARR is coming from VM at this point? I don't think we so we don't break it down on a quarterly basis. What I'd say is that we give snapshots over time. And one way to think about it is that roughly a little bit over half of our business is coming from VM today, but the expansion in the other areas is quite high. And when you think about our focus is that VM is still a growing business for us, which is positive. It's just that our other businesses are scaling and growing at a faster rate. And I think this is something you'll see periodic snapshots for either at our Analyst Day or at one of our annual calls, but we just don't break it down on a quarterly basis in detail. And I just on that is that if you look at our 43% growth rate, and if VM is over half the business, clearly it had a healthy growth rate in the quarter. But as Craig said, we don't break it down specifically by product each quarter. But at a high level, it's still healthy growth. Got it. And I think historically, you guys would talk about, IVR and its percentage of net new ARR. Can you give us an update on that this quarter? Yes. It's still over 30%. It's still growing nicely and it's about triple digit again on a cumulative basis. But in the quarter, the net new was still over 30%. Got it. And should we assume the other 70% is split evenly split amongst the other 3, AppSec and Yes. So what I'll say is that if you think about the growth engines today, because it's hard to translate between the new and then the total ARR and how that translates to revenue. But the key takeaway is that VM is the largest healthy. It's also of the scale businesses, it's doing very well and it's growing faster than the overall market, but it's growing the source of our scale business of our portfolio. And that's just because we have a broad based we have the benefits of a broad based portfolio. You can think that we had a massive investment in IDR and an extraordinarily good return in IDR this year that we think sustains across multiple years. And then this year we had a healthy, but our application and our SOAR investments are still in the early investment phases and we're going to accelerate those investments next year as we have more investment capacity, which is the primary constraint this year. Great. Got it. Thanks. Thank you. Thank you. And ladies and gentlemen, this does conclude today's question and answer session. This concludes today's conference call. Thank you for participating. You may now