Rapid7, Inc. Q2 FY2020 Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to the Second Quarter Rapid7 Earnings Conference Call. 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, Vice President of Investor Relations. Please go ahead, sir.

Thank you, operator and good afternoon everyone. We appreciate you joining us today to discuss Rapid7 second quarter 2020 financial and operating results, in addition to our financial outlook for the third quarter and full fiscal year 2020. With me on the call today are Corey Thomas our CEO, and Jeff Kalowski 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 file. This call is being broadcast live via webcast, and following the call an audio replay will be available at investors.rapid7.com until August 13th 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 third quarter and full year 2020; the assumptions underlying such goals and guidance including the anticipated impact of COVID-19 on our financial guidance; business; financial condition; results of operations and renewals; and our assumptions on the pace of the economic recovery in the global economy on our future results of operations and product strategy. These forward-looking statements are based on 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 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, Sunil and good afternoon everyone. Thank you all for joining us today for our second quarter 2020 earnings call. We are pleased to report solid execution during the second quarter as our team delivered results that exceeded expectations for both growth and profitability. Q2-ended ARR of $380 million grew 31% over the prior year demonstrating our ability to meet customers' diverse priorities with our Insight platform while operating income of $4 million reflects the underlying leverage in our business. Even amidst an uncertain landscape, our consistent first half execution provides us the confidence to raise full year guidance which Jeff will cover during his remarks. Organizations continue to face a mix of economic and operational uncertainty as they navigate a rapid shift in their technology footprint. While customers are in various states of replanning, digital transformation and cloud migration have rocketed up the priority list as companies evolve their business in these dynamic times. During the second quarter, we saw customers return to critical decision-making processes and prioritize security enablement tied to these digital strategies. Security challenges in the cloud are different. So the organizations embrace cloud transformation at a faster pace. CIOs and CISOs need to quickly prioritize security analytics, automation, and cloud enablement. These priorities align directly with our security transformation solutions IDR, AppSec, Connect, and DivvyCloud, which positions Rapid7 to capture the cloud security operations opportunity. During the second quarter, we saw better-than-expected momentum led by these security transformation solutions with particular strength in IDR and InsightAppSec. Our vision for the Insight platform was driven by the belief that cloud adoption would spark the need for organizations to transform their security programs. As companies move beyond the initial Phase one of response to the pandemic of operationalizing work from home, we see a fast-follow Phase two emerging where organizations increasingly look to digitize their operations over the long run. This extended wave of cloud transformation is a catalyst and we are entering the early stages of a sustained effort by companies to transform their security operations around the world. While we don't know the pace at which this transformation will play out, the trend drives our increasing confidence in the long-term growth opportunity for our Insight products. Security teams now accelerate secure cloud migration while navigating a more distributed workforce than ever before. For many organizations, this increase in complexity is exacerbated by tightening budgets due to pandemic-related disruptions. Amidst budget uncertainty, the need for productivity and time to value is critical as ever. Rapid7 is addressing this challenge and closing the security achievement gap for our customers in a way that only we can through an integrated Insight platform that delivers sophisticated security operations while prioritizing ROI. Forrester Consulting shared independent validation of this in a recently commissioned study revealing that organizations that deploy InsightIDR can recognize a 445% ROI over three years. The study found that Rapid7's cloud-native solutions provide 79% faster time to value and deliver improved efficiency through a 38% reduction in incident management efforts. During the second quarter, we saw an existing healthcare customer choose IDR and Connect to solve their growing SecOps challenges. Because of these solutions, superior outcomes, and value, leveraging our single endpoint agent InsightIDR was able to quickly address the customer's need for visibility by doing proof of concept by identifying threats in their environment that competing solutions missed. The customer purchased InsightConnect at the same time to unlock automated response capability across IDR and VM. This is a great example of how customers are leveraging our security transformation solutions together to deliver better security outcomes through advanced analytics and automation. Rapid7's platform strategy positions us to meet customers where they are in their SecOps journey. Whatever their immediate priorities are, it allows them to expand seamlessly over time. Vulnerability management, incident detection response, automation, cloud and application security are increasingly important. As the pace of technology change accelerates, we see growing customer adoption across our platform. Our security transformation solutions IDR, AppSec, Connect, and DivvyCloud continue to gain momentum and for the first time represented over 50% of new business in the quarter as customers prioritize security analytics automation and cloud enablement. These solutions now collectively represent over a third of our total ARR, growing at over 40% year-over-year. All the while, we continue to gain share in the vulnerability management market delivering solid year-to-date ARR and revenue growth in excess of 20%. We continue to see a balanced mix of new business coming from new and existing customers with a bias towards existing customers in the second quarter as we expected. With multiple avenues to land, we saw healthy year-over-year growth in new customers, but we are also focusing on expanding existing relationships in this environment as we help our customers transform their security programs. As a result, we experienced solid expansion in our ARR per customer, ending the quarter at approximately $41,600, growth of 20% year-over-year. Our success in expanding customer adoption across our Insight platform is rooted in Rapid7's long-standing commitment to technology investment and innovation. Let me briefly touch on some of the key achievements from our innovation pipeline in the quarter. During the second quarter we delivered a very successful launch of our enhanced network traffic analysis module or InsightIDR. NTA gives customers greater visibility to the attack surface by leveraging user and device activity across the network effectively shining a light on even the darkest parts of their network. To date, NTA has been successful in driving not only cross-sell deals, but also influencing IDR competitive wins in the quarter. To further enable our customers as they shift to work from home, we introduced a new customizable dashboard within InsightVM to better track remote workforce and external facing assets. With this new dashboard, customers can identify and monitor remote assets in their changing environment and leverage information around vulnerability exposure. We continue to extend the operational weeks of InsightConnect and into the second quarter with over 400 pre-booked plug-ins and workflows. Moreover, we opened our extension library, allowing customers to create and share their own workflows facilitating deeper customer engagement, while empowering security professionals to benefit from the wisdom of their peers. Turning to a brief update on DivvyCloud, we could not be more pleased with the early integration efforts. DivvyCloud met our expectations in the quarter and we are even more optimistic about our long-term growth opportunity in cloud security. As the pandemic effects spark the need for enterprises to move faster to the cloud, CISOs are recognizing a different set of security challenges tied to scale and pace of change. DivvyCloud provides our customers with the visibility and automation necessary to manage their risk exposure, while enabling better teaming experiences with DevOps. This differentiated value was evident in Q2 as DivvyCloud scored one of our top 10 largest deals in the quarter, a cross-sell to an existing Rapid7 customer. Like many organizations, this manufacturing customer is embracing the public cloud to drive efficiency and innovation but was concerned about maintaining continuous security and compliance. Additionally, without the right automation, they worried that a growing cloud footprint means growing risk. This customer chose DivvyCloud because of its real-time detection and strength managing multiple cloud environments coupled with the right product adaptability for their sophisticated approach to security operations. Shifting now to an update on our goals for 2020, as the near and long-term trends reflect a broader shift to both the cloud and a more distributed workforce, our ability to address customers' needs in these areas remains a key driver of our opportunity. Our first goal is to be a leader in enabling customers to transform and upgrade their security operations practices around the cloud. We are experiencing an enduring shift in how work is done which will drive ongoing prioritization of security analytics automation and cloud enablement. Rapid7's ability to solve customers' challenges across these areas with our best-of-breed Insight platform was a key driver of our success in the second quarter. Building upon our recent recognition as a leader in the Gartner Magic Quadrant for Security Information and Event Management, Gartner announced in July that Rapid7 was named a Gartner Peer Insights Customers' Choice for SIEM with customers highlighting InsightIDR's easy-to-use integrations and alert accuracy. This coupled with our long-standing leadership position in vulnerability management and our recent recognition in May, as the only challenger in the Gartner Magic Quadrant for application security testing reflects our ongoing commitment to deliver a leading cloud-enabled SecOps platform that empowers our customers' success in the cloud. Our second goal is to accelerate our platform distribution engine. With an expanding set of market-leading solutions on our Insight platform, we see growing interest from customers to acquire multiple Insight products together. This is in part reflected by our second quarter strength in average ARR per customer which accelerated to 20% year-over-year growth. We remain focused on reducing friction around both our sales and customer purchase motions in a way that drives sustained growth in this metric. Over the course of the next three to six months, we expect to pilot various Insight product bundles as we work to maximize customer adoption and drive improved sales leverage over the long run. Our third goal is to drive long-term operating leverage improvement in our business while investing for growth. Our second quarter results were a clear demonstration of both inherent underlying leverage in our business and strong expense controls. We remain committed to investing behind profitable growth over time and now expect to deliver positive non-GAAP operating profit for the current fiscal year. Additionally, assuming a sustained recovery path in the next year, we expect that we will return to the balanced growth and profitability framework that we shared earlier this year for the full year 2021. Finally, before I hand over the call to Jeff, I would like to take a moment to welcome our newest Board member. As we shared in our earnings press release today, we are privileged to have Reeny Sondhi, who serves as Chief Security Officer at Autodesk, join Rapid7's Board of Directors. Reeny is an accomplished technology leader with deep expertise across cloud and security. And she brings the perspective of our customers to the board. In closing, we continue to execute on our mission to make the best in security operations achievable for all. And I want to thank our Rapid7 team for their commitment to helping solve customers' challenges through these uncertain times. With that, I will turn the call over to our CFO, Jeff Kalowski. Jeff?

Thanks Corey, and good afternoon everyone. Before I begin, a brief reminder that except for revenue, all financial results we will discuss today are non-GAAP financial measures. Unless otherwise stated, reconciliations between our GAAP and non-GAAP results can be found in today's earnings press release. We're pleased to report solid performance during the second quarter of 2020, with results that exceeded our guidance on all metrics. Top line strength was driven by demand for our security transformation solutions, coupled with continued growth in vulnerability management, while underlying leverage on strong expense controls, drove upside to profitability. Total ARR ended the second quarter at $379.9 million, growth of 31% over the prior year, as customers turn to our Insight platform to help facilitate a more secure shift to the cloud. Second quarter total revenue of $98.9 million was above the high-end of our guidance and grew 25% year-over-year. This was driven by better-than-expected year-over-year products revenue growth of 27% to $92.4 million. Recurring revenue represented 91% of total revenue in the second quarter, compared with 87% in the prior year period. Looking at the business geographically, North America revenue grew by 25% year-over-year and comprised 83% of total revenue for the second quarter, while the rest of the world grew by 29%, representing 17% of total revenue. We continue to grow our customer base and ended the second quarter, serving over 9,100 customers globally, a growth of 9% over the prior year period. At the same time, we are focusing on expanding relationships with existing customers, who are turning to Rapid7 to help transform their security programs, as they work to advance securely into the cloud. As a result, ARR per customer saw a strong year-over-year growth of 20%, in the quarter to approximately $41,600. Turning to margins, total gross margin for the second quarter was 74%, an improvement of 73% in Q1 and down slightly from 75% a year ago, primarily due to lower professional services gross margin and continued growth of our cloud-based offerings. Sales and marketing expenses improved to 41% of revenue, compared to 45% of revenue in Q2 2019 and benefited from reduced T&E spend, as well as timing of some marketing spend that shifted into the second half. R&D expenses for the quarter were 20% of revenue, consistent with the prior year period, and included a partial quarter of DivvyCloud expense. G&A expenses in the second quarter were 9% of revenue, down from 10% in the prior year, driven by reduced T&E and natural leverage in the business. For the second quarter, we reported an operating profit of $4.3 million, ahead of our guidance range, driven by overachievement on revenue and solid expense controls. Adjusted EBITDA for the second quarter was $7.6 million and net income per share was $0.05, also ahead of our guidance. Shifting to our balance sheet and cash flows, we ended Q2 with cash, cash equivalents and investments of $321 million, compared to $253.6 million as of Q1 2020. The increase from Q1 predominantly reflects the net proceeds of approximately $196 million related to our convertible notes offering, in cap call transaction, offset by cash outflow of approximately $126 million related to our acquisition of DivvyCloud. We experienced healthy collections activity in the quarter and ended Q2 with operating cash flow of $0.4 million, down modestly compared to $2.5 million in the year ago period. Turning now to guidance, Rapid7's strategic offerings and product leadership position us to capture the expanding cloud SecOps opportunity, as organizations leverage security analytics, automation, and cloud enablement to empower secured digital transformation. During the quarter, we saw this play out, as customers return to decision-making, prioritizing security enablement to our Insight platform products. As we look ahead, our revised 2020 guidance is now franked around two fundamental drivers. Overall demand for our strategic security solutions remains robust. During the second quarter, we experienced healthy activity and engagement, as customers look to Rapid7 with the transformation initiative. However, customers continue to face an unprecedented period of economic uncertainty, clouding budgets and impacting near-term visibility around second half trajectory. Let me share some brief context on how we are balancing optimism around the long-term opportunity with near-term visibility challenges. We continue to analyze financial stress and durability across our customer base at a micro-vertical level to frame a range of outcomes for new business and churn. While Q2's better-than-anticipated demand mitigates our prior downside expectation, we continue to anticipate a wide range of economic scenarios for the second half. The high-end of our revised guidance now contemplates the continuation of Q2 trends, reflecting a jagged but steady economic recovery trajectory. At the low end, our guidance range assumes some additional risk, tied to potential broad regional or systemic shutdowns, as a result of sustained pandemic resurgence that would drive deterioration from Q2 trends. The result is that we are raising and modestly tightening our ARR guidance range entering the second half, while still maintaining a wider-than-usual range to account for the variability in economic outcomes as a result of the ongoing pandemic. For the full year 2020, we now anticipate ARR to be in the range of $404 million to $420 million, an increase of $15 million at the midpoint or growth of 19% to 24%. We're raising full year revenue guidance and now anticipate revenues to be in the range of $399 million to $403 million or growth of 22% to 23%. We continue to invest while focusing on driving sustained long-term leverage in our business through strong expense controls that prioritize high ROI investment. To that end, and building off our strong performance in Q2, we now anticipate returning to a non-GAAP operating profit for the full year, within the range of breakeven to $2 million. As a result, we are raising our expectations for full year non-GAAP loss per share, to be in the range of a loss of $0.14 to a loss of $0.10. This is based on 51 million basic weighted average shares outstanding for the full year 2020. We expect cash flow from operations for the full year to be a loss of approximately $15 million. This improvement relative to our prior expectation of a loss of $25 million is a function of improved full year billing expectations, associated with our revised ARR estimates, coupled with strong expense controls of the business. Additionally, while it remains early in our FY 2021 budgeting process, I will reiterate Corey's earlier comment that assuming a sustained recovery path going forward, we currently expect to return to our previously communicated balanced growth and profitability framework for 2021. Moving now to quarterly guidance, we anticipate total revenue for the third quarter of 2020 to be in the range of $100.7 million to $102.3 million, growth of 21% to 23%. We anticipate non-GAAP operating income in the third quarter to be in the range of a loss of $0.5 million to positive $0.5 million. Recall that Q3 includes a full quarter of DivvyCloud expenses as compared to a partial quarter in Q2. Non-GAAP net loss per share is anticipated to be in the range of a loss of $0.06 to loss of $0.04, which is based on our anticipated 51.3 million basic weighted average shares outstanding, given our projected non-GAAP net loss. In conclusion, as demand accelerates for cloud deployments, Rapid7 is focused on helping make the best security operations achievable for our customers with best-of-breed security solutions on our Insight platform. With that, we appreciate your time and support. I will now open the call for any questions.

Thank you. Our first question comes from Saket Kalia with Barclays. You may proceed with your question.

Okay, great. Hey, guys. Thanks for taking my questions here. How are you?

Pretty good. Glad to have you.

Hey. Awesome. Corey, maybe just to start with you. Helpful commentary on that ARR breakout in terms of a third of ARR kind of coming from non-VM products, let's call it. And I really want to zero in on the InsightIDR or the SIEM part of that equation. I think, we're all seeing sort of the increased prioritization of VM in these times. But I'm curious how are your customers approaching SIEM in a post-COVID world?

Yes. No, your observation is spot on. VM was clearly much stronger than we originally anticipated and communicated, which is sort of the backbone of how we think about rating. But I would say in that context, SIEM was even stronger and we saw strong, both priority and demand for cloud-based SIEM. Really, a few different things actually go to that strength, first and foremost people recognize they need a modern SIEM for these modern times. As you have work from home as you actually have more cloud-based applications, you actually have a different environment that you're monitoring. We saw our SIEM demand even stronger than the VM demand, which was strong itself.

That's great. That's great. Jeff, maybe for my follow-up for you. Can you just remind us what the net revenue retention was this quarter? And maybe just go a little deeper into it. What you're seeing in terms of gross retention versus upsell, cross-sell? Any more of the net revenue return should be helpful.

Sure. First off, on the gross retention, it was good and consistently has been in our historical range. No different this quarter in Q2. On the ORR, we declined a little bit from 106% to 105%. I just want to remind everyone that we anticipated that decline. So that came in, in line with what we were forecasting. So both upsells and cross-sells were up year-over-year. In particular, the cross-sells were up. We had strong cross-sells. That really showed in the growth of ARR per customer, which increased by 20% year-over-year. I mean, I also want to point out that we don't really manage to this metric, but we manage the ARR growth, which is our key metric and which we're guiding to over 20% at the midpoint of our ARR guidance.

Yes. No, absolutely. Definitely saw it. Thanks very much guys. I’ll get back in queue.

Thank you.

Thanks, Saket.

Thank you. Our next question comes from Matt Hedberg with RBC Capital Markets. You may proceed with your question.

Hey, guys. Thanks for taking my questions and congrats on some really strong results. These are certainly uncertain times, so well done on that front. Corey, in your prepared remarks you noted COVID really changes the conversations with CIOs and really pushes them faster to the cloud than maybe previously they would have moved. I guess at a high level can you talk about the urgency of CIOs' desire for this migration? And which of your emerging products which did well this quarter? Do you think you could see the strongest long-term benefit from this sort of paradigm shift?

Yes. It's a great question and, Matt, thank you for joining today. So if you think about what's driving this, it's really two fundamental issues. One, CIOs can no longer wait to actually digitize their operations. And so, what’s driving to the cloud is that, like, digital commerce has to be front and center, not just digital commerce, but digital engagement and digital operations. People will no longer assume that you can actually stand by in a slow transformation. If you want no better example of it, just look at what's happening in the healthcare industry, where somebody who was taking 10 years changed to telehealth overnight. You see that same type of urgency across most industries, where there's an urgency to engage our customers and our partners digitally. At the same time, we think one of the great benefits is that, CIOs and even boards are no longer under the illusion that you can actually shift to digital operations primarily done through the cloud and ignore security. Security is now part of the conversation and part of the narrative. This is going to be an extensive transformation for most operations that’s starting now, but it's going to be a multiyear effort as people actually really upgrade their core, both business operations and technology for the digital age. It will be primarily done in the cloud. As we think about why that's such a big driver and frame it in terms of our security transformation solutions and why that's a significant driver there, is there are a couple of key things. One, everyone knows that those environments and those digital environments are going to be under attack. People have to protect them. We see a massive demand driver for InsightIDR. In fact, we saw that for this quarter. If you look at the other part of our security transformation solution, just like DevOps does more with less by automating much of the environment, we see strong going forward demand for InsightConnect and we had good healthy demand and execution this quarter and we expect that to be durable. Of course, last and probably most importantly, as you think about the cloud, people have to manage security differently. That was a big part of the thesis around the DivvyCloud acquisition: that security management will be essential in the cloud, and we believe we acquired the best platform for DivvyCloud in that acquisition. Those are the core lens spans: cloud and applications, because people have built the cloud-based application to do this. Detection and response and automation, we see as the core tenants to a cloud-enabled digital transformation.

Super helpful. Thanks Corey. Thanks, everybody.

Thank you.

Thank you. Our next question comes from Gur Talpaz with Stifel. You may proceed with your question.

Okay, great. Thanks for taking my questions and congrats on the quarter, guys. Corey, you talked about Phase two of broader security spend. I was hoping you could elaborate a bit on that. How does that correlate to performance in the quarter? And by that, I mean, did you see trends improve as the quarter progressed?

Anyways, so as you recall from last quarter, we expected things to actually slow. But we still believe, in general, that the overall security spend and digital spend is tied to the economy, but it's not as tightly tied as we expected. What's quite clear is that people were not as paralyzed around security spend as we expected them to be. When you really think about Phase 2, we knew that we were in a moment of this work-from-home. What's positive is that we didn't expect is that people fairly quickly move from the work from home, which lots of people got working quickly. And they start thinking about what if this whole environment is likely to sustain through really mean for our operations. People started continuing efforts aligned with their long-term technology strategy and the security strategy to support that. Efforts that are around improving and enhancing cybersecurity for a modern technology environment, lots of those initiatives continued at a pace much faster. I would also say that a surprising number of new initiatives got started in that same way. If you think about how we look at the business both what's happening and also the pipe that we see building, it was definitely much better than we expected when we had this discussion last quarter.

That's super helpful. And then Jeff, maybe one for you. The acceleration in ARR per customer was really interesting. Maybe you could elaborate a bit on what drove that? Is it the growth in VM workflows? What sounded better? Growth in new solutions? Or is it also a reflection of customer sizes perhaps getting bigger here as well? Thank you.

Yes. I think it's across the platform, particularly cross-sells, IDR cross-sells. It's really all across the broad platform. No one specific item.

Okay. Thank you.

Thank you, Gur.

Thank you. Our next question comes from Brian Essex with Goldman Sachs. You may proceed with your question.

Hi, guys. This is Arindam on here for Bryan Essex. Congratulations on the quarter. Corey, first starting with you, if I could. Last quarter you mentioned the introduction of your Flex program that enables customers to temporarily expand their asset coverage at no extra charge. Just wondering if you could provide some color regarding any increase in overall monetizable asset base per customer because of the program, how customers started deploying more of mostly base deployments for VM solutions going forward? Some color on that would be very helpful. And then maybe a follow-up for Jeff.

Yes. So first and foremost, as we mentioned last quarter in the framing is that it was primarily done to actually drop customer satisfaction loyalty and we see a good healthy uptake. Now it is leading to increased pipeline which I think is positive, but our goal, we're not monetizing our goal is to really support our customers. That said, we do expect it to be a positive contribution over time to the business. I would not say that was the primary driver in this specific quarter in and of itself because we launched in the quarter and people were responding in the quarter. But it definitely helped with actually creating a strong relationship with our customers, which if you think about what really sets Rapid7 up for the sustained growth and profitability that we're pursuing, expands our ARR per customer which is one of our primary goals.

That's really helpful. Thank you. And for Jeff for you, maybe if you could provide some color on the average contract length that you witnessed this quarter. In general, have you seen a shortening of the contract length, especially as we saw customers kind of constructing their budgets and trying to conserve cash in this period of economic uncertainty? So any color on that would be really helpful? Thank you.

Sure. Let me start off by saying, overall, the contract lengths did not meaningfully impact billings this quarter. But having said that, in the bookings, we saw them a little longer with more payments annually. Since we're focused on ARR, contract lengths really aren't meaningful as they don't relate to billings and cash flow. So we're not really collecting the money. In other words, if we have a contract like that was 24 months, since we've converted to SaaS, we're not really getting two-years payments upfront. So you really have to look at ARR as the key metric right now. And contract lengths don't correlate to cash anymore. That's really the net of it right now. It used to under the perpetual model because then when we sold multi-years we were paid all upfront. So again, I'll just reiterate that ARR is the key metric.

Perfect, guys. Thank you.

Thank you.

And your next question comes from Rob Owens with Piper Sandler. You may proceed with your question.

Hey, guys. This is Justin on for Rob. I was just hoping to ask maybe relative to the market landscape what portion of opportunities in VM and the rest of the platform are would you characterize as greenfield opportunities versus competitive wins? I know Corey you talked a little bit about the competitive wins in the quarter. If you could maybe just elaborate a little more on that?

Yes. I would say that I have not heard of a big delta from our team. As you can imagine, we had strong growth in the cross-sell motion and we'll continue to add net new customers. But I have not heard from our team that we saw a material difference in our greenfield versus the competitive wins there.

All right. Great. And then just for Jeff real quick. I know you mentioned 10% exposure to heavily impacted verticals in the last quarter. And as maybe if you could dive just back into that relative to what you're seeing trends wise are budgets freer than you expected or still pretty tight there?

We do not see any change in that exposure. When providing our guidance, we examined our verticals and sub-verticals. We clarified in our prepared comments what influenced the high-end and low-end of our guidance. However, there is no change in the overall composition of our customer base in relation to our guidance.

That said, I would say that we saw stronger-than-expected performance across most of the verticals. That's both on the security transformation and which includes things that are helping people transform to the digital enterprise. On the VM side too much so that if you think about why we have confidence in our forward outlook and being back on the model as we enter 2021, we see our security transformation portfolio growing over 40% this year. In fact, I mentioned before that VM grew over 20% this quarter, which was great. Prior, I talked about VM growing in the 5% ARR range. We actually think that's over 10% ARR. And from a revenue perspective, we believe in the mid- to high-teens growth. We feel pretty good about what we're seeing from an overall demand. That said, there are companies going bankrupt, so there are issues as people respond to COVID, but we are seeing a higher level of fundamental demand.

That's great. Thanks.

Thanks.

Thank you. Our next question comes from Keith Weiss with Morgan Stanley. You may proceed with your question.

Thanks everyone. Thank you guys. And thank you, a nice quarter. Corey, I want to dig in a little bit in terms of sort of the changes that you're seeing in the industry. We talked about sort of digital transformation pushing more people to the cloud that increased uncertainty, increasing the priority of security analytics in general. But another big part of the story is getting your customers to buy more broadly across the portfolio. Are you seeing any change in that and sort of that traditional security mindset if we buy just only best of breed solutions to guys more willing to say, listen there's real value-add in having this all on one platform to be able to garner the insights across multiple products? Is that starting to resonate more with your end customer?

Yeah. Keith, it's a great question. I would say that keep in mind, our core thesis was that people would only buy an integrated solution if it was best-in-class. Our core aspiration is to actually be top line in everything that we do. Be one of the top two solutions in every category that we participate in, and we think that we're tracking well on that goal. Being in that space and demonstrating that we're a leader in VM, we're a leader in IDR, and we're a leader in our emerging categories, positions us to be where customers are responding positively to our overall platform, packaging bundle distribution model. We are going to be bundling more platform-selling strategies with our sales force over the course of this year and next year because we're seeing real customer intent and demand. That's because our customers get the fits and they actually feel that they're not having to make a substantial trade-off. They're getting the benefits of platform economics, getting tightly integrated technology deployed as they don’t have to put a whole bunch of different collectors in their environment, allowing tighter integration, delivering more productivity. But do that all with best-in-class performance on each individual category. That's what’s so unique about what we're pursuing in Rapid7, is to be the best in class in every category but integrate it into an experience that lowers the cost of operations, getting people platform economics, especially in this time as people really focus on total cost of operations.

Got it, got it. If I could sneak one more in just on the margin side of the equation. So, really nice progress on the profitability side of the equation this year. But I feel like calendar 2020 comes with an abstract because the expense dynamic is so different, especially with T&E and nobody is traveling and your events change a lot. When you guys are talking about going back to the balance of growth and profitability in calendar 2021, is there an explicit step-up that we should be thinking about in terms of expenses when that T&E comes back in, or when these events come back in? And is this possible to quantify that, listen because the guys aren't flying all around, we were able to sell say $5 million, $10 million, $15 million in this quarter or anything of that ilk?

It's a good question. We definitely benefited from travel and entertainment expenses, but it's important to note that we have always relied on a heavy Insight sales model. Our gross T&E levels are not as high as many other companies, which means that we weren't as reliant on T&E benefits as some market players. Additionally, we are focused on driving our own operating leverage. Internally, we analyze how to improve this by considering factors such as removing certain benefits when we discuss our model. In our three-year outlook, we aim to sustain growth while expanding our margins each year. We take into account that margin expansion will need to occur even when T&E benefits diminish. This helps us make informed investments in the short term. Ultimately, when T&E returns to normal, we want to maintain our margin strategy. While the COVID environment has delayed this by a year, we remain committed to improving our core operating margin, which is the main focus for Jeff and me when evaluating our team.

Perfect. Thanks a lot. Really nice quarter, guys.

Thank you so much, Keith.

Thank you. Our next question comes from Joshua Tilton with Berenberg Capital. You may proceed with your question.

Hi, guys. This is Andrew Smith on for Josh. Could you just remind us what you've experienced in the past when a customer would lay off employees? How long is the lag until it impacts Rapid's business, being as you price per asset or app and not necessarily per user? Thanks.

We don't focus heavily on employee pricing models because we have so few of them. We've found that the growth of the underlying assets that companies possess typically outpaces the growth of their employee base, and this has always been the case. Moreover, in the current digital cloud era, this is even more evident, as cloud technology assets are likely to grow faster than any reduction in the employee base. Our compensation is based on the technology infrastructure that exists, and we're working to make it as predictable as possible for our customers. Regardless of whether the infrastructure is in the cloud or in traditional settings, they continue to get value from that technology.

Great. Thanks, guys.

Thank you.

Thank you. I'm not showing any further questions at this time. I would now like to turn the call back over to Corey Thomas for any further remarks.

Thank you all for joining us today. I also want to thank our team and our customers. This has been a difficult environment for everyone, but our team and our customers are all working well together to ensure that we are delivering the technology that helps people really drive in these times. So thank you all for joining us.

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.