Thank you for standing by. My name is Jessica, and I will be your conference operator today. At this time, I would like to welcome everyone to the Rapid7 Second Quarter Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. I would now like to turn the call over to Sunil Shah, VP of Investor Relations. Please go ahead.

Thank you, operator, and good afternoon, everyone. We appreciate you joining us today to discuss Rapid7's second quarter 2023 financial and operating results in addition to our financial outlook for the third quarter and full fiscal year 2023. With me on the call today are Corey Thomas, our CEO; and Tim Adams, 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. During this call, we may make statements related to our business that are considered 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, strategy, business plans, restructuring plan, financial guidance for the third quarter and full year 2023 financial goals for full year 2024 and the assumptions underlying such goals and guidance. 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 future results expressed or implied in these statements due to a number of risks and uncertainties including those contained in our most recent quarterly report on Form 10-Q filed on May 10, 2023, 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 primarily be in non-GAAP terms and reconciliations between our historical GAAP and non-GAAP results can be found in today's earnings press release and on our website at investors.rapid7.com. 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 update these metrics in the future. With that, I'd like to turn the call over to our CEO, Corey Thomas.

Thank you, Sunil, and welcome to everyone joining us on today's second quarter 2023 earnings call. I would like to start by acknowledging the plan we announced today to restructure and optimize our organization by reducing Rapid7's employee base by roughly 18%. While it was an extremely difficult decision, we believe this step is critical to build on the momentum we're seeing in security operations and to position us to be a more profitable growth company in 2024 and beyond. I will discuss more details about the strategic rationale behind this decision and the associated financial impacts later on today's call. Let's start with our second quarter results. I'm pleased to report that Rapid7 ended the second quarter with $751 million in ARR, or 14% over the prior year, and delivered revenue and operating income above our guidance ranges, alongside better-than-expected free cash flow. During the second quarter, we continued to see strong and improving traction with our consolidation offerings. Customers are gravitating towards our holistic security operations stack, particularly Threat Complete, which unifies risk and threat management into a single integrated offering. The performance of our packages once again exceeded our expectations as over one-third of new ARR in the second quarter was driven by either a direct or cloud risk complete deal as customers looked to increase the effectiveness and efficiency of their security programs by consolidating their vendor footprint. A great example of this consolidation was a six-figure ARR deal in the second quarter with an existing InsightVM customer that was looking to replace a legacy SIEM solution managed by an MSSP. Building on our established VM relationship, Rapid7 was uniquely able to provide the customer with a comprehensive security solution, and our best-in-class technology coupled with the expertise of our SOC analysts was amplified by the value proposition from our Managed Threat Complete offering. We competed against many large players in the extended detection and response space. The customer chose Rapid7 based on the strength of our automation capabilities, our security and incident response expertise, and our predictable pricing model. This customer is indicative of the current environment where customers are upgrading and consolidating providers while looking for better quality services and experiences. Customer spending dynamics in the second quarter were broadly in line with our expectations, with ongoing macro sensitivity influencing customer budgets. We've optimized our sales efforts around this new normal by leaning into customers' needs for more cohesive, efficient solutions that are aligned with their resource constraints. Our strategic focus around SecOps consolidation continues to gain momentum, and we are driving focused innovation across our core products and capabilities to accelerate customer value. We are particularly focused on integrating a frictionless cloud security experience into risk management programs for mainstream buyers. A great proof point is our recently introduced Executive Risk View, a new capability that gives security practitioners unified visibility to risk across all combinations of on-premise, cloud, and hybrid environments. Executive Risk View's ability to holistically assess risk and track security program effectiveness is a complete differentiator for us across VM and cloud security. It's also an example of our unique ability to add value for customers by leveraging the breadth of our Insight platform. Our expertise in helping customers secure the cloud and hybrid environments is illustrated by a six-figure competitive win in the second quarter with an enterprise manufacturing company. As an existing customer, they've built out a strong risk management program with the traditional environment with Rapid7's vulnerability management and AppSec solutions. Despite a flat budget this year, the CSO security teams needed to extend risk visibility and management into their growing cloud footprint. After an extensive POC, Rapid7's cloud security capabilities set us apart from other well-known players for multiple reasons: our ability to provide unified visibility to risk across the full environment, the integration and ease of use of our platform, and our ability to offer extensive automation, including automated remediation. Ultimately, these product differentiators, combined with the budget predictability and value proposition from our Cloud Risk Complete offering, led the customer to consolidate this part of their SecOps stack on the Rapid7 Insight platform. Turning now to our strategic areas of focus as we enter the second half of 2023 and look forward, we remain anchored on our core customer mission to make the best security operations technologies accessible to all. Let me share with you how we are optimizing to execute against this mission through our focus on the modern SOC. With the industry undergoing a customer-driven shift to consolidated security platforms, the early success around our integrated SecOps strategy is evident, as our consolidation offerings track ahead of expectations. Looking ahead, we see an evolving set of critical customer dynamics in this space. First, we have noticed a customer shift from cloud security as a specialized function to cloud security as an integrated capability within security and SecOps teams. We view this as a massive demand driver for integrated SecOps and think that we have a significant opportunity to be the leader in delivering integrated risk and threat management across on-prem, cloud, and external tax services. Second, as the threat landscape continues to grow in complexity, customers are showing more demand than ever for integrated expertise to support them in effectively managing their security technologies. The convergence of these key trends—security consolidation, integrated cloud security, and expertise-driven outcomes—are the foundation of what we view as the new modern SOC. Rapid7's focus is to be the leading provider of integrated security solutions for the modern SOC by providing risk and threat management within the context of overall security delivered as a service alongside expertise tailored to the needs of each customer. Let me walk you through three distinct opportunities for Rapid7 to support the modern SOC and why we believe that we are optimally positioned to win. First, customers continue to upgrade from legacy log-centric detection to cloud-native detection and response programs. With over $300 million of our ARR in detection response with growth at over 25%, it is clear that customer demand is strong, and we have to establish both the scale and product leadership to win this opportunity. Second, customers can no longer treat their risk and threat functions as distinct. The modern SOC manages threats as a function of risk and vice versa. With our integrated best-of-breed capabilities across risk management and threat detection in both cloud and traditional environments, we are uniquely positioned to deliver this integrated experience to mainstream buyers. Third, customers are increasingly reliant upon both greater levels of automation and integrated expertise alongside their technology. Having built best-in-class service augmentation with our global SOC presence, we see massive potential to drive high-margin managed services, both through existing offerings and investing in accelerating our strategic managed service partnerships. With that context, let's talk about the strategic decision we announced today to restructure our organization and reorient our cost structure and how that positions us to better execute against our strategy. We recently completed a deep analysis of our cost structure to delineate and accelerate our investments, to deliver the most comprehensive modern SOC offering for our customers. Earlier today, we announced plans to reduce our global workforce by approximately 18% and to consolidate our global facility footprint. There are two clear outcomes from this reorientation. First, it is clear that we have an opportunity to lean into becoming a leaner business; about half of our planned changes are efficiency-related cuts that we expect to flow directly to the bottom line. These include streamlining management layers, reduction of role overlap, and optimizing our own and offshore talent mix. Second, we have a compelling opportunity to strategically reallocate investment to key areas that we believe will drive the most long-term value for customers. With a vast amount of our product expansion now behind us, we can reallocate and accelerate investment in capabilities and services that customers are purchasing around the modern SOC, including our managed service partnerships. We expect these changes will meaningfully optimize our cost structure while enhancing future product capabilities and delivering a higher quality customer experience. Ultimately, these changes position us to drive strong and more profitable growth over time by aligning our investments with our customers' long-term SecOps needs, while at the same time establishing a strong free cash flow support for our business. Tim will guide you through more specific financial details later on the call. But at a high level, net of the investments we are making in strategic focus areas, we expect these measures to substantially expand our profitability profile while driving significant progress towards our midterm rule of 40 objectives. Looking ahead to 2024, we believe these actions position us to deliver at least $160 million in free cash flow in 2024, doubling from our current 2023 guidance of $80 million. Given the investment levers in our business, we have confidence in our ability to scale free cash flow in 2024. While it's premature to set any revenue or ARR growth targets for 2024, this free cash flow expectation does not assume improvement in the macroeconomic environment, and we're confident we can execute to this target even if our top line growth remains sustained at this year's levels. Shifting our focus back to 2023, I'm pleased with the progress our team has made during the first half of 2023, laying the groundwork for us to drive ongoing customer impact with our integrated SecOps strategy, including executing to our first half growth targets. Looking to the back half of 2023, we continue to see line of sight to our original full-year ARR guidance range. With that said, we believe it is prudent to establish a high-confidence expectation range that accounts for a modest degree of disruption over the next three to six months as we implement the strategic realignment. As a result, we're reducing our full-year ARR guidance by approximately 2% at the midpoint to account for potential disruption. This is coupled with a significant ramp in our operating margin expectations, which we will now expect to improve by approximately 700 basis points over the prior year. Tim will share more specifics on this in his comments. In summary, we continue to focus on the highest value, most impactful areas of our business on behalf of customers. While the changes we announced today are difficult, we have a compelling opportunity to position ourselves to deliver stronger, more profitable growth, and we remain committed as ever to our enduring goals: helping customers securely transition to the cloud, expanding the capabilities and value of our Insight platform, and balancing strategic investments in durable growth with expanding profitability. Thank you all for joining us today. I will now turn the call over to our CFO, Tim Adams, to share additional detail on our financial results and outlook.

Thank you, Corey, and good afternoon to everyone on today's call. Thank you for joining us. Before I turn to the results, a quick reminder that except for revenue, all financial results we will discuss today are non-GAAP financial measures unless otherwise stated. Additionally, reconciliations between our GAAP and non-GAAP results can be found in our earnings press release. Rapid7 ended the second quarter of 2023 with $751 million in ARR, consistent with our expectations and growing 14% over the prior year, reflecting continued demand for our Insight platform, with the strongest growth contribution coming from the high-priority areas of detection and response and cloud security. We continue to see threat and cloud risk complete offerings tracking ahead of our expectations at over one-third of new ARR in the second quarter, with the benefit coming from both landing new customers and driving upgrades and expansion within our base. We also saw balanced contributions from new and existing customers in our overall business during the quarter, with ARR per customer that grew 7% year-over-year to $66,500 as existing customers leverage more capabilities on our platform. We saw a nice improvement in total net customer additions, ending the second quarter with nearly 11,300 customers, representing growth of 6% year-over-year. Second quarter revenue of $190 million grew 14% over the prior year and exceeded the high end of our guidance range. Product revenue grew 14% year-over-year to $182 million and was better than expected on favorable linearity in the quarter. International revenue grew 17% over the prior year and represented 21% of total revenue, while North America revenue grew 13% year-over-year. Now turning to our operating and profitability measures for the quarter. Product gross margin was 76% in the second quarter and overall gross margin was 74%, both in line with our expectations. Sales and marketing expenses represented 39% of revenue in the quarter, down from 41% in the prior year. R&D expenses were 21% of revenue, unchanged from the prior year, and G&A expenses were 7% of revenue compared to 8% in the prior year. Higher revenue, combined with slower hiring in the quarter drove stronger-than-anticipated operating income of $13 million in the second quarter. Our adjusted EBITDA was $19 million in the quarter and diluted net income per share was $0.18, better than our guided range on higher operating income. There are two additional items from the second quarter I want to mention that are non-cash and do not affect our non-GAAP results. First, our GAAP net income reflects a $13 million noncash charge related to a capped call transaction from our 2023 convertible bonds. These bonds were retired as part of a refinancing nearly two years ago, but the associated capped calls require us to record a mark-to-market adjustment at the end of the second quarter. This capped call transaction was settled in early August, resulting in a cash receipt of slightly over $17 million. Second, as part of the restructuring plan, we will be consolidating our global real estate footprint. As a result, we incurred a noncash charge of $27 million in the second quarter related to real estate assets that we determined are not necessary to support our strategic growth objectives. Moving to the balance sheet and cash flow statement, we ended the second quarter with cash, cash equivalents, and investments of $296 million. This is before the $17 million we collected in August related to the capped call transaction on our 2023 convertible bonds. Operating cash flow was $31 million, and we generated $26 million of free cash flow in the second quarter, driven by stronger profitability and more favorable collection trends. Now turning to our outlook for the remainder of the year. The restructuring plan we announced today is a focused effort to align our organization and our investments around the areas of business that are driving the most value for our customers. This was not a decision we made lightly, and we believe these actions will enable stronger and more profitable growth as we invest to meet customer demand for consolidated SecOps solutions. We expect to incur charges of approximately $24 million to $32 million related to the restructuring plan throughout the third and fourth quarters of 2023, of which the majority are expected to be cash expenditures and weighted towards the third quarter. We also expect to incur $3 million to $4 million in non-cash impairment charges from the consolidation of our real estate footprint throughout the second half of 2023. These restructuring charges will be excluded from our non-GAAP operating income and non-GAAP net income results, though the cash expenditures will be reflected in our operating cash flow and free cash flow. As such, the cash benefit of reduced headcount will be offset by the associated severance-related cash charges. As a result, we are maintaining our expectation of approximately $80 million in free cash flow for the full year. As Corey mentioned, we are updating our full-year ARR outlook range to $800 million to $805 million or approximately 12% to 13% in growth over the prior year. This is roughly a 2% reduction in year-over-year growth at the midpoint, which despite healthy year-to-date momentum in our business, we believe is appropriate to account for modest disruption risk in the business as we make these important strategic changes. We are adjusting our total revenue guidance for the full year to $771 million to $775 million or roughly 13% growth. The $3 million reduction at the midpoint is wholly driven by lower professional services revenue tied specifically to our restructuring cost actions, which we now expect should be approximately flat compared to last year. We are raising our full-year operating income guidance to a range of $86 million to $90 million, which represents approximately 700 basis points of operating margin expansion over the prior year. We expect full-year net income per share to be in the range of $1.23 to $1.29 based on an estimated 67.5 million diluted weighted average shares outstanding. Turning to quarterly guidance, for the third quarter of 2023, we expect revenue in the range of $196 million to $198 million, which represents growth of roughly 12% year-over-year. We expect operating income for the third quarter in the range of $29 million to $31 million and non-GAAP net income per share of $0.41 to $0.44, which is based on 71.7 million diluted weighted average shares outstanding. As we look out at next year, we expect to generate at least $160 million in free cash flow in 2024, doubling from our current 2023 guidance of $80 million. We feel good about our results year-to-date and about our ability to pursue the strategic opportunities ahead of us as a leaner, more agile company.

We will now open the call for questions. Operator instructions. Our first question comes from the line of Matt Hedberg with RBC.

So just one, let's see. So I just wanted to maybe get a better perspective on the full year guide. I mean, obviously, the Q2 results were good. I just want to be clear, is the full year reduction just a function of the restructuring? Or is it that you're seeing macro trends deteriorate? Just maybe a little finer point on sort of the assumptions on the 2% reduction would be super helpful.

Very reasonable question. So the first thing is that we were really focused on looking at our cost structure, both this year, but more importantly, as we go into '24. And we decided that if we're going to have the right cost structure in the '24, this is the right time to actually make these changes. Now, the secondary impact is we have to really assess what's the risk of these changes in the business. As you know, we had a back end of the year. But I would say the trends were good, we were trending well towards what we had set out. But when we think about the amount of change that we're doing with the 18% reduction in a back-end loaded year, we want to ensure that we actually gave a guidance range, so a very high-confidence guidance range. So that was the primary driver of the change in the guidance.

Your next question comes from the line of Saket Kalia with Barclay.

Okay. Great. I'll keep it to one as well. Corey, maybe for you. You talked about using this restructuring as a way to also reallocate resources. And clearly, there's a profitability benefit. But also as a way to reallocate resources to the areas where customers are seeing the most value. I was wondering if you could just go deeper into that. What product areas do you think are going to get a little bit of increased investment? Where do you think you can get a little bit more profitability? Tell us how you thought about that?

That's a great question. In fact, one of the things that we actually saw is we were seeing extraordinarily strong, healthy performance conversion rates in certain parts of our business aligned with what we laid out with the package strategy. We have to make sure that our entire organization was aligned around it, and frankly, it just wasn't. And that gave us this opportunity to get the alignment right. The areas specifically, Saket, you very well put your finger on. One is when we think about the modern SOC, customers are looking to upgrade their solutions to drive efficiency. They need both great technology, and yes, also a consolidation play, but they also need expertise on demand. The investments that we're making are really focused on integrating both traditional environments and cloud environments while managing risk and threat. We've seen increasing demand and traction with that strategy. Frankly, the packages are actually going ahead of what we laid out, but there's an opportunity to build a deeper, more integrated solution and to take that to market in a very compelling way. The second thing is as I alluded to previously, we are accelerating investment in cloud security. Cloud is in its early evolution. It's important now that it transitions from a niche area to becoming a mainstream capability within security operations. Our goal is to be a leader in mainstream security operations where we can monitor risk and threats across both traditional and cloud environments seamlessly. We have great traction and progress but it’s a competitive market. We're not resting on our laurels. Finally, I would say there's a realignment focus as we've successfully broadened our product portfolio. We have had varying experiences with different buyers of our products and services. Thus, we're streamlining and aligning that, which creates efficiency but also enhances the customer experience.

Your next question comes from the line of Eric Heath with KeyBanc Capital Markets.

I'll ask two questions, if I may. Just first, Corey, can you help us just give us an understanding of the type of growth profile you're setting yourself up for in '24 following this restructuring plan? And one follow-up, if I may.

Yes. No. So I can answer that one pretty quickly. It's way too premature to talk about the growth we’re about to report, mostly because I am not at all qualified to talk about what the economy is going to be like in '24. And so we'll update you on that later. The important thing to think about is that we knew we wanted to strengthen our free cash flow. We want to establish a strong foundation there. And so what we did was really pressure-test the growth profile to make sure that it was going to be resilient—the free cash flow aspirations and targets in different scenarios. We have a lot of confidence in that. What I will tell you, too, is that we're making investments on our business that as the economy normalizes, whenever that happens, we should see growth accelerate from where we expected to be this year. But again, it's too early to talk about what's going to happen in the economy. We plan to be a competitive grower in the market. As the economy normalizes, our absolute focus is making sure that we're actually growing stronger than what we're seeing at this level today.

Okay. And then just on your comments about cloud, could you just maybe be a little bit more specific on where you'd like to invest in cloud security? Does this mean more aggressively in the Snap space? Is that how I should think about it? And then just if you had any color on how big the cloud security business is at the moment, that would be great color as well.

Yes. So we see traction in cloud. We didn't release the specific numbers on it. What I would just say at a high level for cloud is we're actually seeing great traction. In fact, the traction has accelerated, which is part of our confidence in investing. There are two different areas we actually have core capabilities: cloud vulnerability management and cloud security posture management, and cloud automation today, and we have a good position in other areas. We are committed to making sure that we maintain our leadership position there. So some aspects of cloud security will absolutely be an investment area. The other one is that cloud is a dynamic market. So we want to ensure we have the investment capacity to remain relevant. The last thing I'd say is that we see a big advantage because customers are looking to manage cloud within the context of other things in their environments. Thus, being able to manage our overall security footprint cost-effectively is a massive opportunity.

Your next question comes from the line of Matt Saltzman with Morgan Stanley.

Corey, just to start a quick one for you. When you think about the competitive landscape for Rapid7, I would assume things have certainly shifted, particularly as you broaden the product portfolio and really honed in on these bundled go-to-market motions. So I'm curious in the RFP process that you're seeing a broadening of the vendors that you're competing with and just kind of any commentary that you can give around win rates. I know it's still relatively early in terms of the bundles being in the market. But anything you can give us around win rates against kind of new competitors would be really helpful.

Yes. No, it's a good one. So look, I think the biggest new area where we have to book the best is clearly the modern SOC space, that’s the evolution of the SIEM market, but we also have a consolidation theme. You see a range of different competitors: traditional SIEM players, MDR players, and more. What I would say is that we are having a lot of traction and momentum. That's part of why we're continuing to double down in that business in that space. Our conversion rates are high, the growth rate related to at-scale business is extraordinarily healthy. We’re seeing lots of ability to attach around that business, and our win rates are consistent and growing—we feel very good about it. With managed complete, I would just say we are seeing record conversion rates for that offering, which is a proxy for our win rates, although we haven't publicly disclosed the limit. The second thing I would highlight is two ways to think about the cloud space being integrated. Our strategy right now in the cloud space is both competitive and expensive. We can knock it out of the ballpark by effectively upgrading our vulnerability management installed base, which is a sticky market. That’s the primary focus for us now, rather than trying to land lots of new cloud customers because it’s not the most efficient motion for us right now. As we build momentum in the cloud market, we will absolutely see more cloud competitors since it’s a hyper competitive market, but we are confident about our strategies moving forward.

Your next question comes from the line of Brad Reback with Stifel.

Corey, key percent of a really large number. So as you manage the business going forward, how do you prevent morale breakage? And then how do we think about how long it will take to reinvest those savings back into the business?

One, you're quite right that 18% is large. Of course, we don't do this lightly. So let me just talk about how we actually thought about this. The first thing is that from our employees' perspective, we believe that while we don't control it, incrementalism is not helpful. There are many companies that have to make these cuts multiple times. We decided that doing this deeply means that we only need to do it once. The second thing is that, like all companies, we have inefficiencies. We have to tackle those inefficiencies along with the changes. We've observed many parts of our business that are growing quite healthily with a credible stickiness, showing great signs of expansion and we did not have our team and resources aligned around that for obvious reasons. So when you think about going through a restructuring, we try to tackle the efficiencies deliberately in a way that doesn’t cause pain to employees in the long term. It’s essential to provide visibility for all employees going forward. The data gives me the most confidence for most of our employees is that they're excited about the momentum we’re experiencing. This motivates and excites the employees who see progress. So that’s our decision—to make this one deep cut and focus on the growing business areas.

Corey, just on the second part of Brad's question about the timeliness of the reinvestment, we're going to be very thoughtful and very deliberate in terms of what we do. But Brad, you would expect to see some of that happening in the back half of this year and certainly carrying into next year. But again, we'll be very confident with that improvement in free cash flow doubling year-over-year to the $160 million mentioned earlier for next year.

Your next question comes from the line of Joel Fishbein with Truist Securities.

Just a quick follow-up on Brad's question and then one about acquisitions. You guys are reaching a point where you have easier comps going forward. And I just if you've thought about how this may impact your go-to-market or talk about any impact your go-to-market feel on the street salespeople at the restructuring might have? I know there's not focused there. And then also just as a follow-up to that, how the restructuring or focus on free cash flow might impact your acquisition strategy going forward.

So first off, we strive to minimize customer impact in the short term. In the midterm, it will be very positive concerning customer impact. We have actually oriented more of our people to customer-facing teams. The restructuring is quite mild in terms of customer support people, the number of frontline support staff remains stable. The efficiency adjustments mostly impact overhead management layers. Our significant positive signals, the momentum in business we had in Q2 further supports this. With regards to your second question about M&A, generating more free cash flow gives us a broader range of flexible options for investment. We will look at what's the best for long-term shareholders. We'll have a focus on strong, aligned tech and team acquisitions. I would consider that the additional free cash flow provides us a lot more flexibility and opportunities.

Your next question comes from the line of Shrenik Kothari with Robert Baird.

So Corey, it's good to see that your threat and cloud risk complete offerings are tracking ahead of their expectations and it had over 1/3 of your new ARR and overall better-than-expected kind of favorable linearity in the quarter. From an international revenue standpoint, it seems like it again grew quite strongly about 17%. Can you provide some geographical color around both the favorable linearity as well as the overall retention rates sequentially from last quarter? I really appreciate it.

Yes. I'll tag team that with Tim. So the first thing I would say is we're seeing stabilization and healthy performance in the international channels, especially EMEA where we had pressure last year. Tim spoke about retention last year, and we've seen that stabilize and improve as we go forward. So we feel confident about what we're doing internationally. We believe we’re set up well as we progress. Nevertheless, this improvement is a recovery compared to the rough performance we experienced in '22.

And I would just add that there's certainly a big opportunity still internationally. The growth rate has been better—higher than what we've seen in North America. While there's still a huge total addressable market, retention rates are something we pay keen attention to, and the team does thorough work on that, and they've remained stable.

Your next question comes from the line of Jonathan Ho with William Blair.

I wanted to see if I could get a little bit of additional detail on the MSP opportunity that you referenced and just like why is the MSP opportunity a little bit more attractive than in prior periods? How does the restructuring maybe impact that as well?

Yes, it's a great question. We've been discussing MSPs and partnerships for some time. As customers grow overwhelmed in their security needs, they require both technology and services. As organizations face complex security environments, there's not enough talent available. We need to scale with a strategy that combines technology with quality service experience. Rapid7 fulfills some of that need. We see MSPs as great partners. We are not interested in commodity, low-value managed services that do not provide adequate security for customers. We intend to have world-class services. Thus, we're focusing on our integrated platform. Very few in the market offer integrated solutions that underpin our security operations. This provides MSPs with a compelling solution to compete in detection, threat management, compliance, and even recently enhancing our endpoint space.

Your next question comes from the line of Gregg Moskowitz.

This is Mike on for Gregg here. Just two quick ones. Firstly, just wondering were there any changes this quarter in average sales cycles, average deal sizes or duration as compared with Q1? And just second, what sort of ASP uplift did you see for Threat Complete and cloud risk complete this quarter?

Yes, I would say there was no significant change in Q1. When considering Q4, Q1, and Q2, it has been relatively stable. While the economic environment is pressured, our demand outlook remains healthy and stable. We feel good about the trends we observed in Q2. To directly address your second question, the uplift we saw on the packages was still double; it’s approximately 2x which we’re pleased with.

Your next question comes from the line of Gray Powell with BTIG.

So yes, maybe just one on my side. I want to make sure I had a stack right. I think you called out detection response at over $300 million in ARR with 25% growth. That's great to hear. I know you're not disclosing vulnerability management revenue anymore. But is it safe to say that that's still growing in line or maybe better than the overall VM market? Just how should we think about that mix?

Yes. I will answer two questions, starting with the competitiveness in our usage and adoption, which I believe is healthy. We’re seeing good traction in both usage and new customer adoption for our vulnerability management solutions. However, consider that this situation is a bit like apples and oranges due to the allocation—we’ve increased our focus on platform sales, solution sales, and packages. It becomes more challenging to attribute specific dollar amounts to revenue from various segments. Therefore, I believe we are positioned well to grow at better rates than the overall vulnerability management market long term—although we must overcome economic challenges in the near term.

Your next question comes from the line of Roger Boyd with UBS.

Corey, I’d love to go back on MSSPs for a second. A lot of your competitors in VM, cloud, SIEM, etc., are also emphasizing the growth opportunities they see in this channel. I wonder if you could just talk about the competitive environment there with MSPs and what makes Rapid7 a better partner versus some of your competitors? That would be great.

Yes, I think there's a couple key points. First, not all organizations will succeed at pace; we're seeing a lot of movement in the market. But customers need it, which is why it's critical to emphasize that this is a core component of customer need. Rapid7 addresses this with integrated workflows. If you consider our solution, it provides MSPs with an offering that allows them to compete in various areas: detection, threat management, compliance, and now, endpoint space as well. We've built in extensive automation, allowing us to offer competitive managed service and MDR solutions that attain significant margins. This is our differentiator.

Your next question comes from the line of Alex Henderson with Needham.

Just to start off with a clarification. You said your demand trends are stable, and you were comfortable. But I was hoping if you could just tell us if your pipeline is as robust coming out of the June quarter as it was, say, coming out of the first quarter or out of the end of the year. So there's no change in that trajectory as we go into the restructuring.

Yes. Super fair question, Alex, especially now. Our overall pipeline is stable, and our conversion rates improved throughout the quarter. Thus, we fee good about our conversion rates and the pipeline coming out. To put a finer point on the guidance changes, the adjustments were related to our structural realignment—trends were good. Importantly, we don’t want to be hyper-specific about the $1 million changes but rather provide a high-confidence guidance range that accommodates changes. Regarding your follow-up question, there was consistent performance throughout the quarter; nothing fell off at the last minute.

Just one last question, if I could stick it in. The timing of these restructurings, given the announcement here in August, is most of the cost improvement then going to start kicking in, in the fourth quarter and into '24? Or do you get some of it in the current quarter?

Yes, Alex, you’ll get a little bit in the third quarter; the majority of the 18% is happening right now this week, with some individuals transitioning through the balance of the year. But you will experience the full quarter in Q4, and, of course, for next year as well, which you see in the free cash flow guidance for next year.

Your next question comes from the line of Rob Owens with Piper Sandler.

This is Ethan on for Rob. I wanted to ask about net new customer additions. They looked pretty strong here, both on a sequential basis and a year-over-year basis. So I was hoping you could add some more color there. Where did you see strength? Was it with the new packages, with the MDR services, just curious if there's anything to call out there, and why there's such a marked improvement?

Yes. It was a little bit surprising from what we had commented on about really rotating our focus on expanding the customer base. What I would say is that we have to remind ourselves of our focus on packages and that this follow-on effort would begin to engage deeper with customers in our installed base. That motion started in Q2, and we expect to find continued expansion largely in that installed base moving forward. However, we observed strong performance across regions, products, and territories, so there's a broad base of strength helping drive it.

Your final question comes from the line of Brian Essex with JPMorgan.

Corey, I just want to follow on to that actually the last topic. I echo my congrats on some healthy net new ads here from a customer perspective. Just want to get a sense, anything you can provide us for attach rates within the installed base? How much running room do you have to upgrade existing customers with adoption of packages? And are you seeing anything in your pipeline that's yielding greater confidence in sales productivity from a selling a platform perspective?

Yes. We actually believe we have a massive runway for growth. While the restructuring may obscure some points, a significant opportunity we have is focusing on expanding the installed base where we've done well over the years through strong management innovation. We actually have relevant offerings today in many areas. Yes, there’s work to do, but we are favorably positioned to drive growth despite the near-term challenges we're facing. With strong market trends, we believe through packages and focusing on expansion in the installed base, we can see meaningful growth and momentum in the coming quarters. Thank you for joining us today. I know this was a lot to cover. We certainly appreciate your time and attention. Have a great evening.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.