Good afternoon. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the Rapid7 Third Quarter 2023 Earnings Conference 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. Thank you. Elizabeth Chwalk, Director of Investor Relations, you may begin your conference.

Thank you, operator, and good afternoon everyone. We appreciate you joining us today to discuss Rapid7's third quarter 2023 financial and operating results in addition to our financial outlook for the fourth 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 plans, financial guidance for the fourth quarter and full year 2023, financial goals for the 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 August 9th, 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 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 responses 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.

Good afternoon everyone and thank you for joining us today on our third quarter 2023 earnings call. Rapid7 ended the third quarter with $777 million in ARR, which is a 14% increase over the prior year, while delivering revenue and operating income above our guided ranges. During the third quarter, we continued to see strong demand for integrated security operations solutions across our Insight platform. Our value proposition is resonating with mainstream enterprise customers, particularly with our consolidated offerings. Over 40% of new ARR in the third quarter was from either a threat or cloud risk complete deal, validating our strategic focus on supporting the modern or extended Security Operations Center (SOC) with integrated best-of-breed capabilities across risk management and threat detection. As we sell more of our platform together, we see deal sizes getting larger as average selling prices have steadily increased all year. Overall, we saw a customer spending environment that was in line with our expectations and remained stable during the third quarter and into October. Amid the worsening consequences of cybersecurity incidents and the persistent challenge of proactively securing IT environments in an efficient manner, we consistently hear a set of needs from conversations with customers. There is a necessity for integrated cloud security offerings with InsightOps as well as a desire to upgrade to cloud-native detection response programs. Automation and integrated expertise are often critical differentiators in choosing technology partners. While security team leaders are prioritizing spending around these areas, the budget environment remains complex. Consistent with the last 12 months, we continue to see higher levels of approval during extended procurement cycles. The good news is that our sellers have become more adept at navigating this environment and there is still urgency from customers on projects around cloud security and detection response, which are the anchors of our successful risk and threat management offerings. Our critical role as a strategic partner to SecOps teams is reflected in the growing number of long-term commitments we're seeing from customers. Our total weighted average contract length in the quarter was up 20% over the prior year, which speaks to the value and confidence our customers have in Rapid7 as a long-term technology partner. Regarding the restructuring we announced alongside our Q2 earnings results in August, our efforts to streamline the business are mostly complete and we are making progress in our areas of strategic reinvestment. I am proud of how well our Rapid7 team has responded to the changes as we have worked to optimize our organization and underlying cost structure over the past few months. Collectively, our strategic alignment is benefiting profitability, as we expected, and we continue to expect the full year 2023 operating margin to expand over 750 basis points from the prior year and to generate free cash flows of approximately $80 million. Regarding our customers, we had an intentional focus during the latter half of the third quarter on ensuring continuity and strong overall customer experience as we executed our transition plan. Our customer-facing teams were heavily focused on spending more time engaging with and messaging to existing customers and prospects with less relative focus on scaling incremental pipeline. The result is that our changes were widely well received by customers, driving strong conversion rates that fueled solid overall ARR growth in the quarter. Now that we are largely through these changes, our teams are incrementally more focused on engaging broadly to drive strong and improving pipeline momentum as we exit the year. We believe we remain well positioned to achieve our fourth quarter objectives. Regarding reinvestment into our strategic areas of focus, we're accelerating our leadership in the extended SOC as well as further scaling our ability to offer expertise alongside our technology. While it's still early, we are progressing well in both areas. In October, we announced the general availability of multilayered endpoint protection for our managed detection and response customers. By offering integrated next-gen antivirus alongside digital forensics and incident response capabilities onto our Insight agent, we are elevating the breadth and holistic visibility of our extended detection and response. We saw a meaningful gap in the market for customers with legacy endpoint solutions that are focused on affordable, highly effective solutions. Our expanded offerings will now enable these managed detection and response customers to benefit from reduced endpoint security cost and complexity within their SOC, while freeing up additional budget dollars by consolidating onto our Insight platform. We also continue to see traction in cross-selling across our integrated platform of solutions. A good example of this in the third quarter was a deal with a midsized fintech company owned by a large private equity firm. This customer became a Rapid7 vulnerability management customer in 2022, and earlier this year, extended their enterprise risk visibility with our cloud security offering. They will start again in the third quarter to explore our managed threat complete offering after facing additional resource constraints and regulatory requirements. With transferred dollars that weren't part of their initial budget and after a competitive process, the customer chose Rapid7 for our ability to detect and respond to threats across their entire security environment and throughout each phase of the detection and response lifecycle. With our Insight agent already deployed, the customer is able to implement our robust monitoring capabilities within days of their purchase, allowing for a quick return on their security budget dollars. Our ARR with the customer more than tripled to the high six figures over the course of 18 months, highlighting the urgency and the value resource-constrained enterprises place on best-in-class solutions within strategic areas of security operations. We're also scaling our ability to offer integrated expertise alongside our SecOps solutions by accelerating our strategic managed services partnerships. I am pleased to announce that we signed a partnership deal in the third quarter with a nationwide leader in communication services, who chose Rapid7 technology as the foundation for their managed detection and response offering. It was a highly competitive process, and our new partner needed a single provider to help their customers manage security across their entire network, endpoint server, and cloud infrastructure while helping to contain and disrupt ongoing security breaches. This partnership will combine our best-in-class threat detection and response platform and global Security Operations Center (SOC) presence to help small, medium, and large enterprise customers better manage an ever-evolving and challenging cyber threat landscape. Over time, we'll have the opportunity to expand our partnership to sell other Rapid7 solutions to their substantial customer base. We're excited about this partnership and our ability to leverage similar partnerships in the future as we scale our capability to offer integrated expertise to more customers. Rapid7 remains focused on being the leading provider of integrated security solutions for the extended SOC by providing risk and threat management within the context of overall security, alongside expertise tailored to the needs of each customer. We are pleased with our third quarter results and continue to march forward towards our goals. When we updated our ARR guidance in August, alongside the announcement of our restructuring and strategic realignment, we established a high-confidence range to account for modest degrees of disruption in the business. As we make progress, we've seen performance track within our range of expectations. Given larger deal cycles as well as the heavy concentration of large deals in the fourth quarter, we believe it is prudent to reiterate our full year ARR guidance of $800 million to $805 million. All in all, we are pleased with our third quarter results and the early progress we are making as we work to reaccelerate growth by reinvesting into strategic areas of strong customer demand within our business. We were able to outperform on our operating income target in the third quarter and to flow through that upside to our full year guidance range. This speaks to the benefit of our new streamlined cost structure, which will allow us to become a more profitable growth company. We expect to generate approximately $80 million of free cash flow this year and then double that figure to at least $160 million next year in 2024. With that, thank you for joining us on the call 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. Good afternoon to everyone on today's call, and 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 third quarter of 2023 with $777 million in ARR, growing 14% over the prior year on solid demand for our consolidated offerings across risk management and threat management. Customers continue to gravitate towards our integrated solutions anchored in detection and response and cloud security, which made up over 40% of new ARR in the third quarter. Our value proposition is resonating with customers as we see average selling prices continue to climb and our average contracts get longer. We saw relatively balanced contributions from new and existing customers in the third quarter. ARR per customer grew 7% over the prior year to $6,100, and we ended the quarter with over 11,400 total customers, reflecting 6% growth over the prior year. Third quarter revenue of $199 million represented growth of 13% year-over-year, exceeding the high end of our guidance range. Product revenue grew 14% year-over-year to $190 million as customers continue to prioritize budget dollars around projects in our areas of strategic focus, both around the extended SOC and the ability to offer integrated expertise. International revenue made up 22% of total revenue, while North America represented 78%. Moving on to operating and profitability measures for the quarter. Product gross margin was 77%, in line with the prior year, and total gross margin was 75%. Operating expenses reflect the changes to our cost structure that we implemented in August. Sales and marketing represented 34% of revenue in the quarter, down from 38% in the prior year. R&D and G&A expenses were 16% and 6% of revenue, respectively, compared to 20% and 8% in the third quarter of last year. Overall, higher revenue and a leaner cost structure drove higher-than-expected operating income of $37 million in the quarter. Our adjusted EBITDA was $43 million in the third quarter and diluted net income per share was $0.50. Before we turn to the balance sheet and cash flow statement, I want to mention certain items from the third quarter income statement that do not affect our non-GAAP results. We incurred a total of $24 million in restructuring and real estate impairment charges in the quarter, in line with our expectations. We also booked a non-cash induced conversion expense of $54 million in the quarter as a result of the required accounting treatment related to the partial repurchase of our 2025 convertible notes. We ended the third quarter with cash, cash equivalents, and investments of $373 million. We took proactive steps during the quarter to strengthen our balance sheet and to take advantage of favorable market conditions. The increase in cash and equivalents from the second quarter reflects the proceeds from our convertible notes offering in September, partially offset by the previously mentioned partial repurchase of our 2025 notes. This was primarily a liability management effort, allowing us to enter into a new convert with more favorable terms and extend the maturity date of a portion of our debt structure. Operating cash flow was $4 million and reflects timing of the restructuring payments, which were concentrated in the third quarter, as expected. It also reflects a working capital headwind related to the timing of cash collections. We have already seen strong collections early in the fourth quarter, and we'll continue to manage these working capital dynamics closely. Moving on to our outlook for the remainder of 2023. As Corey mentioned, we are maintaining our full year ARR outlook range of $800 million to $805 million or approximately 12% to 13% growth over the prior year. As our strategic realignment is tracking in line with our range of expectations, we feel confident about maintaining the existing range for the full year. We are raising our full year revenue guidance to $773 million to $775 million, representing 13% growth. This reflects product revenue outperformance in the third quarter, partially offset by slightly lower services revenue forecast for the full year as we actively deemphasize some lower-value professional services coming out of our restructuring. We are also raising the midpoint of our full year operating income guidance by $7 million to reflect our strong third quarter performance. This brings our full year operating income guidance to $94 million to $96 million, representing roughly 12% full year operating margin and over 750 basis points of improvement from the prior year. Non-GAAP net income per share is expected to be $1.26 to $1.29 based on an anticipated 72.1 million diluted weighted average shares outstanding. We are reiterating our free cash flow guidance of approximately $80 million for the full year. As implied by our full year guidance for the fourth quarter of 2023, we expect revenue in the range of $200 million to $202 million and operating income between $33 million and $35 million, which represents an operating margin of approximately 17%. Non-GAAP net income per share for the fourth quarter is expected to be $0.47 to $0.49 based on an anticipated 73.8 million diluted weighted average shares outstanding. With that, thank you for joining us on the call today, and we will now open the call for questions.

And your first question comes from the line of Matt Hedberg from RBC Capital Markets. Your line is open.

Great. Thanks for taking my questions. Corey, great to see the results and demand commentary and the benefits of the restructuring going on here. I'm curious, you noted in your prepared remarks that you're working to reaccelerate growth. I guess, I'm wondering, when we think about sales and marketing or products or whatever it might be, what do you think are some of the most important aspects of what you guys are doing to control some of that reacceleration even despite ongoing economic uncertainty?

Yes. Thanks, Matt. It's a good question. So, I think there are two fundamentals. One, you have to be in the right markets that have the right demand drivers. I think we're there. If you think about what we're doing in the extended SOC, customers are struggling with the cost and complexity of managing their technology stack in this environment. So we are leaning into that and continuing to reallocate investment into that area of focus. That's a long-term investment area that involves cloud, and we're also delivering expertise. But of course, we're focused on that. We have been. We think we have a good leg up. We think we're competitively differentiated. But it's a long-term investment area, and again, we're rotating more of our investment to those areas over time. Now, I would say the point on that one is going to be also the one that goes to go to market is, look, we can actually grow faster. Our big focus right now is growing efficiently, though. This is a focus of making sure we have durable growth and efficient growth because as we look forward, we know that we can actually grow in the right areas and the right spaces. We know we actually are set up for the right products and services, but we have to ensure that we have the efficient growth that we're actually looking for and that spend is going to come over time. So, we are being methodical, very thoughtful. We are going to spend the reinvestment, but it's going to be to extend it into the cloud, continuing to actually work with partners to deliver augmented services. As I talked about with the large national provider and one of the deals we actually just did, you'll see more of that. But it's also a big focus on extending our sales and marketing engine, but actually doing that both through partners, but doing that efficiently ourselves. And that's what you'll see us make investments over the course of both this year, but more importantly, we'll make investments over the course of 2024. But that's kind of how we think about growth. We're focused on efficiency now and then adding growth that actually gives long-term growth potential, but actually doing it in a way that makes sure that we stay very disciplined, very lean, and very efficient.

Super helpful. Thanks, Corey.

Your next question comes from the line of Adam Tindle from Raymond James. Your line is open.

Okay. Thanks. Good afternoon. Corey, I just wanted to start, you mentioned how the pipeline was impacted from Q3 from making sure existing customers were okay, which makes total sense and probably a good move, I guess the question would be, how do you shift the salesforce to focus? How did you shift them to focus on existing? And how do you pivot them to focus on new pipelines, some of the things you can do from incentives? And Tim, if you wanted to maybe as a follow-up to this, I know that that can have a lagged impact on revenue growth, that deceleration in pipeline. Wondering how we should think about that in light of moving forward in 2024 growth. We're exiting, I think, at single-digit growth in Q4. Wondering if that's maybe an indicator of what to expect in 2024. Why or why not? Thank you.

Yes. I'll tackle that. One, as we actually think about sort of guidance, I would just say, listen, the biggest factor there was, as you said, we were very focused on executing the cost structure alignment and making sure we take care of customers. We actually just had very direct discussions with our team about what the priorities were. The priorities were to make sure we're servicing our customers well, make sure that we were converting existing deals. We saw and continue to see very, very strong conversion rates overall. We continue to see that we were actually adding more consolidation pipeline. So, we had more consolidation pipeline; those are bigger deals. They actually have longer sales cycles. So, you ask what the short-term effect was, theoretically, less pipeline for Q4. That's something we're very comfortable with because, again, our big near-term focus was the cost structure. Now, longer term, we're very focused on continuing to build strategic pipeline, which we're seeing in the consolidation efforts. We're doing two things around that. We're making sure that our sales team is well equipped and selling it, and I would just say we're seeing the benefits of that now. Yes, that actually has some benefits in 2024. But the other part of it is, as I talked about on the last call, we did drive efficiencies, not in our direct sellers, but in our overall go-to-market engine. We expect to add more of the pipeline and demand generation capabilities over time, but we are very, very disciplined about adding that in a way that is lean and efficient. I think that sets us up for a good long-term dynamic, but that's the focus that we have right now.

Yes. And then, Adam, it's Tim too. The second part of your question regarding 2024, we are right in the middle of our budgeting process for next year. So, it would be premature for us to make any comments about growth for next year. But I'll reemphasize what Corey said, we're very focused on efficient growth and generating strong free cash flow. So, we've shared with you guys last quarter that we anticipate roughly $160 million in free cash flow next year, and we still feel very good about that number. Look, we had some hard actions that we had to take back in August with the restructuring and realignment of the company. But I do think that sets us up very well for next year that we've rationalized the cost structure. So, we are very focused on efficient growth, and we'll have more to say about next year on the Q4 call.

Makes sense. Thank you very much.

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

Great. Thanks for taking the question. So, just looking at total customer growth, it's kind of trended in this mid-single-digit range for several quarters now. I appreciate you guys don't specifically guide to or disclose gross logo retention. But I'm just curious if you can speak qualitatively about the trends on gross logo retention over the last 12 months and maybe the last six months.

Yes, I mean, I will talk at a high level, as you say, we don't disclose it. I think last year, we talked to were exiting last year seeing some pressure in that area in Europe. And what I would just say is that this year, we've seen the improvement that we actually expected to see. So, we feel good about our retention overall. On balance, if you look at last year compared to this year, we feel that it's trending positively, and we feel good about the direction and the setup going forward. In fact, as we think about sort of efficient growth, a big part of that is really focused on making sure you're taking care of your customers first. That's the allotment for the customer value; it does a lot for us. We feel good about the trends that we're seeing in the business.

Great. Thank you.

Your next question comes from the line of Fatima Boolani from Citi. Your line is open.

Good afternoon. Thank you for taking my questions. Corey, I wanted to revisit some of the pipeline commentary you talked about, very clear that the focus was very intentional on keeping our existing customers happy and growing the wallet share there. But it sounds like there are going to be some pivots into building new pipeline and incremental demand generation on the new logo front. And I just wanted to make sure I understood or picked up on that information correctly. And so really, what are some of the things that you're going to be putting in place to be able to maybe reaccelerate some of that new customer and new logo acquisition momentum and those initiatives?

Great question. And by the way, welcome back. Look, I think that there are two dynamics that are really key to focus on. One, we're actually doing a great job of building a strategic pipeline. I've talked about this before. One of the interesting things is as we actually build more consolidation pipeline, those things are bigger deals and they follow the same sales cycles as the bigger deals. That's a positive thing. We're converting those things well. And that's more of a timing thing. So, I think we have more visibility into the outlook as we go forward. The second thing that I think you're alluding to, which is also important, is we're focusing not just on how do we actually build the pipeline, but we're focusing on, what is the efficiency and what's the cost to build that pipeline. We're not treating all things the same. So, I'll give you a perfect example of that: We have a very intentional focus on how do we actually build pipeline through partners in the ecosystem and through Managed Service Providers (MSPs). You saw an example of that on one of the marquee deals mentioned on the call, going through partners and especially MSSP partners, but more broadly, the channel. We have a very, very tight focus on that, and we think we can do that efficiently through a targeted set of partners. Again, if you're in the right demand areas, then you can actually find ways to build pipeline, and we are focused, I would say, more now on the cost and the efficiency of the pipeline that we build and the overall engine that is just driving growth as fast as possible. We will grow. Again, our tight focus is on long-term growth, but it's not on trying to get the fastest time to that growth; it's actually making sure it's both durable and sustainable but also has the right cost structure around it.

And I think we both commented in our prepared remarks, just on the strength of the packages, the Threat Complete, Cloud Risk Complete, now over 40% of new ARR. We've seen that grow nicely over the quarter. So, that's another tailwind of momentum we have with our sellers, both new and existing customers.

Absolutely. Thank you again. Great question.

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

Hi, this is John Weidemoyer for Jonathan. Thanks for taking our question. So, your solutions are targeting modern SOC efforts in terms of SOC spending. Are you seeing customers start to shift how they approach traditional apps like SIEM and other solutions to save money or improve security? And how might that relate to Rapid7's value proposition?

Yes, we're seeing a big shift. One reason is if you think about traditional SOC, it was primarily focused on collecting log files in the on-premise environment and monitoring that environment. What we're doing when we think about the extended SOC is actually focusing on the overall attack surface, which is not just on-premise, but also the cloud and the applications. So what we're helping customers do is, one, collect all the data to monitor the full attack surface. That also adds a massive volume of data. We're focused on both productivity and augmenting either with our sales or with partners the expertise and talent to manage the volume of data from that larger attack surface. Customers are absolutely shifting their focus from traditional SIEMs and focusing primarily on-prem to look at how do I cover my full attack surface while also looking at how to do that efficiently. The trends that are happening right now show that customers cannot add as many security professionals as they would like, therefore they're really focused on efficiency and partners that can deliver efficiency in their agent, which is our focus on our extended SOC. Thank you for your question.

Your next question comes from the line of Brian Essex from JPMorgan. Your line is open.

Hi, this is on behalf of Brian Essex. Thank you for taking my question. It was encouraging to see you confirm the doubling of free cash flow in 2024. Can you share your level of confidence in this forecast? Also, what are the main factors you are targeting to achieve this cash flow, and how much control do you have over these factors?

Yes, we have very high confidence in the $160 million of free cash flow. I would say that we have a lot of controls and levers in the overall business. We've taken a very thoughtful approach to planning that looked at growth rates, plus or minus the growth rate of this year. We're very thoughtful about how to deliver that free cash flow across a wide range of scenarios. We have levers in the business. That's also a big part of why we're doing reinvestments. We're doing reinvestment steadily, not all at once, because that also gives us levers to ensure that our reinvestments are timed well to the performance we expect to see. I say we have a lot of visibility. We have a lot of controls. But most importantly, our entire company is fairly committed, and we have a good structure from today to deliver on that.

Great. Thank you.

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

Hey, thanks for taking the question. Corey and Tim, good execution in a tough environment. So, just to follow up on some of the macro guidance questions. Just curious what is kind of embedded in your guidance for Q4 in terms of conversion rates because it seems like maybe you had some relatively high conversion rates this quarter. So, just curious if you're extrapolating that out. Also, any color on the macro or expectations on the budget flush? If you had any commentary on the linearity so far this quarter, that would be great, too.

Yes, I may miss something. I'll cover those and Tim will cover for me if I miss something. What I would say is we've seen improved conversion rates this year, not just across one quarter, but it's been a consistent theme that's actually picked up. So, we expect consistency more than anything else. I would just say on that one, I think the early start to the quarter indicates consistency and the consistency that we expect in overall conversion rates. The other piece of it is, no, we're not getting ahead of ourselves with expecting a budget flush. We did not factor a budget flush in for this quarter. I don't see any indicators that would suggest a budget flush right now. If we do, that's great, but there was no reason to factor a budget flush into our expectations and how we think about overall guidance.

Thanks.

And your next question comes from the line of Mike Walkley from Canaccord Genuity. Your line is open.

Hey guys, good afternoon. It's Daniel on for Mike. Thanks for taking the question. Could you just provide maybe some color on how the productivity of your sales reps is changing now that they have a few quarters' worth of experience, really exclusively selling via consolidated offerings? Also, just given your focus on improving profitability and cash flows, do you think the level of investments is sufficient to continue to grow longer term? Thanks.

Yes, two great questions. First, on productivity, what I would say is that through Q3, they're where we expected the productivity to actually be for our direct sellers. We are building larger deals in the pipeline, which has some timing impact on the sales cycle. You have a mix shift in the size of the deals in the pipeline. I've provided a little bit of qualitative data on that in my prepared remarks. That's more of a timing issue, but we think that washes out. We see very healthy productivity trends, and we expect reasonable, consistent levels of productivity to actually come up next year. We're happy with the trends and outlook on productivity. Your second question was, I forgot the second part.

With our focus on profitability, are we still investing at the right levels to continue to grow long term?

I want to clarify that my focus is on mid- to long-term growth rather than pushing for short-term acceleration. Our strategy involves making significant investments in our products and services, particularly to enhance our ecosystem and support our customers. We are dedicated to becoming the preferred provider for the extended Security Operations Center and are committing substantial resources to achieve this. The investments we are making now will be gradually implemented and will increase over the next year. Additionally, we're also focusing on enhancing our sales and marketing efforts. While we are being prudent, we plan to allocate more resources and capacity while ensuring efficiency. Our approach is geared towards partnering more closely in this environment. In the midterm, we anticipate a strong growth engine, but we are not hurrying our sales and marketing investments to meet short-term targets.

Great. Thanks so much for the color.

Your next question comes from Trevor Rambo from BTIG. Your line is open.

Hi, thank you for the question. This is Trevor filling in for Gray Powell. I wanted to ask how you are seeing customer reactions to the recent breach and the increasing number of breach headlines. Do you anticipate this will lead to greater activity for the company? Additionally, are there any specific product categories that seem to be benefiting more than others? Thank you.

Yes. First, we tend to be pretty focused on not trying to sell into news headlines just because that creates some weird incentives. It also hurts customers' trust over time. That said, it is a backdrop that's happening. Here's how I just set the backdrop at the fundamental level: CISOs, especially with some of the SEC's recent actions concerning SolarWinds and other things, are clearly very focused on security and their personal accountability. They see security as a top priority. I still think we have a significant backlog of security projects and resources that are needed. The funding environment for CISOs is tight. That means the reconciliation of that demand backlog and the pressure CISOs face, along with the speed and velocity of the budgets they're getting, is an underlying tension that underpins all the deals and cycles we see. Assuming that out, the backlog of projects has to get resolved over time. So I think we have a healthy demand driver and market. I love the place that Rapid7 sits with the extended SOC, focusing on the attack surface looking across the entire environment from on-prem and endpoint to the cloud. I think we're set up well. But I would just say, the budget environment for CISOs is going to play out as a budget environment.

So, there was maybe one last piece of that question. Just does it benefit any products in particular? I just go back to the packages, the way we fund.

Yes, consolidation is an excellent point; it provides leverage and scale, enabling our customers to manage their attack surface from the endpoint to the cloud. It offers economic advantages that assist CISOs in their responsibilities. This approach allows them, whether working with us or our partners, to enhance their capabilities with expertise. It addresses essential security issues while preserving that value.

Great. Thanks for the color.

Hi, this is Rob on for Brad. Thanks for taking the question. The international growth of 16% and 22% of revenue appears to be trending well. I'm wondering if the offshore talent mix shift from the restructuring discussed last quarter had any impact on this growth, or if the offshore talent mix shift was more focused on operating cost efficiencies? Thanks.

Yes. It's a great question. I would not say it's a primary driver of growth because it's too early to tell. We did have some catch-up work to do to ensure that the distribution of our global service and support ecosystem was properly allocated around the world to manage workloads better. The reality of cyberattacks is that many attackers operate in time zones that are not the time zones of the US. We need to ensure our teams operate around the clock, thus it's crucial to have people available in the same time zones as our customers and the attackers. I believe we will see more benefits and confidence as our teams in Europe and Asia are now able to communicate aggressively about the ability to provide local resources and commitment. We expect that to be a positive factor going forward; however, it is still early for that to show up in Q3 results.

Great. Thank you.

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

Great. Thanks so much. I was hoping you could talk a little bit about the partnership expansion programs, particularly the MSP that you noted in your call. How material do you think that will be as we look out into 2024 and 2025? Can it add 3%, 4%, 5% to your topline growth rate? And while you're at it, would you mind just looking at the Splunk acquisition by Cisco? Does that have any positive impact on you as a result of that consolidation? Thank you.

Yes. Two great questions. On the first one, I would say it will be incrementally positive, I think, in 2024. We did one big one. I think we’ll do more. We've had some smaller ones prior to this. So, I think it will be incrementally positive in 2024. The bigger they are, I would just say, the longer the ramp cycle is. I want to be clear; these are big organizations, and you have to get the gears of the organizations turning. I would say some incremental movement in 2024, but I think it really picks up in 2025 and 2026. We like this consolidated focus on partnering, especially with the breadth of partners; having a few bigger, focused partners really drives results. These are sophisticated organizations with lots of customers, so the effort and investment is well worth it, and we'll be investing heavily with our partners. But there is a considerable amount of effort involved to ensure these partnerships deliver results. On your second question regarding the Cisco acquisition of Splunk, I have a lot of respect for Cisco and Splunk. There’s nothing specifically about that or those teams and organizations. I’d say when there's change or disruption in the market, that's always an opportunity. Especially in this environment, where budgeting and talent are concerned, I think it's an opportunity for us. Any time a competitor in the market is faced with challenges that shift their focus is an opportunity for us, and I believe we can effectively leverage that.

Great. Thanks. Would note that they both were downsizing, so that helps too. Thanks.

Thank you.

And we have reached the end of our question-and-answer period. I will now turn the call back over to our CEO, Corey Thomas, for some final closing remarks.

Thank you all for joining us today on our call, and I wish you all a good rest of the year.

Thank you.

This concludes today's conference call. Thank you for your participation. You may now disconnect.