“We expect these efforts to gain traction over the next few quarters, with improvements in growth starting in the second half of 2023.”

In context

“Corey Thomas (CEO): Thank you, Sunil, and hello to everyone on the call today. Thank you for joining us on our third quarter 2022 earnings call. Rapid7 ended the third quarter with $684 million in ARR, representing 24% year-over-year growth. While revenue was within our guided range, operating income exceeded our expectations. Our ARR results came in below our expectations for the quarter. Growth was moderated by two key dynamics. First, the impact of ongoing global macroeconomic uncertainty on customers' budgets. And secondly, further anticipated sales productivity challenges as we evolve our model towards a consolidated platform sales approach. I will speak to this in detail on today's call. But first, let's discuss the environment. We spoke on our last earnings call about how the macroeconomic environment is affecting the pace of demand, driving higher levels of scrutiny as customers and prospects manage reputations amid increased economic uncertainty. These persistent trends continue to affect us broadly, with downward pressure coming from our international region. Customers continue to squeeze time into new projects and are, in some cases, taking a more measured approach to scaling their security investments. While we have limited visibility into the macroeconomic trajectory, we continue to factor in this headwind as we look ahead to the fourth quarter and next year. Now, let me turn to the internal dynamics affecting our performance. As we successfully expanded from selling a single product to a suite of products, you may recall that we relied on product-specific sales teams to scale the business. In the back half of last year, we began to mature our sales model towards the channel itself, enabling all of our salespeople to sell the full suite of our insight products. This was a key step in the evolution of our sales force toward a platform selling motion. While we expected multiple products to take slightly longer as we scaled our teams this year, we did anticipate an increase in sales activity during the second half of this year, as they gained mastery of our product suite. Entering the quarter, it became clear that our salesforce is taking longer than we expected to effectively sell a wider set of solutions on our insight platform. Let me highlight two predominant reasons for this. First, our audience is changing. Given the breadth of our platform, sellers are increasingly engaging in high-level discussions. This requires more robust seller enablement, especially for newer representatives, to familiarize them with important products and features for selling platform solutions and outcomes. Second, this strategy requires more focused packaging compared to the previous approach, particularly in an environment where customers are under budgetary pressures. As you might expect, rapidly scaling our sales engine across multiple products while entering a recessionary spending environment exacerbated these challenges during the quarter. In hindsight, our measured transition from a product-centric sales force to a security transformation model, which has understandably been slower than expected, underestimated the amount of time and support necessary for our team to drive efficient platform adoption. We have responded quickly to address this situation. And here's what we're doing today that gives us confidence in our path forward to improve execution. We maintain strong confidence in our mid to long-term thesis to become the platform of choice for consolidated security across resource-constrained organizations. Amidst a complex and highly fragmented security tool ecosystem, security teams of all sizes are struggling more than ever to deliver the right level of security effectiveness for their spending. The bar is higher today, as these teams face increased budgetary pressure. In a recent survey of cybersecurity professionals, 75% of organizations indicated they are looking to consolidate security vendors, as opposed to only a few years ago. We believe the platform investments we've made in recent years position us exceedingly well to help customers achieve more consolidated risk and threat visibility, response, and automation across their expanding digital footprint and growing cloud environment. A great example of how we're delivering on this consolidation value proposition at scale is a seven-figure ARR deal signed in the third quarter with an enterprise healthcare provider. This customer struggled to effectively and efficiently manage their expansive security environment with a leading team offering managed services from a large global consulting firm, experiencing challenges at multiple levels throughout the organization. Rapid7's solution with embedded automation stood out among the competition for its rich detection capabilities. However, a huge differentiator for this customer was our ability to consolidate their SecOps back onto a single platform. By leveraging our DNR threat complete package, this customer was able to solve their most urgent detection and response challenge, while also displacing their existing vendor, all at a better overall economic value. This ability to consolidate parts of their security ecosystem onto our insight platform not only solidified Rapid7 as the platform of choice but also expanded the value of our relationship. In an increasingly challenging landscape, our offerings continue to resonate with customers of all sizes, including our growing enterprise customer base. Customers continue to look to Rapid7 for detection and response solutions amid this dynamic threat landscape for its expert-driven, intelligent, and extensive detection capabilities that deliver market-leading time to value. Rapid7's risk visibility platform is resonating with customers expanding rapidly into the cloud, as we provide more consolidated risk visibility across cloud and on-prem environments. This underpins the sustained growth we've seen in our security transformation solution, which recorded another quarter of 40% year-over-year ARR growth. Let me share how we're optimizing our go-forward sales approach by focusing on specific customer opportunities. As we look to the fourth quarter and early 2023, we're activating more focused, customer-centric sales motions organized around customer needs. This will simplify and consolidate the sales motions that our teams will leverage. Many customers began to separate in Q3 as we started to categorize them alongside security transformation projects. However, we're accelerating this path in the fourth quarter as we plan to anchor our customer engagement around their most critical needs related to detection, response, and cloud risk visibility. This is an obvious next step for two distinct reasons. First, as we engage with customers today, we see the strongest and most urgent customer challenges centered around detection, response, and cloud security, especially regarding our visibility in the cloud while supporting on-premises activities. Second, this aligns directly with the natural progression we've seen in our business, as security transformation has scaled to represent over 70% of our year-to-date land motion. Over 50% of our land ARR is derived from detection and response specifically. Thus, we expect to focus our sales efforts around two core platform packages optimized to address our customers' most pressing security needs. Our threat complete package enables customers to consolidate best-in-class, expert-driven threat detection and response offerings alongside comprehensive coverage of our market-leading vulnerability management on a single platform. A cloud risk complete offering is our cloud-centered risk visibility solution that consolidates unlimited visibility across customers' on-prem, cloud, and external environments at all stages of cloud transition. It enables a comprehensive security experience with unlimited coverage of cloud and application security all within one platform subscription, providing comprehensive coverage of their cloud and traditional infrastructure environments. In addition to this, we plan to refine our pricing and packaging over the next quarter, intending to sharpen our enablement and drive focused marketing efforts around the detection and risk complete value proposition as we leverage our opportunity to help customers manage and respond to threats in their modern cloud environments. We expect these efforts to gain traction over the next few quarters, with improvements in growth starting in the second half of 2023. We will pay close attention to sales productivity as we monitor the success of our packaging efforts with both new and existing customers. Over the past few years, we've developed a best-in-class suite of products across the platform. We firmly believe that the fundamentals of our business remain healthy, and our growth opportunities are strong. Honing and operationalizing our pricing, packaging, and overall go-to-market strategy remains essential for the next phase of our growth. We've enjoyed success with thoughtful investments in the past, and this gives us confidence in our trajectory towards a more effective and efficient platform-centric sales motion. While these changes may be moderately disruptive in the short term, we believe they will better position us for growth in the latter part of 2023 and beyond. Rapid7 continues to benefit from strong secular tailwinds, and the underlying drivers of digital transformation and prioritization of security spending are very much intact. Our plans to improve sales execution while navigating macroeconomic uncertainty are aligned with our overall strategy to provide a compelling value proposition for customers. As we work to help organizations close the gaps in their security environments, we remain highly focused on addressing critical customer challenges. Looking forward, our updated outlook incorporates near-term macroeconomic and productivity-related headwinds, with the latter expected to start normalizing over the next few quarters. We anticipate gradual benefits from the changes we're implementing, which should translate to a modest sales execution tailwind in the latter part of 2023 and into 2024. In early 2021, we shared our expectation to become a rule of 40 company with over $1 billion in ARR by 2025. We remain confident in reaching those targets, though our expected path has shifted. Let me provide some context on how we view that today. Despite execution challenges, which we are actively addressing, we still see an attractive path to a 20% ARR growth CAGR through 2025. We do, however, expect that 2023 may be modestly below 20% as we navigate the short-term impact of our sales optimization efforts. Ultimately, this means we now anticipate a relative balance of growth and profitability to achieve our rule of 40 status leaning more towards profitability than previously expected. Our strong Q3 profitability underscored by our elevated full-year non-GAAP operating income demonstrates our deliberate focus on margin expansion and underpins our confidence in achieving our mid-term targets, which Tim will elaborate on. We remain committed to our long-term strategic goals to support customers in securely transitioning to the cloud, expanding the capabilities and value of our best-in-class insight platform, and balancing our dual mandate of sustainable growth and strategic investment to stimulate overall growth.”