“It is worth noting that we will carry this higher Q4 expense base into 2026. However, as the investments take hold and the efficiencies they bring materialize, we expect operating margins to expand as 2026 progresses.”

In context

“Rafe Brown (CFO): Thank you, Corey, and good afternoon, everyone. As a quick reminder, unless otherwise noted, all numbers except revenue and balance sheet items mentioned during my remarks today are non-GAAP. I want to begin by sharing how happy I am to have joined Rapid7. This is a great company doing incredible work to protect its customers around the world. And moreover, I believe there is tremendous opportunity to build shareholder value in the coming years. In this fourth quarter earnings call, I'm pleased to report that we exceeded our guidance across revenue, annual recurring revenue, or ARR, and operating income. For the quarter, we generated total revenue of $217.4 million, growing 0.5% year over year. This brings us to a total of $859.8 million of revenue for the full year 2025, growing 1.9% year over year. For the quarter, we recorded product revenue of $209.1 million, growing at 1.4% on a year-over-year basis. Professional services revenue for the quarter totaled $8.2 million, compared to $9.9 million in 2024. Our year-over-year results reflect an intended shift in our operating model toward a greater utilization of our partners for professional service delivery, allowing Rapid7 to remain focused on its core offerings. Our ending ARR of $839.9 million was approximately flat year over year as the business digests a mix shift towards our faster-growing detection response business, which currently constitutes just over 50% of our ending ARR. On a year-on-year ARR basis, our DNR business grew at approximately 7% in total, with the MDNR portion of the business growing in the high single digits. We continue to believe that the managed detection and response market is a significant opportunity for us, and we are focused on unlocking the value in this market with our AI-enabled approach to preemptive security. Within our exposure management business, there are encouraging signs that our investments in modernizing and upgrading our offerings are taking hold. For example, our Exposure Command offering saw rapid adoption in Q4 by both new and existing customers. Turning now to profitability. Our Q4 non-GAAP operating income of $30.1 million or a margin of 13.9% was incrementally ahead of expectations. The sequential downtick in margin reflects a continued ramp of 2025 investments discussed in prior earnings calls. Across our global capacity center in India, our go-to-market teams, product teams, and new organizational leadership. It is worth noting that we will carry this higher Q4 expense base into 2026. However, as the investments take hold and the efficiencies they bring materialize, we expect operating margins to expand as 2026 progresses. I will provide more context in a moment when we discuss our 2026 guidance. For the fourth quarter, we posted non-GAAP earnings of $0.44 per diluted share at the high end of our guidance range. For the full year, we delivered non-GAAP operating income of $135.7 million or an operating margin of 15.8%. And drove non-GAAP earnings of $2.08 per diluted share. Our fourth-quarter free cash flow was $32.3 million, bringing us to a total of $130 million of free cash flow for the full year 2025. We finished the year with over 11,500 customers with an average ARR per customer of approximately $72,000. From a balance sheet perspective, we ended 2025 with over $659 million in cash, cash equivalents, and government securities. In addition to these resources, we have a $200 million undrawn revolver in place. Thus, our balance sheet position, strong free cash flow from operations, and available undrawn credit capacity give us confidence in our ability to settle our March 2027 convertible debt upon maturity. Before we turn to our 2026 guidance, I would like to share some initial observations. It has been an energizing first two months with Rapid7. The security market is in the midst of a dramatic change. Likewise, Corey and the leadership team are focused on taking Rapid7 to new levels, ensuring we meet our customers' increasing demands for excellence, as we protect their businesses from an ever more dangerous threat environment. As such, Rapid7 is well-positioned to take advantage of a growing market opportunity. Within the company, there are a number of areas where we must continue to improve. Both in terms of focus and execution. In addition to the go-to-market efforts Alan is spearheading and which Corey discussed, we have the opportunity to improve our focus across our portfolio of offerings and in particular, to prioritize investments in the products and revenue streams that are core to our future. In my role as CFO, I'm focused on the following key objectives: improving financial forecasting, driving measurement and accountability across the organization, focusing and shifting our resources to align with our core products and growth strategy, expanding non-GAAP operating margins as we move across 2026 and into '27, and focusing on free cash flow as a core operating metric across the organization. As we turn to guidance, I would like to begin by sharing that we have been refining our financial projection models over my first few weeks with the company. Our philosophy for providing guidance works to ensure transparency with investors while setting realistic, meetable expectations for company performance. I would like to note that while we continue to provide full-year revenue guidance for 2026, we've decided at this time not to give full-year ARR guidance. While we have a clear view of current trends across our business, we have several new leaders in place, and we are implementing key improvement initiatives across sales, marketing, and our customer success and support organizations. As such, we believe visibility into ARR is best reflected on a quarterly basis at this time. This brings us to our first quarter 2026 guidance. In the first quarter, we expect ARR of approximately $830 million or down 1% on a year-over-year basis. While we are optimistic about the leadership changes in strategy that have been implemented in our go-to-market organization, we do not anticipate the benefits of these changes will impact Q1. The total first-quarter revenue is expected in the range of $207 to $209 million or down 1% year over year at the midpoint. We expect non-GAAP first-quarter operating income in the range of $19 million to $21 million or a non-GAAP operating margin of 9.6% at the midpoint. As previously mentioned, margins in Q1 will be pressured by a higher expense envelope entering the year in addition to seasonal expenses such as our global sales kickoff. Non-GAAP earnings per share is expected in the range of $0.29 to $0.32 per share on approximately 77 million fully diluted shares. Turning to full-year 2026 guidance. In fiscal 2026, we expect total revenue in the range of $835 to $843 million or a decline of 2% year on year at the midpoint. Non-GAAP operating income is expected to be in the range of $108 to $116 million or a non-GAAP operating income margin of 13.3% at the midpoint. As stated earlier, we made a number of investments during 2025. As we move into 2026, we expect these will yield improvements in the efficiency and operation of our business, moving our non-GAAP operating margins into the mid-teens. Non-GAAP earnings per share is expected in the range of $1.50 to $1.60 per share on approximately 78 million fully diluted shares. Free cash flow for the year is expected in the range of $125 to $135 million, flat with prior year performance at the midpoint and a margin of approximately 15.5%. As a reminder, the company is focused on free cash flow as a core KPI in 2026. Please refer to our earnings release and SEC filings for any additional details regarding the presentation of our results and guidance metrics. And with that, I'd like to turn it over to the operator for Q&A.”