Rapid7, Inc. Q4 FY2025 earnings call

Key Points

• Rapid7 concluded fiscal 2025 with ARR of $840 million and total revenue of $860 million, surpassing guidance. Q4 witnessed sustained new deal activity for the MDR offering and growth in the exposure command platform.
• Strategic investments were made across key product growth initiatives to strengthen AI-enabled security operations.
• The sales kickoff with the go-to-market team was held, aiming to reenergize the growth engine.
• In detection response, AR growth of 7% was driven by MDR ARR growth. For exposure management, efforts were focused on simplifying the migration to the exposure command platform.
• Three parallel initiatives are being pursued: shifting operational services work to the AI layer, redefining the portfolio of solutions, and extending the AI-enhanced services layer.
• Notable wins included a leading offshore drilling company, a sovereign tribal government, and a strategic MSSP provider choosing Rapid7 for its technology, data breadth, and expert-led services.

In the fourth quarter, total revenue stood at $217.4 million, marking a 0.5% year-over-year growth. Product revenue reached $209.1 million, with a year-over-year increase of 1.4%. Professional services revenue for the quarter was $8.2 million, down from $9.9 million in 2024. The ending ARR was $839.9 million, nearly flat compared to the previous year, with the detection response segment accounting for just over 50% of the ending ARR. The DNR business saw an overall growth of approximately 7%, with the MDNR portion growing in the high single digits. The Exposure Command offering experienced rapid adoption in the fourth quarter from both new and existing customers.

First Quarter 2026 Guidance

• ARR is expected to be approximately $830 million, a 1% year-over-year decline.
• Total revenue is projected to be in the range of $207 to $209 million, a 1% year-over-year decline at the midpoint.
• Non-GAAP operating income is anticipated to be between $19 million and $21 million, with a non-GAAP operating margin of 9.6% at the midpoint.
• Non-GAAP earnings per share is expected to be in the range of 29¢ to 32¢ per share.

Full Year 2026 Guidance

• Total revenue is expected to be in the range of $835 to $843 million, a 2% year-over-year decline at the midpoint.
• Non-GAAP operating income is projected to be between $108 million and $116 million, with a non-GAAP operating income margin of 13.3% at the midpoint.
• Non-GAAP earnings per share is expected to be in the range of $1.50 to $1.60 per share.
• Free cash flow is expected to be in the range of $125 to $135 million, flat with prior year performance at the midpoint.

Risks Identified

• Uncertainty regarding the durability of software business models, especially those based on per-seat pricing.
• Complex and fragmented regulatory environment globally, which can impact security operations and business performance.
• Challenges in executing growth initiatives and converting pipeline into actual revenue, including balancing large deals and smaller transactions.

Q: Just in terms of some of the changes that you were mentioning, in terms of tighter marketing and sales, refined customer success, refreshed incentives. Just how would you measure or kind of expect where some of those changes should be seen first and kind of what milestones are you holding yourselves to see evidence of those changes?

A: Corey Thomas mentioned looking at increased sales and marketing productivity efficacy, growing faster while doing it more efficiently, and focusing on customers seeking more services, customization, and depth. The key focus is on scaling using technology, people, and expertise to handle more work for customers while maintaining or enhancing the gross margin profile.

Q: In terms of the segments of the market that you're prioritizing, can you talk a little bit about what you see as sort of the core growth businesses going forward? And know, what are, you know, some of the changes or areas of focus that you can implement, you know, to sort of drive that acceleration?

A: Corey Thomas stated that the biggest growth area is detection response, concentrating on the mid-sales or mainstream enterprise (1000-20,000 employees) and focusing on delivering a deep and quality service experience. Exposure management is an integrated part of the stack. There is less focus on legacy on-prem, with efforts underway to upgrade to the command platform. Alan and the team are concentrating on a tight focus on the core customer and profile to drive acceleration and win rates.

Q: Can you maybe walk through the rationale for not offering the full-year ARR guidance and what maybe has to happen for that visibility to be brought back?

A: Rafe Brown explained that it's crucial to release meetable and clear guidance, and given changes in sales, marketing, customer success, and support, revenue was the most suitable metric for the current period. Once trends are established, investments bear fruit, and the new team is settled, they will reconsider providing full-year ARR.

Q: What are conversations with relative to AI, the potential threat of AI? And what are they asking of Rapid7, if anything?

A: Corey Thomas stated that customers want Rapid7 to assist them in doing more with less, desire transparency in AI, and expect Rapid7 to take on more operational workloads. Since security professionals are skeptical, Rapid7 needs to deliver AI velocity in a trustworthy manner and take on more of customers' operational workloads as they scale security operations with fewer staff.

Q: Outside of AI customer consolidation trends. How are those impacting your win rates and deal sizes? And in the conversations with customers, what is most important for you to be a beneficiary of this trend?

A: Corey Thomas said Rapid7 is benefiting from customer consolidation but needs to enhance the delivery of simplifying the proposition, storytelling, and packaging. The focus is on being the best at integrating into customers' technology and security stacks, taking on more work through partnerships such as with Microsoft and others. There is a need to simplify the consolidation story and improve the way it is presented in hyper-competitive sales cycles.

Q: When does MDR get big enough to drive growth acceleration, and maybe how do we think about that dynamic there?

A: Corey Thomas said MDR is close to driving growth acceleration but needs to unlock the ability to say yes to customers and provide more services and customizations. Confidence exists that it will improve over the year as they unlock the business and market it with the right narrative.

Q: Just kinda circle back to Rob's line of questioning and just double click on what's driving the ARR decline in Q1 based on guidance. It's just a little bit more meaningful in the past, down $10 million or so on net new ARR. And I wouldn't think Q1 is necessarily a big renewal quarter, so I was confused at the churn comments. Just maybe double click on why that is happening in Q1. And then if you could tie in the color on investments and strategy to potentially reverse this decline in net new ARR.

A: Corey Thomas said DNR is growing but not enough to offset other parts of the business that are not growing. Churn in DNR is seen as customers wanting more services and customizations, but they are not yet set up to fully unlock that. Exposure was stable last year but can be improved with major releases. They have good visibility on DNR and are retooling around it to improve the addressable market and the ability to say yes to customers.

Q: In looking at the guidance here. You do have that improving EBIT margin I know you talk about, but in dollars, it's also improving $20 million or so. In Q1, and EBIT dollars has to go to 30-ish to hit the annual guide on EBIT. And I'm noticing that, revenue growth is not accelerating, so it's not necessarily an operating leverage dynamic going on here. What's driving the improvement, in EBIT?

A: Rafe Brown explained that Q1 has additional expenses like sales kickoff and tax rate resetting. Investments in MDNR have slightly lower margins but are still good, and the mix shift continues to put pressure on the cost of goods sold to some extent. These investments are part of the planned strategy, and the gradual shift to MDNR brings efficiency gains as the year progresses, contributing to improved operating income.

Q: Entering last year, I think we felt like we had a stronger pipeline at the beginning of the year than fiscal 2024. You know, of course, this has been somewhat of a challenging year. In retrospect, I mean, was the quality of the pipeline lower than original valuations? Just how do you feel about evaluation methodology and just the quality of the pipeline heading into '26?

A: Corey Thomas said last year's pipeline had larger deals faster than they could be consumed, but there was demand. This year will align demand and supply capabilities for customized accounts. Alan is focused on not just big deals but also singles and doubles (mid-market AI MDR, incident command, exposure command upgrades). This year will have a more matched pipeline with systematized singles and doubles across a few quarters.

Q: Trevor Rambo asked about the mix of enterprise versus mid-market deals and where they're seeing traction heading into 2026.

A: Corey Thomas said in the pipeline, there was a shift towards larger ASP deals, but this year they expect a more balanced mix. They are planning for a more balanced mix of deal sizes and complexity, focusing on both larger deals and singles and doubles (mid-market AI MDR, incident command, exposure command upgrades) to drive growth.