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Rapid7 Inc
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Good day, ladies and gentlemen, and welcome to the First Quarter 2019 Rapid7 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct the question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this call will be recorded.
I would now like to introduce your host for today’s conference, Mr. Neeraj Mahajan, Vice President of Investor Relations. You may begin.
Thank you, operator, and good afternoon, everyone. We appreciate you joining us today to discuss Rapid7’s first quarter financial and operating results, in addition to our financial outlook for the second quarter and full fiscal year 2019. With me on the call today are Corey Thomas, our CEO; and Jeff Kalowski, 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 until May 9, 2019.
As a reminder, our discussion today contains forward-looking statements about events and circumstances that have not yet occurred, including without limitation, statements regarding our objectives of future operations and future financial and business performance. These forward-looking statement are based on our current expectations and beliefs and on information currently available to us. Actual outcomes and results may differ materially from the expectations contained in these statements due to a number of risks and uncertainties, including those contained in our most recent annual report on Form 10-K and subsequent reports that we filed with the Securities and Exchange Commission. 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 GAAP and non-GAAP results and guidance can be found in today’s earnings press release. At times, in our prepared comments 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 onetime in nature and we may or may not provide an update in the future on these metrics.
With that, I would like to turn the call over to Corey.
Thank you, Neeraj, and good afternoon, everyone. Thank you all for joining us today on our first quarter 2019 earnings call. We again exceeded the high end of our guidance for revenue and operating profit. Year-over-year our ARR grew by 51%, revenue grew by 34% and we generated a small non-GAAP operating profit. The percentage of total revenue that is recurring continued to increase and accounted for 85% of our total revenue in the first quarter. We ended Q1 with more than 7,900 customers, a year-over-year increase of 12%. Our customer economics remain strong with ARR per customer increasing to almost $34,000, up 35% year-over-year.
Rapid7 today has been successfully transformed to a high-growth, multi-product cloud software company on a path to higher long-term profitability. Based on the strength of our business, we are raising our full year 2019 guidance for total revenue. We expect to generate leverage across our business, but also see plenty of opportunities to invest for further growth. And we continue to expect non-GAAP operating income to be breakeven in 2019.
Our strong results were once again driven by consistent performance across our product lines. We continue to take share in the vulnerability management market. But more importantly, we are seeing outsized performance in our broader SecOps portfolio. With the strength of our product portfolio and our focus on strategic professional services, we have seen an expected decline in our overall professional services revenue, as we continue to churn transactional services-only customers.
Over the last few months, I have met with a lot of customers discussing how we can help better manage their security challenges. One of the recurring themes I hear is the concern that IT and security teams are unable to keep up with the pace of innovation. Security professionals are therefore hyper focused on tools that not only help them manage security risks, but also make them more productive. Rapid7 has built the Insight platform with this exact concern in mind and our focus on delivering improved outcomes for our customers is what truly differentiates our strategy.
In this context, we are pleased to announce the acquisition of NetFort, a leading technology for network traffic visibility in analytics across cloud, virtual and physical assets. NetFort accelerates our mission to integrate real-time network monitoring and intelligence capabilities into the Insight platform. Their technology will broaden our data collection capabilities, which will accelerate our expansion into the enterprise segment for InsightIDR. It will also expand our capabilities for InsightVM to gain visibility into access that can’t be scanned with the traditional approach, such as emerging markets and IoT and OT devices, allowing us to provide a holistic approach that doesn’t exist in the market today. We have acquired a very experienced R&D in the network intelligence space and I want to take this opportunity to welcome them again to the team Rapid7.
NetFort adds to a very strong R&D team here at Rapid7. Our efforts were recognized when our industry cyber exposure report was referenced in the Economic Report of the President of the United States of America to highlight cyber security vulnerabilities across industries. This report and our other research efforts, including our contribution to the Metasploit community, enabled the analytics in our platform and products, as well as deliver strategic value to the security community at large. These efforts continue to increase our credibility in the global market.
The end markets where we operate remain very strong and with our four engines of growth, we believe we will continue to define and lead the SecOps market. Underlining our growth remains a healthy VM market and we continue to strengthen our differentiation with investments in remediation and automation capabilities. But what we’re really excited about are the expansionary parts of our SecOps portfolio which are growing extremely well and helping drive the increases in ARR per customer I noted earlier.
We again saw triple-digit ARR growth in InsightIDR, our SIEM product, but we are clearly gaining market share and believe the acquisition of NetFort will only strengthen our position. InsightAppSec is also seeing strong adoption and we are just getting started with InsightConnect, where we are really excited about the mid and long-term prospects.
Now let’s review the quarter in the context of our 2019 goals. Our first goal is to continue to focus on growth. As I mentioned before, we delivered strong growth in the first quarter with ARR growth at 51% and revenue growth of 34%. Our updated guidance for 2019 revenue growth reflects our confidence in the business and our strategic initiatives.
Our second goal is continue to make it easier for our customers to adopt our platform and optimize our customer economics. With four strong product pillars, we have the opportunity to help our customers across their SecOps needs and further increase average ARR per customer. We are in the initial phase of making multiyear investments to drive higher ARR per customer by increasing customer satisfaction throughout our product portfolio.
One of our key wins last quarter is a testament to our efforts to make it easy for customers to buy multiple platform products are starting to bear fruit. This customer, a large nonprofit healthcare institution, was looking for a comprehensive VM solution, but also wanted help streamlining and automating their security workflows. The ease of install and use, combined with prioritization and reporting capabilities, made InsightVM a very attractive alternative to their existing solution. But it was really the native integration of InsightVM with InsightConnect, providing prebuilt remediation workflows that drove home the power of our platform and helped us displace the competitor.
Our third goal is to continue to drive leverage in our business. In the first quarter we generated a non-GAAP operating profit of $0.6 million. Jeff will talk about this in more detail, but while feel confident in the path to profitability, we intend to continue investing for growth and in the long-term durability of the business.
Overall the first quarter was a good start to 2019 and we look forward to executing during the remainder of the year. With that, let me turn the call over to our CFO, Jeff Kalowski. Jeff?
Thanks, Corey, and good afternoon, everyone. We are very pleased with our strong performance in the first quarter, with results that exceeded our guidance on all metrics. Total revenue for the first quarter was $73.2 million, above the high end of our guidance and an increase of 34% year-over-year. Our strong ARR growth of 51% drove 48% growth in recurring revenue. Recurring revenue now constitutes 85% of total revenue compared to 77% a year ago, highlighting our successful transition to a recurring revenue business model.
Our focus on recurring revenue drove a 60% increase in our product revenue, which was once again driven by strong growth across VM, IDR, and Application Security. This was partially offset by a decline in maintenance and support revenue, as Nexpose customers migrate to the Insight platform, resulting in reclassification of maintenance revenue to product revenue. Therefore, it makes sense to look at product and maintenance and support revenue together, which collectively grew at 43% year-over-year.
As expected and as we mentioned in our prior earnings call, with the favorable shift towards ARR bookings, we experienced a slowdown in our professional services revenue which declined by 13% when compared to Q1 2018. We expect the services revenue to stabilize in the second half of 2019.
Looking at the business geographically, revenue from North America grew by 34% and comprised 85% of total revenue. Revenue for rest of world grew by 37% year-over-year and comprised 15% of total revenue in the first quarter.
Total ARR grew to $268.2 million at the end of the first quarter, a 51% increase year-over-year. ARR growth was driven by strong new customer growth as well as expansion into our install base. For the first time, IDR comprised over 30% of new ARR bookings. Our customer account increased by 12% year-over-year and we ended Q1 with more than 7,900 customers globally. The quality of our customer base continues to improve as higher growth in our product customers more than offset the decline in service-only customers. Our customer economics remain strong, with average ARR per customer increasing to almost $34,000, up 35% year-over-year.
Calculated billings for the first quarter was $61.1 million, a 27% year-over-year growth. This was driven by both strong new ARR bookings and renewals performance, partially offset by a decline in average contract length and professional services bookings. Contract length for Q1 2019 was 15 months, down from 18 months in Q1 2018 and a decline from an average contract length of 16 months we reported in Q4 2018.
Our overall renewal rate was 120% in Q1 2019, which again reflected the strong growth in ARR. With our transition to a predominantly SaaS and recurring revenue business model almost complete and combined with our expectation of ARR growth of 30%-plus in 2019 versus growth of 53% last year, we expect the overall renewal rate to decline slightly this year. As we mentioned before, our primary focus this year is drive a higher customer satisfaction and higher ARR per customer through multi-product adoption. Hence, we believe expiring renewal rate or ERR is no longer a meaningful metric as we move forward. As a result we will only be disclosing the overall renewal rate, which we believe is more relevant, and our overall retention remains strong.
Turning to margins, total non-GAAP gross margin in Q1 2019 improved to 75%, up from 72% last year and 74% last quarter. We are benefiting from a shift towards a more favorable mix of higher margin product revenue. Product non-GAAP gross margin was 81%, up from 79% in Q1 2018 and slightly up from 80% last quarter. Professional services non-GAAP gross margins declined to 28% when compared to a margin of 30% in Q4 2018 due to lower revenue as part of our continued focus on ARR and more strategic professional services.
During the first quarter, sales and marketing expense decreased to 45% of revenue when compared to Q1 2018 expense of 50%. This improvement reflects the operating leverage inherent in our business model, but is also driven by the timing of some hiring that was pushed out to future periods.
R&D expenses were 20% of revenue in Q1 2019 as compared to 26% in Q1 2018 and 22% in Q4 2018. This lower percentage of revenue partially reflects an increase in capitalized software to account for increased investments in our Insight SaaS platform. G&A expenses in Q1 2019 were 10% of revenue compared to 12% in Q1 2018 and 11% in Q4 2018.
For Q1 2019, we generated non-GAAP operating income of approximately $600,000, well ahead of our guidance. Non-GAAP operating margin was 0.8% compared to a margin of negative 16% in Q1 2018 and negative 4% in Q4 2018. This improvement is primarily driven by the over-performance in revenue combined with the timing of some expenses that were pushed to future quarters. Adjusted EBITDA for the first quarter was $2.6 million and diluted non-GAAP net income per share was $0.02, also well ahead of our guidance.
We ended Q1 with cash, cash equivalents and investments of $285.1 million. This compares to $303.7 million as of Q4 2018. During the quarter, operating cash flow was negative $13.6 million as compared to positive $7.3 million in the prior year. Approximately half of this decrease was due to the decline in contract length from the model shift to subscription and to the decline in professional services billings. The balance was due to timing of collections, which were strong in early Q2 and were still projecting positive operating cash flow for the full year of 2019.
In April we acquired NetFort for $15 million in cash. While NetFort is not expected to have a material impact on 2019 revenue, we will be absorbing their R&D expenses for the rest of the year.
I also want to point out that as of Q1, we adopted a new lease accounting standard, ASC 842. This lease standard drives a net increase in assets and liabilities of $15.9 million on the balance sheet, which represents the present value of our lease payments. The adoption of the new lease standard has no impact on our income statement, operating cash flow or free cash flow.
Now moving onto the guidance. For Q2 2019 we anticipate total revenue to be in the range of $74.3 million to $75.9 million. As I mentioned before, some of the hiring and investments we intended to do in Q1 have been pushed out, resulting in higher expenses in Q2. Hence, we anticipate non-GAAP operating loss in Q2 2019 to be in the range of $4.7 million to $3.7 million. We anticipate non-GAAP net loss per share for Q2 to be in the range of $0.08 to $0.06, which is based on our anticipated 48.4 million weighted average shares outstanding.
For the full year of 2019, we’re raising our guidance and now anticipate total revenue to be in the range of $312 million to $318 million, which is a 29% growth over 2018 at the midpoint. While we’re pleased to report non-GAAP operating income for the first quarter, we continue to see plenty of investment opportunities. We believe these investments will further help improve customer experience, drive growth and obtain long-term leverage in our cost structure.
As we stated in our fourth quarter call, we will invest any upside back into the business. And as a result, we are still guiding to breakeven non-GAAP operating income for 2019. This guidance includes the expenses related to the NetFort acquisition.
We anticipate non-GAAP net income per share to be $0.05, which is based on an estimated 52.3 million diluted weighted average shares outstanding. The weighted average shares outstanding for the second quarter of 2019 represent basic shares outstanding, given our projected non-GAAP net loss. The weighted average shares outstanding for the full year of 2019 represent the diluted shares outstanding, given our projected non-GAAP net income. Non-GAAP income for the full year 2019 largely represents interest income on projected cash and investments. On a GAAP basis, we expect a full-year net loss for 2019.
As a reminder, we’re moving our global headquarters and consolidating facilities this year and hence our free cash flow will be negative as a result of significant capital improvements in 2019. But these expenditures will decline substantially in 2020.
In conclusion, Rapid7 had a great start to 2019 and we look forward to delivering strong ARR and revenue growth, while significantly improving non-GAAP operating margin. With that, we appreciate your time and support and we’ll open the call for any questions. Operator?
Thank you. [Operator Instructions] And our first question comes from Rob Owens with KeyBanc Capital Markets. Your line is open.
Great, and thanks for taking my question. Corey, as you guys have developed a broader product strategy in the overall portfolio at this point, talk about the solutions that you’re landing with and how that’s changing. And you’re showing really strong ARR per customer. But just what’s happening in terms of deal sizes initially or on the follow-on, when you’re really seeing that uptick?
That’s a great question, Rob. So first and foremost, we find that we can actually land with almost all of our cloud-based products. It’s definitely true that InsightIDR and InsightVM are the dominant landing solutions. And I would say that it’s very pleasant that InsightIDR is very balanced with both cross sells and also with actually landing net new customers. Even though they’re earlier in their evolution and they’re seeing traction and success, we also are landing net new customers with both InsightConnect and our application security products.
So we really feel at this point in time we have the advantage of not having to force customers into a single track. Part of our ability to actually get leverage long term is we can just start where the customers’ problems are. We say, what’s most important to you and let’s help you with that security operations problem. And we think that’s a big long-term benefit to our ability to be able to serve and deliver on customers.
And to your question about the overall economics, as we’ve said before, we have a big push on really driving net new customer growth. I think the number I quoted this quarter was roughly 12%. And our focus on that is that we’ve proven our model to be able to expand and upsell and even do cross sell over time. But we still think that we’re at the stage of evolution where we want to continue to grow net customers. And that’s the managerial push that we have on our team. I’m happy to say that we’re seeing success in that effort.
And the other thing that we’re seeing is customers are coming in with larger commitments up front. Those larger commitments contain both larger assets that are under management and also we’re seeing increases in the number of products that customers are starting to think about and look at as they come into the cycle.
And relative to that new customer growth versus the land, are you seeing it across all four solutions? I know there’s some that say that not a lot of new customer growth out there, so they’re trying to go deeper. But it seems like your customer growth has remained strong and in fact is getting even stronger. So maybe you could speak to that to some degree. Are there some areas where there’s more greenfield opportunity or are you finding it across the board?
Yes, I would say we’re finding greenfield opportunity across the board, although the results will come in uneven based on the level of investment that we have in the sales and go-to-market effort. So if you imagine that VM and the SIEM space are our highest sales and marketing investment areas and also our highest producers of new customers; that’s not a shock there. We expect that to continue to scale as we are increasing our investment based on the success in both application security and then especially this year we’re really starting to scale the InsightConnect, our automation and orchestration business. But this is still the scale year for that. We don’t anticipate seeing the results of that investment until next year.
Thank you very much.
Thank you, Rob.
Thank you. And our next question comes from Gur Talpaz with Stifel. Your line is open.
Great. Thanks for taking my questions and congrats again on a nice quarter here. Corey, you laid a really nice broad vision for NetFort and I was hoping you could maybe elaborate a bit here on the timetable for some of the things you announced, especially around things like the push into OT and passive scanning. Maybe just a little bit of elaboration there would be really helpful. Thank you.
Yes, so the first focus on NetFort is to extend our network data collection capabilities, really serving the enterprise segment of the SIEM market. We have great traction in the SIEM market with the IDR solution overall. We actually are gaining traction and momentum in the enterprise segment of that market. And so where we have momentum, we want to apply our focus there.
And so that’s the first place where we’re actually applying the NetFort technology. Also it provides one of the, I think, important but not only component that allows you to actually collect the data necessarily for an IoT/OT solution. We just have a different view that’s in the broader market about IoT and OT. We think a holistic solution not just tells customers what the problems that they have are, but helps customers figure out how to manage some of those risks and challenges they have in the environment.
And so we don’t anticipate really this year being a focus area in the IoT/OT space. We see that as something that evolves over the next three years. And I actually that that evolves in alignment with the market maturity. Again, it’s very early in the IoT/OT space today. And so we’ll continue to provide solutions along the way. But we look at our highest impact solutions rolling in over the next several years.
That’s really helpful, and then you noted some really strong metrics here on IDR, triple-digit growth again in ARR and bookings, and then over 30% of new business ARR bookings here. Can you talk about where some of that strength is coming from? Is it primarily upsell to core VM customers kind of looking to extend the value prop or are you actually going out there and seeing some replacement deals coming across your desk here?
Yes, so I would categorize it slightly differently. It’s one, we’re actually seeing a healthy balance. And by the way, we have always seen a healthy balance of cross selling IDR to the base and adding net new customers, where they’re first time to Rapid7 on our IDR SIEM solution. So that’s the first thing that I would highlight. The second thing that I would actually emphasize is most of our traction is actually coming from customers that are deploying new capabilities for SIEM and for monitoring their overall environment.
And you can think about really two core drivers that one, the cost and complexity of previous solutions made it difficult for them to actually build a successful program. The second one that we see around displacement is people that have spent money but not been able to build successful programs to their likings. We’re seeing traction in both of those different areas. One, the dissatisfied displacement and the other one is people that are actually really focused on building out their security operations program.
That’s really helpful. Thanks, Corey.
Thank you.
Thank you. And our next question comes from Jonathan Ho with William Blair. Your line is open.
Hi, congratulations on the strong quarter. I just wanted to start out trying to understand a little bit about sort of the sustainability of the ARR growth. You know we’ve seen a few quarters here where it’s been above 50% and it seems to be persisting at these levels. But how do you guys think about like that over a longer-term basis and how should we be thinking about that as we put our models together?
Yes, I mean the first thing I would say and Jeff can comment, you can just look at the guidance that we gave. Our guidance for ARR this year is over 30%. Our focus as a management team is actually for long-term durable growth that’s profitable We actually think we have a great market, a great opportunity. We actually think we’re well-positioned in the market. But to be clear, we’re not actually attempting investing or even focused on trying to actually have temporary spikes of 50% and actually drive that. We’re focused on durable growth over time. We think we’re well set up for that. I would actually look to our guidance as sort of how we actually think about our overall investment strategy and philosophy.
Yes, so Jonathan, if you look this year, we guided to [indiscernible] plus. So obviously in the second half we have tougher comps so that the rate will go down over the course of the year. But at this point, we’re not going to project growth beyond 2019 right now. We’ll do that at a later date.
Got it. That makes sense. And then just in terms of the incremental upside that you guys talked about and sort of the investment opportunities, where do you see the most opportunity to put those investments to work?
Yes, I would say the nice thing that we actually have from a – you can think about multiple categories. One, we’re in a great demand environment. We are seeing demand across our portfolio as evidenced by the strong performance overall. And so we’re investing and taking advantage of demand where it’s right there and continuing to drive growth there. We’re also investing in actually taking our SOAR and application security capabilities and continuing to mature those. Because we see great long-term growth dynamics there.
So from a sustainable growth perspective, we actually have lots of stuff to invest in and we’re taking a very disciplined approach, actually in those areas to actually achieve the growth – not just this year but also in the future. But we’re very focused on making sure we have expense discipline, which is why we’re highly committed to the target to breakeven that we laid out at the end of the year.
The second class of stuff is that now that we actually know that we actually a multi-product cloud company for SecOps, and we have solutions that are in demand, we’re very, very focused on the customer operations, reducing friction and making it easy to actually cross sell, upsell and retail customers over time. And that’s the big area of what I think about as operational investments that actually go into our systems and processes to actually make sure that we actually have a smooth glide path to become and fulfill our SecOps promise and potential.
Great, thank you.
Thank you.
Thank you. Our next question comes from Matt Hedberg with RBC Capital Markets. Your line is open.
Hey, guys. Thanks for taking my questions. So recurring revenue now, I believe it was 85% of total revenue, which is really, really obviously strong and that sits on a nice trajectory. I’m curious though. When you look at the percentage of customers that are still sort of like not on Insight, is there a way to think about what that base looks like and are there things that can be done? Obviously there’s a technology advantage and a lot more product on Insight. But how do you kind of think about the non-Insight base?
Yes, so I think there’s a couple of – that’s a great question, by the way. I think there are a couple of points of clarification. The first is that Jeff can talk about, we’ve been steadily growing the percentage of customers that are on our Insight platform. So we’re quite happy with the progress that we made and we made that progress without actually forcing customers to actually go onto the Insight platform. We have not actually done anything to really say customers have to – other than saying that hey, here’s the capabilities and the features and benefits that you actually get. But we’ve not done anything to actually force the shift there. And so much of the transition has been willing and Jeff may have some further color.
Yes, so Matt, what happens is when the customers renew, we tend to migrate them then. So we’re happy with the pace of the migration. Every quarter we get more and more customers and that’s why you’re seeing in my comments the reclassification of the revenue going to product from maintenance as a result of that migration. So we’re pleased that every quarter we continue to add more on the platform.
Yes, and I would say that if you ask about the long-tail of the customers, the biggest ones are just going to be specific customers or regions of the world where they have prohibitions against cloud-based technologies. And we’ll continue to support those customers. But that’s probably the longest tail that’s actually there.
Got is, and then maybe just as a follow-up, obviously IDR and AppSec continue to do well. But when we look at Connect, I know it’s still early. But you know, when you guys think of like kind of that two to five year view of that product, what makes you so excited? Are there some things that you’re hearing from customers that sort of get you guys excited about this, not necessarily this year, but sort of in that two to five year view?
No, absolutely. And you’re right. We are extraordinarily excited about it. While we haven’t quantified it, we actually think it has great potential to be a major leg of growth. The things that cause excitement are really a couple things. So the first and foremost is that the fundamental need is deep with our customers and that they need things that actually drive productivity. Many of our customers are overwhelmed, understaffed and talent is a big problem for them. And so therefore they’re trying to find solutions to drive productivity.
And so the reason that people are optimistic about the overall SOAR market is automation orchestration is deeply welcomed by customers of all stripes there, because they actually need the productivity growth. The second thing that I would actually say from some of our early explorations and early wins there is that of all of our solutions, the value proposition is the clearest in the sales cycle. When you get in there, you can actually demonstrate the productivity gains with more than any other security solution, it’s really about a return on investment. Because it’s actually labor savings or higher impact the teams can have by automating more flows. And so the simplicity of that value proposition combined with the needs the customers have for productivity are two of the things that have us as the most optimistic here.
Super, helpful. Thanks guys and congrats.
Thank you very much.
Thank you. And our next question comes from Michael Turits with Raymond James. Your line is open.
Everybody, good evening. Obviously, really strong growth overall and great growth in InsightIDR, but what’s the growth like in VM? I think you talked about it at one point being long term expected it over 15%. So what does it look like both on an overall basis and then on an ARR basis?
Yes, so I would maintain that our long-term expectations, we’ll update them, but I would assume that our long-term expectation remain consistent with what we laid out at our previous Analyst Day and we think in that environment we will be a share gainer in the overall market. That expectation hasn’t changed. Again, that’s a long-term expectation. We have seen our total ARR growth continue for vulnerability management specifically continue to be at levels higher than that, both last year and even in the first quarter of this year.
And that’s great. It gives us confidence. It gives us belief and gives us a strong foundation, especially with the other dynamics that are happening in the business. And so but I would still say that our long-term expectations are in line. But for the past year and for the past quarter, we’ve seen much higher total ARR growth in that.
Yes, so Mike, just to add to that, VM is still over half of our ARR base. So without giving specific growth rates on the VM, but if we grew 51% then obviously VM was still very strong in the quarter.
Great. And then maybe you can talk for a minute on – there have been a couple of questions on InsightIDR or SIEM. Can you talk about that competitively, who you’re seeing competitively? And also I think it’s been asked before, but thoughts on the rollouts of Sentinel and Backstory that were announced at RSA in that space. When do you think that you’ll be going up against those guys?
Yes, it’s a great question. So one, the SIEM market is an extraordinarily competitive market, which is one of the things I’m proud of our team across whether it’s our sales and marketing teams or engineering teams or our support and services team, is that think about the fact that we’re actually winning and getting scale in a market that is extraordinarily competitive and actually has very strong players in the market overall. And many of the deals that we do are competitive deals.
And we’re winning on the strength of our technology, our services and our experience that are there. And so that’s the backdrop. The range of competitors really varies broadly. And so what I would say is that if you just looked at any of the SIEM reports that any third-party analysts put out, you will see us competing at some level at some times with all of the different players there. I’ll reemphasize the point I actually made earlier, is our focus area is the people that are actually building out new security operation programs or displacing those folks that are actually dissatisfied with their current solutions.
We do not have to, nor is it the strategy of ours actually to go out and displace happy customers. That just doesn’t make sense with the large market opportunity that we have in front of us. As far as the recent introductions from both Google and Microsoft in the market, I’ll talk about it as sort of like two different apples. One, overall actually I think it’s a good thing. If you think about us being one of the few primarily cloud players, anything that we actually do to actually lend credence to the fact that basically cloud SIEMs should be a dominant way that we actually think about the evolution of that market, actually strengthens and broadens our market scope and market opportunity.
And so we think that, just like any market where you have competitive concentration and that drives large opportunity, that’s a healthy thing. And as far as the competitive dynamics that we expect there, while it’s early, I think Google and Microsoft are in two very different positions. Google has a very sophisticated threat hunting solution that solves a part of what a SecOps professional would actually do. But it’s not a full SIEM in and of itself. Microsoft has introduced a full SIEM that’s centered around Azure.
Our belief is that from a positioning perspective, we’re extraordinarily well-positioned with our focus on ease of use, productivity and taking our expertise and building solutions that can do complex work and simplify that and actually serve a broader market. Because most people’s environments are extraordinarily heterogeneous. And you have to actually be deep, not just in Azure, but across AWS, across on-prem solutions and across the broader overall market. Again, we take the Microsoft SIEM seriously. But we think overall we’re well-positioned in an incredibly well market that’s actually growing very fast.
Great. Thanks, Corey. Thanks, Jeff. Thanks, Neeraj.
Thank you.
Thanks.
Thank you. Our next question comes from Gregg Moskowitz with Mizuho. Gregg, go ahead and ask your question. Your line is open. Gregg, go ahead and ask your question.
Thank you. Hi, guys. I’ll add my congratulations, both on the ARR strength as well as for reaching non-GAAP profitability this quarter. So Corey, just maybe to follow up on Michael’s question and your response to that. So completely understand that the value proposition, especially in a multi-cloud world, but I think with Azure Sentinel, the hope and kind of what they are talking about is the ability to extend into on-prem environments as well. So I think it might be helpful if you can just sort of talk to their ability or for potentially their limitations in being able to serve customers in a hybrid cloud world.
Yes, so first of all, I have a huge amount of respect for Microsoft and what they built. I actually do believe that they’ll be more than just Azure and they’ll extend it to on-prem. More of what I’m emphasizing is what I believe is our differentiated focus and differentiated advantage. We have one of the broadest data collection ecosystems in the world and we continue to expand that. And no matter where you sit, we’re looking at collecting more data from more types of environments. And our goal is to do that better than anyone else in the world.
The second thing that I’ll actually emphasize is that we think about modern SecOps as how well can you collect the right type of data, how well can you analyze that data, but in how well do you operationalize that data to actually drive productivity. And we think that we’re building one of the best and more world-class SOAR offerings in the world that allows people to operationalize the data that they’re collecting in their environment. We think that that combination of that pervasive data collection that we think is deeper than most organizations that are out there, and we continue to add to that with our NetFort acquisition and we’ll continue to add to that.
Combined with our ability to simplify analytics and actually drive the operationalization with our automation orchestration; we think that that is a solution that customers are going to continue to prefer and the nice advantage that we actually have is that by and large what we’ve found is customers are looking at what’s the right solution to drive their productivity and that simplifies their mission to actually keep themselves secure. And so we think we’re well-positioned.
Again, we think Microsoft will be successful. We think that this is a space right now, if you characterize it, is you have a SIEM market that is actually growing faster than the overall security market. You have right now most of that market being legacy on-prem. We think if you look five years from now, most of that will actually be in the cloud. And we think that we’re positioned to actually be one of the leaders when people think about cloud SIEM. And by the way, that doesn’t mean Microsoft won’t also be successful too.
All right, that’s extremely helpful, Corey. Thanks very much for that. And then just a question for Jeff. On the call, you guys talked about new logos being a priority and certainly this quarter was good. I realize that your professional services business acts as a headwind on your customer count. Just curious in spite of that, if you’re expecting the total number of net new customers to be greater this year versus what you showed in 2018.
Yes, we would expect it to increase. If you look at the services-only customers, we’re getting towards the end of that attrition by the end of – that’s tailing off. So we would expect an increase. And if you looked at product-only customers, the growth there is more in the mid-teens.
Fantastic. Thanks very much, guys.
Thank you.
Thank you. And our next question comes from Saket Kalia with Barclays. Your line is open.
Hey, guys. Thanks for squeezing me in here. So maybe just to start with you, Corey, and apologies if you already mentioned this. But I think you talked about on the call sort of the idea of taking share in the VM market, which seems clear. But it also feels like a lot of the VM specialists as a whole have also been doing well. And so the question is, are there any other larger entities that we don’t typically think of as VM players that are maybe building in the share. And I think you touched on this in one of your prior answers, but just to make sure it’s asked this way, do you still see sort of net new TAM as well in terms of white space and VM specifically?
Yeah, so we still see white space in VM. It really comes from two areas. One is uncapped. One you could argue you have some level of cap at some point in time in the future. The uncapped one is that we still see plenty of opportunity to expand in the mid-market and internationally. And we actually think that has a long cycle of actually growth to it. That has been a pillar of growth, but by no means the only or dominant pillar of growth. But we see lots of long-term potential in that overall market, which is why we’re very confident about those long-term growth rates that we actually laid out previously.
We’re still above the overall security market, if you think about the growth rates that we laid out in our previous Analyst Day. The second thing that I would actually say is you’ve seen over the last several years, and we see it continuing, an expansion of the strategic value of vulnerability management. And what that really means is us and all the major players in the vulnerability management space are actually seeing growth in assets under management. And we talked about this before, is if it started out when it was compliance only thing and being less than 10%.
That’s continued to grow over time. We think that that still has legs to continue grow over time. But of course, you have to be capped out at 100% of the assets in the environment. But we’re nowhere near 100% of the assets in the environment right now. But I think that’s also providing lots of the growth that you’re seeing across the broader market over there. Those are two different types of, I would say, growth opportunities that are there.
Got it. That’s really helpful. Maybe for you, Jeff, I think a lot of the questions have been focused on the IDR part of the business. I think you said in the prepared remarks that it made up over 30% of ARR. Now that we’ve had a little bit more time under our belt, the first question is, how did the renewal rates look better? And the second question around that qualitatively is, how did the pipeline for IDR deals sort of look for the remainder of 2019?
Yes, so Sak, let me just correct you on one point. That was 30% of just the new ARR, not of the total ARR. Yes, so right now IDR performed really well this quarter. It was again triple-digit growth. Renewal rates are strong. They continue to be strong. And based on the pipeline, we see that as the fastest-growing segment in our market right now. InsightConnect is growing fast as well. But that’s still early days. So all the indications are that it’s all good. It’s all going well.
That’s great. Thanks very much guys.
Thank you.
Thank you. Our next question comes from Alex Henderson with Needham & Company. Your line is open.
Hi, guys. Dan Park on for Alex. So can you just talk about the strong 30% international growth this quarter? I know this has remained pretty steady at 15% of revenues. But what geos are you seeing strength in and where do you see further opportunity for improvement?
Yes, so I’ll start this one off. We are seeing very healthy growth internationally. It has been at 15%, but a lot of that has to do with the strength of our North American business also growing at a very healthy rate in and of itself. We think that our growth around the world has lots of legs and can sustain for a very long time. And we do think that that 15% will come up over time. If you think about the major dynamics that are there, we’ve actually done a shift to cloud, which while positive, has more specific implications on different markets internationally.
And we’ve been steadily rolling out cloud-based instances around the world. We just introduced our full cloud-based instance in Japan. Last year we introduced Australia. We have Germany. We actually have the UK. But that is for a world that’s become more and more concerned about controlling data within their borders. That is something that has to actually happen in conjunction with the growth in different markets. So what I would say is that our biggest growth potential is in places that either have very low cloud localization concerns about like the data has to reside within the country, or places where we’ll actually put our cloud instances, of which we continue to expand those around the world.
Great. Thanks for that. And just as a follow-up, are you seeing the same, I guess the same interest internationally for the Insight subscriptions? How is the uptake been overseas?
It’s been very healthy. I mean the dynamics are our growth and our growth of the platform is very healthy around the world. And so that has just been a universally healthy thing.
Great. Thanks for taking my questions.
Thank you very much.
Thank you. And our next question comes from Melissa Franchi with Morgan Stanley. Your line is open.
Great. Good afternoon and thanks for taking my question. Corey and Jeff, you talked about doing a good job in converting the base into Insights at renewal. Can you maybe talk about the ASP uplift you get at that conversion, either on a like-to-like basis or what you’re seeing in terms of additional attach?
Yes, so Melissa, remember that what we didn’t do is we did not penalize the base. So when they migrate, we keep them at their same rate of maintenance and content, other than an inflationary uplift. But when they do upsell, which they do, then we get the uplift of the SaaS tailwind, because on an annual basis, that’s at a higher rate. So I just wanted to clarify that.
Okay, got it. All right. That makes sense. And then I guess another one for you, Jeff. In terms of the margin improvement this quarter was definitely notable. I know you said that there was some timing around investments and hiring. So to what extent was the margin driven by some of those timing factors versus more sustainable areas of leverage in sales and marketing and not R&D?
Yes, so if you look at our guidance based on where we ended up, we guided to about $5 million at the midpoint. About $3.5 million was revenue and gross margin. So we did better on the gross margin, a more favorable mix with less services, but higher revenue with higher performance. And that was about $3.5 million. And the other piece was on the OpEx line, about $1.5 million. But what we’re doing is we’re reinvesting that upside into the remainder of the year. As we said, any upside that we had in the year, we’re going to reinvest to drive further growth. So that’s really what happened in the first quarter with respect to the over-performance.
Got it. Congrats. Thank you very much.
Thank you, Melissa.
Thank you. And our next question comes from Joshua Tilton with Berenberg. Your line is open.
Thanks for taking my questions, just the first one, has the application security space become more competitive, especially with Synopsys’ recent push with their Polaris platform?
It’s a great question. I would describe the application security market as wide open. I mean there’s so many things that are happening as people – one, you have more traditional companies, be they retail or manufacturing, becoming software companies. So the pace of applications are just growing, more borne in the cloud applications. And so what you find is lots of the established players trying to reconfigure themselves to be successful in this world and some new entrants that are there. I don’t know if the net competition level has actually changed. I look at it from an opportunity standpoint is that there’s no one that actually is a shoe-in to be dominant and we see that as a pretty big opportunity for us. Now we have to work at it. We have to make investments at it. We think we’re well-positioned. But we see this as a massive opportunity to become a dominant player in this market.
Okay, thank you. That was helpful. And then really quick, how should we think about the benefits of gross margins as you churn off the rest of the service customers?
Can you repeat the question one more time?
How should we think about the benefit to gross margins as you churn off the rest of the service customers?
Well, I think the way you want to look at it is services this year will be about mid-20s in margin is what we’re projecting for the year. It may fluctuate a little bit. But the way to look at it is the mix difference. So right now it’s about 10% and if you look at our overall margin on products, it’s about 80%. So the way I would look at it is just take a weighting if that mix changes. Over time, that 10% may go down a little bit and that would drive up the overall gross margin. But that’s the best way to look at it. We think the product margins are relatively stable right now. They may fluctuate a little bit. But overall we’re forecasting mid-70s.
Okay, that was very helpful. And then maybe just one last quick one. The additional functionality that you guys are getting from the NetFort acquisition, is that just going to be integrated into the offering or is that going to be another upsell for existing customers?
Yes, we haven’t announced our pricing and packaging around the solution yet.
Okay, thanks.
Thanks.
Thank you. And our next question comes from Sarah Hindlian with Macquarie. Your line is open.
It looks like you saw a really nice Q1 in terms of new customer adds, even though usually we look at Q1 as primarily upsell. So I had a couple questions for you guys on the back of that. You know the first – I’d love to get a better understanding of any initiatives or brand awareness programs or anything you guys are doing to continue to drive recognition of your logo in such a competitive market, if indeed there is anything like that in place. And then secondly, some of these look like slightly lower initial ARR for new customers just a little bit lower than we were expecting. So I was wondering if there’s something there seasonally or worth calling out that we should be aware of. Thank you guys, those would be very helpful.
Yes, I think Jeff and I will tag team it. So starting with the last question. In general, we’re actually seeing initial deals have larger ARRs coming in. Now that’s absolutely true that our Q4 has a larger concentration of larger customers. So there’s definitely a seasonal effect that actually happened on a fairly consistent basis. But by and large, we’re actually seeing consistent growth in the ARR of customers as they actually come in and the overall ARR per customer.
Yes, Sarah, I’m not quite sure I follow the lower number. But the average ARR per customer grew by 35%. So I wasn’t quite sure where you were?
Specifically it was specifically for new customers, given the strength of your 12% customer count growth, it was a little bit lower, just ARR for new customers, just a little bit lower than what we were modeling. But it’s likely just some seasonality.
Yes, and I would suspect that that has to do with the seasonality, if anything. Again, we do get more larger deals in our Q4 and Q1 is typically smaller. But we were quite happy to see both. To answer your other question about the initiatives that we’re driving, we do have a big managerial focus on adding new customers. It’s quite easy to just focus on cross sell and upsell. And we’re quite proud of our sales and go-to-market teams that they’re being fairly disciplined and focusing on adding new customers and not just milking the install base with cross sell and upsell. And we think that’s been a very successful initiative.
Awesome. That’s great. It’s really nice to see. Congratulations.
Thank you very much.
Thank you and that’s all the questions we have for today. This concludes today’s program. You may all disconnect. Everyone, have a great day.