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Rapid7 Inc
Earnings Call Analysis
Q2-2024 Analysis
Rapid7 Inc
In the second quarter of 2024, Rapid7 demonstrated robust financial performance, ending the quarter with $816 million in Annual Recurring Revenue (ARR), representing a 9% growth year-over-year. This growth was primarily driven by the company's Detection and Response segment, indicating strong demand for its comprehensive security solutions. Notably, the consolidated 'threat complete' offerings contributed over 40% of new ARR, showcasing the effectiveness of Rapid7’s integrated solutions. The total revenue for the quarter reached $208 million, also reflecting a 9% year-over-year increase, exceeding the company's own guidance.
Rapid7's customer base has shown incremental growth, reaching nearly 11,500 customers, a 2% increase compared to the previous year. The ARR per customer rose to $71,000, marking a 7% increase. This shift indicates that while the company is managing to onboard new customers, it is also expanding its relationships with existing ones, particularly among its higher-value platform customers, signaling a robust demand for integrated security operations solutions.
Rapid7's revenue mix is increasingly skewing towards international markets, which grew by an impressive 19% year-over-year. This now constitutes 23% of the total revenue. Such diversification is crucial as it mitigates reliance on domestic markets and showcases Rapid7's capability to adapt to varied international landscapes.
The company achieved a gross profit margin of 76%, with total gross margin at 74%. Operating expenses have been effectively managed with sales and marketing representing 33% of revenue and R&D at 15%, down from higher percentages in the previous year. Operating income was reported at $39 million, representing approximately a 19% operating margin, which is a significant improvement of 12% compared to the same period last year. These metrics indicate that Rapid7 is not only growing but also improving its cost efficiency.
Looking ahead, Rapid7 has raised its full-year revenue guidance to a range of $833 million to $837 million, projecting a growth rate between 7% to 8%. The expected net income per share for the full year is estimated to be between $2.15 and $2.20. Furthermore, for the upcoming third quarter of 2024, the company forecasts total revenue between $209 million to $211 million, translating to a growth of 5% to 6% year-over-year. They also anticipate a high single-digit sequential increase in net new ARR, similar to the previous quarter's trend.
Rapid7 is diversifying its product offerings with the introduction of its Exposure Command platform, focusing on integrated risk visibility across customers' attack surfaces. This new platform is expected to drive customer retention and upsell opportunities, responding to market demands for a comprehensive, unified view of security data. The acquisition of Noetic is a strategic move aimed at enhancing the capabilities of this new platform. The company's strategy appears focused on transitioning customers from traditional vulnerability management to a broader integrated model of security operations, addressing both existing and emerging market needs.
Despite the robust growth and innovation, Rapid7 acknowledges the ongoing challenges in the market, such as elongating sales cycles and budget constraints among customers. However, the company remains confident in its strategic direction, emphasizing the importance of enhancing partner ecosystems and continuing to build pipeline growth. The focus on core areas such as detection response innovation, partner engagements, and mainstream cloud security adoption is set to strengthen Rapid7's position in the market.
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Thank you for standing by. I'd like to welcome everyone to the Rapid7 Second Quarter 2024 Earnings Call. [ Operator Instructions] I would now like to turn the call over to Elizabeth Chwalk, Director of Investor Relations at Rapid7. Please go ahead.
Thank you, operator, and good afternoon, everyone. We appreciate you joining us today to discuss Rapid7 second quarter 2024 financial and operating results in addition to our financial outlook for the third quarter and full fiscal year 2024. 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 and financial guidance for the third quarter and 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 May 8, 2024, our most recent annual report on Form 10-K on February 26, 2024, 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 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 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 comments 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 onetime 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. Corey?
Hello, and welcome to everyone joining us on our second quarter 2024 earnings call. As [ previously ], a few weeks ago, Rapid7 ended the second quarter with $86 million of ARR which is in line with our expectations and represents 9% growth over the prior year. Growth was led by our direct detection response business as customers continue to prioritize their ability to efficiently monitor security data across their full environment while extending their teams with our deep security expertise.
The strongest demand was for our consolidated threat complete offerings which drove over 40% of new ARR in the quarter. As we progress through the second quarter, the underlying market dynamics we've highlighted as tailwinds to our business continue to support our broad strategic plans. Security practitioners are increasingly struggling [ in managing ] visibility into their complete IT [ assets ]. Current market offerings don't tackle these challenges effectively or economically which the latter factor being particularly difficult for mainstream enterprises. As we continue to advance key investments around innovation this year, these are the core customer challenges, we remain focused on solving.
Rapid7 is investing to build a strong security operational ecosystem for mainstream [ inter ] process, supported by a leading data platform for contextualizing risk across fragmented complex environments. Over the past year, we've been strategically [ reorienting ] our company towards an integrated data platform, focusing on the highest value workloads in cloud and detection response and building out a more efficient go-to-market motion. We firmly believe that providing visibility across the customers' risk environment by integrating traditional vulnerability management with a broad set of cloud security solutions and [ pairing that ] with a world-class D&R SOC efficacy in one place gives customers a more effective solution and overall better security outcomes at the price value they are seeking.
Our strategic plan is to capture this opportunity while optimizing our business for better long-term growth. In order to meet these strategic objectives, we start this year by sharing our intentional and targeted efforts around 3 key areas: detection response innovation, our partner ecosystem and mainstream cloud security adoption. We've spoken to these critical areas on the last few earnings calls. And today, I'm pleased to update you on the progress we made in each and every last one of them.
Our first area of focus is innovation to deliver world-class detection response experience to our customers. Rapid7 has taken a deliberate approach in this market over the last few years, and we continue to invest in extending our capabilities with a committed focus on delivering the integrations, features and usability that resonates most with mainstream enterprise customers. This overarching approach supports the steady growth we are seeing today in the following ways. The escalated frequency of ransomware attacks is driving security teams to favor solutions that monitor their full IT environment. We continue to focus investments towards expanding the breadth of alert coverage on our platform, which improves our ability to monitor and manage more third-party security data on our platform and sets Rapid7 apart from our peers in [indiscernible] and the [ SGR ] space.
Rapid7 also stands out against point vendors that lack broad expertise and capabilities across security operations. Our ability to offer integrated platform to solve adjacent security concerns like full visibility into hybrid attack service delivers better security outcomes and more compelling economic value. And lastly, we are one of the few detection response platforms that gives customers a seamless extension of their own security teams by using our managed services and the extensive expertise that comes along with it. We continue to invest in the efficiency and scale of our SOC including leveraging AI and analytics to make these [ teams ] more [indiscernible].
Our second area of focus this year is our partner ecosystem, which continues to increase in importance as we scale and prioritize efficient demand generation. Investing in our grower services and partner ecosystem to increase our capacity for service delivery as well as provide a strong source of efficient demand generation will help us deliver more sustainable and profitable growth. Sales pipeline generated across our strategic partners grew 15% year-over-year in the second quarter, which was an accelerate from Q1.
Our team is seeing traction broadly as we continue to implement our MSSP partnerships, key channel relationships and increasingly engaged with customers in marketplaces like AWS. Our Comcast business partnership is progressing nicely and will serve as a steady driver of scale for our detection response business. Customer buying behavior continues to shift towards the hyperscaler marketplaces, and our ability to support this has doubled the volume of deals that we have closed year-to-date on AWS marketplace. Furthermore, we're gaining mind share and momentum with our top channel partners, which is helping to support stronger pipeline growth remains a growth opportunity for Rapid7.
Our last area and the one that I'm most excited about today is our focus on leading mainstream cloud security adoption. To give some context to the unique challenges and opportunities in this space, it's helpful to remember that many security teams don't exactly know what their IT environments look like. While this knowledge is foundational to protecting those environments, [ mass suite ] of the customer attack surface is [ limited ] by data collection, which tends to be expensive and challenging, especially as it relates to securing cloud security environments. Because there are multiple sources of data to [ emulate ]. We are lowering the barrier of visibility by allowing customers to secure their attack service by integrating diverse set of security data, including network, identity and cloud [ telemetry ] together on the Rapid7 demand platform.
This leads me to the announcement you may have heard and seen yesterday, we introduced our new Command Platform at [ Black Hat ]. This fully integrated platform extends our traditional insight capabilities by allowing customers to integrate more of their critical security data in one place, whether that data comes from Rapid7 or other providers, given security operations teams greater visibility that they can trust. Our flagship exposure command offering aims to provide integrated risk visibility across the full attack surface and optimal cost effectiveness.
This single unified view can help customers understand what does my complete environment look like and what are my biggest exposures is the core of our new Exposure Command offering. The hybrid attack surface clarity offered by Exposure Command across both traditional and cloud environments is now built into our vulnerability management and improved suite of robust CNAPP capabilities for an integrated threat-based approach to risk reduction. Exposure Command is voiced by our recent acquisition of Noetic, which provides an integrated high-confidence view of assets across the attackers.
We believe that the Noetic technology and the topnotch team will be crucial pieces of Rapid7 broader offering, and we're thrilled to have them on board.
Starting officially this week, the Rapid7 team will be [ executing ] on the following opportunities for our company and our customers related to Exposure Command. First, the opportunity to drive meaningful expansion from our existing [ inside VM base ] to Exposure Command with frictionless upsell offers for customers looking to unlock better attack service visibility and expand into the cloud. Second, we expect this new platform offering can enhance retention not only through Exposure Command, but by offering additional attack surface management functionality as part of the existing VM offering and a minimal uplift. Third, Exposure Command [ acts ] as a second flagship land offering with disruptive market pricing to position us strongly in competitive deals and to help us expand the market to new mainstream customers. We believe there are many underserved mainstream customers that lack visibility into their broader environments, in part due to the complexity and cost structure for existing CNAPP [ offers ]. And finally, we believe accelerating cloud security adoption, via Exposure Command will further support D&R growth.
As customers know well, you can't effectively monitor and respond [ to risk ] without visibility into your [indiscernible] [ surface ] and having visibility into your full environment is a driver for greater urgency around [indiscernible] and responding to threats.
As we look ahead, we believe that the long-term investments we are prioritizing this year is [ the 3 ] critical areas I just described, reporting the [indiscernible], looking at our partner ecosystem and accelerating mainstream cloud adoption, will ultimately deliver the best security outcomes and the strongest economic value for our customers. We remain steadfast in our commitment to enhancing value for our shareholders, and we are working to capture upside and opportunity through our focus strategic plan.
We're currently in the market with our 2 flagship offerings, Exposure Command and detection response, to address the highest priority areas of [indiscernible] with their security operations. We continue to innovate on our underlying product capabilities and improve our land and expand motions to meet customers' needs in the existing markets. We are confident that our recently streamlined leadership organization focused on profitability and efficient growth and a clear strategy to provide leading security operations platform to mainstream enterprise customers will support long-term growth for Rapid7.
Thank you for joining us on the call today. I will now like to turn the call over to our CFO, Tim Adams, to share additional detail on our financial results and outlook. Tim?
Thank you, Corey, and good afternoon to everyone on today's call. Thank you for taking the time to join us today. Before I turn to our 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 second quarter of 2024 and with $816 million in ARR, consistent with our expectations and growing 9% over the prior year. Our Q2 ending ARR result reflects continued strength in our detection and response business, particularly for our threat complete offerings. As Corey shared, this consolidated offering drove over 40% of new ARR in the quarter and underscores the customer demand we are seeing for broad, effective well-integrated solutions at compelling price points. Trends in the rest of the business during the second quarter were in line with our expectations as we work towards the launch of our Exposure Command, our new integrated risk management offering.
ARR growth in the second quarter was weighted towards our sales expansion as ARR per customer grew 7% over the prior year to $71,000. While our total customer base grew 2% year-over-year to end the quarter with nearly 11,500 customers. We continue to see growth in our higher-value platform customers that is partially offset by a decline in lower value non-platform customers.
Second quarter revenue of $208 million grew 9% over the prior year and exceeded our guided range. Recurring product subscription revenue grew 10% over the prior year to $200 million which was better than expected on favorable linearity in the quarter. Professional services revenue declined sequentially as we continue to actively deemphasize certain lower-value services. Our revenue mix continues to shift towards international, which grew 19% year-over-year and now represents 23% of total revenue.
I'll turn now to our operating and profitability measures for the second quarter. Profit gross margin was 76% in the quarter and total gross margin was 74%, and both of which are in line sequentially and with the prior year. Sales and marketing and R&D expenses were 33% and 15% of revenue, respectively, compared to 39% and 21% in the prior year. G&A expense was in line with the prior year at 7% of revenue. Operating income of $39 million was above our guided range and represented a roughly 19% operating margin, approximately 12% higher than the second quarter of last year. Adjusted EBITDA was $45 million in the quarter and net income per diluted share was $0.58.
Moving to our balance sheet and cash flow. We ended the second quarter with cash, cash equivalents and investments of $494 million compared to $464 million at the end of the first quarter. We generated $29 million of free cash flow in the quarter, up from the $28 million we reported last quarter. This brings us to our guidance for the remainder of the year. We continue to expect full year ending ARR to be in the range of $850 million to $860 million, which represents growth of 6% to 7% over the prior year.
Our second quarter was broadly in line with our expectations. And as we look out at the rest of the year, our assumptions for the second half have not meaningfully changed since we updated guidance in May. While the demand environment continues to be chunky, we expect relative stability in customer spending trends to continue. And while we expect improving pipeline momentum exiting the year, only a modest contribution from Exposure Command is assumed in the fourth quarter. And lastly, we continue to expect that our detection and response business will remain healthy.
Similar to the comments we made last quarter, given the ramp of ARR in the second half of the year and the timing of our recent Exposure Command launch, I would like to share some directional commentary on our ARR expectations for the third quarter. We expect a high single-digit sequential increase in millions of net new ARR dollars similar to the increase in the second quarter. We are raising and narrowing our full year revenue range to $833 million to $837 million representing growth of 7% to 8%, up from the $830 million to $836 million.
On profitability, we are maintaining the midpoint and narrowing our full year operating income range to $152 million to $156 million. Our updated operating income range is the result of better expense control in the second quarter that is offset by new incremental costs in the second half of the year related to the Noetic acquisition as well as higher advisory and legal fees. We expect full year net income per share in the range of $2.15 to $2.20 based on an estimated 74.7 million diluted weighted average shares outstanding.
Our full year expectation for free cash flow is now $150 million to $160 million. While we remain strongly committed to expanding profitability and continue to see a reasonable path to our original target of $160 million. Our updated range reflects the new incremental costs in the second half of the year related to Noetic and higher advisory and legal fees.
Moving to quarterly guidance. For the third quarter of 2024, we expect total revenue in the range of $209 million to $211 million, representing growth of 5% to 6% over the prior year. We expect non-GAAP operating income in the second quarter in the range of $36 million to $38 million and non-GAAP net income per share of $0.50 to $0.53 which is based on 74.9 million diluted weighted average shares outstanding.
Thank you for taking the time to join us on the call today. And with that, we will open the call for questions. Operator?
[Operator Instructions] Your first question comes from the line of Matt Hedberg from RBC.
Corey, nice to see the stability in the results. I guess I wanted to drill down a little bit on some of the go-to-market changes that you talked about a month or so ago. Maybe just a little bit more of the rationale there? And how do you think about that potentially impacting second half performance?
Yes. No, it's a great question, Matt. So the primary drivers, we're gearing up for the evolution of our go-to-market motion as we really focus on both the Command and Exposure Command launches. A big part of that is upgrading our VM customers to our new Command Platform, which we think is going to be more relevant to the future, the traditional vulnerability management, and we had a higher urgency around that.
We had 3 established leaders who have a strong track record, strong tenure with the company that we're ready to actually take over sort of like integrated roles across each of the regions. The second part of it is, I've been spending the last several years, really focused on our product and R&D. And I really wanted to actually sort of like spend more direct time with our sales leaders as we were actually making this -- as we were making this transition, and as we were looking to accelerate the business going forward.
Got it. That makes a lot of sense. And then I guess somewhat related to the second question. In your prepared remarks, you called out sales pipeline from partners grew nicely. And I think you called out sort of MSP and AWS and maybe a couple of others. How does that -- as you think about the evolving go-to-market motion, how important are partners going to be especially with new product rollouts and just broader distribution from that sense?
Look, I think it's critical. If you just take a step back, remember, we have like 2 big things that we're really focusing on is, one, making sure and making the transition to make sure that our products and our services are relevant for the next 5 years, not the past 5 years. We've had a lot of focus on the product strategy around detection and response, managed detection and response and now sort of like integrated Exposure Command with our new attack service management offering. And so we've been highly focused there overall.
But the second part is how do we actually set ourselves up for efficient growth as we actually go forward. And as you know, we have to make some sort of like hard but important decisions to actually look and say, like, how do we become the growth-oriented security operations company over the next 5 years, and we saw partners is critical to that. We think we're making good traction there. We're still in the middle of the transition there. But we're seeing the things point in the right way. Partners like our offering. We're increasing our investment. We're increasing our service around it. We think it's good for partners, it's good for our customers. But we think that these 2 big things that we've been actually doing, ensure our product strategy is right for the next 5 years which is really a long-term orientation and ensuring that our go-to-market strategy has the most leverage for both our customers and the company are 2 big things we're doing and partner's a key to that.
Operator?
Your next question comes from the line of Fatima Boolani from Citi.
This is Joel on for Fatima. So maybe just first one to follow up on the GTM conversation. So in relation to some of the GTM and sales org changes from earlier this year, could you just talk about how sales productivity and attrition levels have trended relative to your internal expectations? And then also from that perspective, what's embedded in your guidance for the year?
Yes. So on the -- I assume you're talking about the sales people themselves. We've seen very healthy retention of the sales force. It's in line with our expectations overall and where we're expecting the sales force maturity. I can tell you that our sales team is extraordinarily excited by the new Command launch and the new products that we actually have coming into the market. I haven't seen this much momentum in a long time. We think that that's bolstering some of the retention in an overall, I would to say challenging high-level macro environment, we're seeing lots of excitement and momentum as we enter the second half of the year from our sales team.
Got it. And then maybe just a follow-up for you, Corey. On the [ CRC D2 ], any shareable anecdotes from customers and maybe how early momentum is tracking relative to your expectations?
Yes. So the biggest difference between -- so we launched our new Command Platform. And you can think about the Insight Platform was a Rapid7 platform that actually offered a common set of products on [ a common ] platform. The Command Platform is in all security data platforms. It includes both Rapid7 data. But critically, customers want to actually see all of their security data about their attack surface and they don't want that to be the system integrator on that.
The problem that we actually solve with the Command Platform and with the Exposure Command is we provide the lowest cost, highest efficacy view of the overall attack surface while actually integrating all the security telemetry across the ecosystem overall. And so that's the primary drive and purpose of the Command Platform overall. And with that, I would just say that we're actually seeing a lot of early interest. That's too early to tell, but I'll tell you, we saw prelaunch, the pipeline build -- we saw our sales has been the highest of any launch that I've seen in Rapid7's history. We've already got the first set of deals in that was sort of like -- because it was addressing a real customer need. That said, is that we're pretty pragmatic about the expectations for this year. Our primary goal this year is to build [ pipe ] so that we're set up for sort of right reacceleration next year. But if sales cycles come in, that's great, but it's not something we're factoring into our overall plans.
The next question comes from the line of Jonathan Ho from William Blair.
Can you hear me okay?
Yes.
Yes, John.
Just wanted to get a sense for how you're thinking about this Command Platform upsell, and perhaps how you're seeing the market change, whether there's any shift in terms of customer spending behaviors that are maybe moving more towards the [ CTAM ] or attack surface management value proposition?
Yes. It's a great question. Look, we've been worried about this for a while. We started investing, as you know, several years ago. We've been accelerating the investment. That was a big part of the restructuring that we did last year. because what we really want to position ourselves up was to position ourselves for future customer needs and that customer needs to [indiscernible]. Right now, our customers' biggest challenge is that you asked almost any customer, they do not have a clear understanding of the overall attack surface. And vulnerability management has done a decent job, but it's still sort of providing a silo of data about parts of the attack surface [ space ] provides it with a lack of context.
What we heard from lots of customers is they wanted to actually have a high confidence view of their overall attack service. They wanted to actually integrate the data from all of their security telemetry not just from one vendor. That [ supply many ] asset inventory systems. And they actually want to lower the cost of actually the ability to get an understanding to the overall attack surface, which is one of the challenges that you have on the cloud side.
And so we are seeing a shift to CTAM, or I think Gartner calls the exposure management space. It's not just sort of packaging vulnerability management together and cloud together. It's the ability to make sure you have end-to-end visibility across the environment. but just important where we put lots of investment, where we actually combine our innovations with Noetic's innovation is the ability to integrate all that data in to actually have the highest confidence view of the state of the overall attack surface at any moment in time and then to be able to integrate all that different data in and be able to drive in, investigate, respond, prioritize across all the data, across all the attack surface.
So far in early discussions, that's providing real value to customers in ways that traditional vulnerability management didn't, which was just another data source that customers didn't have to spend a lot of time and people to actually go figure out like how do I relate that data to other data in the environment.
The next question comes from the line of Joel Fishbein from Truist Securities.
Congrats on the Command Platform launch. Corey, for you, I just would love a little bit more color on -- and I know it's early days, pricing, packaging and go-to-market for the Command Platform. And what will it actually include and not include that would be really helpful.
Yes. So the -- while it's early days, what I would just say is that, look, similar to what we did in D&R, our goal is to actually make the ability to have 100% visibility with confidence into customers' environments, affordable and achievable. So it will be an uplift, but it's a relatively, I think, reasonable uplift for existing vulnerability [ management ] with customers. We think that if we actually do that, it will not just improve sort of like NRR expansion growth, it will also [indiscernible] customers in for longer, and make them stickier because we're solving a bigger, better problem.
The second thing that we've actually -- gives us by taking that approach is when the customers better understand what their attack surface is, it turns out that there's more to monitor, and we can actually monetize it with our detection and response offering. So you can expect it to be a small uplift from the incremental vulnerability management perspective, but we really are pricing this to actually have customers complete visibility into their overall attack surface. From there, we actually have several different offerings on top of that, that we can actually monetize, but it all starts on the basis of every customer has a 100% confidence in understanding of their attack surface.
Your next question comes from the line of Alex Henderson from Needham.
Yes, before I throw a question at, I just wanted to clarify something. Did you say your pipeline was up 15% for the company as a whole? Or was that just the bar channel [indiscernible] question?
Yes. So that was our overall partner ecosystem, was up 15%. The commentary on the company is just that we have seen pipeline stabilize and improving, but we want to see that improvement continue as we build our momentum for next year.
Okay. So if I were to look at the 2 major products that you've got now, what you're calling your 2 foundational platforms, if I was a new customer, say, in the June quarter of next year, and I acquired these 2 product lines simultaneously for a reasonable sized company. What would be the relative sizing of the 2 acquired properties? Would one be larger than the other? Is the exposure of Command product larger or smaller than the detection and response platform?
Yes. You're just talking about [ raw ] pricing. Is that correct? Just so I'm sure I understand the question.
Yes. If a new customer, say, 1,000 employees which is larger?
Yes. So the way to think about it is that Surface Command is designed to sort of be very low cost and give you complete coverage of the environment, and so people can actually integrate the data across the environment. Exposure Command combines the integration capabilities of Surface Command with all of the raw sort of capabilities. So think about it, it will be disruptive against traditional cloud pricing but it's meant to actually really drive adoption. So it's meant to be affordable and drive overall coverage in the environment.
And then there's lots of -- the way to think about it is detection and response is going to be at a premium price point. And frankly, it's going to be more customizable the customers needs, and we really get our monetization in the detection and response space because that's critical, and we have a wide range of price points from technology only, demand services partners, demand service with us, to customer learning. But we have a wider range of price points with detection and response, and that's also a super strategic for customers. And part of why we take the disruptive approach on Surface Command and Exposure Command is because the more people understand their attack surface, the easier it is for us to monitor and secure the attack surface with the customers.
So should we be thinking about this as somewhat of a loss leader entry product that then allows you to upsell the detection and response platform and therefore, is a much smaller contribution to revenues but does drive the overall business proposition over time. Is that the right way to think about...
Yes. The way that I would think about it is it will actually be a contributor -- we expect it to be a contributor to growth. But I would say it's probably a smaller contributor to growth in detection and response, but it's still a net positive contributor to growth, just to be clear. And I think that is disruptive sort of like packaging and pricing doesn't interrupt that, it does set up for higher expansion in growth in the detection and response business. That's true. But we're not pricing [ in ] where it's a negative to growth. It is accretive to growth. We expect it to be accretive to growth, but we expect detection and response to be a larger growth driver. That's true.
Next question comes from the line of Joshua Tilton from Wolfe Research.
Can you hear me?
Yes.
We can hear you just fine.
Look, I just have one for me. And I guess I heard the prepared remarks, especially around the guidance. But just maybe help us get a little confidence around your confidence interval on the [ applied ] second half net new ARR. I understand you guys talk to like strength in consolidated offerings, which was 40% of net new ARR this quarter. But we're talking about pretty small numbers for net new ARR in the first half versus what's implied in the second half. And kind of feels like the rest of the business needs to pick up to kind of hit the numbers you're talking to. So just maybe help us gain a little bit more confidence around your [ guys' ] decision to leave the full year -- to reiterate the full year ARR outlook today.
That's great. If you really look at it, I think while you're right on the first year half of guidance, it's really Q1 was just like sort of like really poor in terms of it. Our big question that we actually had was really stabilized in Q2 and having a stable outlook for Q3. We feel very good about that. In addition, in Q4, we have just more longer-term deals in there. So we have a little bit more in the bank going into Q4. But really, what you're talking about is getting back up to a little bit above a flat year-over-year net ARR from last year.
We feel good about that trend line. I mean frankly, from the Q1 spot to the Q2, just even though it was a small number, getting that momentum back and having that outlook be stable for Q3, was the trend that we're actually looking to actually get on. And that puts us, I think, in the guidance range. And actually, we feel comfortable about landing in the guidance range right now.
Yes. Corey, in your prepared comments, you talked about the strength in the partner pipeline build up 15%, which year-over-year, which was up from Q1. So we are seeing the momentum on that side. And we know that Q4 has historically always been a strong quarter for us, and we anticipate that again this year.
But even that, we expect it to be relatively like stable from last year, and we're seeing enough momentum and build for that.
Just a very quick follow-up on my end. Can you guys, maybe broadly speaking, actually not broadly speaking, just in general, I don't know if you give an update. I don't remember exactly when you give -- but can you just help us understand like the strength you're seeing or like what the run rate is, or is there an update on the IDR business. Has that kind of been a shining light for you guys over the last 2 quarters?
Yes. IDR is much higher in the preference stack, and it's been the biggest contributor of overall growth this year. And we see the demand there. And in fact, we are working to expand our IDR services. because we see customers looking for us to actually do more from a detection response perspective. So we see that as something that's high in the value stack. Customers are looking [ at health ] both on the technology side and on the managed service side from us and our partners. And so we see that as a big opportunity, frankly, not just now, but over the next several years.
Yes, Corey, we didn't break it out this quarter and maybe we have in the past. But we both said in our prepared comments, it's really been an acre for us, a very strong positive anchor and it grew very nicely in the quarter.
Your next question comes from the line of Brian Essex from JPMorgan.
This is Charlotte [indiscernible] on for Brian Essex. I know you gave some color in the prepared remarks, but could you expand a little bit about the platform customer count versus your total customer count and how that's trending? And if there -- if you're seeing better traction in the enterprise [ has be ] -- different aspects like that, that would be really helpful.
Yes. I think in the past, we've broken it out platform versus traditional. Look, we continue to see fall off of our small dollar transactional customers. Our platform customers grew faster than that. And so you can think about like mid-single digits in terms of that, which was -- I would just say in line with expectations and healthy. We always want to grow customers. But we're happy that the growth is coming on the platform side. We think that sets up for better long-term growth.
Yes. Corey, it was up sequentially and year-over-year on the platform side, and it's the lion's share of the customer base, and it's performing well.
Your next question comes from the line of Rob Owens of Piper Sandler.
Great. This is Ethan on for Rob. Corey, I just wanted to ask on the VM space as a whole. Do you see some of the headwinds in growth that you're seeing here, you and other -- your peers are seeing as kind of cyclical or more secular longer term?
Yes. So look, I think the biggest thing is we've been worried and focused on building our platform for a little while because we've seen the pressure that -- and the strategic value that vulnerability management was going to have. And so we really have to have an intentional approach to actually shift our value stack up. First, with detection response. And now with our CTM or overall Exposure Command offering to make -- to solve more strategic problem for customers because at the end of day, it's about the customer. And vulnerability management solves a problem, but that problem is becoming less and less strategic for customers. I think that's the pressure that you're [ staying ] in the market. It's one that we've been sort of like worried about and focused on for a little while.
So while I think that's true, I think vulnerability management is still critical, and that's why we see it as an important capability of our solution, but it's a capability of the solution. It's not a stand-alone solution as we see it, and we think stand-alone solutions will continue to see pressure, but we do think that if you're solving the broader visibility risk, understanding of the attack surface problem, then we actually think that's something that customers are going to find valuable. We're seeing good early momentum, but it's sort of the tail -- the pace of that, but we're seeing very good on traction there.
The next question comes from the line of an anonymous caller from Morgan Stanley.
This is Oscar Saavedra on for Hamza Fodderwala from Morgan Stanley. I want to dig in a little on your commentary on pipeline generation by partners. Nice to see that it was up 15%. Last quarter, I know you mentioned -- you indicated that the contribution from the new focus was not yet making up the contribution loss from you deemphasized, I was just wondering if you can comment on how that trended this quarter to what extent that gap was closed compared to last quarter. And as we look ahead, how should we think about maybe the time line for that to sort of breakeven?
Yes. As part of the -- some of the changes that we actually made it is something that I'm paying a lot of attention to. What I'll say is that we saw it stabilize and grow better than it has in a while in the quarter. But we do are looking to actually manage it to grow faster. Now the partner stuff takes time. And I would just say that, that's a core sort of like part of the transition period but we feel that we're on the right trajectory enough so that we're actually increasing our investment allocation to the partner ecosystem because we're seeing the yield and the results there.
And really, what we're focusing on is how do we, of course, make sure that we actually are executing against this year's [ targets ], but also how do we actually build that momentum as we actually go into next year. And so I'll just say it's trending the right way. Of course, like everybody else, we want to see more sooner. And we're managing our investments [indiscernible] off that path, but we're seeing the right direction. We're just looking to actually get more out of it faster.
The next question comes from the line of Mark Cash of Raymond James.
This is Mark on for Adam. So Corey, if I could start with you. Some exciting changes in the product front happening, while those just move to regional go-to-market structure [ are ] not reflecting [ to your ] overall -- so are those changes related? Or was the move to regional sales structure something that's already being worked on? And why move to that structure?
Yes. The changes to actually -- the regional sales structure [ array is being ] worked on. We have been looking at how to within the region align the land, expand, retain businesses, drive not just efficiency but especially since we have more partnership business, to make sure that we actually had more alignment there. So that work was already underway and our previous Chief Commercial Officer actually did lots of their homework working with the regional sales leaders to actually help bring that plan forward and to make it a reality there. So -- but the reason for it was not just an efficiency thing, it was also execution about how do we actually make sure that we're actually upgrading our installed base to the new Command Platform in a timely fashion while working with and expanding our partner ecosystem.
Okay. And Corey, if I could ask -- I'm sorry, maybe actually for Tim, if you don't mind. I guess you generate $150 million to $160 million of free cash flow this year, substantial margin improvement year-over-year. So how are you now thinking about rank ordering the uses of cash that you have this more durable statement of cash coming to the business?
Yes. In terms of more of a capital structure use of cash. So first priority is to make sure we always have enough cash to run the business, which has never been a problem, I would call that a couple of hundred million that you would leave on the balance sheet. Corey and I have talked very publicly of one acquisition per year to at least have the room to do that similar to the acquisition, we welcome the Noetic team to Rapid7, and that is a tech and team, a smaller-sized deal. So I would call all of that priority #1. And then priority #2 is we're very mindful of the debt stack that we have, and we have plenty of time to manage that accordingly but ultimately, to repay the debt. So I'd put it in that order of priority.
Our next question comes from the line of Michael Romanelli from Mizuho.
Yes. This is Mike on for Greg. Maybe 2 for me. I guess, just firstly, from your perspective, have you seen any change in customer behavior since the CrowdStrike IT outage very recently? And then just on average discounting rates. So what do they look like in 2Q? Were there any changes sequentially?
Look, the CrowdStrike was a big deal for our customers and for the security industry in general. It took a lot of time. Lots of people put heroic efforts in to get their businesses back online while they were staying secure. We have overlapping customers and we were trying to make sure that we supported our customers. And so I think people are sort of like, while systems are back online, I think that took a lot out of security teams. And so I think that was probably the bigger pressure point. I think it's too early to know anything else. But I just know security teams and IT teams put in a herculean efforts and I think it really matters, and they should be appreciated.
Your second question, remind me what it was again?
Just on relative discounting and...
Relative discount. I don't think we saw anything material on the relative discounting...
No real change.
Yes.
Our next question comes from the line of Kingsley Crane.
So in light of some of your peers focusing on profitability, I wanted to double click on product gross margins. How much room do you feel you have to expand product gross margins over time? Is 80% a reasonable goal? Or you expect most future margin improvements to be from sales and [ marketing ], for example?
It's a really good question. I would say the one -- look, I think customers get a vote here. And I will say that customers are also looking for more existence and enablement. So I think right now, we have confidence that we can grow margins overall. We have the flexibility to actually grow it at the gross margin line from operating expenses. But customers are looking for more help and assistance.
Now I think part of the reason that we actually have room on the gross margin line is really 2 things is one, we are gearing up more partners [ and ] managed services partners, which actually help with that. And our team is investing in AI, which actually has the benefit of helping our customers get more coverage and support, while also allow us to expand our margin profile. And so we haven't sort of like fixed the model. We don't want to sacrifice our ability to support customers engage with customers. But right now, we have very high confidence that we can expand our overall margin as a company while accelerating growth but it's going to actually -- sorry, the overall demand level of customer service, which has been going up hugely where customers want to have Rapid7 and its partners help them more -- their security programs that's going to be offset by AI and the ability for us to continue to ramp partners. Great question. Thank you.
Both of that's really helpful. And just one more. So one of thing through [ geodynamics ], we've seen some challenges in the states for a lot of security companies. You've added almost as much net new revenue last year in international as you did in the state. So I just want to talk more about what you're seeing in the U.S. market in particular, and what you're hearing from the customers?
So I would -- so there's 2 things. One, customers are still under lots of budget crushers. And so I just want to be clear that, that has not gone away. Customers are trying to figure out how to address security, and frankly, how to do it in a tighter budget envelope overall. But we see most customers trying to really address security, and they're trying to address the budget envelope overall. That hasn't changed.
What they're focusing on is the most critical security problems, and that's why we've had this urgency to really drive and make sure the problems that we solve are the most meaningful problems that we can possibly solve in the security stack. That's what you've seen us [ aggress ] so heavily in long-term product service and technology. Because that's the moment to do it, so that we're actually doing a more important job for customers overall. But most customers are struggling with this, how do I actually make sure that I'm adjusting my business' budget needs while also making sure obviously [ ensuring ] our business and that's not going away. And we see that in North America, too, just like most security companies.
Our next question comes from the line of Brad Reback from Stifel.
Great. Corey, as we look out to next year, can you envision a scenario where total customer count is actually down?
Look, look, in this world, you can never say never. I'll just say that our strategy right now is to focus on quality of customers. And I think that like if you look at our strategic platform customers, if you look at what we're doing with the Command Platform, I have high confidence in the Command Platform customers will be up. I have high confidence that the strategic customers will be up.
I would just say we're less concerned about some of the historical transactional business, and that creates noise. And so on the overall customer count, who knows. But I'll just say on the things that actually matter, we have very high confidence that, that will continue to improve. And we're expecting to see a healthy transition and help the adoption of our overall Command Platform.
Yes, and the platform customers, Corey, as we mentioned earlier, continue to grow sequentially in the year-over-year...
Yes, absolutely. Yes. But that's also -- on the total customer count, there are some things that we are managing and some that we are not [indiscernible] over time, more consistent transparency to the things that matter. But I would just say about the things that matter, we feel very good about our ability to grow that customer [ segment ].
That's great. Just one follow-up on that. Any reason you wouldn't start providing the absolute platform customer count going forward?
Yes. So right now, our team is looking -- every year, we go through the cycle of looking at like what's the right thing to provide. I know that amongst a bunch of other things are in consideration about what we actually share and provide going forward. Look, our goal is to provide the most meaningful insight to our investors. And I know that Elizabeth and the team are working through that right now. So I can't make any commitments now, but they work through that every year. I know they're looking to it again now as we are at the end next year.
Our next question comes from the line of Schneider Rod from Baird.
This is Zack Schneider on for [indiscernible] at Baird. I just wanted to ask about upselling to existing customers and specifically how you plan sustaining its momentum in the face of budget constraints and elongated sales cycles? If you could talk to any specific initiatives that are being implemented to enhance customer engagement and drive higher upsells? And additionally, how you're addressing customer concerns regarding pricing and ROI?
Yes. So absolutely. Look, we have what I think is a very high ROI story. We saw a big problem for our -- to say, relatively modest and reasonable incremental spending cost. And we think that, that formulation has the impact of making it easier for customers to say, yes, make it easier to actually secure existing renewals because we're [ prioritizing ] a lot of incremental value to customers for what's a relatively modest incremental price point. And so we're taking that out to all of our customers.
Again, the initial feedback has been good, but we're in the early stages of taking that strategy out to customers. We're doing it across all of our sales teams. And I think we're set up well for success there. But again, we want to make it really, really compelling. And that's why we did not pick like others, a purely monetization strategy, which is about the company. We [indiscernible] solve the biggest possible customer problem at the most reasonable economics. And we think that's a [indiscernible] that's going to be attractive.
Our next question comes from the line of Trevor Rambo of BTIG.
SP-10 This is Trevor on for Gray Powell. Congrats on some nice results. Maybe dovetailing off a question before, but what needs to happen for ARR growth to improve back to double digits over the next year or so in terms of growth, what levers do you guys have to -- at your disposal to get there? Is that something more of an exposure command gaining traction? And when should we think about that becoming a possibility at this point?
Yes. So look, we're clearly your -- while it's too early to comment specific to next year, I will comment on the levers because that's a very reasonable question there. Look, the levers we have is one, we have [ latent ] demand in detection response that we just have to actually -- our team took on work to expand the offering to the [indiscernible]. So customers are asking us for stuff. And we just have to explain our offerings. It's not rocket science there. but our team is working through that, and we think that allows us to address more of the overall detection response market as we actually go forward.
The one that we've actually talked about is the Command Platform, Exposure Command. We actually think that allows us to actually really participate in the higher value set similar to the cloud, similar to the attack surface management, where customers actually spend their money versus traditional vulnerability management, which just isn't as big a budget priority. So now we're actually playing in the area where customers actually have priority and they're looking to spend money, and we're providing a good overall value proposition. And then in addition to that, we actually have a couple of add-ons that we're introducing in the installed base.
Now all of that has to tee up with the continued investments that we're actually making in the partner ecosystem to actually drive scale and the rationalization that we're actually doing around the alignment across the business. But if you look at that right product strategy around detection response, which we expanded that business, you're going to hear more about that later. The Exposure Command, which allows us to be more strategic in the risk and visibility space. We're executing that. We have good momentum there. Partner, continue to make investments. And frankly, we're going to be accelerating those investments over time. We're seeing good traction there.
And then we're really focused on equipment [ to ] enable our team. We have a good nor team there, and I think that they're set up well. Those are the things that can actually drive traction as we actually go into next year. It's early, but we're actually seeing this set up good -- but we have to actually, first and foremost, we have to start by continuing to actually leverage the healthy pipeline trends that we actually saw where it stabilized and upticked in Q2. And we have to actually really accelerate that and build that. But those are the things that actually drive as we go forward.
Our last question comes from the line of Rudy Kessinger of D.A. Davidson.
I want to come back to just some [ slides ], net new ARR in the second half. I mean it's 4x as much net new ARR basically implied in the second half versus the first half, at the midpoint of the ARR outlook. And I know you've given a few comments, Marketplace pipeline, up 15%. They get 4x the net new ARR. So just can you give some commentary on the overall pipeline for the second half relative to the first half? Is there any other assumptions in the outlook such as maybe improved gross retention that might be helping drive some of the sequential improvements here? Or just any other color you could provide would be very helpful.
Yes, 2 quick things. One, it's a primarily a Q1 dynamic not the linearity exiting Q2. I would just point out that you talk about 4x in the second half, it was 7x in Q2. And so when you have the Q1 that we actually had the numbers don't make any sense. You could have actually said 7x in Q2 was going to make it -- or 8x in Q2, [ it's ] going to make any sense either. And so really, it's the traction and the -- it's the rate of improvement, and we're back on a healthy rate of improvement. So yes, Q1 was bad, but I think we actually normalized and stabilized things in Q2 and we said, well -- and then to get to your quarter question, which is actually really good is that we didn't leave the guidance range the same, just to leave it the same. We actually took a very detailed look at our pipeline. And we believe that from the pipeline and the data and everything that we actually see today that we're going to be in the guidance range that we actually indicated. But those are the 2 considerations that are [ just here ]. Thanks for the question.
Yes. Okay. And then just as a quick follow-up, if I could, just...
Go ahead, please.
Just on the new logo side. Yes, on the new logo side, I saw it looked back to positive quarter-over-quarter. I guess, just any comments on new logo bookings in Q2 relative to expectations?
So I would just say [ with ] any expectation, look, Q2 was a quarter that we expected to normalize. We saw normalization. I would not say it was a whole [indiscernible] quarter. I would just say that Q1 was a bad quarter. Q2, we expect it to actually get back to business and normalize it, it normalize. We saw very healthy traction and normalized traction on the platform side. We gave the number [ about ] mid-single digits. We saw the -- us getting back to positive net overall customer growth. And that's kind of where we expect it to be in a healthy normalized environment and the setup.
So we actually -- it was what we expected, and what we needed to do to actually set up for us to be where we want to be as we actually exit the year. The primary thing that I'm focused on right now is, of course, the introducing the product to our customers, the new products to our customers and building pipeline not just for the back half of the year, but as we go forward.
Thank you very much. And operator, are there any other questions?
There are no more questions.
All right. With that, I want to thank everyone. I know that there's lots of stuff going on, but I really appreciate the questions and the support. I think we're in an exciting time. We've been executing our product strategy. We're taking that out to our customers. And we've been intentionally focused on investments that are going to set us up for the next several years, not the past 3 years. So I appreciate everyone's time and attention. Thank you all.
Thank you.
Ladies and gentlemen, that concludes today's conference call. Thank you all for joining. You may now disconnect.