Rapid7 Inc

NASDAQ:RPD

Earnings Call Transcript 2022-Q3

[Operator]

Hello. My name is Lisa, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Rapid7 Q3 2022 Earnings Call. [Operator Instructions].

I would now like to hand the call over to Mr. Sunil Shah, Vice President, Investor Relations. Please go ahead.

[Sunil Shah, VP, IR]

Thank you, operator, and good afternoon, everyone. We appreciate you joining us today to discuss Rapid7's third quarter 2022 financial and operating results in addition to our financial outlook for the fourth quarter and full fiscal year 2022.

With me on the call today are Corey Thomas, our CEO; and Tim Adams, our CFO. We've 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 fourth quarter and full year 2022 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 August 4, 2022, and in the subsequent reports 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 information presented on this conference call, except to the extent required by applicable law.

Our commentary today will be primarily in non-GAAP terms. And reconciliations between our historical GAAP and non-GAAP results and guidance can be found in today's earnings press release and on our website at investors.rapid7.com.

At times, in our prepared remarks or in responses to your questions, we may offer incremental metrics to provide greater insights into the dynamics of our business or 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'd like to turn the call over to our CEO, Corey Thomas. Corey?

[Corey Thomas, Chairman & CEO]

Thank you, Sunil, and hello to everyone on the call today. Thank you for joining us on our third quarter 2022 earnings call. Rapid7 ended the third quarter with $684 million in ARR, representing 24% year over year growth. While revenue was within our guided range, and operating income exceeded our expectations.

Our ARR results came in below our expectations for the quarter. Growth was moderated by two key dynamics. First, the impact of ongoing global macroeconomic uncertainty on customers' benefits. And secondly, further anticipated sales productivity amount as we evolve our model towards a consolidated platform sales approach.

I will speak to this in detail on today's call. But first, let's discuss the environment. We spoke on our last earnings call about how the macroeconomic environment is affecting the pace of demand, driving higher levels of inspection as customers and prospects manage reputation and increased economic uncertainty.

These persistent trends continue to affect us broadly. With the downward pressure coming from our international region. Customers continue to squeeze in time into new projects and in some cases are taking a more measured approach to scaling their security investments. While we have limited visibility into the macroeconomic trajectory, we continue to factor in this headwind as we look ahead to the fourth quarter and next year.

Now, let me turn to the internal dynamics affecting our performance. As we successfully expanded from selling a single product to a best-in-suite that platform a number of years ago, you may recall that we rely on product specific sales teams to scale the business. In the back half of last year, we began to mature our sales motion towards the channel itself, towards enabling all of our salespeople to sell the full suite of our insight products.

This was a key step in the evolution of our Salesforce toward a platform selling motion. While we expected in that times for multiple products to take slightly longer as we scaled our teams this year, we did anticipate an increase in sales activity during the second half of this year, as they gain mastery of our four products suite.

Entering into the quarter, it became clear that our salesforce is taking longer than we expect it to effectively sell a wider set of solutions on our insight platform. Let me highlight two predominant reasons for this. First, our audience is changing. Given the breadth of our platform, as sellers are increasingly engaging, and see through level discussions. This requires more robust seller enablement, especially for newer reps to ship them some important product and features to selling platform solutions and outcomes.

Second, this motion requires more focused packaging models compared to the land anywhere approach, particularly in an environment where customers have budgetary pressures. As you might expect rapidly sales engine across multiple products while entering a recessionary spending environment further exacerbated these challenges during the quarter.

In hindsight, our measured transition from a VM centric salesforce to a security transformation which itself of course has been slower than expected to be underestimated the amount of time enablement support and focus necessary for our team to drive efficient platform adoption. We have responded quickly to address this situation. And here's what we're doing today that gives us confidence in our path forward to improve execution.

We maintain strong confidence in our mid to long term thesis. To become the platform of choice for consolidated across the management to resource constrained organization. Amidst a complex and highly fragmented security tool ecosystem, security teams of all sizes are struggling more than ever to deliver the right level of security efficacy for their spending.

And the bar is higher today, as these teams are increased budgetary pressure. In a recent survey of [indiscernible] are the highlight of the 75% of organizations they surveyed are looking to consolidate security vendors from destroying African organizations only a few years ago.

We believe the platform investments we've made in recent years position us exceedingly well to help customers achieve more consolidated risk and threat visibility, response and automation across their expanding digital footprint and growing cloud environment.

A great example of how we're delivering on this consolidation value proposition at scale is a seven figure ARR deal signed in the third quarter with an enterprise healthcare provider. This customer was struggling to effectively and efficiently manage their expansive security environment with a leading team offering managed by a large global consulting firm, claiming pain points and many levels throughout the organization.

Rapid service [indiscernible] solution with embedded automation stood out among the competition for its rich detection capabilities. However, a huge differentiator for this customer was our ability to consolidate their SecOps back on a single platform. By leveraging our DNR threat complete packets, this customer was able to solve their most urgent direct response challenge, while also displacing their existing VM provider. All at a better overall economic value.

This ability to consolidate parts of their security ecosystem or insight platform, not only solidify Rapid7 platform of choice expanded the value of the relationship for Rapid7.

In an increasingly talented transitory landscape, our offerings continue to resonate with customers of all sizes, including our growing enterprise customer base. Customers attending to Rapid7 detection response often and this dynamic threat landscape for its expert driven, intelligent and extensive detection laboratory that delivers market leading time to value.

And Rapid7 risk visibility platform is resonating for customers expanding rapidly into the cloud. As we deliver more consolidated risk visibility across cloud and on-prem environment. This underpins the sustained growth we've seen in our security transformation solution. We saw another quarter of 40% year over year AR growth.

Let me share how we're optimizing our go forward sales approach by operationalizing our strip around these two specific customer opportunities. As we look to the fourth quarter and early 2023, we're activating more focused customer centric sales motions that are organized around customer needs.

This will simplify and consolidate the cell emotions that our teams leverage many customers, we began to separate in Q3 as we started to attack them alongside security transformation project. However, we're accelerating this path in the fourth quarter as we plan to a placement anchor our customer engagement around their most critical needs tied to detection response, and cloud risk visibility.

This is an obvious next step for two distinct reasons. One, as we engage with customers today, we continue to see the strongest the most urgent customer challenges centered around detection response and cloud security, especially for our time in the process visibility in the cloud, we see on-prem VM as a critical component of that.

Number two, this step directly aligns with the natural progression we've seen in our business, as security transformation has scale to represent over 70% of our year to date, land motion. With over 50% of our land ARR coming from detection and response, specifically. Even this one, we expect to focus sales efforts around two core platform packages that are optimized to address customers' most pressing security needs on our platform.

[Indiscernible] threat complete, enables customers to consolidate best in class, expert driven threat detection response offering, along with a limited coverage of our market leading VM on a single platform. A cloud with complete is our cloud center risk visibility offering which consolidates unlimited visibility across customers on-prem, cloud and external environments at all stages of transition to the cloud.

It enables the use of cloud and application security with unlimited VM covered together in one platform subscription for more complete coverage of their cloud and traditional infrastructure environments. In addition to this to provide pricing and packaging, over the next quarter, we intend to sharpen our enablement and drive a focused marketing efforts around threats and this complete value proposition as we lean into our opportunity to help customers manage and respond to threats in their modern and cloud environments.

We expected experts to gain traction over the next few quarters. With improvements in growth starting in the second half of 2020. We will pay close attention to sales productivity as the success of our packaging efforts with both new and existing customers? Over the past few years, we've assembled the best in class suite of products across the platform. We firmly believe that the fundamentals of our business are healthy and our opportunity for growth remain strong.

Honing and operationalizing our pricing packaging and overall go to market strategy, which rob the next leg of our growth. We've had success with thoughtful in some cases, to ourselves plus in the past, and this gives us confidence in our four trajectory towards a more effective and efficient platform centric sales motion.

While these cases are moderately disruptive in the short term, we believe they will set us up better for growth in the back half of 2020 and beyond. Rapid7 continues to benefit from strong secular tailwinds and underlying drivers of digital transformation and prioritization of security spending are very much intact. Our plans to approve sales execution by navigating macroeconomic uncertainty are aligned with the overall strategy to provide a strong value proposition for customers.

As we work to enable organizations to close the gaps in their security environments, we remain hyper focused on solving critical customer challenges. Looking forward, our updated outlook assumes near term macro and productivity related headwinds, the latter of which we expect to begin to normalize over the next few quarters, and we see gradual benefits from the changes that we're putting in place.

This should translate to a modest sales execution tailwind in the later part of 2023 and into 2024. In early 2021, we shared our expectation to become a ruler 40 company with over $1 billion in ARR by 2025. We remain confident in reaching those targets. However, our expected path to get to, shifted.

Let me share some brief context on how we think about that today. First, despite the execution challenges, which were actively interesting, we continue to see a double multi Japan for 20% ARR growth CAGR and our business through 2025. Though we expect that 2023 may be modestly below 20% as we navigate short term impact to our sales optimization efforts.

Ultimately this means we now expect the relative mix of growth and profitability to achieve our ruler 40 status will be more balanced towards profitability than we previously anticipated. Our strong Q3 profitability demand and raise to full year not GAAP operating income demonstrates our deliberate focus on margin expansion and underpinned our confidence in delivering our midterm targets, which Tim will provide more color on.

We remain committed to our long term strategic goals to enable customers to securely transition to the cloud to expand the capabilities and value proposition of our best in class insight platform and to balance our dual mandate of scaling profitably, while strategically investing to drive general growth. With that, thanks again for joining us on the call today. I will now turn the call over to our CFO, Kevin Adams to share additional detail on our financial results and outlook. Tim?

[Timothy Adams, CFO]

Thank you, Cory. Good afternoon, everyone. And thank you for joining us on the call today. Before I turn to the results, a quick reminder that except for revenue, all financial results we will discuss today our 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 third quarter, with ARR of $684 million growing 24% year over year.

ARR growth continues to be led by security transformation solutions, which sustained 40% ARR growth during the third quarter, even as we left last year's threat intelligence acquisition. And despite the macroeconomic and sales productivity challenges, Cory highlighted earlier. New ARR was driven by our detection and response, cloud security and threat intelligence solutions as customers continue to prioritize around these critical categories.

The value proposition of our platform is resonating with security teams looking to consolidate their spending. As larger new customer deals and expansion with existing customers drove ARR per customer to $63,000 growth of14% year over year. Total customer count benefited from healthy growth and platform customers. However, we did see a modest impact from the macroeconomic and sales productivity dynamics that Cory spoke about earlier.

We ended the quarter with approximately 10,800 global customers growth of 9% over the prior year as we lap the insights acquisition, and at the upper end of our previously stated long term range of 5% to 10% growth. Third quarter revenue of $176 million grew 26% over the prior year and was at the midpoint of our guidance range.

Products revenue grew 27% to $166 million on momentum in our security transformation offerings. International revenue grew 36% year over year, representing 21% of total revenue, while North American revenue grew 23% over the prior year. Moving to operating and profitability measures for the third quarter our product gross margin of 76% and total gross margin of 73% are each within our expected ranges and improved modestly from last quarter.

Sales and marketing expenses represented 38% of revenue compared to 40% in the prior year period, while R&D and G&A expenses were 20% and 8% of revenue respectively, compared to 21% and 8% in the third quarter of last year. Broad Based and disciplined expense management probe operating income of $13 million in the third quarter, representing over 7% operating margin as we proactively focused on achieving our profitability targets in an uncertain macroeconomic environment.

Our third quarter adjusted EBITDA was $18 million and non-GAAP earnings per share were $0.14. Turning to the balance sheet and cash flow statement. We ended to three with cash, cash equivalents and investments of $268 million. Our strong operating income and working capital management drove third quarter operating cash flow of $20 million and free cash flow of $10 million.

This brings us to our guidance for the remainder of the year. As Corey said, we expect the optimizations we are making to our platform go to market strategy will gain traction over the next few quarters, and we expect them to provide meaningful support to growth starting in the second half of 2023.

But that said, we believe it is prudent to account for a moderate level of near term performance disruption exacerbated by ongoing macroeconomic pressures. Given these dynamics, we now expect full year 2022 ARR to be in the range of $711 to $717 million, growth of 19% to 20% over the prior year.

For revenue, we are narrowing and lowering our full year 2022 outlook to $680 million to $682 million dollars, or 27% year over year growth driven by our lowered ARR expectations for the year. We remain committed to scaling profitability in our business, as we look ahead and have multiple levers to achieve that.

As a result, we are raising our full year operating income outlook to $25 million to $27 million, reflecting the strength in our third quarter profitability that we expect to continue.

Non GAAP earnings per share is expected to be $0.17 to $0.20 for the year, based on an anticipated $59.9 million diluted weighted average shares outstanding.

Turning to free cash flow, we are adjusting our full year outlook modestly lower to a range of $36 million to $40 million. Just below the low end of our prior range. The new range reflects our continued strong focus on cash generation and profit expansion, offset by lower billing expectations associated with our reduced ARR estimates for the full year.

As implied by our full year guidance for the fourth quarter of 2022. We expect revenue in the range of 179 to $181 million in operating income between $14 million to $16 million. Non GAAP earnings per share is expected to be 17 to 20 cents, based on an anticipated $66 million diluted weighted average shares outstanding.

We are confident in our ability to navigate through the macroeconomic backdrop and to successfully transition our sales force to a more focus and streamline platform selling motion. As Cory mentioned, we continue to see a path for 20% ARR growth CAGR as we march towards our target of being a rule of 40 company by 2025.

And as we focus on scaling our profitability to achieve the rule of 40, we expect a steady improvement in free cash flow margins, which we anticipate should ramp by at least 400 basis points per year over the next few years. This is aligned with the vision from our previous investor day. And we have the right strategy in place today to meet these targets.

Thank you for joining us on the call today. And we will open the line for questions. Operator.

[Operator]

Your, first question comes from the line of Matt Hedberg with RBC Capital Markets.

[Matthew Hedberg, RBC Capital Markets]

Great, thanks for taking my question, guys. Cory, for you, I guess on the on the sales execution or the sales productivity. It sounds like you guys are looking at a variety of ways to improve that and obviously make sense long term as a platform sale. I'm curious as you look at the composition of the Salesforce today, is it the right people in place or is it more of a process improvement that needs to happen?

[Corey Thomas, Chairman & CEO]

Thanks, Matt. It's a good question. We think we have the right people, I think there's really two core things that we're actually focused on. One, we actually have to make it more direct and easier for people to sell the platform. So if you look at what we've been doing is we had a platform that our sales team was enabled, and selling packages that involve individual products instead of platform packages and products.

So that's the first thing that we're correcting and adjusting and that's already in the way and that has good momentum behind it. The second thing is actually more of a process and I will say enablement a nicely, we've actually seen more momentum actually selling higher in organizations, which is not something rapid seven has traditionally done.

So we're training and enabling our sales team to really be able to sell as a CIO and do direct level, which is a core benefit and be able to sell platform capabilities at that level across the organization. So those are our two main focus areas, when we think about Salesforce enablement, both of those things we anticipate actually occurring over the course of the end of this year and the first part of next year. And we think that will normalize.

[Matthew Hedberg, RBC Capital Markets]

Thanks a lot Cory.

[Operator]

[Operator Instructions] Your next question comes from the line of Jonathan hall with William Blair.

[Jonathan Ho, William Blair & Company]

Hi, good afternoon. I wanted to maybe understand a little bit better, in terms of number one, that guidance on you. Can you talk a little bit about the additional conservatism that you've baked in? You know, if there was any, and how we should sort of think about that, you know, as we contemplate 2023, how much, -- I guess, what are your assumptions around the macro? What are your assumptions around, sort of your ability to improve that sales productivity that are sort of embedded in the guidance? Thank you.

[Corey Thomas, Chairman & CEO]

Yes, Jonathan, there's two factors to consider. The first is that, our changes are really based on customer demand. And we think this is the best time ever to actually do consolidation, with customers have more constrained budget environments. And that's having the platform capability, we were accelerating our entire effort to make sure that we're well positioned to respond to where customers currently are. So that's the first thing is we are seeing customer demand around this area, but we realized that we were not fully optimized around it.

Now, because of that, there's two factors that we actually have in mind. One is, it was time to accelerate the optimization around the consolidation, sales cycle on our platform. And the second is that we really wanted to de risk the macro in this environment. So part of the way you think about sort of like those two, and how they intersect together, is that we have, in my view, de risk, sort of like the fourth quarter, specifically as it relates to the mid-market, because we do think there's going to be more pressure in the mid-market, as you actually enter a potentially recessionary environment, and also internationally. So those are the two areas that we want to make sure we actually just de risks from a forward guidance perspective,

I would say our macro assumptions going into next year is that there's some likelihood that we'll see ourselves in recessionary environment. So we would expect the overall macros to actually have a potential hit when going into next year. And that's in our baseline planning and assumptions.

Now, the second thing that we actually are really focused on is accelerating. What I talked about earlier, is our optimization around the platform selling motion. And that's something that we're really looking at this quarter, and the first half of next year, we expect to come out of that very specific sell to optimization and go to market optimization effort, in the second half of next year.

[Timothy Adams, CFO]

And Jonathan, this is Tim, I would just add to Cory's comments, and you were talking maybe a little bit longer term as well. Cory and I both reiterated in the prepared comments, our commitment to being a rule of 40 company by the year 2025. And we still feel confident in a 20% growth CAGR for arr. Over that time period. I believe Cory did mention that it may dip moderately below 20% next year, I would say call that a point or so. And we see it recovering in the second half of next year based on all the improvements Cory has talked about.

[Jonathan Ho, William Blair & Company]

Thank you. I’ll get back in queue. Thank you.

[Operator]

Next question comes from the line of Rob Owens with Piper Sandler.

[Unidentified Analyst]

Hey, guys, this is Justin Roach on for Rob, just wanted to ask on the cloud security side, just given this as a pretty big priority for you guys moving forward. Would you guys create characterize this as primarily a greenfield opportunity where you guys are seeing success? Or are you guys displacing other platform or point vendors at this point? And what are the primary different differentiators between your platform and say, your largest competitors?

[Timothy Adams, CFO]

So we see this is mostly Greenville, because of cloud, while it's an increasingly urgent priority is that there's a lot of opportunity to attack and the opportunities growing every day, and it'll accelerate over the last couple of years. If you just zoom out, we've always been a visibility and risk analytics platform and focus company.

In on prem world that was vulnerability management, the platform that we've been building and our approach has been to make sure that we're actually building the platform or customers are deploying and managing their technology. If you look at what's happened, it's just been a critical shift from on prem being the primary driver or frequently critical assets to increasingly that's more and more and more in the cloud. And our sense as the year progressed, and over the last two years, we've got higher urgency, because you're now seeing the most critical assets in any enterprise now being centered in one file.

And so our view and our goal is to be the default, and the leading platform for visibility and risk analytics. And that means you have to be able to do it on prem, in the cloud, and across the eternal effects office.

Now the thing that we're really focusing on and optimized is that right now. And leading up to this point, we've had a relatively fragmented sales motion, where we actually sold those separately, as we introduced risk complete this quarter, one of the value propositions that we actually saw resonating quite strongly is that many customers are not static. They're actually migrating their sort of like infrastructure from on prem to the cloud. And so the ability to have unconstrained and unlimited visibility across on prem, and the cloud is more valuable than ever. And so our core value proposition is that we will give you your visibility and your risk analytics, no matter where it sits.

And you can actually move that around without having to be constrained about these dollars are locked up in the on prem world. Are these doors locked up in the cloud? To get to the other part of your question around competition, that does put us in new competition. But other than folks like Palo Alto, it's mostly point competition, and it's mostly Greenfield.

And what I would say is that in this environment more than ever, customers are looking at how do they solve their problems at the best economic value and leverage. So our platform of risk complete, any cloud first unlimited visibility platform is one that we're already seeing evidence is resonating more with customers, and we just have to operationalize with our packaging in our sales enablement around that strategy.

[Unidentified Analyst]

Got it. Thanks, Corey.

[Corey Thomas, Chairman & CEO]

Thank you very much.

[Operator]

Question comes from the line of Mark Cash with Raymond James.

[Mark Cash, Raymond James]

Yes, thanks for the question on for Adam. I was just wondering if you could talk about for the ARR outlook was lowered by about $31 million. It's kind of bucket ties, I think about like, how much is that productivity versus customer service, maybe requiring extra signature versus FX headwinds?

[Corey Thomas, Chairman & CEO]

I mean, Tim, and I was tag team, this is an estimate that there's a number of moving parts, I was just roughly half and half. But we think that half of our half of the gains that we can actually make in productivity is just ensuring that our sales force has a simpler, more efficient selling motion.

Now one of the things we see is that we're actually doing a very good job of generating demand from the traditional VM, Salesforce, and the new security transformation areas, but they're not as efficient as selling that they were being that was intentional, it took a little while longer. But we can improve that. And we can actually simplify that we can make that better.

Now, what I would also say is that when you look at the macro, what would be the other half of the story is that if you look up to this point in the year, you saw a little bit of pressure, we are assuming right now that we are seeing more likelihood of going to a recessionary environment. And we don't know it's prudent right now to actually derisk, especially mid-market going forward, and especially Europe going forward. So our estimate roughly half and half in my mind, but Tim can talk about it more.

[Timothy Adams, CFO]

No, Cory, I agree, I think it is roughly 50-50. We've acknowledged, hey, we can perform better. And we're very focused on that. And there are things outside of our control with macroeconomic, and we're seeing that, certainly in EMEA, we're seeing it in the mid-market segments, included in that macroeconomic, we do have FX, and it's approximately $7 million for the year as a whole. That's putting a headwind pressure against ARR for this year.

[Operator]

Your next question comes from the line of Michael Turits with KeyBanc Capital Markets.

[Unidentified Analyst]

Hi, this is Ashley Owens on for Michael. Just a quick one for me. Last quarter, you guys mentioned VM air slowing to the mid-teens. Just curious if you saw it hold steady there or if there was any further slowing this quarter? Thanks.

[Timothy Adams, CFO]

It's a good question. But clearly, we missed our expectation. So there was some pressure on VM, I would say that as we look at our outlook going forward, we think about VM as being a key feature of our broader visibility and risk enablement platform. So it gets harder, harder to break out, because we are selling it as part of our platform packages and sales. We think it's critical. But listen, customers will have on prem for a long time. And customers will be transitioning for a long time. One of our differentiators is the fact that we can allow customers to actually transition without locking up their spin in either bucket.

And so on the past, I would say that yes, we were a little bit it was less than we expected on the go forward. Our belief is we're going to be gaining unit share in the vulnerability management market, because we're delivering a more complete solution that customers are looking for.

[Unidentified Analyst]

Great, thanks.

[Operator]

Your next question comes from a line of Hamza Fodderwala with Morgan Stanley.

[Unidentified Analyst]

Hey guys, it's Matt on for Hamza tonight. Thanks for taking the question. Just wanted to get a clarification on guidance, it looked like a nice beat on Q3 operating income, you guys raised the full year operating income guide, but it looks like it's slightly less than the Q3 beat. So I'm just I'm just wondering, is that related to more fixed costs hitting in the fourth quarter? Is that directly related to some of the investments you're making in Salesforce productivity? Just trying to understand the juxtaposition between that and kind of the growth versus profitability outlook?

[Corey Thomas, Chairman & CEO]

Yes, Matt -- Tim, it's a good question. Look, we remain very focused on how we find leverage in the business and investing appropriately across the business. And we're certainly willing to rebalance investments from one area to another as we see fit, we stay committed to the growth and profitability framework. And the guide overall falls within that, we did bring down the full year revenue guide, and that does put a little bit of pressure on the operating income. I'm sure you're thinking the full $6 million should roll through, we rolled most of it through an operating income, but there is a headwind from revenue coming down a little bit as well.

[Unidentified Analyst]

That makes sense. Thank you.

[Operator]

Your next question comes from a line of Fatima Lulani.

[Unidentified Analyst]

Hi, this is Joel on for Fatima this evening. So just a quick one on the discounting levels? Could you speak to anything you've seen on discounting and customer pushback from last quarter, especially on the core VM side? And then maybe going forward? And looking at the macro? Just your propensity for concessions and how much flexibility you're looking at having on the pricing side? Thank you.

[Corey Thomas, Chairman & CEO]

Yes, it's a good question. Customers' budgets are clearly constrained at some level. And we see lots of customers just doing recessionary planning. Like, they're just trying to figure out, this deals that we're actually moving last quarter, they slowed down a bit, they closed at the start this one. And so we expect more than I would say less than two things, fundamental approaches to it.

One, when we think about our outlook and our guide, and other things, we actually did increase our coverage ratios and our expectation of how much coverage we actually need to close. That's a relatively straightforward. But the second part of that instead of actually tackling that one off, what we really focused on is how do we actually address customers undermine need to make sure they have a well-managed security operations environment without actually just having to resort to discounting?

And so for us the core that is our threat complete, our package, which is sort of like how do you actually get the most efficacy from your solution. And if you think about what we're talking about, with the risk complete, cloud first risk complete offering, that is really one that actually says listen, instead of actually bifurcating and locking up your spin across two or three areas and customer intelligence for the external attack surface, the on-prem world and the cloud world, we will actually give you world class capabilities at the best possible economics. And we're just building that in.

Now, that does that we just be clear, that does three things that were standalone as components and features of underlying platform. What we expect them to do is raise our ASP and ARR for customer overall. But let us actually not treat being a standalone market. So we are targeting -- how do you deliver the most value to customers? Which means that we're not optimized on how you actually maximize value in vulnerability management, or an external attack surface, or in the cloud. We're looking at how do you actually maximize value to customers, while you're raising our customer as economic that ARR for customer. That will put pressure on the traditional, I would say isolated and fragmented approaches to doing security operations and visibility.

[Unidentified Analyst]

Thank you.

[Operator]

Your next question comes from the line of Robert Galvin with Stifel.

[Robert Galvin, Stifle]

Hi, this is Rob Galvin on for Brad Reback. Thanks for taking the question. I was wondering if you could review how VM would be pricing these new package bundles. I thought I heard commentary during prepared remarks that would be on the medium from last year if that was a correct understanding on my part.

[Corey Thomas, Chairman & CEO]

Yes, there's two. So I just talked about the customer dynamics, that's the most important. So one, customers are actively moving their environments around and they are in progress. The one is that there's low appetite for locking up dollars in one environment versus another. The second one is customers don't want to be nickeled and dimed. And we've seen this other areas.

We've actually done this with our detection and response and our threat complete scenario with unlimited but it's actually what that's really about is that having a model where customers don't have to be nickel and dime all the way. And so customers need visibility into their compute environment.

Our packaging and pricing approach with our risk complete, allows customers to actually have unlimited visibility. And then true up is actually hit certain milestones in terms of their company size, or gross usage. But it's not sort of like big, sort of like nickel and diming along the way, which is frustrated about the customers. And they've given the feedback that a lot of their budget.

So that's the approach that we're actually taking is how do you actually make it simpler, and by the way, that value proposition itself in itself, our sales team, but it also makes it much easier for customers to actually plan out their expenses over time.

[Operator]

The next question comes from the line of Mike Walkley with Canaccord Genuity.

[Unidentified Analyst]

Guys, good afternoon. This is Daniel on from Mike, thanks for taking my question. So just quickly, double clicking on the sales execution challenge, which is pretty broad based across your business or was it more pronounced internationally?

[Corey Thomas, Chairman & CEO]

We commented before, there is a more -- historically it's been more pronounced internationally this year, especially in Europe. So I would say that there is a focus there. And then prescriptively and it guide, we are actually expecting the mid-market to see more pressure. We just saw as prudent to actually de risk that as we're seeing more customers during recessionary planning. And I would say, so mid-market is probably more broader based. That said, that's not what we've seen over the first half of the year. It's just something that we saw tea leaves of that we're actually planning for and we do risk informed backup here.

Thank you for the question.

[Operator]

At this time, there are no further questions. This concludes today's conference, you may now disconnect.