Rapid7, Inc. (RPD) FY 2021 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those contained in or implied by any forward-looking statements. Factors that could cause or contribute to these differences include those under “Risk Factors” included in Part I, Item 1A or in other parts of this Annual Report on Form 10-K.
Overview
Rapid7 is advancing security with visibility, analytics, and automation delivered through our Insight Platform. Our solutions simplify the complex, allowing security teams to work more effectively with IT and development to reduce vulnerabilities, monitor for misconfigurations and malicious behavior, investigate and shut down attacks, and automate routine tasks.
In the over 20 years that Rapid7 has been in business, security companies and trends have come and gone, while broader technology innovation continues to advance rapidly. Every company is now a technology company, and rampant innovation inevitably creates security risk. The migration of businesses to the cloud, more distributed workforces, and ubiquitous connected devices present security teams with an increasingly complex, ever-changing, and unpredictable attack surface.
We believe as cybersecurity challenges continue to rise exponentially; two key factors can prevent organizations from effectively managing their growing security exposure. First, the tools to manage complex security problems are often equally complicated to use. Second, there is a scarcity of cybersecurity professionals who are qualified to successfully manage these sophisticated tools. These two factors compound the difficulties that resource-constrained organizations face when attempting to minimize their security exposure, meet security compliance regulations and provide visibility to their leadership. We call the expanding divide between risk created through innovation and risk effectively managed by security teams the security achievement gap.
We believe Rapid7 is uniquely positioned to improve how customer security challenges are addressed. All of our solutions and services are built with and supported by the expertise of our dedicated team of security researchers, expert SOC analysts and consultants, who bring knowledge of attacker behavior and emerging vulnerabilities directly to customers. We also continue to invest in further simplifying our technology to improve usability, lowering the barrier for teams and organizations who lack resources to manage their security posture.
While our security technology is the foundation of our mission to make successful security accessible to all, technology alone will not solve today’s cybersecurity challenges. Our ongoing commitment to researching and partnering with the technology community helps to curb new security risks born through innovation. We are also investing in under-served, at risk communities, like non-profits and hospitals, to better understand their needs and make security technology and services accessible. By continuously improving our technology, stemming the creation of risk in the community, and making security more usable and accessible, Rapid7 aims to close the security achievement gap.
We market and sell our products and professional services to organizations of all sizes globally, including mid-market businesses, enterprises, non-profits, educational institutions and government agencies. Our customers span a wide variety of industries such as technology, energy, financial services, healthcare and life sciences, manufacturing, media and entertainment, retail, education, real estate, transportation, government and professional services. As of December 31, 2021, we had over 10,000 customers in 142 countries, including 44% of the Fortune 100. Our revenue was not concentrated with any individual customer and no customer represented more than 1% of our revenue in 2021, 2020 or 2019.
Recent Developments
COVID-19 Response
Rapid7 remains focused on supporting its customers, partners, employees and communities during the COVID-19 pandemic. The impact of COVID-19 on the global economy and on our business continues to be a fluid situation. As a result of the COVID-19 pandemic, we have modified certain aspects of our business, including restricting employee travel, adopting a virtual sales strategy to enable our employees to work productively from home, transitioning our employee onboarding and training processes to remote or online programs, and canceling certain events and meetings, among other modifications. We have begun to selectively reopen certain offices in a phased approach and to hold in-person or hybrid meetings, on a voluntary basis, taking into consideration government restrictions and employee safety.
We will continue to actively monitor the at times rapidly evolving situation related to COVID-19 and may take further actions that alter our business operations, including those that may be required by federal, foreign, state or local authorities, or that we determine are in the best interests of our employees, customers, partners, suppliers, vendors and stockholders. At this point, the
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extent to which the COVID-19 pandemic may impact our business, results of operations and financial condition is uncertain. While we have not experienced significant disruptions from the COVID-19 pandemic during the years ended December 31, 2021 and 2020, we are unable to accurately predict the full impact that COVID-19 will have due to numerous uncertainties, including the duration of the outbreak, the result of vaccination efforts, resurgence of the virus, actions that may be taken by governmental authorities, the impact on our business including our sales cycle, sales execution and marketing efforts, and the impact to the business of our customers, vendors and partners. Furthermore, due to our subscription model, any effect of the COVID-19 pandemic may not be fully reflected in our results of operations until future periods. For further discussion of the challenges and risks we confront related to the COVID-19 pandemic, please refer to Part I, Item 1A Risk Factors of this Annual Report on Form 10-K.
Our Business Model
We have offerings in six key areas: (1) Incident Detection and Response, (2) Cloud Security, (3) Vulnerability Risk Management, (4) Application Security, (5) Threat Intelligence and (6) Security Orchestration and Automation Response.
We offer our products through a variety of delivery models to meet the needs of our diverse customer base, including:
•Cloud-based subscriptions, which provide our software capabilities to our customers through cloud access and on a subscription basis. Our InsightIDR, InsightCloudSec, InsightVM, InsightAppSec, InsightConnect and Threat Intelligence products are offered as cloud-based subscriptions, generally with a one-year term.
•Managed services, through which we operate our products and provide our capabilities on behalf of our customers. Our Managed Vulnerability Management, Managed Application Security and Managed Detection and Response products are offered on a managed service basis, generally pursuant to one-year agreements.
•Licensed software consists of term licenses and to a lesser extent perpetual licenses. When a term license is purchased, maintenance and support and content subscriptions, as applicable, is bundled with the license for the term period. Our Nexpose, Metasploit, AppSpider and InsightCloudSec products are offered through term software licenses. When a perpetual license is purchased, a customer typically purchases maintenance and support and content subscriptions, as applicable. Our maintenance and support provides our customers with telephone and web-based support and ongoing bug fixes and repairs during the term of the maintenance and support agreement, and our customers who purchase our Nexpose and Metasploit products also purchase content subscriptions, which provide them with real-time access to the latest vulnerabilities and exploits. Our maintenance and support and content subscription agreements are typically for one-year terms.
We also offer various professional services across all of our offerings, including deployment and training services related to our software and cloud-based products, incident response services, penetration testing and security advisory services. Customers can purchase our professional services together with our product offerings or on a stand-alone basis pursuant to fixed fee or time-and-materials agreements.
In 2021, 2020 and 2019 recurring revenue, defined as revenue from term software licenses, content subscriptions, managed services, cloud-based subscriptions and maintenance and support, was 92%, 90% and 87%, respectively, of total revenue.
Key Metrics
We monitor the following key metrics to help us measure and evaluate the effectiveness of our operations and as a means to evaluate period-to-period comparisons. We believe that both management and investors benefit from referring to these key metrics as supplemental information in assessing our performance and when planning, forecasting, and analyzing future periods. These key metrics also facilitate management's internal comparisons to our historical performance as well as comparisons to certain competitors' operating results. We believe these key metrics are useful to investors both because they allow for greater transparency with respect to key metrics used by management in its financial and operational decision-making and also because they are used by institutional investors and the analyst community to help evaluate the health of our business:
| Year Ended December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | 2019 | ||||||||
| (dollars in thousands) | ||||||||||
| Total revenue | $ | 535,404 | $ | 411,486 | $ | 326,947 | ||||
| Year-over-year growth | 30.1 | % | 25.9 | % | 33.9 | % | ||||
| Non-GAAP income from operations | $ | 7,599 | $ | 2,032 | $ | 2,404 | ||||
| Free cash flow | $ | 35,053 | $ | (15,045) | $ | (36,935) |
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| As of December 31, | ||||||
|---|---|---|---|---|---|---|
| 2021 | 2020 | |||||
| (dollars in thousands) | ||||||
| Annualized recurring revenue (ARR) | 599,020 | 432,946 | ||||
| Year-over-year growth | 38.4 | % | 27.8 | % | ||
| Number of customers(1) | 10,283 | 8,718 | ||||
| Year-over-year growth | 18.0 | % | 9.3 | % | ||
| (1) In 2021, we modified our definition of a customer in order to better align the calculation of our number of customers with ARR. We previously defined a customer as any entity that has (1) an active Rapid7 contract or a contract that expired within 90 days or less of the applicable measurement date; and for Logentries products, those customers with a contract value equal to or greater than $2,400 per year, or (2) purchased Rapid7 professional services within the 12 months preceding the applicable measurement date. We have eliminated the 90-day expiration period and removed professional services-only customers and low-value InsightOps customers. See the revised definition below. Prior period number of customers have been revised to conform with the modified definition. |
Total Revenue and Growth. We are focused on driving continued revenue growth through increased sales of our products and professional services to new and existing customers. We monitor total revenue and believe it is useful to investors as a measure of the overall success of our business.
Non-GAAP Income from Operations. We monitor non-GAAP income from operations, a non-GAAP financial measure, to analyze our financial results. We believe non-GAAP income from operations is useful to investors, as a supplement to U.S. GAAP measures, in evaluating our ongoing operational performance and enhancing an overall understanding of our past financial performance and allowing for greater transparency with respect to metrics used by our management in its financial and operational decision-making. See Non-GAAP Financial Results below for further information on non-GAAP income from operations and a reconciliation of non-GAAP income from operations to the comparable GAAP financial measure.
Free Cash Flow. Free cash flow is a non-GAAP measure that we define as net cash provided by operating activities less purchases of property and equipment and capitalization of internal-use software costs. We consider free cash flow to be a liquidity measure that provides useful information to management and investors about the amount of cash generated by the business after necessary capital expenditures. See Non-GAAP Financial Results below for a reconciliation of non-GAAP free cash flow to the comparable GAAP financial measure.
Annualized Recurring Revenue and Growth. Annualized Recurring Revenue (ARR) is defined as the annual value of all recurring revenue related to contracts in place at the end of the quarter. ARR should be viewed independently of revenue and deferred revenue as ARR is an operating metric and is not intended to be combined with or replace these items. ARR is not a forecast of future revenue, which can be impacted by contract start and end dates and renewal rates and does not include revenue reported as perpetual license or professional services revenue in our consolidated statement of operations. We use ARR and believe it is useful to investors as a measure of the overall success of our business.
Number of Customers. We believe that the size of our customer base is an indicator of our global market penetration and that our net customer additions are an indicator of the growth of our business. We define a customer as any entity that has an active Rapid7 recurring revenue contract as of the specified measurement date, excluding InsightOps and Logentries only customers with a contract value less than $2,400 per year.
Non-GAAP Financial Results
To supplement our consolidated financial statements, which are prepared and presented in accordance with GAAP, we provide investors with certain non-GAAP financial measures, including non-GAAP gross profit, non-GAAP income from operations, non-GAAP net income (loss), non-GAAP net income (loss) per share, adjusted EBITDA and free cash flow. The presentation of the non-GAAP financial measures is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. We use these non-GAAP financial measures for financial and operational decision-making purposes and as a means to evaluate period-to-period comparisons, and use certain non-GAAP financial measures as performance measures under our executive bonus plan. We believe that these non-GAAP financial measures provide useful information about our operating results, enhance the overall understanding of past financial performance and future prospects and allow for greater transparency with respect to metrics used by our management in its financial and operational decision-making. While our non-GAAP financial measures are an important tool for financial and operational decision-making and for evaluating our own operating results over different periods of time, you should review the reconciliation of our non-GAAP financial measures to the comparable GAAP financial measures included below, and not rely on any single financial measure to evaluate our business.
We define non-GAAP gross profit, non-GAAP income from operations, non-GAAP net income (loss) and non-GAAP net income (loss) per share as the respective GAAP balances excluding the effect of stock-based compensation expense, amortization of acquired intangible assets, amortization of debt discount and issuance costs and certain other items such as
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acquisition-related expenses, litigation-related expenses and induced conversion expense. Non-GAAP net income (loss) per basic and diluted share is calculated as non-GAAP net income (loss) divided by the weighted average shares used to compute net income (loss) per share, with the number of weighted average shares decreased, when applicable, to reflect the anti-dilutive impact of the capped call transactions entered into in connection with our convertible senior notes.
We believe these non-GAAP financial measures are useful to investors in assessing our operating performance due to the following factors:
•Stock-based compensation expense. We exclude stock-based compensation expense because of varying available valuation methodologies, subjective assumptions and the variety of equity instruments that can impact our non-cash expense. We believe that providing non-GAAP financial measures that exclude stock-based compensation expense allows for more meaningful comparisons between our operating results from period to period.
•Amortization of acquired intangible assets. We believe that excluding the impact of amortization of acquired intangible assets allows for more meaningful comparisons between operating results from period to period as the intangible assets are valued at the time of acquisition and are amortized over several years after the acquisition.
•Amortization of debt discount and issuance costs. The expense for the amortization of debt discount and debt issuance costs related to our convertible senior notes and revolving credit facility is a non-cash item and we believe the exclusion of this interest expense provides a more useful comparison of our operational performance in different periods.
•Induced conversion expense. In conjunction with the first quarter of 2021 partial repurchase of our 1.25% convertible senior notes due 2023, we incurred an induced conversion expense of $2.7 million. We exclude induced conversion expense because this amount is not indicative of the performance of, or trends in, our business and is neither comparable to the prior period nor predictive of future results.
•Litigation-related expenses. We exclude certain litigation-related expenses consisting of professional fees and related costs incurred by us related to significant litigation outside the ordinary course of business. We believe it is useful to exclude such expenses because we do not consider such amounts to be part of our ongoing operations.
•Acquisition-related expenses. We exclude acquisition-related expenses that are unrelated to the current operations and neither are comparable to the prior period nor predictive of future results. Our acquisition-related expenses for the year ended December 31, 2021 include $9.0 million of tax expense related to the sale of acquired intellectual property through an intercompany transaction related to the Alcide acquisition.
•Anti-dilutive impact of capped call transaction. Our capped calls transactions are intended to offset potential dilution from the conversion features in our convertible senior notes. Although we cannot reflect the anti-dilutive impact of the capped call transactions under GAAP, we do reflect the anti-dilutive impact of the capped call transactions in non-GAAP net income (loss) per diluted share, when applicable, to provide investors with useful information in evaluating our financial performance on a per share basis.
We define adjusted EBITDA as net loss before (1) interest income, (2) interest expense, (3) other income (expense), net, (4) provision for income taxes, (5) depreciation expense, (6) amortization of intangible assets, (7) stock-based compensation expense, and (8) certain other items. We believe that the use of adjusted EBITDA is useful to investors and other users of our financial statements in evaluating our operating performance because it provides them with an additional tool to compare business performance across companies and across periods.
Our non-GAAP financial measures may not provide information that is directly comparable to that provided by other companies in our industry, as other companies in our industry may calculate non-GAAP financial results differently, particularly related to non-recurring, unusual items. In addition, there are limitations in using non-GAAP financial measures because the non-GAAP financial measures are not prepared in accordance with GAAP, may be different from non-GAAP financial measures used by other companies and exclude expenses that may have a material impact upon our reported financial results. Further, stock-based compensation expense has been and will continue to be for the foreseeable future a significant recurring expense in our business and an important part of the compensation provided to our employees.
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The following tables reconcile GAAP gross profit to non-GAAP gross profit for the years ended December 31, 2021, 2020 and 2019:
| Year Ended December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | 2019 | ||||||||
| (in thousands) | ||||||||||
| GAAP total gross profit | $ | 366,456 | $ | 289,969 | $ | 235,801 | ||||
| Stock-based compensation expense | 6,491 | 4,298 | 2,580 | |||||||
| Amortization of acquired intangible assets | 15,373 | 8,700 | 6,339 | |||||||
| Non-GAAP total gross profit | $ | 388,320 | $ | 302,967 | $ | 244,720 |
| Year Ended December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | 2019 | ||||||||
| (in thousands) | ||||||||||
| GAAP gross profit – products | $ | 360,070 | $ | 286,058 | $ | 229,718 | ||||
| Stock-based compensation expense | 4,357 | 2,740 | 1,405 | |||||||
| Amortization of acquired intangible assets | 15,373 | 8,700 | 6,339 | |||||||
| Non-GAAP gross profit – products | $ | 379,800 | $ | 297,498 | $ | 237,462 |
| Year Ended December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | 2019 | ||||||||
| (in thousands) | ||||||||||
| GAAP gross profit – professional services | $ | 6,386 | $ | 3,911 | $ | 6,083 | ||||
| Stock-based compensation expense | 2,134 | 1,558 | 1,175 | |||||||
| Non-GAAP gross profit – professional services | $ | 8,520 | $ | 5,469 | $ | 7,258 |
The following table reconciles GAAP loss from operations to non-GAAP income from operations for the years ended December 31, 2021, 2020 and 2019:
| Year Ended December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | 2019 | ||||||||
| (in thousands) | ||||||||||
| GAAP loss from operations | $ | (120,065) | $ | (74,099) | $ | (45,995) | ||||
| Stock-based compensation expense | 102,579 | 63,888 | 40,664 | |||||||
| Amortization of acquired intangible assets | 17,305 | 9,138 | 6,479 | |||||||
| Acquisition-related expenses | 7,211 | 1,343 | 514 | |||||||
| Litigation-related expenses | 569 | 1,762 | 742 | |||||||
| Non-GAAP income from operations | $ | 7,599 | $ | 2,032 | $ | 2,404 |
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The following table reconciles GAAP net loss to non-GAAP net (loss) income for the years ended December 31, 2021, 2020 and 2019:
| Year Ended December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | 2019 | ||||||||
| (in thousands, except share and per share data) | ||||||||||
| GAAP net loss | $ | (146,334) | $ | (98,849) | $ | (53,845) | ||||
| Stock-based compensation expense | 102,579 | 63,888 | 40,664 | |||||||
| Amortization of acquired intangible assets | 17,305 | 9,138 | 6,479 | |||||||
| Acquisition-related expenses | 16,176 | 1343 | 514 | |||||||
| Litigation-related expenses | 569 | 1,762 | 742 | |||||||
| Induced conversion expense | 2,740 | — | (761) | |||||||
| Amortization of debt discount and issuance costs | 3,982 | 17,518 | 10,513 | |||||||
| Non-GAAP net (loss) income | $ | (2,983) | $ | (5,200) | $ | 4,306 | ||||
| Reconciliation of net (loss) income per share, basic: | ||||||||||
| GAAP net loss per share, basic | $ | (2.65) | $ | (1.94) | $ | (1.10) | ||||
| Non-GAAP adjustments to net loss | $ | 2.60 | $ | 1.84 | $ | 1.19 | ||||
| Non-GAAP net (loss) income per share, basic | $ | (0.05) | $ | (0.10) | $ | 0.09 | ||||
| Reconciliation of net (loss) income per share, diluted: | ||||||||||
| GAAP net loss per share, diluted | $ | (2.65) | $ | (1.94) | $ | (1.10) | ||||
| Non-GAAP adjustments to net loss | $ | 2.60 | $ | 1.84 | $ | 1.19 | ||||
| Non-GAAP net (loss) income per share, diluted | $ | (0.05) | $ | (0.10) | $ | 0.09 | ||||
| Weighted-average common shares used in GAAP per share calculation, basic | 55,270,998 | 51,036,824 | 48,731,791 | |||||||
| Weighted average shares used in non-GAAP per share calculation: | ||||||||||
| Basic | 55,270,998 | 51,036,824 | 48,731,791 | |||||||
| Diluted | 55,270,998 | 51,036,824 | 52,058,103 |
The following table reconciles GAAP net loss to adjusted EBITDA for the years ended December 31, 2021, 2020 and 2019:
| Year Ended December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | 2019 | ||||||||
| (in thousands) | ||||||||||
| Net loss | $ | (146,334) | $ | (98,849) | $ | (53,845) | ||||
| Interest income | (365) | (1,454) | (6,014) | |||||||
| Interest expense | 14,292 | 24,137 | 13,389 | |||||||
| Other (income) expense, net | 1,921 | 81 | 433 | |||||||
| Provision for income taxes | 10,421 | 1,986 | 42 | |||||||
| Depreciation expense | 12,342 | 11,036 | 8,963 | |||||||
| Amortization of intangible assets | 21,159 | 11,595 | 7,565 | |||||||
| Stock-based compensation expense | 102,579 | 63,888 | 40,664 | |||||||
| Acquisition-related expenses | 7,211 | 1,343 | 514 | |||||||
| Litigation-related expenses | 569 | 1,762 | 742 | |||||||
| Adjusted EBITDA | $ | 23,795 | $ | 15,525 | $ | 12,453 |
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The following table reconciles net cash provided by (used in) operating activities to free cash flow for the years ended December 31, 2021, 2020 and 2019:
| Year Ended December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | 2019 | ||||||||
| (in thousands) | ||||||||||
| Net cash provided by (used in) operating activities | $ | 53,917 | $ | 4,887 | $ | (1,420) | ||||
| Purchases of property and equipment | (9,010) | (13,802) | (29,428) | |||||||
| Capitalized internal-use software costs | (9,854) | (6,130) | (6,087) | |||||||
| Free cash flow | $ | 35,053 | $ | (15,045) | $ | (36,935) |
Components of Results of Operations
Revenue
We generate revenue primarily from selling products and professional services through a variety of delivery models to meet the needs of our diverse customer base.
Products
We generate products revenue from the sale of (1) cloud-based subscriptions, (2) managed services offerings, which utilize our products and (3) software licenses with related maintenance and support and content subscription, as applicable. Software license revenue consist of revenues from term licenses, and to a lesser extent perpetual licenses. When a term license is purchased, maintenance and support and content subscription, as applicable, is bundled with the license for the term period. When a perpetual license is purchased, a customer typically purchases maintenance and support and content subscription, as applicable.
Professional Services
We generate professional service revenue from the sale of deployment and training services related to our products, incident response services and security advisory services.
Cost of Revenue
Our total cost of revenue consists of the costs of products and professional services, as noted below. In addition, cost of revenue includes overhead costs for depreciation, facilities, IT, information security, and recruiting. Our IT overhead costs include IT personnel compensation costs and costs associated with our IT infrastructure. All overhead costs are allocated based on relative headcount.
Cost of Products
Cost of products consists of personnel and related costs for our content, support, managed service and cloud operations teams, including salaries and other payroll related costs, bonuses, stock-based compensation and allocated overhead costs. Also included in cost of products are software license fees, cloud computing costs and internet connectivity expenses directly related to delivering our products, amortization of contract fulfillment costs, as well as amortization of certain intangible assets including internally developed software.
Cost of Professional Services
Cost of professional services consists of personnel and related costs for our professional services team, including salaries and other payroll related costs, bonuses, stock-based compensation, costs of contracted third-party vendors, travel and entertainment expenses and allocated overhead costs.
We expect our cost of revenue to increase on an absolute dollar basis as we continue to grow our revenue.
Gross Margin
Gross margin, or gross profit as a percentage of revenue, has been and will continue to be affected by a variety of factors, including the average sales price of our products and services, transaction volume growth, the mix of revenue between software licenses, cloud-based subscriptions, managed services and professional services and changes in cloud computing costs.
We expect our gross margins to fluctuate over time depending on the factors described above.
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Operating Expenses
Operating expenses consist of research and development, sales and marketing, and general and administrative expenses. Operating expenses include overhead costs for depreciation, facilities, IT, information security and recruiting. Our IT overhead costs include IT personnel compensation costs and costs associated with our IT infrastructure. All overhead costs are allocated based on relative headcount.
Research and Development Expense
Research and development expense consists of personnel costs for our research and development team, including salaries and other payroll related costs, bonuses and stock-based compensation. Additional expenses include third-party infrastructure costs, travel and entertainment, consulting and professional fees for third-party development resources as well as allocated overhead costs.
We expect research and development expense to increase on an absolute dollar basis in the near term as we continue to increase investments in our products and technology platform innovation and to increase slightly as a percentage of total revenue.
Sales and Marketing Expense
Sales and marketing expense consists of personnel costs for our sales and marketing team, including salaries and other payroll related costs, commissions, including amortization of deferred commissions, bonuses and stock-based compensation. Additional expenses include marketing activities and promotional events, travel and entertainment, training costs, amortization of certain intangible assets and allocated overhead costs.
We expect sales and marketing expense to increase on an absolute dollar basis in the near term as we continue to increase investments to drive our revenue growth, but to decrease as a percentage of total revenue.
General and Administrative Expense
General and administrative expense consists of personnel costs for our executive, legal, human resources, and finance and accounting departments, including salaries and other payroll related costs, bonuses and stock-based compensation. Additional expenses include travel and entertainment, professional fees, litigation-related expenses, insurance, acquisition-related expenses, amortization of certain intangible assets and allocated overhead costs.
We expect general and administrative expense to increase on an absolute dollar basis in the near term as we continue to increase investments to support our growth, but to remain relatively consistent as a percentage of total revenue.
Interest Income
Interest income consists primarily of interest income on our cash and cash equivalents and our short and long-term investments.
Interest Expense
Interest expense consists primarily of contractual interest expense, amortization of debt discount and issuance costs related to our convertible senior notes and revolving credit facility and induced conversion expense. We expect interest expense in the near term to represent contractual interest expense and amortization of debt issuance costs related to our convertible senior notes and revolving credit facility.
Other Income (Expense), Net
Other income (expense), net consists primarily of unrealized and realized gains and losses related to changes in foreign currency exchange rates.
Provision for Income Taxes
Provision for income taxes consists of income taxes in foreign jurisdictions where we conduct business, withholding taxes, and state income taxes in the United States. We maintain a full valuation allowance for domestic and certain foreign deferred tax assets, including net operating loss carryforwards and tax credits. Based on our history of losses, we expect to maintain this full valuation allowance for the foreseeable future as it is more likely than not that some or all of those deferred tax assets may not be realized.
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Results of Operations
| Year Ended December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | 2019 | ||||||||
| (in thousands) | ||||||||||
| Consolidated Statement of Operations Data: | ||||||||||
| Revenue: | ||||||||||
| Products | $ | 500,843 | $ | 382,922 | $ | 297,897 | ||||
| Professional services | 34,561 | 28,564 | 29,050 | |||||||
| Total revenue | 535,404 | 411,486 | 326,947 | |||||||
| Cost of revenue:(1) | ||||||||||
| Products | 140,773 | 96,864 | 68,179 | |||||||
| Professional services | 28,175 | 24,653 | 22,967 | |||||||
| Total cost of revenue | 168,948 | 121,517 | 91,146 | |||||||
| Operating expenses:(1) | ||||||||||
| Research and development | 160,779 | 108,568 | 79,364 | |||||||
| Sales and marketing | 247,453 | 195,981 | 157,722 | |||||||
| General and administrative | 78,289 | 59,519 | 44,710 | |||||||
| Total operating expenses | 486,521 | 364,068 | 281,796 | |||||||
| Loss from operations | (120,065) | (74,099) | (45,995) | |||||||
| Interest income | 365 | 1,454 | 6,014 | |||||||
| Interest expense | (14,292) | (24,137) | (13,389) | |||||||
| Other income (expense), net | (1,921) | (81) | (433) | |||||||
| Loss before income taxes | (135,913) | (96,863) | (53,803) | |||||||
| Provision for income taxes | 10,421 | 1,986 | 42 | |||||||
| Net loss | (146,334) | (98,849) | (53,845) |
(1)Cost of revenue and operating expenses include stock-based compensation expense and depreciation and amortization expense as follows:
| Year Ended December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | 2019 | ||||||||
| (in thousands) | ||||||||||
| Stock-based compensation expense: | ||||||||||
| Cost of revenue | $ | 6,491 | $ | 4,298 | $ | 2,580 | ||||
| Research and development | 46,622 | 24,423 | 15,670 | |||||||
| Sales and marketing | 23,828 | 16,826 | 11,883 | |||||||
| General and administrative | 25,638 | 18,341 | 10,531 | |||||||
| Total stock-based compensation expense | $ | 102,579 | $ | 63,888 | $ | 40,664 |
| Year Ended December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | 2019 | ||||||||
| (in thousands) | ||||||||||
| Depreciation and amortization expense: | ||||||||||
| Cost of revenue | $ | 21,484 | $ | 13,218 | $ | 9,110 | ||||
| Research and development | 3,566 | 2,844 | 2,083 | |||||||
| Sales and marketing | 6,277 | 4,779 | 3,971 | |||||||
| General and administrative | 2,174 | 1,790 | 1,364 | |||||||
| Total depreciation and amortization expense | $ | 33,501 | $ | 22,631 | $ | 16,528 |
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The following table sets forth our consolidated statements of operations data expressed as a percentage of revenue:
| Year Ended December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | 2019 | ||||||
| Consolidated Statement of Operations Data: | ||||||||
| Revenue: | ||||||||
| Products | 93.5 | % | 93.1 | % | 91.1 | % | ||
| Professional services | 6.5 | 6.9 | 8.9 | |||||
| Total revenue | 100.0 | 100.0 | 100.0 | |||||
| Cost of revenue: | ||||||||
| Products | 26.3 | 23.5 | 20.9 | |||||
| Professional services | 5.3 | 6.0 | 7.0 | |||||
| Total cost of revenue | 31.6 | 29.5 | 27.9 | |||||
| Operating expenses: | ||||||||
| Research and development | 30.0 | 26.4 | 24.3 | |||||
| Sales and marketing | 46.2 | 47.6 | 48.2 | |||||
| General and administrative | 14.6 | 14.5 | 13.7 | |||||
| Total operating expenses | 90.8 | 88.5 | 86.2 | |||||
| Loss from operations | (22.4) | (18.0) | (14.1) | |||||
| Interest income | 0.1 | 0.4 | 1.8 | |||||
| Interest expense | (2.7) | (5.9) | (4.1) | |||||
| Other income (expense), net | (0.4) | — | (0.1) | |||||
| Loss before income taxes | (25.4) | (23.5) | (16.5) | |||||
| Provision for income taxes | 1.9 | 0.5 | — | |||||
| Net loss | (27.3) | % | (24.0) | % | (16.5) | % |
Year Ended December 31, 2021 Compared to the Year Ended December 31, 2020
Revenue
| Year Ended December 31, | Change | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | $ | % | |||||||||||
| (dollars in thousands) | ||||||||||||||
| Products | $ | 500,843 | $ | 382,922 | $ | 117,921 | 30.8 | % | ||||||
| Professional services | 34,561 | 28,564 | 5,997 | 21.0 | ||||||||||
| Total revenue | $ | 535,404 | $ | 411,486 | $ | 123,918 | 30.1 | % |
Total revenue increased by $123.9 million in 2021 compared to 2020 and consisted of $114.8 million of organic growth and $9.1 million related to the acquisition of IntSights in July 2021. The $114.8 million increase in revenue related to organic growth consisted of a $3.4 million increase in revenue from new customers and a $111.4 million increase in revenue from existing customers. The $111.4 million increase in revenue from existing customers was due to an increase in revenue from renewals, upsells and cross-sells as a result of our growing base of existing customers. Revenue from new customers represents the revenue recognized from the customer's initial purchase. All renewals, upsells and cross-sells are considered revenue from existing customers.
The increase in total revenue in 2021 was comprised of $90.5 million generated from sales in North America and $33.4 million generated from sales from the rest of the world.
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Cost of Revenue
| Year Ended December 31, | Change | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | $ | % | |||||||||||
| (dollars in thousands) | ||||||||||||||
| Products | $ | 140,773 | $ | 96,864 | $ | 43,909 | 45.3 | % | ||||||
| Professional services | 28,175 | 24,653 | 3,522 | 14.3 | ||||||||||
| Total cost of revenue | $ | 168,948 | $ | 121,517 | $ | 47,431 | 39.0 | % | ||||||
| Gross margin %: | ||||||||||||||
| Products | 71.9 | % | 74.7 | % | ||||||||||
| Professional services | 18.5 | 13.7 | ||||||||||||
| Total gross margin % | 68.4 | % | 70.5 | % |
Total cost of revenue increased by $47.4 million in 2021 compared to 2020, primarily due to a $19.7 million increase in cloud computing costs related to growing cloud-based subscription and managed services revenue and a $16.8 million increase in personnel costs, inclusive of a $2.2 million increase in stock-based compensation expense, resulting from an increase in headcount to support our growing customer base, as well as $1.7 million of additional costs attributable to the employees acquired in the IntSights acquisition in July 2021 and the DivvyCloud acquisition in May 2020. Our increase in total cost of revenue also included a $6.7 million increase in amortization expense for acquired intangible assets, a $1.9 million increase in third-party professional service consulting costs, a $1.4 million increase in amortization expense for capitalized internally-developed software and a $0.9 million increase in other expenses.
Total gross margin percentage decreased in 2021 compared to 2020. The decrease in products gross margin was primarily due to an increase in revenue from cloud-based subscriptions and managed services, which have lower margins than our licensed software products as well as an increase in amortization expense for the developed technology acquired intangible asset related to the acquisition of IntSights. The increase in professional services gross margin was primarily due to the increase in professional services revenue.
Operating Expenses
Research and Development Expense
| Year Ended December 31, | Change | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | $ | % | |||||||||||
| (dollars in thousands) | ||||||||||||||
| Research and development | $ | 160,779 | $ | 108,568 | $ | 52,211 | 48.1 | % | ||||||
| % of revenue | 30.0 | % | 26.4 | % |
Research and development expense increased by $52.2 million in 2021 compared to 2020, primarily due to a $44.5 million increase in personnel costs, a $4.4 million increase in allocated overhead driven largely by an increase in IT and facilities costs, a $2.5 million increase in third-party infrastructure costs and a $0.8 million increase in other expenses. The $44.5 million increase in personnel costs was primarily due to a $22.3 million increase in salaries and related costs driven by growth in headcount, inclusive of $13.7 million in additional salaries and related costs attributable to the employees acquired in the acquisitions of IntSights in July 2021, Alcide in January 2021 and DivvyCloud in May 2020, and a $22.2 million increase in stock-based compensation expense. The $22.2 million increase in stock-based compensation expense includes $16.4 million of stock-based compensation for employees acquired in the acquisitions of IntSights, DivvyCloud and Alcide, inclusive of $6.9 million of stock-based compensation expense related to accelerated vesting of a stock award which was deemed a modification of the original award.
Sales and Marketing Expense
| Year Ended December 31, | Change | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | $ | % | |||||||||||
| (dollars in thousands) | ||||||||||||||
| Sales and marketing | $ | 247,453 | $ | 195,981 | $ | 51,472 | 26.3 | % | ||||||
| % of revenue | 46.2 | % | 47.6 | % |
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Sales and marketing expense increased by $51.5 million in 2021 compared to 2020, primarily due to a $32.9 million increase in personnel costs, an $8.4 million increase in commission expense, a $6.1 million increase in marketing and advertising costs, a $1.2 million increase in amortization of acquired intangible asset and a $2.9 million increase in other expenses. The $32.9 million increase in personnel costs was primarily due to a $25.9 million increase in salaries and related costs driven by growth in headcount, inclusive of $7.0 million of additional costs attributable to the employees acquired in the acquisitions of IntSights in July 2021 and DivvyCloud in May 2020, and a $7.0 million increase in stock-based compensation expense.
General and Administrative Expense
| Year Ended December 31, | Change | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | $ | % | |||||||||||
| (dollars in thousands) | ||||||||||||||
| General and administrative | $ | 78,289 | $ | 59,519 | $ | 18,770 | 31.5 | % | ||||||
| % of revenue | 14.6 | % | 14.5 | % |
General and administrative expense increased by $18.8 million in 2021 compared to 2020, primarily due to a $11.8 million increase in personnel costs due to an increase in headcount, inclusive of a $7.3 million increase in stock-based compensation expense, a $6.8 million increase in professional fees primarily due to acquisition-related expenses and other professional consulting fees and a $3.0 million increase in other expenses. These increases were partially offset by a $2.8 million decrease in bad debt expense.
Interest Income
| Year Ended December 31, | Change | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | $ | % | |||||||||||
| (dollars in thousands) | ||||||||||||||
| Interest income | $ | 365 | $ | 1,454 | $ | (1,089) | (74.9) | % | ||||||
| % of revenue | 0.1 | % | 0.4 | % |
Interest income decreased by $1.1 million in 2021 compared to 2020 primarily due to a decrease in interest rates.
Interest Expense
| Year Ended December 31, | Change | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | $ | % | |||||||||||
| (dollars in thousands) | ||||||||||||||
| Interest expense | $ | (14,292) | $ | (24,137) | $ | 9,845 | (40.8) | % | ||||||
| % of revenue | (2.7) | % | (5.9) | % |
Interest expense decreased by $9.8 million in 2021 compared to 2020 primarily due to primarily due to a $15.8 million decrease in amortization of debt discount costs as a result of our adoption of ASU 2020-06, partially offset by $2.7 million of induced conversion expense incurred in conjunction with the partial repurchase of the 2023 Notes in March 2021, a $1.0 million increase in contractual interest and a $2.3 million increase in amortization of debt issuance costs related to the 2025 Notes issued in May 2020, the 2027 Notes issued in March 2021 and the revolving credit facility issued in April 2020 and amended in December 2021.
Other Income (Expense), Net
| Year Ended December 31, | Change | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | $ | % | ||||||||||
| (dollars in thousands) | |||||||||||||
| Other income (expense), net | $ | (1,921) | $ | (81) | $ | (1,840) | NM | ||||||
| % of revenue | (0.4) | % | 0.0 | % |
Other income (expense), net reflected a $1.8 million decrease in expense in 2021 compared to 2020 due to realized and unrealized foreign currency losses, primarily related to the euro and British pound sterling.
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Provision for Income Taxes
| Year Ended December 31, | Change | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | $ | % | ||||||||||
| (dollars in thousands) | |||||||||||||
| Provision for income taxes | $ | 10,421 | $ | 1,986 | $ | 8,435 | NM | ||||||
| % of revenue | 1.9 | % | 0.5 | % |
Provision for income taxes increased by $8.4 million in 2021 compared to 2020 primarily due to $9.0 million of tax expense recorded for an intercompany sale of intellectual property as part of post-acquisition tax planning related to the Alcide acquisition.
Year Ended December 31, 2020 Compared to the Year Ended December 31, 2019
Revenue
| Year Ended December 31, | Change | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2020 | 2019 | $ | % | |||||||||||
| (dollars in thousands) | ||||||||||||||
| Products(1) | $ | 382,922 | $ | 297,897 | $ | 85,025 | 28.5 | % | ||||||
| Professional services | 28,564 | 29,050 | (486) | (1.7) | ||||||||||
| Total revenue | $ | 411,486 | $ | 326,947 | $ | 84,539 | 25.9 | % |
Total revenue increased by $84.5 million in 2020 compared to 2019 which included $6.3 million of revenue attributable to the DivvyCloud acquisition in May 2020. The remainder of the increase in revenue was primarily from existing customers as a result of the continued growth of our customer base. Revenue from renewals, upsells and cross-sells are considered revenue from existing customers.
The increase in total revenue in 2020 was comprised of $68.1 million generated from sales in North America and $16.4 million generated from sales from the rest of the world.
Cost of Revenue
| Year Ended December 31, | Change | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2020 | 2019 | $ | % | |||||||||||
| (dollars in thousands) | ||||||||||||||
| Products | $ | 96,864 | $ | 68,179 | $ | 28,685 | 42.1 | % | ||||||
| Professional services | 24,653 | 22,967 | 1,686 | 7.3 | ||||||||||
| Total cost of revenue | $ | 121,517 | $ | 91,146 | $ | 30,371 | 33.3 | % | ||||||
| Gross margin %: | ||||||||||||||
| Products | 74.7 | % | 77.1 | % | ||||||||||
| Professional services | 13.7 | 20.9 | ||||||||||||
| Total gross margin % | 70.5 | % | 72.1 | % |
Total cost of revenue increased by $30.4 million in 2020 compared to 2019, primarily due to a $14.3 million increase in personnel costs, inclusive of a $1.7 million increase in stock-based compensation expense, resulting from an increase in headcount to support our growing customer base, and a $11.4 million increase in cloud computing costs related to growing cloud-based subscription revenue. The $14.3 million increase in personnel costs included $1.2 million of additional costs attributable to the employees acquired in the DivvyCloud acquisition in May 2020. Our increase in total cost of revenue also included a $2.6 million increase in allocated overhead driven largely by an increase in IT and facilities costs, a $2.4 million increase in amortization expense for acquired intangible assets and a $1.4 million increase in amortization expense for capitalized internally-developed software. These increases were partially offset by a $1.7 million decrease in other expenses.
Total gross margin percentage decreased in 2020 compared to 2019. The decrease in products gross margin was primarily due to an increase in revenue from cloud-based subscriptions and managed services, which have lower gross margins than our licensed software products. The decrease in professional services gross margin was primarily due to a reduction in professional services revenue as customers delayed scheduling the delivery of services in response to the COVID-19 pandemic.
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Operating Expenses
Research and Development Expense
| Year Ended December 31, | Change | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2020 | 2019 | $ | % | |||||||||||
| (dollars in thousands) | ||||||||||||||
| Research and development | $ | 108,568 | $ | 79,364 | $ | 29,204 | 36.8 | % | ||||||
| % of revenue | 26.4 | % | 24.3 | % |
Research and development expense increased by $29.2 million in 2020 compared to 2019, primarily due to a $22.9 million increase in personnel costs, a $5.1 million increase in allocated overhead driven by costs related to our global kick-off meeting and an increase in IT and facilities costs, and a $1.7 million increase in third-party infrastructure costs. These increases were partially offset by a $0.5 million decrease in other expenses. The $22.9 million increase in personnel costs was primarily due to a $14.1 million increase in salaries and related costs driven by growth in headcount, including $5.3 million in additional salaries and related costs attributable to the employees acquired in the acquisition of DivvyCloud in May 2020, and a $8.8 million increase in stock-based compensation expense, including $4.2 million of stock-based compensation expense related to RSUs issued to retained employees and common stock to be issued to the founders as part of the acquisition of DivvyCloud.
Sales and Marketing Expense
| Year Ended December 31, | Change | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2020 | 2019 | $ | % | |||||||||||
| (dollars in thousands) | ||||||||||||||
| Sales and marketing | $ | 195,981 | $ | 157,722 | $ | 38,259 | 24.3 | % | ||||||
| % of revenue | 47.6 | % | 48.2 | % |
Sales and marketing expense increased by $38.3 million in 2020 compared to 2019, primarily due to a $26.8 million increase in personnel costs, a $6.5 million increase in commission expense, a $5.0 million increase in allocated overhead driven by costs related to our global kick-off meeting as well as an increase in IT and facilities costs, a $4.0 million increase in marketing and advertising costs and a $0.9 million increase in other expenses. The $26.8 million increase in personnel costs was primarily due a $21.9 million increase in salaries and related costs driven by growth in headcount, including $6.1 million of additional costs attributable to the employees acquired in the DivvyCloud acquisition in May 2020, and a $4.9 million increase in stock-based compensation expense, including $1.5 million in stock-based compensation expense related to RSUs issued to DivvyCloud retained employees. These increases were partially offset by a $4.9 million decrease in travel and entertainment expenses as a result of reduced travel due to the COVID-19 pandemic.
General and Administrative Expense
| Year Ended December 31, | Change | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2020 | 2019 | $ | % | |||||||||||
| (dollars in thousands) | ||||||||||||||
| General and administrative | $ | 59,519 | $ | 44,710 | $ | 14,809 | 33.1 | % | ||||||
| % of revenue | 14.5 | % | 13.7 | % |
General and administrative expense increased by $14.8 million in 2020 compared to 2019, primarily due to a $10.7 million increase in personnel costs due to an increase in headcount, inclusive of a $7.8 million increase in stock-based compensation expense, a $2.1 million increase in professional fees primarily due to litigation and acquisition-related expenses and other professional consulting fees, a $0.6 million increase in allocated overhead driven by costs related to our global kick-off meeting as well as an increase in IT costs, a $0.6 million increase in other office expenses and a $0.8 million increase in other expenses.
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Interest Income
| Year Ended December 31, | Change | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2020 | 2019 | $ | % | |||||||||||
| (dollars in thousands) | ||||||||||||||
| Interest income | $ | 1,454 | $ | 6,014 | $ | (4,560) | (75.8) | % | ||||||
| % of revenue | 0.4 | % | 1.8 | % |
Interest income decreased by $4.6 million in 2020 compared to 2019 primarily due to a decrease in interest rates.
Interest Expense
| Year Ended December 31, | Change | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2020 | 2019 | $ | % | |||||||||||
| (dollars in thousands) | ||||||||||||||
| Interest expense | $ | (24,137) | $ | (13,389) | $ | (10,748) | 80.3 | % | ||||||
| % of revenue | (5.9) | % | (4.1) | % |
Interest expense increased by $10.7 million in 2020 compared to 2019 primarily due to contractual interest and amortization of debt discount and issuance costs related to the 2025 Notes issued in May 2020.
Other Income (Expense), Net
| Year Ended December 31, | Change | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2020 | 2019 | $ | % | |||||||||||
| (dollars in thousands) | ||||||||||||||
| Other income (expense), net | $ | (81) | $ | (433) | $ | 352 | (81.3) | % | ||||||
| % of revenue | — | % | (0.1) | % |
Other income (expense), net reflected a $0.4 million decrease in expense in 2020 compared to 2019 due to realized and unrealized foreign currency gains and losses, primarily related to the euro and British pound sterling.
Provision for Income Taxes
| Year Ended December 31, | Change | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2020 | 2019 | $ | % | ||||||||||
| (dollars in thousands) | |||||||||||||
| Provision for income taxes | $ | 1,986 | $ | 42 | $ | 1,944 | NM | ||||||
| % of revenue | 0.5 | % | — | % |
Provision for income taxes increased by $1.9 million in 2020 compared to 2019 primarily due to a $1.1 million increase in foreign income and withholding taxes and a $0.8 million deferred tax benefit in 2019. The $0.8 million deferred tax benefit resulted from a partial release of our valuation allowance to account for the creation of a deferred tax liability for the developed technology intangible asset acquired in the acquisition of NetFort, which is not deductible for tax purposes.
Liquidity and Capital Resources
As of December 31, 2021, we had $164.6 million in cash and cash equivalents and $92.9 million of short- and long-term investments that have maturities ranging from 2 to 23 months. Since our inception, we have generated significant losses and expect to continue to generate losses for the foreseeable future and as of December 31, 2021 have an accumulated deficit of $736.0 million. Our principal sources of liquidity are cash and cash equivalents, short and long-term investments and our Credit and Security Agreement (Credit Agreement). To date, we have financed our operations primarily through private and public equity financings and issuance of convertible senior notes and through cash generated by operating activities.
We believe that our existing cash and cash equivalents, our short and long-term investments, our available borrowings under our Credit Agreement and cash generated by operating activities will be sufficient to meet our operating and capital requirements for at least the next 12 months as well as our longer-term expected future cash requirements and obligations. Our foreseeable cash needs, in addition to our recurring operating expenses, include our expected capital expenditures to support expansion of our infrastructure and workforce, office facilities lease obligations, purchase commitments, including our cloud infrastructure services (including with Amazon Web Services (AWS)), potential future acquisitions of technology businesses and any election we make to redeem our convertible senior notes.
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Our future capital requirements will depend on many factors, including our growth rate, the timing and extent of spending to support research and development efforts, the expansion of sales and marketing activities, particularly internationally, the introduction of new and enhanced products and service offerings, the cost of any future acquisitions of technology or businesses and any election we make to redeem our convertible senior notes. In the event that additional financing is required from outside sources, we may be unable to raise the funds on acceptable terms, if at all. If we are unable to raise additional capital on terms satisfactory to us when we require it, our business, operating results and financial condition could be adversely affected.
Cash Flows
The following table shows a summary of our cash flows for the years ended December 31, 2021, 2020 and 2019:
| Year Ended December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | 2019 | ||||||||
| (in thousands) | ||||||||||
| Cash, cash equivalents and restricted cash at beginning of period | $ | 173,617 | $ | 123,413 | $ | 99,565 | ||||
| Net cash provided by (used in) operating activities | 53,917 | 4,887 | (1,420) | |||||||
| Net cash (used in) provided by investing activities | (325,378) | (156,287) | 16,811 | |||||||
| Net cash provided by financing activities | 264,133 | 200,925 | 8,788 | |||||||
| Effects of exchange rates on cash, cash equivalents and restricted cash | (1,272) | 679 | (331) | |||||||
| Cash, cash equivalents and restricted cash at end of period | $ | 165,017 | $ | 173,617 | $ | 123,413 |
Acquisitions
On July 16, 2021, we acquired IntSights Cyber Intelligence Ltd. (IntSights), a provider of contextualized external threat intelligence and proactive threat remediation, for a purchase price with an aggregate fair value of $322.2 million. The purchase consideration consisted of $319.2 million in cash paid at closing, $5.6 million in deferred cash payments and a $2.6 million receivable for estimated purchase price adjustments.
On April 12, 2021, we acquired Velocidex Enterprises Pty Ltd (Velocidex), a leading open-source technology and community used for endpoint monitoring, digital forensics, and incident response, for a purchase price of $3.0 million.
On January 28, 2021, we acquired Alcide.IO Ltd. (Alcide), a leading provider of Kubernetes security, for a purchase price of $50.5 million.
Convertible Senior Notes
In March 2021, we issued $600.0 million aggregate principal amount of 0.25% convertible senior notes due 2027 (the 2027 Notes). The total net proceeds from the offering, after deducting initial purchase discounts and estimated debt issuance costs, were approximately $585.0 million. We used $182.6 million of the net proceeds from the 2027 Notes and issued 2.2 million shares of our common stock to repurchase $182.6 million aggregate principal amount of our outstanding 1.25% convertible senior notes due 2023 in a privately negotiated transaction concurrently with the issuance of the 2027 Notes. In connection with the issuance of the 2027 Notes, we entered into capped call transactions with certain counterparties (the 2027 Capped Calls). We used $76.0 million of the net proceeds from the 2027 Notes to purchase the 2027 Capped Calls.
On September 16, 2021, we issued a redemption notice for the remaining $45.4 million aggregate principal amount outstanding of the 2023 Notes. Pursuant to the redemption notice, on November 30, 2021 we paid $43.4 million in cash and issued 697,262 shares of our common stock to the holders of the 2023 Notes who submitted conversion notices, and the remaining $2.0 million of 2023 Notes were redeemed in cash, plus accrued and unpaid interest.
Uses of Funds
Our historical uses of cash have primarily consisted of cash used for operating activities such as expansion of our sales and marketing operations, research and development activities and other working capital needs, as well as cash used for business acquisitions and purchases of property and equipment, including leasehold improvements for our facilities.
Operating Activities
Operating activities provided $53.9 million of cash in 2021, which reflects our continued growth in revenue offset by continued investments in our operations and impact of the timing of working capital items. Cash provided by operating activities reflected our net loss of $146.3 million, offset by a decrease in our net operating assets of $55.0 million and non-cash charges of $145.2 million related primarily to depreciation and amortization, stock-based compensation expense, deferred income taxes, induced conversion expense, amortization of debt issuance costs and other non-cash charges. The decrease in our net operating assets
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was primarily due to a $85.6 million increase in deferred revenue due to increased billings, a $19.2 million increase in accrued expenses and a $3.7 million increase in other liabilities, which each had a positive impact on operating cash flow. These factors were partially offset by a $25.5 million increase in accounts receivable, a $22.5 million increase in deferred contract acquisition and fulfillment costs, a $3.4 million increase in prepaid expenses and other assets and a $2.1 million decrease in accounts payable, which each had a negative impact on operating cash flow.
Operating activities provided $4.9 million of cash in 2020, which reflects our continued growth in revenue offset by continued investments in our operations and impact of the timing of working capital items. Cash provided by operating activities reflected our net loss of $98.8 million and an increase in our net operating assets and liabilities of $3.5 million, offset by $106.7 million of non-cash charges related primarily to depreciation and amortization, stock-based compensation expense, amortization of debt discount and debt issuance costs, provision for doubtful accounts, deferred income taxes and other non-cash charges. The increase in our net operating assets and liabilities was primarily due to a $24.4 million increase in accounts receivable, a $13.4 million increase in deferred contract acquisition and fulfillment costs, a $8.9 million increase in prepaid expenses and other assets, a $2.4 million decrease in accounts payable and a $0.4 million decrease in other liabilities, which each had a negative impact on operating cash flow. These factors were partially offset by a $37.4 million increase in deferred revenue from sales of our products and services and a $8.6 million increase in accrued expenses, which each had a positive impact on operating cash flow.
Operating activities used $1.4 million of cash in 2019, which reflects our continued growth in revenue offset by continued investments in our operations and impact of the timing of working capital items. Cash used in operating activities reflected our net loss of $53.8 million and an increase in our net operating assets and liabilities of $15.2 million, offset by non-cash charges of $67.6 million related primarily to depreciation and amortization, stock-based compensation expense, amortization of debt discount and debt issuance costs, provision for doubtful accounts and other non-cash charges. The increase in our net operating assets and liabilities was primarily due to a $14.8 million increase in accounts receivable, $13.7 million increase in prepaid expenses and other assets and a $11.3 million increase in deferred contract acquisition and fulfillment costs, which each had a negative impact on operating cash flow. These factors were partially offset by a $18.7 million increase in deferred revenue from sales of our products and services, a $4.7 million increase in accrued expenses, a $1.1 million increase in other liabilities, and a $0.1 million increase in accounts payable, which each had a positive impact on operating cash flow.
Investing Activities
Investing activities used $325.4 million of cash in 2021, consisting of $358.4 million of cash paid for the acquisitions of IntSights, Alcide and Velocidex, net of cash acquired, $9.9 million for capitalization of internal-use software costs, $9.0 million in capital expenditures to purchase computer equipment, furniture and fixtures and leasehold improvements, $3.0 million for other investing activities, partially offset by $54.9 million of investment sales and maturities, net of purchases.
Investing activities used $156.3 million of cash in 2020, consisting of $125.8 million of cash paid for the acquisition of DivvyCloud, net of cash acquired of $5.0 million, $13.8 million in capital expenditures to purchase leasehold improvements, furniture and fixtures and computer equipment, $10.6 million for purchases of investments, net of sales and maturities, and $6.1 million for capitalization of internal-use software costs.
Investing activities provided $16.8 million of cash in 2019, consisting of $66.9 million for investment sales and maturities, net of purchases, $29.4 million in capital expenditures to purchase leasehold improvements and furniture and fixtures, primarily related to office space build-outs including our new corporate headquarters and computer equipment, $14.6 million of cash paid for the acquisition of NetFort and $6.1 million for capitalization of internal-use software costs.
Financing Activities
Financing activities provided $264.1 million of cash in 2021, which consisted primarily of $585.0 million in proceeds from the issuance of the 2027 Notes, net of issuance costs paid of $15.0 million, $9.3 million in proceeds from the issuance of common stock purchased by employees under the Rapid7, Inc. 2015 Employee Stock Purchase Plan (ESPP) and $4.3 million in proceeds from the exercise of stock options, partially offset by $230.0 million for the redemption, repurchase and conversion of the 2023 Notes, $76.0 million for the purchase of 2027 Capped Calls, $16.0 million in withholding taxes paid for the net share settlement of equity awards, $12.1 million for payments related to the acquisitions of DivvyCloud, Alcide and IntSights, and $0.3 million for payments of debt issuance costs.
Financing activities provided $200.9 million of cash in 2020, which consisted primarily of $222.8 million in proceeds from the issuance of the 2025 Notes, net of issuance costs paid of $7.2 million, $7.8 million in proceeds from the exercise of stock options and $7.1 million in proceeds from the issuance of common stock purchased by employees under the ESPP, partially offset by $27.3 million for the purchase of 2025 Capped Calls, $8.9 million in withholding taxes paid for the net share settlement of equity awards, $0.4 million of payments of debt issuance costs and $0.2 million of deferred consideration payments.
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Financing activities provided $8.8 million of cash in 2019, which consisted primarily of $10.2 million in proceeds from the exercise of stock options and $5.5 million in proceeds from the issuance of common stock purchased by employees under the ESPP, partially offset by $6.9 million in withholding taxes paid for the net share settlement of equity awards.
Off-Balance Sheet Arrangements
We do not have any relationships with unconsolidated entities or financial partnerships, including entities sometimes referred to as structured finance or special purpose entities that were established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. We do not engage in off-balance sheet financing arrangements. In addition, we do not engage in trading activities involving non-exchange traded contracts. We therefore believe that we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships.
Critical Accounting Policies
Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States (GAAP). The preparation of our consolidated financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenue, costs and expenses. We base our estimates and assumptions on historical experience and other factors that we believe to be reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates.
Our significant accounting policies, including those considered to be critical accounting policies are summarized in Note 2, Summary of Significant Accounting Policies, in the Notes to our Consolidated Financial Statements included in this Annual Report on Form 10-K. The following critical accounting policies reflect significant judgments and estimates used in the preparation of our consolidated financial statements:
•Revenue recognition;
•Deferred contract acquisition and fulfillment costs; and
•Business combinations
Revenue Recognition
We generate revenue primarily from: (1) subscriptions from the sale of cloud-based subscriptions, managed services, term software licenses, content subscriptions and maintenance and support associated with our software licenses, (2) perpetual software licenses and (3) professional services from the sale of our deployment and training services related to our solutions, incident response services, penetration testing and security advisory services.
The majority of our contracts with customers contain multiple performance obligations. For these contracts, we account for individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations on a relative standalone selling price (SSP) basis. We determine SSP of our products and services based on our overall pricing objectives using all information reasonably available to us, taking into consideration market conditions and other factors, including the geographic locations of our customers, negotiated discounts from price lists and selling method (i.e., partner or direct). When available, we use directly observable stand-alone transactions to determine SSP. When not regularly sold on a stand-alone basis, we estimate SSP for our products and services utilizing historical sales data, including discounts from list price. The historical data is aggregated and analyzed by geographic location and selling method to establish a median or average price. Once SSP is established it is applied consistently to all transactions involving that product or service utilizing a portfolio approach.
Deferred Contract Acquisition and Fulfillment Costs
We capitalize commission expenses paid to internal sales personnel and partner referral fees that are incremental costs to obtaining customer contracts. Costs to obtain a contract for a new customer, upsell or cross-sell are amortized on a straight-line basis over an estimated period of benefit of five years as sales commissions on initial sales are not commensurate with sales commissions on contract renewals. We determined the estimated period of benefit by taking into consideration the contractual term and expected renewals of customer contracts, our technology and other factors, including the fact that commissions paid on renewals are not commensurate with commissions paid on initial sales transactions. We periodically review the carrying amount of deferred contract acquisition costs to determine whether events or changes in circumstances have occurred that could impact the period of benefit. Commissions paid relating to contract renewals are deferred and amortized on a straight-line basis over the related renewal period. Costs to obtain a contract for professional services arrangements are expensed as incurred in accordance with the practical expedient as the contractual period of our professional services arrangements are one year or less.
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Business Combinations
We allocate the fair value of purchase consideration to the tangible asset acquired, liabilities assumed, and intangible assets acquired based on their estimated fair values. The excess of the fair value of purchase consideration over the fair value of these identifiable net assets and liabilities is recorded as goodwill. Determining the fair value of the tangible assets acquired, liabilities assumed and intangible assets requires management to make significant estimates and assumptions, especially with respect to intangible assets. Significant estimates in valuing certain intangible assets include, but are not limited to, cash flows that an asset is expected to generate in the future, technology migration curves, discount rates, and useful lives. While we use our best estimates and judgements, our estimates are inherently uncertain and subject to refinement.
Recent Accounting Pronouncements
See Note 2, Summary of Significant Accounting Policies, in the Notes to our Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K for a description of recent accounting pronouncements and our expectation of their impact, if any, on our results of operations and financial conditions.