Rapid7 Q2 2026 Earnings Call Transcript

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Provided by Quartr
August 10, 2026

Key Takeaways

  • Negative Sentiment: Total ARR declined to $824 million, with non-core products driving the sequential decline and total revenue falling 1.5% year over year to $210.9 million. Management acknowledged that the current ARR trajectory is “not good enough.”
  • Positive Sentiment: Detection and Response ARR grew approximately 5% year over year, while the core platform represented more than 80% of total ARR and grew about 1%; management also cited healthy adoption of Exposure Command among new and upgrading customers.
  • Positive Sentiment: Rapid7 announced a restructuring affecting approximately 12% of its workforce to focus resources on Detection and Response, Exposure Command, and AI capabilities. The company expects non-GAAP operating margin to reach approximately 20% in Q4 2026 and raised full-year operating income guidance to $129 million–$133 million.
  • Neutral Sentiment: Management is positioning Kenzo and an AI-first platform to connect exposure management, detection, response, automation, and human expertise, with product investments expected to produce meaningful capabilities through 2027. Executives emphasized that the transformation will take multiple quarters before durable growth becomes visible.
  • Positive Sentiment: Q2 free cash flow was strong at $31.9 million, and Rapid7 ended the quarter with $702.6 million in cash and investments plus an undrawn $200 million credit facility, supporting repayment of its $600 million convertible notes due in March 2027.
AI Generated. May Contain Errors.
Earnings Conference Call
Rapid7 Q2 2026
00:00 / 00:00

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Operator

Good day, everyone. My name is Kahelauni, and I'll be your conference operator today. At this time, I would like to welcome you to the Q2 2026 Rapid7 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, and if you have joined via the webinar, please use the raise hand icon, which can be found at the bottom of your webinar application. At this time, I would like to turn the call over to Matt Wells, Vice President of Investor Relations.

Matt Wells
Matt Wells
VP of Investor Relations at Rapid7

Thank you, operator, and good afternoon, everyone. Today, we will be discussing Rapid7's second quarter fiscal 2026 financial results. We've distributed our earnings press release over the wire, and it can be accessed on our investor relations website. With me on the call are Corey Thomas, Executive Chairman, Wael Mohamed, CEO, and Rafe Brown, CFO. As a reminder, all participants are in a listen-only mode, and a question-and-answer session will follow our opening remarks. Before I hand the call over to Corey, I want to remind everyone that certain statements made during this conference call may be considered forward-looking statements under federal securities laws.

Matt Wells
Matt Wells
VP of Investor Relations at Rapid7

These statements are made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995 and include, among other things, our outlook for the third quarter and full year 2026, our expectations regarding fiscal periods beyond 2026, our transformation and restructuring initiatives, our strategy, priorities, and capital allocation, anticipated operational improvements, investments in our core platform and AI capabilities, and our expected growth drivers and financial performance. These forward-looking statements are based on our current expectations and beliefs and information currently available to us. While we believe any forward-looking statements we make are reasonable, actual results could differ materially due to a number of risks and uncertainties, including those contained in our filings with the SEC. Reported results should not be considered indicative of future performance.

Matt Wells
Matt Wells
VP of Investor Relations at Rapid7

We do not undertake and expressly disclaim any obligation to update or alter our forward-looking statements, whether as a result of new information, future events, or otherwise, except to the extent required by applicable law. Further information on these forward-looking statements and risk factors are included in the filings we make with the SEC, including the section titled Cautionary Language concerning forward-looking statements in our earnings press release. Additionally, over the course of this call, we'll reference non-GAAP measures to describe our performance. Please review our earnings press release and filings with the SEC for our rationale behind the use of non-GAAP measures and for a full reconciliation of these GAAP to non-GAAP metrics. These documents, in addition to a replay of this call, will be available on the Rapid7 investor relations website. With that, I'd like to turn the call over to Corey.

Corey Thomas
Corey Thomas
Executive Chairman at Rapid7

Welcome to Rapid7's Q2 2026 earnings call. I join you today in a new role but with the same passion and purpose: to ensure that organizations of all sizes can get the best results from their security operations. I have worked with the board, and especially with Wael, over the last year to revitalize our team, improve our execution, and fully leverage the opportunity that AI is providing. As part of that work, it was clear that we have significant opportunities, but only if we tighten our focus on our core offerings, sharpen our alignment and execution around those offerings, and deliver a more efficient model. The board and I recruited Wael, whom I have known and respected for many years, to do exactly that, deliver on Rapid7's full potential in the midst of one of the most exciting moments in technology.

Corey Thomas
Corey Thomas
Executive Chairman at Rapid7

In many ways, Wael is accelerating a plan he helped develop. In other areas, he's providing sharper focus and leadership, as you will hear in his upcoming comments. Before I hand it over to Wael, I want to take a moment to acknowledge the incredible work of our colleagues at Rapid7, whose passion and care for our customers and their deep and energetic embrace of innovation continue to inspire me. With that, I turn the call over to Wael. Wael?

Wael Mohamed
Wael Mohamed
CEO at Rapid7

Thank you, Corey, and good afternoon. Since this is my first earnings call as CEO of Rapid7, I want to use my time a little differently. Rafe will take you through the quarter, the actions we announced, and our guidance. I want to focus on our strategy, the operating discipline behind it, and how I ask you to measure our progress. I have known Rapid7 for years. Long before I joined the board, I saw this company at its best, moving fast, earning customer trust, and winning in the heart of the market. Joining the board gave me a much closer view of the company, its people, and its potential. The closer I got, the more I liked what I found. Rapid7 is a good company ready to be great. It is not broken. It has reached a ceiling. The issue is not our assets.

Wael Mohamed
Wael Mohamed
CEO at Rapid7

It is how we focus our resources and energy. Breaking through requires clear choices, strong execution, and an operating system that can repeat success at scale. That is the work I signed up for. Transformation is not about changing everything. It is about having the discipline to change the few things that matter most and doing so consistently over time. Over the past year, we put the leadership team in place for this next chapter. We added a proven Chief Financial Officer to strengthen operating discipline, a Chief Commercial Officer to help us scale and win with customers, and a Chief Product and Technology Officer to build an AI-first platform. We now have our leadership team, operating model, and capital allocation aligned behind one direction. Since stepping into this role, I have spent my time listening to customers, our people, partners, and many of you. Three things are clear.

Wael Mohamed
Wael Mohamed
CEO at Rapid7

First, focus matters. We do not need to win everywhere. We need to be exceptional where we can win. Our clearest right to win is in the heart of the enterprise market, customers that need enterprise-grade security, but also need fewer tools, less complexity, and faster outcomes. Our leadership in the mid-market is proof of our strength. It is not a limit on our technology or our market. We will continue to compete for larger enterprises where our platform is the right fit. These customers want fewer, better partners, not more tools. That is where Rapid7 has earned the right to win. Second, outcomes matter more than products. For years, cybersecurity answered complexity with more complexity: more tools, more alerts, more consoles, more people. Customers do not need another dashboard. They need less risk, less complexity, and faster action.

Wael Mohamed
Wael Mohamed
CEO at Rapid7

Our opportunity is to connect Exposure Management with Detection and Response to move from finding problems to resolving them. For many customers, that outcome will be delivered as a service. Skilled security people are hard to find. They need a trusted partner that can bring the platform, the expertise, and the work together. Third, the way security work gets done is changing. AI should not become another label. It should change the work. Automation helps us move faster today. Agents let us do more across more data, more steps, and at much greater scale. Attackers are moving at machine speed. Attackers only need to find the seam between an exposure and the fix, an alert and the work needed to investigate it, or a decision and an action. Defenders need the same reach and speed, with people remaining in control. People decide. Agents do.

Wael Mohamed
Wael Mohamed
CEO at Rapid7

In this model, agents are not just features inside a product. They become part of the service layer, extending the reach of our security experts and helping us deliver outcomes faster and at scale. We acquired Kenzo because AI needs a foundation, not another feature. That foundation connects data, agents, and human decisions across the tools customers already use while keeping customers in control of their data. We want AI to fit into our customers' environments, not force them into ours.

Wael Mohamed
Wael Mohamed
CEO at Rapid7

Building that future requires focus now. The changes we announced affect colleagues who have contributed to Rapid7. I want to thank them for what they have given to this company and to our customers. These actions are a focused reset. We are not shrinking our way to the future. We are reshaping the company so we can invest more behind the parts of the business that will define it.

Wael Mohamed
Wael Mohamed
CEO at Rapid7

We are simplifying the company, aligning our cost structure with the core, and creating room to invest. We are concentrating our growth investment behind Detection and Response, Exposure Management, and the AI foundation that connects them. We will continue to support customers using our other products. This is not simply a cost action. We will reinvest a meaningful portion of the savings in our core platform, the people building it, and the AI foundation behind the next generation of our products. 70 days is not enough to complete a transformation. It is enough to set direction and show how we will operate with speed, clarity, and accountability. Operating discipline creates choices. As Rafe will explain, the actions we announce put us on a path to exit the year at approximately 20% non-GAAP operating margin. That is not the destination.

Wael Mohamed
Wael Mohamed
CEO at Rapid7

It is evidence that we are building a healthier company, one with more capacity to invest, innovate, and generate durable returns over time. In the second quarter, we came in slightly above the guidance we provided. Detection and Response continued to perform well. At the same time, total ARR declined. Exposure Management is not yet where it needs to be, and other parts of the portfolio continued to pressure our results. The current direction of ARR is not good enough. We are acting on it. This is a multi-quarter transformation. We are changing the path of the company toward durable growth, not managing for one quarter. As we sharpen our focus, some parts of the business may face pressure before the benefits become visible. At times, we may need to simplify before we can accelerate.

Wael Mohamed
Wael Mohamed
CEO at Rapid7

Let me leave you with the framework I ask you to use when measuring Rapid7 over the coming quarters. First, look at the cash generated. Cash is not the finish line. Durable growth is, but cash tells you whether the operating model is becoming healthier and whether we have the capacity to keep investing. Second, measure this transformation over several quarters, not one. Look for stronger execution in the core, better outcomes for customers, and meaningful improvement in Exposure Management. Third, watch how we reinvest. We are putting resources behind the platform, the people, and the AI foundation required to return Rapid7 to durable growth. We have hard work ahead, but we also have what matters most: strong customer trust, deep security expertise, a clear place to win, and a team that cares deeply about our mission. I have believed in Rapid7 for years.

Wael Mohamed
Wael Mohamed
CEO at Rapid7

The more time I have spent with its people, its customers, and its technology, the stronger that belief has become. We know this transformation will take time. We will not ask you to judge us by promises. Judge us by execution. Judge us by whether, quarter after quarter, this company becomes more focused, more disciplined, and more capable of delivering durable growth. That is how we intend to earn your confidence. Rafe, over to you.

Rafe Brown
Rafe Brown
CFO at Rapid7

Thank you, Wael, and good afternoon, everyone. As a quick reminder, unless otherwise noted, all numbers except revenue and balance sheet items mentioned during my remarks today are non-GAAP. Please refer to our earnings release and SEC filings for additional details regarding the presentation of our results and guidance metrics. In the second quarter of 2026, I am pleased to report that we exceeded expectation across all guided metrics. We ended the second quarter with total ARR of $824 million. We reported non-GAAP operating income of $28.9 million. Free cash flow came in strong at $31.9 million, with collections healthily exceeding our internal expectations. As of the end of the quarter, we had total cash equivalents, and short-term investments of $702.6 million. I want to begin by taking a closer look at our ARR as of the end of the quarter.

Rafe Brown
Rafe Brown
CFO at Rapid7

As a quick reminder, our long-term strategy is focused on our core platform solutions, comprised of our Detection and Response business, which includes MDR, and our Exposure Management business. Our core platform solutions represent over 80% of overall ARR and grew approximately 1% on a year-over-year basis, led by our Detection and Response business, which at approximately 55% of total ARR, grew approximately 5% on a year-over-year basis. While our overall Exposure Management business offsets some of the growth of our D&R business, within the Exposure Management segment of our core offerings, we continue to see healthy adoption of our Exposure Command solution, driven by both new customers and customers upgrading from our older vulnerability management solutions.

Rafe Brown
Rafe Brown
CFO at Rapid7

In contrast, our non-core products, which as a reminder, are less than 20% of total ARR, declined in the quarter, driving the sequential decline we saw in total ARR as we focus our resources toward growing our core products. As we plan for the remainder of 2026 and beyond, we see opportunities to optimize margins for these standalone non-core solutions, as well as opportunities to migrate customers to core platform offerings. As Wael mentioned, our organization is undergoing a significant transformation. Our new Chief Product and Technology Officer, Dan Deklich, just two months into his role, is making changes and investments across the product and engineering organization. We expect these investments to strengthen our core platform solutions, accelerate innovation, and deliver meaningful product capabilities throughout 2027. We expect, however, that these efforts will take time to translate into ARR growth. Returning now to our financial statements.

Rafe Brown
Rafe Brown
CFO at Rapid7

Total revenue of $210.9 million declined approximately 1.5% year-over-year, reflecting the declines in non-core product ARR we saw earlier this year. We finished the quarter with over 11,500 customers and an average ARR per customer of approximately $70,000. Turning to second quarter profitability. Total non-GAAP gross margins of 71.7% were down approximately 215 basis points year-over-year, consistent with our expectations, driven by year-over-year increases in staffing of our global security operations centers and increased cloud usage for product improvements. We reported non-GAAP operating income of $28.9 million, or a margin of 13.7%, favorable to our guidance. This upside to profitability drove non-GAAP earnings per share of $0.44 per diluted share. Free cash flow totaled $31.9 million in the second quarter, driven by strong collections.

Rafe Brown
Rafe Brown
CFO at Rapid7

From a balance sheet perspective, we ended the second quarter with $702.6 million in cash equivalents, and short-term investments. Combined with our continued free cash flow generation and a $200 million undrawn credit facility, we are well-positioned to repay our $600 million convertible notes due in March of 2027. Turning to the restructuring announced earlier today. This restructuring marks a strategic shift in our business operations to drive efficiency and focus across the organization, aligning resources and investments to our core platform solutions. We are also creating capacity to increase our investments in cutting-edge AI-driven solutions that will improve customer experience and increase competitiveness in the marketplace. In terms of approach, we first eliminated non-headcount spend wherever possible. Unfortunately, approximately 12% of our workforce has been notified that their roles are impacted by the restructuring.

Rafe Brown
Rafe Brown
CFO at Rapid7

From a financial perspective, as a result of the efficiency gains already underway, as well as the impact of the restructuring announced today, we expect to deliver 20% non-GAAP operating margins in Q4 of 2026, compared to 13.7% in the second quarter, fulfilling our commitment to improve our cost run rate as we exit 2026. We expect to incur restructuring charges of approximately $10 million-$11 million, the majority of which will be paid throughout the third and fourth quarters of 2026. These restructuring charges will be excluded from our non-GAAP P&L results. The cash expenditures will, however, be reflected in our operating and free cash flow results. As such, for the remainder of the year, the cash benefit of reduced headcount will largely be offset by the associated severance-related costs, as well as targeted reinvestments into our product and engineering organization.

Rafe Brown
Rafe Brown
CFO at Rapid7

Therefore, while weighted toward the fourth quarter, we are maintaining our expectation of approximately $130 million in free cash flow for the full year 2026. We believe this restructuring will allow us to improve free cash flow in 2027 over our 2026 guide, despite a lower ARR base as we enter 2027, investments we are making to modernize our products and SDLC process, and the reduction of our interest income that will occur once we use our invested cash to repay our March 2027 convertible bonds. This brings us to third quarter 2026 guidance. We expect to end the third quarter with ARR of approximately $812 million, and on a sequential basis, we expect ending ARR for our combined core platform solutions of D&R and Exposure Management will be approximately flat quarter-on-quarter, with the expected sequential ARR decline coming from our non-core offerings.

Rafe Brown
Rafe Brown
CFO at Rapid7

For the third quarter, we expect total revenue in the range of $208 million-$210 million, or down approximately 4% at the midpoint on a year-over-year basis. Non-GAAP operating income is expected to be in the range of $34 million-$36 million, or a margin of 16.7% at the midpoint. Non-GAAP earnings per diluted share are expected to be in the range of $0.44-$0.47 on approximately 80 million fully diluted shares. Updating our full-year fiscal 2026 guidance, we expect total revenue in the range of $837 million-$841 million, a year-on-year decline of approximately 2% at the midpoint. We are raising non-GAAP operating income guidance for 2026 to a range of $129 million-$133 million, or a full-year non-GAAP operating margin of 15.6% at the midpoint. As I mentioned earlier, this implies a 20% non-GAAP operating margin in the fourth quarter.

Rafe Brown
Rafe Brown
CFO at Rapid7

Non-GAAP earnings per share are expected to be in the range of $1.78-$1.83 per share on approximately 79 million fully diluted shares. We expect free cash flow of approximately $130 million for the full year, in line with prior year performance, and a free cash flow margin of approximately 15.5%. In conclusion, our solid execution in the second quarter, combined with our focus and prioritization efforts to improve our core product offerings, as well as our commitment to manage costs and expand operating margins, positions Rapid7 well for the transformation ahead. With that, I'd like to turn the call over to the operator for Q&A.

Operator

We will now move to our question-and-answer session. If you have joined via the webinar, please use the raise hand icon, which can be found at the bottom of your webinar application. When you are called on, please unmute your line and ask your question. We kindly ask that you limit yourself to one question and one follow-up. Our first question comes from Rob Owens with Piper Sandler. Please unmute to ask your question.

Rob Owens
Rob Owens
Analyst at Piper Sandler

Great. Good afternoon, and thank you guys for taking my question. As you look across the product set and, in particular, your exposure management platform, and I know you said that things will get better from here, and you are looking at adding to the portfolio or adding to the capability. When you focus on that, is this a function of coverage, or is it lacking functionality that your customers are looking for? Just trying to understand directionally where you hope to take this technology, and I will just ask the follow-up right away. In terms of customers that have not moved to your more comprehensive capability, especially given the threat environment that we are in right now, what is your sense as to what customers are doing here? Thanks.

Wael Mohamed
Wael Mohamed
CEO at Rapid7

Thanks, Rob. Very good question. First of all, it is nice to actually be here, and I look forward to work with all of you. It has been a little bit over two months. When I was on the board, and as you know, I actually started a year ago, over a year ago, with Corey on the board, and I looked at the overall business. It was very clear that there was part core and non-core.

Wael Mohamed
Wael Mohamed
CEO at Rapid7

Nonetheless, there is a lot of work we need to do on the core side. The restructure that Rafe talked about was to shift some of our focus to the core and making sure that we have our weight on it, because we have really a good position. We have a lot of customers that is using us. We have the right to win. Most importantly, we are invited every single day. I sat in a lot of customer calls in the last two months, and I can see that we actually in a better position. But to answer your question on the Exposure Management, there is definitely some work to do on focus.

Wael Mohamed
Wael Mohamed
CEO at Rapid7

We were spread very thin, trying to be able to address all our portfolio, and now we are basically shifting our focus on the core side and making sure that we are actually also making some investments so we can get our fair share in that market. We are invited, which is good. We are shortlisted because we are one of the leaders. Nonetheless, we can increase our win rate by having more focus and obviously having the right investment. I am very excited about the addition of Dan, since Dan is working very hard to making sure that not only new features, but the AI first methodology is implemented in all our product line. The second question was.

Wael Mohamed
Wael Mohamed
CEO at Rapid7

Wait. The migration path.

Rob Owens
Rob Owens
Analyst at Piper Sandler

What are customers doing in this environment? Yeah.

Wael Mohamed
Wael Mohamed
CEO at Rapid7

When I talk to customers, they talk about how can you not only find things, but actually fix it. I am very excited that we play in these two subcategories, the Exposure Management as well as the Detection and Response. I do believe the AI first, basically, a structure will allow us to be able to provide that for customers. But customers are actually buying every single day. They are not waiting and wait and see. That is what I thought when I came in. It would be a wait and see. They are waiting for the AI. They just want to make sure that the right vendors are moving in the right direction, and they are looking for solution that not only help them to identify what is going on, but also fix it and take them through that journey.

Rob Owens
Rob Owens
Analyst at Piper Sandler

Great. Wael, good to connect again, and thank you for taking my questions.

Wael Mohamed
Wael Mohamed
CEO at Rapid7

Thank you.

Operator

Thank you. Your next question comes from the line of Jonathan Ho with William Blair. Please unmute to ask your question.

Jonathan Ho
Jonathan Ho
Analyst at William Blair

Hi. Just wanted to understand, first of all, Wael, I really appreciate the detail that you're providing. Can you help us understand the opportunities to re-accelerate growth? Where do you specifically see these ability to focus paying off? It's always been challenging to show operating leverage while trying to re-accelerate growth at the same time. Can you help us understand the balance between these two?

Wael Mohamed
Wael Mohamed
CEO at Rapid7

Thank you, Jonathan. It's a very good question, and I always ask myself, before I started, the most question I asked myself, are we in a categories that it's big enough and is growing fast enough to be able to get us the growth we're looking for? You cannot buy that. We are very fortunate that we are in two big categories. Even in the vulnerability management and basically the migration into exposure, it almost feel like it has a refuel of interest again. So there's two categories that we have very strong position. We are definitely a leader. We have the right to win, and we're invited to participate, and that's itself extremely important. How can we basically find growth? The way I look at it is a sequence. This is not going to be a one quarter turnaround.

Wael Mohamed
Wael Mohamed
CEO at Rapid7

It's going to be a multiple quarters. The way I think about it, first, the cash generated, it will be able to demonstrate how well and how precise we're running the business. Number two, we need the non-core to clear, and we already basically understand what that is, and we making all the right structure to allow us to do that. Number three, we need to stabilize the core itself. Within the core, there is a lot of great assets, a good position, but there is some more work we needed to do, and that's why we are refunneling part of the investment and put it behind that. Fourth, we will get back again to growth. So I believe the category we're in will allow us to do so. The work we're doing will allow us to get there faster.

Jonathan Ho
Jonathan Ho
Analyst at William Blair

Excellent. Just in terms of the strong margins that you guided to in the fourth quarter, I just want to better understand, is this a starting point then for 2027? Or can you maybe help shape what the endpoint looks like in terms of what you want to ultimately achieve? Thank you.

Wael Mohamed
Wael Mohamed
CEO at Rapid7

When I was at the board, I was actually part of the work on Kenzo, and I was very excited because it can be able to allow us to do two things. Not only we can be able to provide services at scale with a software like Margins, but it will allow us to connect our solutions together with a common data structure. So I believe that basically the AI first work that Dan is doing, it will allow us to not only maintain the margin that we're providing today but actually sustain it and even better. I will pass it to Rafe. He can share with you how we're thinking about it. We want to run a business that's profitable, high margin, and at scale.

Wael Mohamed
Wael Mohamed
CEO at Rapid7

The only way we can be able to do that in the category we are in is to be able to make sure that our gross margin is best in class.

Rafe Brown
Rafe Brown
CFO at Rapid7

Jonathan, just to add to that, one of the things that I think we're pleased to be able to talk about today is, we talked about improving margins as we went through 2026. We're delivering on that, and I think that was an important goal for us. That balanced growth that Wael is talking about is how we really look out across the next few years, frankly, about how we're focusing. We want to invest in the product so we can drive growth. That is incredibly important, and we think that will be a big driver of valuation over the longer term. But we also realize that the margins on the bottom line are incredibly important. So we've taken a big step today.

Rafe Brown
Rafe Brown
CFO at Rapid7

We're obviously not giving 2027 guidance yet, but it speaks to our commitment and our focus, and I think we'll continue to maintain that focus on being very smart about how we invest and also keeping an eye constantly on the bottom line.

Jonathan Ho
Jonathan Ho
Analyst at William Blair

Thank you.

Operator

Thank you. Our next question comes from the line of Fatima Boolani with Citi. Please unmute to ask your question.

Fatima Boolani
Fatima Boolani
Analyst at Citi

Good afternoon. Thank you so much for taking my questions. Wael, you counted a number of ways in which you are setting the foundation for running a more streamlined business and a streamlined execution. But specifically, I wanted to ask you on the non-core product portfolio, is the eventual conclusion or end game there to deprecate most of that portfolio on a standalone basis? I think you earlier did talk about transitioning some customers out of the non-core and providing them a bridge into the core. I was wondering if you could help us a little bit around, is the entire non-core portfolio eligible to move into the core? Or perhaps there is an opportunity to deprecate and/or rationalize some of what is in that portfolio under the auspices of just becoming more efficient as an organization. Then I have a follow-up as well, please.

Wael Mohamed
Wael Mohamed
CEO at Rapid7

Sounds good. Thank you, Fatima. Those are very good questions. The way I look at it, at the non-core, certain categories that require a different type of investment if you are going to be competing with the pure players, and those races are not the one that we are actually going after. We are focusing all our energy and our investment behind the one that we are already a leader, and we can participate and basically grow with those categories. Nonetheless, we have an incredible amount of technologies, and our customer base is intertwined. Some of those technologies will basically be servicing our customers from the vignettes of our platform.

Wael Mohamed
Wael Mohamed
CEO at Rapid7

We are basically looking at every opportunities to make sure that we can provide outcomes to our customers, but also not to chase certain races that the market already decided, and the pure play game is not going to be ours to win. There is enough for us to win. There is a big market that is pulling us, and we need to put the appropriate investments so we can make sure that we can have our lion's share of those subcategories as well. As a matter of fact, I believe there is a category envy. The neighboring industry players, they are already coming from EDR, and they see there is a lot of action in MDR. We see some competition coming sideways. They do not have the right to win because they are not vendor neutral like we are.

Wael Mohamed
Wael Mohamed
CEO at Rapid7

They don't really have the strength and the depth that we have. We have thousands of customers relying on us every single day. We really need to focus to make sure we defend our turf that we have earned, and that may make us de-emphasize in some subcategories that we would not be able to chase. We have to make some choices.

Fatima Boolani
Fatima Boolani
Analyst at Citi

Understood. Thank you. Very clear. You mentioned earlier that the core of the portfolio was around finding things, but then being able to also fix them, right? This whole patch management and remediation window that has effectively vanished against the innovation that we've seen out of the large language model providers. I'm curious, just from an asset management, patch management perspective, what intellectual property you have there, and why do you feel that a Detection and Response angle to solving that approach is the right way versus a traditional asset management or patch management intellectual property? Thank you very much.

Wael Mohamed
Wael Mohamed
CEO at Rapid7

Thank you. We are in a very fortunate position. Over the years, we have assembled some deep technology, deep expertise, and we understand our customer environment extremely well. Sometimes we see the alerts before they even enter, and sometimes we are integrated within the customer, where we can work with them to be able to tackle some attacks and make sure that we respond swiftly. What we saw, in order for us to do this, the way the market is going, we needed to have a common data backbone. When we have a common data backbone, that allows us to leverage customers' assets instead of asking them to replace it. From an architecture perspective, we basically had to focus on that. That also going to be the basis for the agentic work that we're working towards.

Wael Mohamed
Wael Mohamed
CEO at Rapid7

With that, we can be able to do way more than what we're doing today. It's the combination between our expertise and our people and the future agents. We should be able to close those gaps. There's going to be many gaps, in the future, more than today. Customers are asking us, "How can you be able to help us at scale?" That's really the work that we're doing right now in the platform. We see that customers will be coming to us asking not only to find the vulnerabilities, not only to make sure that it's exploitable, but help them to close all the gaps, all the seams, and help them to fix. The ultimate answer is patching. There is a lot of things you can be able to do if you cannot patch on time.

Fatima Boolani
Fatima Boolani
Analyst at Citi

I appreciate the detail. Thank you.

Operator

Your next question comes from the line of Brian Essex with JPMorgan. Please unmute to ask your question.

Brian Essex
Brian Essex
Analyst at JPMorgan

Great. Thank you for taking the question, and good afternoon. Maybe first of all, Rafe, thank you again for another good quarter of transparency. We really appreciate the level of detail. Maybe for Wael, we would love to understand what you are seeing in the pipeline. It seems as though we are in an unprecedented time here for some of the business that your core segments are exposed to. We would love to know, are you seeing the acceleration pipeline? If you are, it seems as though the assumptions around the core business are relatively conservative. If you could maybe contextualize your outlook for that business, how conversion win rates are transpiring and what your expectations might be for potential upside, downside to those expectations, given what you are seeing in the environment on the customer side. Then I have got a follow-up for Corey.

Wael Mohamed
Wael Mohamed
CEO at Rapid7

Sounds great. Thank you, Brian. The way I look at it, I just talked to some of my team members who came back from Black Hat, and the excitement and the talk around basically our solution, it was very much notable. Nonetheless, I see customers actually now exploring more than buying as they are basically trying to figure out who are the players that they are going to need to be putting bets behind. They are actually asking a lot of questions about Exposure Management and Detection and Response. A lot of questions. Some of the questions is related to what type of investment they need to make, what type of basically integration need to happen, and what is our vision and philosophy when it come to agentic. What they need to basically be prepared to do.

Wael Mohamed
Wael Mohamed
CEO at Rapid7

What is the connections between Exposure Management and Detection and Response and how we see that. I cannot really wait for this week to pass by. It has been a very difficult week for us as a company, where we actually had to make some major restructuring. I am very positive that we should be able to participate. I actually participated in a lot of customers' calls in the last few weeks, and the last couple of months. To my surprise, the customers actually asking us for answers. We have 10,000+ customers who have been doing business for years. That level of confidence that we can be able to give them answers is definitely there. Nonetheless, there is some more work we need to do to sharpen our story and connect it together. That is going to be my job in the next couple of months.

Rafe Brown
Rafe Brown
CFO at Rapid7

Brian, I would just add on a couple of the points you called out there.

Brian Essex
Brian Essex
Analyst at JPMorgan

Yeah.

Rafe Brown
Rafe Brown
CFO at Rapid7

I think we have been very pleased as the year has been developing. Remember, the sales leadership team was really brand new at the beginning of the year. We continued to see productivity per rep go up. The team has really done a lot of work focusing on their pipeline generation efforts. Also frankly, as precursor to the things we are talking about now on a regular basis, really directing the team's efforts so they make sure we are selling our core platform solutions. We could see strong evidence of all three of those elements coming into play, in Q2. I think Allan and the team have done a great job there. It is part of the longer journey. It has got to be paired with the product releases.

Rafe Brown
Rafe Brown
CFO at Rapid7

When we look at the competitive deals that we went head-to-head against our well-known competitors, we win because of great sales execution combined with the product that is there today. We have room to get out there and win, and I think that is always super encouraging to us. As we gain momentum under new leadership on the product side, we really hope that that is going to play out in a very positive way. It may take some quarters for it to become large enough and evident enough for everybody on this call, but we are really encouraged by those elements, that just good execution in the trenches, if you will.

Brian Essex
Brian Essex
Analyst at JPMorgan

Got it. I really appreciate the color. Maybe a quick one for Corey, just because Corey, you have the context here. From a restructuring perspective, you guys have gone through a number of changes over the years. Back in 2023, I think 18% of the workforce, and as Rafe just mentioned, you have new sales leadership in place. I would just love to, if you could just wrap some context around the changes that you're going through now, how they're different than ones that you've gone through before, and what the environment is for attracting and retaining talent. Wael, feel free to interject as well, but Corey, just because you have that context, historical context, would love your insight.

Corey Thomas
Corey Thomas
Executive Chairman at Rapid7

No, absolutely. Context is important though. I think the biggest change, especially from the last time that we did this, is we have a lot more clarity today. Keep in mind today we enter with doing this with a completely revised leadership team that's operated at this scale, that's actually done turnarounds, that's done growth. So we iterate with a strong team. We iterate with clarity of knowing where we need to focus and frankly, where we need to defocus. So we do this work with more purpose in mind and more clarity about where we're going and what we want to become. Frankly, a very inspired view of the work that we could do for our customers in the future.

Corey Thomas
Corey Thomas
Executive Chairman at Rapid7

When Wael talks about sort of the reallocation of focus and investment, it's something he's quite serious about, is that we are investing and building something that's not just relevant, but leverages lots of the great technologies and lots of the great work that we've done and builds on it for our customers. So I think today we're doing it from a place of clarity and focus. Not that it wasn't important before. We knew the right things that we needed to do before, but we were still evolving the direction. We have a lot more clarity about where we need to actually go. We have a team that actually has the experience doing it.

Brian Essex
Brian Essex
Analyst at JPMorgan

I appreciate that. Thank you.

Corey Thomas
Corey Thomas
Executive Chairman at Rapid7

Absolutely.

Wael Mohamed
Wael Mohamed
CEO at Rapid7

Yeah, I'm sorry. Go ahead.

Wael Mohamed
Wael Mohamed
CEO at Rapid7

Yeah, no problems. That's okay. Just to follow on what Corey said is, from day one, and my partnership with Corey on the board and as a CEO, was understanding the culture of the company, making sure that everybody understand why we're doing this, understand exactly the compositions and the options. In the last couple of months, regularly, we've been communicating with the team basically the finding, the structure, and the whys. As basically Corey said, to my surprise, actually, the leadership, the new and the existing, and even the second level and the third level, the embracing of the change was there. This has all been fueled by conviction that we actually in a place where we can service customers in a way that the customer want us to serve them. That's really what driving all these changes.

Brian Essex
Brian Essex
Analyst at JPMorgan

Great. Thank you, Wael.

Operator

Thanks. Your next question comes from Joseph Gallo with Jefferies. Please unmute to ask your question.

Joseph Gallo
Joseph Gallo
Analyst at Jefferies

Hey, guys. Thanks for the question. Wael, there's a lot of changes, and you've talked about product a lot on the call, but can you just talk a little bit more about go-to-market refinement? Are any more changes expected there? With the 12% of jobs impacted, is that also impacting the go-to-market organization? As part of my follow-up, Rafe, how are you embedding all of that uncertainty and job impact into guidance? When we look at your guide, is it more prudent than the previous guides that you've given, or is the right read that ARR decline should worsen versus the past two quarters? Thanks.

Wael Mohamed
Wael Mohamed
CEO at Rapid7

Thank you. When we actually been looking at this, we've been looking at this before I started. On the board, Corey and the team been actually looking at how we can be able to reshape our company into the future for growth. So, the addition of Rafe for precision and Allan as a CCO for scale, and Dan for the AI first, that was actually always from day one in the structure. On the go-to-market, I had a partnership with Allan when I was actually on the board, and today as a CEO, and made sure that any restructuring we're making, it will not impact the scale we need to be able to actually continue with our transformation. It's a multiple basically sequence, and I believe that the way we actually did the restructuring, we tried to be very careful in a couple of areas.

Wael Mohamed
Wael Mohamed
CEO at Rapid7

Number one is anything to do with customer journey, pre or post, we made sure that we have all the right resources that allow us to get there safely. We need to protect our customer base, we need to protect our turf, we need to show up when customer invite us, and we need to be able to have our fair share win rate. When Rafe basically mentioned many times actually we get invited, and we get shortlisted, and we get selected, but even when I examine the time when we do not get selected, I feel we can improve that, and we can actually increase that win rate. Allan is laser focused on it.

Wael Mohamed
Wael Mohamed
CEO at Rapid7

He has done a very good job taking our existing great go-to-market team, augmented it with basically done it before team members, and I think the combination will allow us to be able to navigate. Rafe?

Rafe Brown
Rafe Brown
CFO at Rapid7

Yeah. On the guidance side, obviously this is something you look at when you are looking across the team. As Wael mentioned, the reorganization, every group participated in the reorganization to one extent or the other. There was and will always be a very big focus on those individuals who frankly touch customers or are on the front lines, whether it is on the customer success side or on the new sales side. So we tried to be very prudent as we looked at where savings opportunities had to be taken. But it is something we have considered as we are forming our guidance.

Joseph Gallo
Joseph Gallo
Analyst at Jefferies

Thank you.

Operator

Your next question comes from Meta Marshall with Morgan Stanley. Please unmute to ask your question.

Meta Marshall
Meta Marshall
Analyst at Morgan Stanley

Great. Thanks. Maybe a question. You noted Dan has been doing some significant work for a couple of months, and I know that there has been a lot of work being done over the last year to add a lot of features into the MDR product. So just, how do you think about, obviously, the product will be continuously evolving, but when should we think of judging milestones in terms of the products for both Exposure Management, MDR being closer to where you would like to see them? Then the second question, just on MDR, just any pricing commentary of what you are seeing in the market would be helpful. Thanks.

Wael Mohamed
Wael Mohamed
CEO at Rapid7

Great. Yes, we've been actually doing a lot of work on the product, not only in the last couple of months for Dan, for the last year. I see that with the win rate and how we can basically win some of the RFPs coming our way. We will continue to basically make the right investment. On the D&R, I sat with customers, and I can see who are the competition. Most times, actually, price was never the differentiator. They are looking for a partner that can be able to help them and can be able to be there, and they are looking for a lot of references. We have plenty of references that we can be able to furnish to those customers to give them the comfort.

Wael Mohamed
Wael Mohamed
CEO at Rapid7

I have talked to some customers, and when we basically talk about the sensitivity, I did not see that the price sensitivity. There is a customer that we are talking to, it was mostly about the service level, the ability to evolve into the agentic and the AI world. That was the number one priority for them. When you talk about basically the Exposure Management, I think it is just focus. I think we just needed to put more focus and let the team know that this is definitely not only core, but it is very much a priority because it will help us to complete the journey of our customers. Not only we can find things, we can be able to fix it. The connection is extremely important. There is a huge opportunity with our platform to be able to do so.

Wael Mohamed
Wael Mohamed
CEO at Rapid7

Overall, I think there is a lot of work done, but there is a lot of work need to be done as well. From a modernization perspective, the way I always talk as a team, AI first is going to be always part of our design. Vendor neutral is extremely important in what we do. Number three, connecting basically our Exposure Management with our Detection and Response so our customer can get the highest value from our platform and a greater outcome into the future. That is the way that Dan is actually managing his priorities, and he has done a lot of progress in the last couple of months. I see that the next quarters will see that manifest itself, then increasing our win rate, as we participate in more RFPs and more customer requests.

Meta Marshall
Meta Marshall
Analyst at Morgan Stanley

Great. Thanks so much.

Operator

The next question comes from Adam Tindle with Raymond James. Please unmute to ask your question.

Adam Tindle
Adam Tindle
Analyst at Raymond James

Okay, thanks. Wael, you mentioned that you are asking investors to judge you on cash generated over time, and you are addressing profitability now and generating cash, which is especially important with that debt instrument coming due in March. That makes total sense. Beyond this, I think you mentioned your other thing that you asked investors to judge you on was how you reinvest, and that is the part that I wanted to ask you about as we kind of squint forward. You have been on the board for other initiatives that involved accelerating hiring. Today we are making the decision to restructure. What would be different about that period of time where you are investing, once we get to that point, what have you learned and what might be different as you enter into that phase?

Wael Mohamed
Wael Mohamed
CEO at Rapid7

When I was at the board, it was very clear that there is definitely a core and non-core component in our book. It was very clear. Making sure that we have the right categorization was very important. As I sat in the seat, I was pleasantly surprised that most of the decline happened in the non-core. I thought I was going to come in and I am going to try to do some basically shifting and showing the team why we needed to be able to focus on the core more and de-emphasize the non-core. It was very clear, and the work was done for me when the majority of the decline was happening in the non-core. The other part that was very surprising to me is the appetite of our customers to talk to us and work with us and want us to give them more.

Wael Mohamed
Wael Mohamed
CEO at Rapid7

I knew the subcategory that we play in are attractive, and as I said, there is a category envy where I saw myself in the outside. Endpoint players are trying to become in the MDR because they know there is projects, there is budget, and there is action. They are trying to get in. Although they do not have the right to win, we have the right to win. We are actually invited. That made me feel stronger about accelerating the restructure that fast and redirecting our energy into these two important subcategories. Some of them are growing fast. The others will actually start growing faster, and we need to be ready. There is a lot of work we need to do to make sure we can really get our fair share from that upcoming growth, if you will.

Adam Tindle
Adam Tindle
Analyst at Raymond James

Great. Thanks. Maybe just a quick follow-up, and this might be for Rafe. I just wanted to ask for a little bit more quantification around the restructuring, if possible. What maybe hits in Q3, what is incremental in Q4? Because it's quite a ramp on EBIT margin. I imagine there's dollars of savings. To the extent that you could maybe just help us with the quantification of that. Secondly, Rafe, sorry to throw two at you, but.

Rafe Brown
Rafe Brown
CFO at Rapid7

Sure.

Adam Tindle
Adam Tindle
Analyst at Raymond James

I would also be interested in the cash costs of the restructuring. I couldn't help but notice your strong cash flow guide for fiscal 2026. So just wondering how you considered that when you looked at the $130 million, I think what you guided to for cash. Thanks.

Rafe Brown
Rafe Brown
CFO at Rapid7

Yeah. Thank you. I think in terms of the split of the benefit, and you can frankly see this looking at the operating income guide between Q3 and the full year, it kind of gives you the full view. Q3 is obviously, the restructuring's happening partway into the quarter. Obviously, especially as we look around the world, the discussions are ongoing pursuant to local law. So Q3 will not see that much of the benefit, really, when all things being equal. Q4, you start to get a much cleaner view of it. So you can see that full impact because it'll be a quarter where, by and large, we'll work through all of that. So that's what is really driving that big increase we're projecting for Q4. On the cash side, you're spot on.

Rafe Brown
Rafe Brown
CFO at Rapid7

Again, we do have the severance costs, and as I mentioned in the scripted part of the call, most of those severance costs will fall in Q3 and Q4, and that offsets essentially a lot of the savings that we're getting from the restructuring. So we've been calling out approximately $130 million of free cash flow all year long. So we're really just staying with that and working towards that number. It will be more back-end loaded, just the way the timing of the collections goes, as well as the severance costs and whatnot from the restructuring.

Adam Tindle
Adam Tindle
Analyst at Raymond James

Helpful details. Thank you.

Operator

At this time, we have reached the end of our question-and-answer session. We thank you all for your questions, and you can now disconnect your lines.

Executives
    • Matt Wells
      Matt Wells
      VP of Investor Relations
    • Corey Thomas
      Corey Thomas
      Executive Chairman
    • Wael Mohamed
      Wael Mohamed
      CEO
    • Rafe Brown
      Rafe Brown
      CFO
Analysts
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