Item 2. 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 (1) our unaudited condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and (2) the audited consolidated financial statements and the related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations for the fiscal year ended December 31, 2025 included in our Annual Report on Form 10-K, filed with the SEC on February, 19, 2026. Forward-looking statements in this review are qualified by the cautionary statement included under the next sub-heading, “Special Note Regarding Forward-Looking Statements”.
Special Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q, including the sections entitled “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Statements that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are often identified by the use of words such as, but not limited to, “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “seek,” “should,” “target,” “will,” “would” and similar expressions or variations intended to identify forward-looking statements. These forward-looking statements include, but are not limited to, statements concerning the following:
• our ability to continue to add new customers, maintain existing customers and sell new products and professional services to new and existing customers;
• uncertain impacts that prolonged economic uncertainty may have on our business, strategy, operating results, financial condition and cash flows, as well as changes in overall level of software spending and volatility in the global economy;
• the effects of increased competition as well as innovations by new and existing competitors in our market;
• our ability to effectively restructure our business in alignment with our strategic priorities;
• our ability to adapt to technological change and effectively enhance, integrate, innovate and scale our solutions and platform capabilities, including our Command Platform;
• our ability to capitalize on customer demand for consolidated security platforms and vendor consolidation trends, including out ability to deliver an integrated, open security operations platform;
• our ability to deliver, scale and operate managed services (including managed detection and response (“MDR”) and related offerings, including with respect to service quality, staffing, operating efficiency, and the integration of technology and expertise;
• our ability to effectively manage or sustain our growth and to sustain profitability;
• our ability to diversify our sources of revenue;
• potential acquisitions and our ability to successfully integrate acquired businesses, technologies and personnel, including the realization of anticipated benefits from such acquisitions;
• our expected use of proceeds from future issuances of equity or convertible debt securities;
• our ability to maintain, or strengthen awareness of, our brand;
• perceived or actual security, integrity, reliability, quality or compatibility problems with our solutions, including problems related to systems, unscheduled downtime, outages or security breaches in our customers;
• statements regarding future revenue, hiring plans, expenses, capital expenditures, capital requirements and stock performance;
• our ability to meet publicly announced guidance or other expectations about our business, key metrics and future operating results;
• our ability to maintain an adequate annualized recurring revenue growth;
• our ability to attract and retain qualified employees and key personnel and further expand our overall headcount;
• our ability to grow, both domestically and internationally;
• our ability to stay abreast of new or modified laws and regulations that currently apply or become applicable to our business both in the United States and internationally;
• our ability to maintain, protect and enhance our intellectual property;
• the outcomes of our initiatives that use artificial intelligence (“AI”), including the development, integration and effectiveness of AI-driven and autonomous (“agentic”) security capabilities within our solutions;
• the evolving threat landscape, including the increasing sophistication and frequency of cyberattacks, including those leveraging AI;
• costs associated with defending intellectual property infringement and other claims; and
• the future trading prices of our common stock and the impact of securities analysts’ reports on these prices.
These statements represent the beliefs and assumptions of our management based on information currently available to us. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified above, and those discussed in the section titled “Risk Factors” included under Part II, Item 1A. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances that occur after the date of this report.
As used in this report, the terms “Rapid7,” the “company,” “we,” “us,” and “our” mean Rapid7, Inc. and its subsidiaries unless the context indicates otherwise.
Overview
Rapid7 is a global leader in AI-powered managed cybersecurity operations, trusted to advance organizations’ cyber resilience. Open and extensible, the Rapid7 Command Platform integrates security data, enriching it with AI, threat intelligence, and 25 years of expertise and innovation to reduce risk and disrupt attackers. As a recognized leader in preemptive managed detection and response (MDR), Rapid7 unifies exposure and detection to transform the cybersecurity operations of customers worldwide. In today's rapidly evolving IT environment, customers are encountering escalating challenges due to the widening spectrum of attackers and techniques, including the proliferation of cyberattacks leveraging AI. We empower security professionals to manage a modern attack surface through our AI-driven technology, research, and broad, strategic expertise. Rapid7’s comprehensive security solutions, including our MDR services, next-gen security information and event management ("SIEM"), and exposure management help our global customers unify exposure management with threat detection and response to prioritize and reduce material risk, and eliminate threats with greater speed, precision, and consistency.
We believe that Rapid7 is poised to expand the capabilities of today's SecOps teams through our integrated, open data security operations platform which is powered by our AI-assisted workflows to AI-driven, machine-speed security operations. Rapid7 enables the Security Operations Center (“SOC”) to understand their fragmented attack surface through an attacker's perspective, thereby allowing them to proactively reduce exposures and better detect and respond to threats. Enriched by years of industry-leading risk research and managed services expertise, our integrated platform replaces reactive security with a preemptive, risk-aware approach that reduces attack surfaces and enables faster, more confident response through contextually rich insights and deep operational visibility.
In recent years, security leaders have increasingly prioritized consolidating fragmented point products into unified security operations platforms to improve visibility, operational efficiency, and risk outcomes. In 2022, Gartner reported that approximately 75% of organizations were pursuing security vendor consolidation as part of their SecOps strategies. This shift reflects mounting challenges associated with managing expanding attack surfaces, disconnected exposure data, escalating alert volume, and the need to continuously prioritize and respond to risk across complex environments. As a result, customers are seeking platforms that unify exposure management with threat detection and response, enabling them to identify where they are most vulnerable, anticipate how attackers may exploit those exposures, and respond with speed and precision. At the same time, customers are increasingly relying on MDR and adjacent managed services to deliver continuous expertise, higher-fidelity detection, and faster response outcomes that extend and augment internal SOC teams. In this context, organizations are prioritizing open, integrated security operations platforms that pair technology with expertise to deliver risk-aware detection and response across on-premise, cloud, identity, and external attack surfaces. We have been an active participant in advancing this shift toward consolidated SecOps by innovating across our open platform architecture, strengthening our exposure management and AI SOC capabilities, and expanding our managed services portfolio. As we continue to execute on our SecOps consolidation strategy, we are advancing innovation across our core platform capabilities and managed services to accelerate customer value and deliver a frictionless, integrated security operations experience.
As the threat landscape continues to grow in complexity, customers are demonstrating demand for integrated expertise to support them in effectively managing their security technologies. The convergence of these key trends – security consolidation, AI SOC capabilities, integrated cloud security, and expertise driven outcomes – forms the foundation of what our customers require for the modern SOC. Our focus is to be the leading provider of integrated, AI-driven security solutions infused with
human expertise for the modern SOC by providing risk-aware detection and response that outpaces attackers and strengthens security program maturity.
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 March 31, 2026, we had over 11,500 customers in 150 countries, including 35% of the Fortune 100. Our revenue was not concentrated with any individual customer and no customer represented more than 1% of our revenue for the three months ended March 31, 2026 and 2025.
Recent Developments
Kenzo Security Acquisition
On March 26, 2026, we acquired Kenzo Security, Inc. ("Kenzo") an agentic AI security platform built to scale autonomous security investigations for a purchase price with an aggregate fair value of $25.5 million. The purchase consideration consisted of $24.2 million in cash paid at closing and $1.3 million of deferred cash payments related to certain indemnities outlined in the purchase agreement. The acquisition further enhances our Command Platform, accelerating industry-leading MDR services from AI-assisted workflows to AI-driven, machine-speed security operations.
Our Business Model
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 Incident Command, Exposure Command, and Threat Command products are offered as cloud-based subscriptions, with an option for a one or multi-year term.
•Managed services, through which we operate our products and provide our capabilities on behalf of our customers. Our Managed Vulnerability Management, Managed Detection and Response, and Managed Application Security products are offered on a managed service basis, pursuant to one or multi-year agreements.
•Licensed on-premise software consists of term licenses. When licensed on-premise software is purchased, maintenance and support and content subscriptions, as applicable, are bundled with the license for the term period. Our Nexpose and Metasploit products are offered through term software licenses with an option for one or multi-year terms. 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.
Additionally, we offer our products through our consolidation offerings, which unify our products and services to our customers in a single package. Our Threat Complete and Cloud Risk Complete packages are offered as cloud based subscriptions, with an option for a one or multi-year term. Our Managed Threat Complete Offering is offered on a managed service basis, generally pursuant to one or multi-year agreements.
For the three months ended March 31, 2026 and 2025, recurring revenue, defined as revenue from term software licenses, content subscriptions, managed services, cloud-based subscriptions and maintenance and support, was 97% and 96%, respectively, of total revenue.
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.
Product Subscriptions
We generate product subscriptions 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 consists of revenues from term licenses. When software licenses are purchased, maintenance and support and content subscription, as applicable, are bundled with the license for the term period.
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 product subscriptions 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 Product Subscriptions
Cost of product subscriptions 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 product subscriptions 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 over time.
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.
Operating Expenses
Operating expenses consist of research and development, sales and marketing, general and administrative expenses, impairment of long-lived assets, and restructuring costs. 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. In the near term, we expect our operating expenses to increase as a percentage of revenue as we prioritize investments to drive growth.
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.
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.
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.
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 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.
Other (Expense) Income, Net
Other (expense) income, net consists primarily of the change in fair value of derivative assets and unrealized and realized gains and losses related to changes in foreign currency exchange rates.
Provision for Income Taxes
Provision for income taxes consists of domestic and foreign taxes on income and withholding taxes. We maintain a substantially full valuation allowance for domestic and certain foreign deferred tax assets, including net operating loss carryforwards and tax credits. We determined as of March 31, 2026 that it was more likely than not that these deferred tax assets will not be realized. However, we may release some of these valuation allowances in future periods if positive evidence, such as projection of sustained future growth, supports the realization of such deferred tax assets. Release of all or a portion of these valuation allowances would result in a decrease in the provision for income taxes in the period of the release.
Results of Operations
The following table presents the consolidated statement of operations data (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | |
| | 2026 | | 2025 | | | | | | |
| Revenue: | | | | | | | | | | |
| Product subscriptions | | $ | 204,049 | | | $ | 203,935 | | | | | | | |
| Professional services | | 5,642 | | | 6,318 | | | | | | | |
| Total revenue | | 209,691 | | | 210,253 | | | | | | | |
Cost of revenue(1): | | | | | | | | | | |
| Product subscriptions | | 59,154 | | | 54,368 | | | | | | | |
| Professional services | | 5,595 | | | 5,112 | | | | | | | |
| Total cost of revenue | | 64,749 | | | 59,480 | | | | | | | |
Operating expenses(1): | | | | | | | | | | |
| Research and development | | 48,354 | | | 47,888 | | | | | | | |
| Sales and marketing | | 78,934 | | | 79,400 | | | | | | | |
| General and administrative | | 18,212 | | | 23,586 | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Total operating expenses | | 145,500 | | | 150,874 | | | | | | | |
| Loss from operations | | (558) | | | (101) | | | | | | | |
| Interest income | | 5,612 | | | 5,758 | | | | | | | |
| Interest expense | | (2,498) | | | (2,654) | | | | | | | |
| Other (expense) income, net | | (726) | | | 1,802 | | | | | | | |
| Income before income taxes | | 1,830 | | | 4,805 | | | | | | | |
| Provision for income taxes | | 700 | | | 2,700 | | | | | | | |
| Net income | | $ | 1,130 | | | $ | 2,105 | | | | | | | |
(1) Cost of revenue and operating expenses include stock-based compensation expense and depreciation and amortization expense as follows (in thousands): | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | |
| | 2026 | | 2025 | | | | | | |
| Stock-based compensation expense: | | | | | | | | | | |
| Cost of revenue | | $ | 1,716 | | | $ | 2,264 | | | | | | | |
| Research and development | | 8,406 | | | 10,386 | | | | | | | |
| Sales and marketing | | 5,071 | | | 7,241 | | | | | | | |
| General and administrative | | 4,697 | | | 7,260 | | | | | | | |
| Total stock-based compensation expense | | $ | 19,890 | | | $ | 27,151 | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | |
| | 2026 | | 2025 | | | | | | |
| Depreciation and amortization expense: | | | | | | | | | | |
| Cost of revenue | | $ | 9,297 | | | $ | 8,674 | | | | | | | |
| Research and development | | 716 | | | 910 | | | | | | | |
| Sales and marketing | | 841 | | | 1,666 | | | | | | | |
| General and administrative | | 356 | | | 415 | | | | | | | |
| Total depreciation and amortization expense | | $ | 11,210 | | | $ | 11,665 | | | | | | | |
The following table sets forth our consolidated statements of operations data expressed as a percentage of revenue:
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | |
| | 2026 | | 2025 | | | | | | |
| Revenue: | | | | | | | | | | |
| Product subscriptions | | 97.3 | % | | 97.0 | % | | | | | | |
| Professional services | | 2.7 | % | | 3.0 | % | | | | | | |
| Total revenue | | 100.0 | % | | 100.0 | % | | | | | | |
Cost of revenue: | | | | | | | | | | |
| Product subscriptions | | 28.2 | % | | 25.9 | % | | | | | | |
| Professional services | | 2.7 | % | | 2.4 | % | | | | | | |
| Total cost of revenue | | 30.9 | % | | 28.3 | % | | | | | | |
Operating expenses: | | | | | | | | | | |
| Research and development | | 23.1 | % | | 22.8 | % | | | | | | |
| Sales and marketing | | 37.6 | % | | 37.8 | % | | | | | | |
| General and administrative | | 8.7 | % | | 11.2 | % | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Total operating expenses | | 69.4 | % | | 71.8 | % | | | | | | |
| Loss from operations | | (0.3) | % | | (0.1) | % | | | | | | |
| Interest income | | 2.7 | % | | 2.7 | % | | | | | | |
| Interest expense | | (1.2) | % | | (1.3) | % | | | | | | |
| Other (expense) income, net | | (0.3) | % | | 0.9 | % | | | | | | |
| Income before income taxes | | 0.9 | % | | 2.2 | % | | | | | | |
| Provision for income taxes | | 0.3 | % | | 1.3 | % | | | | | | |
| Net income | | 0.5 | % | | 0.9 | % | | | | | | |
Comparison of the Three Months Ended March 31, 2026 and 2025
All numbers presented below are in thousands, except for percentages.
Revenue
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | Change | | | | |
| | 2026 | | 2025 | | $ | | % | | | | | | | | |
| Revenue: | | | | | | | | | | | | | | | | |
| Product subscriptions | | $ | 204,049 | | | $ | 203,935 | | | $ | 114 | | | 0.1 | % | | | | | | | | |
| Professional services | | 5,642 | | | 6,318 | | | (676) | | | (10.7) | % | | | | | | | | |
| Total revenue | | $ | 209,691 | | | $ | 210,253 | | | $ | (562) | | | (0.3) | % | | | | | | | | |
The decrease in total revenue for the three months ended March 31, 2026 as compared to the same period in 2025 was driven by a decrease in professional services revenue from less consulting testing performed in the first quarter of 2026. Revenue from product subscriptions was approximately flat.
Cost of Revenue
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | Change | | | | |
| | 2026 | | 2025 | | $ | | % | | | | | | | | |
| Cost of revenue: | | | | | | | | | | | | | | | | |
| Product subscriptions | | $ | 59,154 | | | $ | 54,368 | | | $ | 4,786 | | | 8.8 | % | | | | | | | | |
| Professional services | | 5,595 | | | 5,112 | | | 483 | | | 9.4 | % | | | | | | | | |
| Total cost of revenue | | $ | 64,749 | | | $ | 59,480 | | | $ | 5,269 | | | 8.9 | % | | | | | | | | |
| Gross margin %: | | | | | | | | | | | | | | | | |
| Products | | 71.0 | % | | 73.3 | % | | | | | | | | | | | | |
| Professional services | | 0.8 | % | | 19.1 | % | | | | | | | | | | | | |
| Total gross margin % | | 69.1 | % | | 71.7 | % | | | | | | | | | | | | |
The increase in total cost of revenue for the three months ended March 31, 2026 as compared to the same period in 2025 was primarily driven by a $3.1 million increase in personnel costs related to supporting product delivery, a $0.9 million increase in cloud computing costs, a $0.6 million increase in amortization expense for capitalized internally-developed software, and a $0.5 million increase in facilities expenses. The increase was partially offset by $0.1 million decrease in subscription expense.
Operating Expenses
Research and Development Expense
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | Change | | | | |
| | 2026 | | 2025 | | $ | | % | | | | | | | | |
| Research and development | | $ | 48,354 | | | $ | 47,888 | | | $ | 466 | | | 1.0 | % | | | | | | | | |
| % of revenue | | 23.1 | % | | 22.8 | % | | | | | | | | | | | | |
Research and development expenses increased for the three months ended March 31, 2026 as compared to the same period in 2025, primarily driven by a $2.5 million increase in personnel cost driven by an increase in headcount to further product development and offset by a $0.6 million decrease in impairment expense of capitalized internally-developed software projects, $0.5 million decrease in professional expenses, and $0.5 million decrease in hosting expenses.
Sales and Marketing Expense
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | Change | | | | |
| | 2026 | | 2025 | | $ | | % | | | | | | | | |
| Sales and marketing | | $ | 78,934 | | | $ | 79,400 | | | $ | (466) | | | (0.6) | % | | | | | | | | |
| % of revenue | | 37.6 | % | | 37.8 | % | | | | | | | | | | | | |
Sales and marketing expenses decreased for the three months ended March 31, 2026 as compared to the same period in 2025, primarily driven by a $2.6 million decrease in personnel costs, primarily consisting of a $2.2 million decrease in SBC expense $1.3 million decrease in commissions, and offset by a $0.9 million increase to salaries and bonus costs. The decrease was also driven by a $0.6 million decrease in amortization of acquired intangibles. The decrease was partially offset by a $0.9 million increase in full time and contract labor costs. The decrease was partially offset by a $1.7 million increase to our sales related events and a $1.3 million increase to professional fees for consulting.
General and Administrative Expense
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | Change | | | | |
| | 2026 | | 2025 | | $ | | % | | | | | | | | |
| General and administrative | | $ | 18,212 | | | $ | 23,586 | | | $ | (5,374) | | | (22.8) | % | | | | | | | | |
| % of revenue | | 8.7 | % | | 11.2 | % | | | | | | | | | | | | |
General and administrative expenses decreased for the three months ended March 31, 2026 as compared to the same period in 2025, primarily driven by a decrease of $3.2 million personnel costs, which included a $2.6 million decrease in stock-based compensation expense due to fewer awards granted and more recent grants valued at a lower grant price. Additionally, professional fees decreased by $1.7 million, primarily related to certain consulting services, and a $1.2 million decrease in bad debt expense. The decrease was partially offset by an increase in hosting expenses of $0.6 million associated with enterprise software and cloud computing costs and $0.5 million of acquisition-related expenses associated with our acquisition of Kenzo.
Interest Income
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | Change | | | | |
| | 2026 | | 2025 | | $ | | % | | | | | | | | |
| Interest income | | $ | 5,612 | | | $ | 5,758 | | | $ | (146) | | | (2.5) | % | | | | | | | | |
| % of revenue | | 2.7 | % | | 2.7 | % | | | | | | | | | | | | |
Interest income slightly decreased for the three months ended March 31, 2026 compared to the same period in 2025, primarily due to lower cash and investment balances this year compared to prior year.
Interest Expense
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | Change | | | | |
| | 2026 | | 2025 | | $ | | % | | | | | | | | |
| Interest expense | | $ | (2,498) | | | $ | (2,654) | | | $ | 156 | | | (5.9) | % | | | | | | | | |
| % of revenue | | (1.2) | % | | (1.3) | % | | | | | | | | | | | | |
Interest expense slightly decreased in the three months ended March 31, 2026 compared to the same period in 2025.
Other (Expense) Income, Net
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | Change | | | | |
| | 2026 | | 2025 | | $ | | % | | | | | | | | |
| Other (expense) income, net | | $ | (726) | | | $ | 1,802 | | | $ | (2,528) | | | (140.3) | % | | | | | | | | |
| % of revenue | | (0.3) | % | | 0.9 | % | | | | | | | | | | | | |
Other (expense) income, net decreased for the three months ended March 31, 2026 compared to the same period in 2025 primarily due to unrealized losses on foreign currency transactions resulting in an increase in unrealized losses as compared to unrealized gains in comparative periods primarily related to the British Pound Sterling and Euro.
Provision for income taxes
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | Change | | | | |
| | 2026 | | 2025 | | $ | | % | | | | | | | | |
| Provision for income taxes | | $ | 700 | | | $ | 2,700 | | | $ | (2,000) | | | (74.1) | % | | | | | | | | |
| % of revenue | | 0.3 | % | | 1.3 | % | | | | | | | | | | | | |
Provision for income taxes decreased for the three months ended March 31, 2026 compared to the same period in 2025. The decrease was primarily driven by a one-time discrete tax benefit in the first quarter of 2026 for $0.6 million related to the acquisition of Kenzo and an increase to tax expense in the first quarter of 2025 for $1.1 million related to an unfavorable international return-to-provision expense of $1.1 million.
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 (in thousands, except percentages):
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | |
| | 2026 | | 2025 | | | | | | |
| Total revenue | | $ | 209,691 | | | $ | 210,253 | | | | | | | |
| Year-over-year growth | | (0.3) | % | | 2.5 | % | | | | | | |
| Non-GAAP income from operations | | $ | 24,432 | | | $ | 32,353 | | | | | | | |
| Non-GAAP operating margin | | 11.7 | % | | 15.4 | % | | | | | | |
| Free cash flow | | $ | 33,417 | | | $ | 24,677 | | | | | | | |
| | | | | | | | | | | | | | |
| | As of March 31, |
| | 2026 | | 2025 |
| Annualized recurring revenue (“ARR”) | | $ | 832,130 | | | $ | 837,220 | |
| Year-over-year change | | (0.6) | % | | 3.7 | % |
| Number of customers | | 11,629 | | | 11,685 | |
| Year-over-year change | | (0.5) | % | | 1.9 | % |
| ARR per customer | | $ | 71.6 | | | $ | 71.6 | |
| Year-over-year change | | — | % | | 1.7 | % |
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 and Non-GAAP Operating Margin. We monitor non-GAAP income from operations and non-GAAP operating margin, which are non-GAAP financial measures, to analyze our financial results. We believe non-GAAP income from operations and non-GAAP operating margin are useful to investors, as supplements 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 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. ARR is defined as the annual value of all recurring revenue related to active contracts as of the last day of the period. ARR is measured at a specific point in time and does not incorporate consideration of any anticipated contract terminations or other prospective events, regardless of whether such events may exert a favorable or adverse influence on the metric. 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 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 only InsightOps and Logentries customers with a contract value less than $2,400 per year.
ARR per Customer. ARR per customer is defined as ARR divided by the number of customers at the end of the period.
Non-GAAP Financial Results
To supplement our consolidated financial statements, which are prepared and presented in accordance with GAAP, we may provide investors with certain non-GAAP financial measures from time to time, including non-GAAP gross profit, non-GAAP income from operations, non-GAAP operating margin, non-GAAP net income, non-GAAP net income 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 operating margin, non-GAAP net income and non-GAAP net income per share as the respective GAAP balances excluding the effect of stock-based compensation expense, amortization of acquired intangible assets, amortization of debt issuance costs and certain other items such as acquisition-related expenses, non-ordinary course litigation-related expenses, impairment of long-lived assets, induced conversion expense, change in the fair value of derivative assets, restructuring expense and discrete tax items. Non-GAAP net income per basic and diluted share is calculated as non-GAAP net income divided by the weighted average shares used to compute net income 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 issuance costs. The expense for the amortization of 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.
•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.
•Discrete tax items. We exclude certain discrete tax items such as income tax expenses or benefits that are not related to ongoing business operations in the current year and adjustments to uncertain tax position reserves as these charges are not indicative of our ongoing operating results, and they are not considered when we are forecasting our future results.
We define adjusted EBITDA as net income 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, (8) acquisition-related expenses, and (9) restructuring expense. 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.
The following tables reconcile GAAP gross profit to non-GAAP gross profit for the three months ended March 31, 2026 and 2025 (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | |
| | 2026 | | 2025 | | | | | | |
| GAAP total gross profit | | $ | 144,942 | | | $ | 150,773 | | | | | | | |
| Stock-based compensation expense | | 1,716 | | | 2,264 | | | | | | | |
| Amortization of acquired intangible assets | | 4,423 | | | 4,423 | | | | | | | |
| Non-GAAP total gross profit | | $ | 151,081 | | | $ | 157,460 | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | |
| | 2026 | | 2025 | | | | | | |
| GAAP gross profit – product subscriptions | | $ | 144,895 | | | $ | 149,567 | | | | | | | |
| Stock-based compensation expense | | 1,369 | | | 1,731 | | | | | | | |
| Amortization of acquired intangible assets | | 4,423 | | | 4,423 | | | | | | | |
| Non-GAAP gross profit – product subscriptions | | $ | 150,687 | | | $ | 155,721 | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | |
| | 2026 | | 2025 | | | | | | |
| GAAP gross profit – professional services | | $ | 47 | | | $ | 1,206 | | | | | | | |
| Stock-based compensation expense | | 347 | | | 533 | | | | | | | |
| Non-GAAP gross profit – professional services | | $ | 394 | | | $ | 1,739 | | | | | | | |
The following table reconciles GAAP loss from operations to non-GAAP income from operations for the three months ended March 31, 2026 and 2025 (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | |
| | 2026 | | 2025 | | | | | | |
| GAAP loss from operations | | $ | (558) | | | $ | (101) | | | | | | | |
| Stock-based compensation expense | | 19,890 | | | 27,151 | | | | | | | |
| Amortization of acquired intangible assets | | 4,494 | | | 5,120 | | | | | | | |
Acquisition-related expenses(1) | | 606 | | | 183 | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Non-GAAP income from operations | | $ | 24,432 | | | $ | 32,353 | | | | | | | |
(1) For the three months ended March 31, 2026 and 2025, acquisition-related expenses included $0.1 million and $0.2 million, respectively, of accretion expense related to contingent consideration recorded in connection with our July 2024 acquisition of Noetic.
The following table reconciles GAAP net income to non-GAAP net income for the three months ended March 31, 2026 and 2025 (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | |
| | 2026 | | 2025 | | | | | | |
| GAAP net income | | $ | 1,130 | | | $ | 2,105 | | | | | | | |
| Stock-based compensation expense | | 19,890 | | | 27,151 | | | | | | | |
| Amortization of acquired intangible assets | | 4,494 | | | 5,120 | | | | | | | |
| Acquisition-related expenses | | 606 | | | 183 | | | | | | | |
| | | | | | | | | | |
| Amortization of debt issuance costs | | 1,045 | | | 1,019 | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Discrete tax items | | (600) | | | — | | | | | | | |
| Non-GAAP net income | | $ | 26,565 | | | $ | 35,578 | | | | | | | |
Interest expense of convertible senior notes(1) | | 1,313 | | | 1,571 | | | | | | | |
| Numerator for non-GAAP earnings per share calculation | | $ | 27,878 | | | $ | 37,149 | | | | | | | |
| | | | | | | | | | |
| Weighted average shares used in GAAP earnings per share calculation, basic | | 66,174,341 | | | 63,835,945 | | | | | | | |
Dilutive effect of convertible senior notes(1) | | 10,429,891 | | | 11,183,611 | | | | | | | |
Dilutive effect of employee equity incentive plans(2) | | 730,651 | | | 388,471 | | | | | | | |
| Weighted average shares used in non-GAAP earnings per share calculation, diluted | | 77,334,883 | | | 75,408,027 | | | | | | | |
| | | | | | | | | | |
| Non-GAAP net income per share: | | | | | | | | | | |
| Basic | | $ | 0.40 | | | $ | 0.56 | | | | | | | |
| Diluted | | $ | 0.36 | | | $ | 0.49 | | | | | | | |
(1) We use the if-converted method to compute diluted earnings per share with respect to our Notes. There was no add-back of interest expense or additional dilutive shares related to the Notes where the effect was anti-dilutive. On an if converted basis, for the three months ended March 31, 2026, the 2029 Notes and 2027 Notes were dilutive, for the three months ended March 31, 2025 the 2029 Notes, 2027 Notes and 2025 Notes were dilutive.
(2) We use the treasury method to compute the dilutive effect of employee equity incentive plan awards.
The following table reconciles GAAP net income to adjusted EBITDA for the three months ended March 31, 2026 and 2025 (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | |
| | 2026 | | 2025 | | | | | | |
| GAAP net income | | $ | 1,130 | | | $ | 2,105 | | | | | | | |
| Interest income | | (5,612) | | | (5,758) | | | | | | | |
| Interest expense | | 2,498 | | | 2,654 | | | | | | | |
| Other expense (income), net | | 726 | | | (1,802) | | | | | | | |
| Provision for income taxes | | 700 | | | 2,700 | | | | | | | |
| Depreciation expense | | 2,374 | | | 2,791 | | | | | | | |
| Amortization of intangible assets | | 8,836 | | | 8,874 | | | | | | | |
| Stock-based compensation expense | | 19,890 | | | 27,151 | | | | | | | |
| Acquisition-related expenses | | 606 | | | 183 | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Adjusted EBITDA | | $ | 31,148 | | | $ | 38,898 | | | | | | | |
The following table reconciles net cash provided by operating activities to free cash flow for the three months ended March 31, 2026 and 2025 (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | |
| | 2026 | | 2025 | | | | | | |
| Net cash provided by operating activities | | $ | 39,817 | | | $ | 29,757 | | | | | | | |
| Less: Purchases of property and equipment | | (2,081) | | | (1,361) | | | | | | | |
| Less: Capitalized internal-use software costs | | (4,319) | | | (3,719) | | | | | | | |
| Free cash flow | | $ | 33,417 | | | $ | 24,677 | | | | | | | |
Liquidity and Capital Resources
As of March 31, 2026, we had $343.3 million in cash and cash equivalents, $327.0 million in investments that have maturities ranging from one to eleven months and an accumulated deficit of $963.5 million. Our principal sources of liquidity are cash and cash equivalents, investments, cash flow provided by operating activities and our Credit Agreement. To date, we have financed our operations primarily through private and public equity financings, issuance of convertible senior notes and through cash generated by operating activities.
On June 25, 2025 we entered into a credit agreement (the "Credit Agreement") that establishes a senior secured revolving credit facility and provides for borrowings in an aggregate principal amount of up to $200 million (the “Revolving Facility”, the loans thereunder, the “Revolving Loans” and the commitments thereunder, the “Revolving Commitments”).The Credit Agreement allows for incremental facilities up to the greater of $141 million or 75% of Consolidated EBITDA (as defined in the Credit Agreement). Additional incremental facilities may be incurred, subject to certain conditions. The proceeds of the Revolving Facility can be used to finance working capital needs, capital expenditures, permitted acquisitions and other general corporate purposes. As of March 31, 2026, we were in compliance with all applicable covenants and had sufficient capacity under the affirmative covenants. Refer to Note 9, Debt, for additional information related to the credit agreement.
We believe that our existing cash and cash equivalents, our investments, our cash generated by operating activities and our available borrowings under our Credit Agreement will be sufficient to meet our operating and capital requirements for at least the next 12 months. 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, potential future acquisitions of technology businesses and any election we make to redeem our convertible senior notes. Further, in January 2025, we entered into a cloud-services agreement with a cloud services provider that contains minimum spend commitments. The agreement provides for an annual commitment of $125.0 million per year over the next five years, with an additional $35.0 million obligation over the five-year period of the agreement, for an aggregate total commitment of $660.0 million. For more information regarding this commitment, see Note 15, Commitments and Contingencies, in the Notes to our consolidated financial statements on Form 10-K for the year ended
December 31, 2025, filed with the SEC on February, 19, 2026 . In preparation for the repayment of the 2027 Notes, due on March 15, 2027, we implemented the following measures:
•Liquidity Management: Cash management procedures have been refined to ensure the availability of adequate liquidity, thereby supporting uninterrupted operations and facilitating the fulfillment of obligations related to the 2027 Notes without the incurrence of additional indebtedness.
•Investment Policy: We revised our investment policy to restrict all new investments to instruments with maturities not exceeding twelve months.
These actions collectively reinforce the organization’s commitment to prudent financial management and maintenance of a robust liquidity position.
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 three months ended March 31, 2026 and 2025 (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | |
| | 2026 | | 2025 | | | | | | |
| Cash, cash equivalents and restricted cash at beginning of period | | $ | 246,664 | | | $ | 342,101 | | | | | | | |
| Net cash provided by operating activities | | 39,817 | | | 29,757 | | | | | | | |
| Net cash provided by (used in) investing activities | | 55,255 | | | (79,213) | | | | | | | |
| Net cash provided by financing activities | | 2,634 | | | 4,732 | | | | | | | |
| Effects of exchange rates on cash, cash equivalents and restricted cash | | (1,079) | | | 1,334 | | | | | | | |
| Cash, cash equivalents and restricted cash at end of period | | $ | 343,291 | | | $ | 298,711 | | | | | | | |
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 $39.8 million of cash and cash equivalents for the three months ended March 31, 2026, which reflects the cash generating ability of our operations. Cash provided by operating activities was primarily driven by a net income of $1.1 million in addition to significant beneficial adjustments to reconcile net income to net cash provided from operating activities including $19.9 million in stock-based compensation, $11.2 million of depreciation, from our fixed assets, and amortization, primarily from our internally-developed software and acquired intangibles. Additionally, working capital contributed an additional $6.3 million of cash to operating activities primarily driven by significant accounts receivable collections of $31.4 million, partially offset by decreases in accrued expenses of $14.8 million and $11.1 million of deferred revenue.
Operating activities provided $29.8 million of cash and cash equivalents for the three months ended March 31, 2025, which reflects continued growth in revenue partially offset by our continued investments in our operations and the timing of working capital adjustments. Cash provided by operating activities reflected our net income of $2.1 million and a decrease in our net operating assets and liabilities of $11.0 million, offset by non-cash charges of $38.7 million related primarily to depreciation and amortization, stock-based compensation expense, amortization of debt issuance costs and other non-cash charges. The change in our net operating assets and liabilities was primarily due to a $20.3 million decrease in accrued expenses, a $12.9 million decrease in deferred revenue, a $2.0 million increase in prepaid expenses, a $2.2 million decrease in other liabilities and a $6.6 million decrease in accounts payable, which each had a negative impact on operating cash flow. These factors were
offset by a $27.7 million decrease in accounts receivable and a $5.3 million decrease in deferred contract acquisition and fulfillment costs, which each had a positive impact on operating cash flow.
Investing Activities
Investing activities provided $55.3 million of cash for the three months ended March 31, 2026, primarily driven by $85.0 million of investment maturities, which was partially offset by $23.3 million in cash paid, net of cash acquired, in the acquisition of Kenzo to further strength our AI SOC capabilities and $4.3 million in capitalized internal-use software costs as we continue to invest and develop our product offering.
Investing activities used $79.2 million of cash for the three months ended March 31, 2025, consisting of $75.5 million in purchases of investments, net of sales/maturities, $3.7 million for capitalization of internal-use software costs, and $1.4 million in capital expenditures to purchase computer equipment and leasehold improvements, partially offset by $1.3 million in proceeds from other investments.
Financing Activities
Financing activities provided $2.6 million for the three months ended March 31, 2026, which consisted primarily of $2.9 million in proceeds from our employee stock purchase plan and was partially offset by $0.3 million in withholding taxes paid for the net share settlement of equity awards.
Financing activities provided $4.7 million of cash for the three months ended March 31, 2025, which consisted primarily of $4.4 million in proceeds from the issuance of common stock purchased by employees under the Rapid7, Inc. 2015 Employee Stock Purchase Plan (“ESPP”) and $1.6 million in proceeds from the exercise of stock options, partially offset by $1.3 million in withholding taxes paid for the net share settlement of equity awards.
Contractual Obligations and Commitments
As of March 31, 2026, there were no material changes from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2025, filed with the SEC on February, 19, 2026 (the “Annual Report”).
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 Estimates
Our unaudited condensed consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). The preparation of our unaudited condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and disclosures. 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. Other than the new market-based PSU estimate discussed in Note 2, Summary of Significant Accounting Policies, there have been no material changes in our critical accounting policies from those disclosed in our Annual Report.