Corey Thomas – CEO Steven Gatoff - CFO Mark Donohue – IR.

Rob Owens - Pacific Crest Securities Michael Turits - Raymond James Gregg Moskowitz - Cowen & Company Melissa Gorham - Morgan Stanley Matt Swanson - RBC Capital Markets Jonathan Ho - William Blair Saket Kalia - Barclays Capital.

Ladies and gentlemen, thank you for standing by. Welcome to the Rapid7 Third Quarter 2016 Earnings Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to Mark Donohue..

Thank you, Operator, and good afternoon everyone. We appreciate you joining us to discuss our Q3 2016 financial and operating results. I'm Mark Donohue, VP, Treasury and Investor Relations and I'm here today with Corey Thomas, our President and CEO; and Steven Gatoff, our CFO.

We've distributed our Q3 2016 earnings press release over the wire and have posted it on our website at investors.rapid7.com. We've also posted our Q3 2016 results earnings presentation, along with an updated company presentation on our investor relations website. This call is being webcast and can be accessed at investors.rapid7.com.

The webcast of this call will be archived and a telephone replay will be available on our website until November 12, 2016. We would like to bring the following to your attention. The date of this call is November 9th 2016.

Our discussion today may contain forward-looking statements about events and circumstances that have not yet occurred, including without limitations, statements regarding our objectives for future operations and future financial and business performance.

These forward-looking statements are based on our current expectations and beliefs and on information currently available to us. Statements containing words such as anticipate, believe, continue, estimate, expect, intend, may, will and other similar statements, are intended to identify such forward looking statements.

Actual outcomes and results may differ materially from the expectations contained in these statements due to a number of risks and uncertainties including those contained in the risk factors section of our annual report on form 10-K filed with the Securities and Exchange Commission for the fiscal year ended December 31, 2015 and subsequent reports that we file with the Securities and Exchange Commission.

The information provided on this conference call should be considered in light of such risks. Actual results and the timing of certain events may differ materially from the results or timing predicted or implied by such forward looking statements, and reported results should not be considered as an indication of future performance.

Rapid7 does not assume any obligation to update the information presented on this conference call except to the extent required by applicable law. On this call we will provide and talk about our results using non-GAAP financial measures and provide non-GAAP guidance.

We believe that the use of these non-GAAP financial measures provides an additional tool for investors to use in understanding company performance, but note that the presentation of non-GAAP financial information is not meant to be considered in isolation or as a substitute for the directly comparable financial measures prepared in accordance with GAAP.

We have provided a reconciliation of the historical non-GAAP financial measures to the most comparable GAAP measures in the financial statement tables included in the press release announcing our results. The press release announcing our financial results is available on our website at investors.rapid7.com.

With that, I'd like to turn the call over to Corey..

Thank you, Mark, and good afternoon everyone. I would like to start by thanking all of you for joining us today on our third quarter 2016 earnings call. We continue to see robust demand for data and analytics solutions that provide visibility, analysis and insight into cybersecurity exposures, attack or behaviors and general IT challenges.

This is especially true as more customers seek to optimize their security and IT spend, relying on data to help them prioritize their investments and measure the effectiveness of their programs.

Our third quarter results show fundamental strength in several areas related to these favorable dynamics, including ongoing strength in our pipeline growth, solid growth in our midmarket customer base, new product adoption and uptake of our platform-based cloud analytics.

Customers continue to see the value of our technically superior approach to security data and analytics. We had solid performance in these areas and see healthy market demand.

Nonetheless, total billings in the third quarter were below our expectations, primarily due to internal sales execution issues in two specific areas, larger deals in the enterprise sector and in the federal sector.

As we have mentioned previously, the timing of larger deals can be hard to predict and we manage this pipeline over a multi-quarter basis due to its variability.

Most important, we have a highly differentiated product offering and a strong pipeline of opportunities in the enterprise sector, so we need to approve the effectiveness of our sales agents as we further scale this growth engine.

One of the meaningful changes that we’ve already made at the leadership level is creating the role of Chief Operating Officer and having Andrew Burton take on this role. His specific mandate is driving growth and execution across sectors while delivering significant increases in the leverage and efficiency of our go to market engine.

In this regard, Andrew’s focus will include re-aligning some of our top talent as we are making some critical hires. More importantly, we are actively engaged in the recruiting process to bring on new sales leadership experienced in managing complex sales cycles, as well as hiring sales talent with enterprise experience.

We are taking quick action on these initiatives. However, I also know that it will take a couple of quarters to get our execution back to the necessary levels. The second specific area in which bookings underperformed in Q3 was with our management of federal accounts.

Last year, we had particularly strong results within the Federal sector, and in Q3 2015 we highlighted on the November 2015 call. While we had many opportunities in our pipeline this year including some large deal opportunities, we did not execute as we expected from a deal closure perspective.

While the Federal sector does not currently make up a large part of our overall business, it did contribute to more than half of our billings underperformance in the third quarter. We believe these specific federal deals in the pipeline will materialize in fiscal 2017. As such we are not planning for these deals to be included in our Q4 2016 results.

We are committed to building our market presence and relationship in the Federal sector, which is part of the reasons why we added key sales leadership roles in late spring of this year. We have a clear understanding of our sales execution challenges.

Both the larger enterprise deals and the Federal sector benefit from strong demand, strong pipeline and strong products, and therefore our focus is on expanding our leadership capacity, managing a large deal execution and ramping our new sales professionals. These are addressable challenges over the next few quarters.

There are many things going tremendously well in our business. As I noted a moment ago, we continue to perform well in the mid-market. Our investments in international expansion are continuing to pay off as we grew our international revenue 69% year over year with solid activity in EMEA, LatAm and APAC.

We also continue to grow our land and our expend as we grew our customer base an impressive 33% year over year, and our renewal rates came in at 121%.

Turning to our products and customer engagements, from a new product perspective I’m very pleased with the progress we are making with inside InsightIDR and AppSpider, which together are now a meaningful portion of our bookings.

We just finished our second full quarter with the InsightIDR product offering in the market and the feedback from customers has been overwhelmingly positive.

The combination of our market leading user behavior analytics, a market that we helped pioneer is now tracked closely by industry analysts, coupled with our advanced search and endpoint technology is resonating with customers.

Our platform is assigned to allow us to quickly innovate, provide our customers an agile solution and respond to the full gamut of incident detection and response challenge. Let me provide one of many similar examples of how we are able to provide customers with a full service solution.

A telecom provider covering the Midwest needed to implement an overall security plan for their business as well as to ensure compliance standards are being met. This required bringing together multiple groups across the organization. Without a centralized IT group in place, it was a huge challenge for the customer.

With such a disparate and resource constrained organization, they did not have efficient visibility into the assets on their internal network infrastructure. Our combined InsightIDR and Nexpose solution offering were able to provide the detection, analytics and remediation path they needed with limited in house support.

InsightIDR is performing well both in greenfield and replacement opportunities. We’ve often said that the SIM market is going through an upgrade cycle and we’ve seen evidence of that trend.

According to a recent Voice of the Enterprise Report published by 451 Research, SIM was cited as the second highest spending priority for info tech investments over the next 12 months.

Furthermore, our progress with InsightIDR in terms of wins and pipeline deals, has resulted in deeper engagement with large enterprises and gives us great confidence that we have a differentiated product offering. Historically SIM technology has been highly customized and very expensive.

Our InsightIDR offering is designed to help resource constrained organizations easily implement, operate and get meaningful insights into their risks through robust analytics.

We believe we have designed an affordable alternative and the value we provide, coupled with the depth and breadth of capabilities we can offer are giving us a competitive advantage. Another product seeing strong demand is our AppSpider offering, which targets modern web application threats.

This continues to be a leading attack vector and we believe our solution has proven to be technically superior to competitor products. In the third quarter, a Fortune 500 media content provider who has a complex environment of 12,000 plus applications, including a multitude of micro services and APIs, deployed our AppSpider technology.

They previously had been having significant issues with authenticated scans, which were producing a high volume of false positives as well as frequently crashing. The customer displaced its previous Fortune 50 provider who was not able to deliver on the support and automation capabilities in favor of our AppSpider solution.

Noting the ease of use of deployment of our technology, the customer also said they had accomplished more in 3 weeks with Rapid7 than in 18 months with their last provider. In terms of the continued adoption of our Nexpose product offering, this quarter we displaced one of our closest competitors in a Fortune 50 retailer.

The retailer has over 1,800 franchise locations and 250,000 plus employees. This was a large and extensive deployment as we needed to accommodate customized reporting around their SQL server database. Our ability to scale and meet both their scanning and reporting needs, was a key decision factor in this win.

In addition, we are pleased with the adoption rate of our Insight platform, which is our cloud-based analytics capability leveraged both by the InsightIDR and Nexpose product offerings. Last quarter we shared that just over 12% of our customer base had adopted the platform.

In the third quarter, that figure has risen markedly to 17% of our customer base, which represents more than 1,000 customers. This is important because this allows us to upsell and cross sale more effectively over time while simultaneously lowering our cost of expansion.

As IT professionals continue to navigate the fragmented ecosystem, there’s clear evidence that the demand for comprehensive solutions are coming into favor.

During the third quarter, Rapid7 was recognized by the System Administration Network and Security Institute, better known as SANS for providing the most comprehensive coverage across the center for internet security, critical security controls for effective cyber defense.

The ranking found that we covered 19 of the 20 controls through our combined incident detection and response and the right exposure management solutions. Of the 19 companies listed including SWAMP and Tenable, no other company met the depth and breadth of our robust product offerings or the technology capabilities in this ranking.

You can see why we continue to believe that we have the solid technology and customer engagement foundation to support continued growth in our business. Our differentiated solutions both on a single cloud platform provide a competitive advantage and position us very well in the data and analytics market.

We continue to be committed to delivering on the 3 main objectives that we said at the beginning of the year, disrupting the traditional SAN market, expanding the direct exposure management opportunity, and driving scale and beverage into our business.

To help us continue to execute well on our vision, I’m happy to announce the recent appointment of our newest board member, Judy Bruner. Judy is a seasoned executive with an impressive track record of operational excellence as both a company executive and board member. She previously held a role of Chief Financial Officer at both SanDisk and Palm.

We are excited to have her considerable skills and leadership as we continue to scale our business and execute our long term growth strategy. We see significant demand for data and analytic solutions, both at the macro-market level and at the Rapid7 product-centric demand level.

We believe we have superior solutions both on a scalable platform architecture and we remain focused on innovation. We believe we are not only well positioned to displace the lagging incumbents, but also win against the shrinking list of viable competitors in this space.

It is all about execution and we are confident in our strategy, technology and most importantly, our talented team. There’s a tremendous market opportunity ahead of us and we believe we are well positioned to capitalize on it. Finally, before I pass the call over to Steven, I want to provide a quick update on the CFO search.

We are very pleased with both the quality and the quantity of the candidates that we’ve seen in the past 90 days. We’re in the final stages of completing the process and we expect to have something to announce very shortly. With that, I’d like to turn the call over to Steven..

Thanks Corey. Good afternoon everyone. I’d like to start by providing some color around the business and reviewing our Q3 financial results and metrics, and then provide our guidance for Q4, and then wrap up the call as we always do by opening the call to your questions.

Reviewing our Q3 results, three financial highlights stand out as we continued to disrupt the SIM market, expand the threat exposure management opportunity, and drive scale and leverage in our business.

First, we delivered another quarter of compelling revenue growth north of 40% year over year driven by our high visibility, highly recurring ratable revenue model. Second, we continue to make good progress on our path to profitability with another quarter of improving expense ratios.

And third, becoming a consistent theme, we delivered another quarter of positive operating cash flow, which demonstrates our progress toward profitability and the strength and sustainability of our financial model. Before we get into the details around these three areas, let me briefly comment on the billings dynamics that we saw in Q3.

As Corey called out, our implied billings growth in Q3 was short of expectations, with total billings increasing 10% year over year to $44.9 million. That results in a total billings increase of 28% year over year to $131.4 million for the first 9 months of 2016.

The Q3 shortfall was due to two specific sales execution issues around our larger enterprise transactions and our federal sector deals. Importantly, we continue to see strong activity in pipeline generation for out threat exposure management and InsightIDR offerings, and for our strategic advisory services.

As Corey also noted, we’ve already began addressing the specific sales execution issues with concrete actions. Creating the role of COO and having Andrew specifically lead the mandate to focus and improve our go-to-market engagements, has also been a terrific evolution for Rapid7, and is already making a positive impact.

Turning now to the details around our Q3 financial results and the first highlight of the quarter, Q3 total revenue came in at $40.3 million, a strong increase of 42% year over year above the high-end of our guidance.

Products revenue increased 42% year over year driven by fairly consistent and good mix of both new customer logos as well as upsells and cross sales within our base of existing customers.

Maintenance and support revenue grew 38% year over year, and our professional services revenue increased 49% year over year as customers continue to recognize Rapid7 as provided premier security assessment and advisory expertise.

Importantly we continue to have high visibility into our quarterly revenue results, with 62% of our revenue being recurring in nature and 87% of Q3 revenue already on our balance sheet and deferred as of the first day of the quarter.

And looking at some of the related dynamics contributing to our strong revenue growth, total deferred revenue grew 36% year over year in Q3 and was comprised of 41% year over year growth in short-term deferred, and 25% in long-term deferred.

Long-term deferred revenue growth was impacted by fewer large deals in Q3 that we discussed and by marginally shorter average contract lengths that came in at 21 months for total billings compared to 23 months in the previous quarter and prior year period. Another positive in the quarter was the strong year over year customer growth.

Our total customer base increased approximately 33% as we ended Q3 with more than 5,800 customers globally. We now have 37% of the Fortune 1000 as customers of Rapid7, up from 35% a year ago.

As noted, we’re having success not only with bringing on new customers, but also with continued customer expansion as seen in our strong renewal rate of 121% for Q3. A related and important customer metric that we always share with you is the expiring revenue renewal rate, which measures our baseline customer revenue retention.

In Q3, this expiring revenue renewal rate increased to 89% versus 88% in Q3 2015. We see that’s illustrating two important dynamics for the business; high customer satisfaction and stickiness of our technology and product offerings.

In order to help facilitate our continued geographic in the customer expansion growth, we initiated a focused effort a few years ago to expand our international business. At the time we had less than a dozen employees outside of North America and single digits of our revenue from outside the US.

Since then we’ve grown our engineering, sales, and go-to-market presence significantly in EMEA, Latin America and Asia PAC and this investment is beginning to pay dividends. International revenue in Q3 grew 69% year over year and was 14% of total revenue for the quarter.

To continue the momentum and further enable our sales teams to be well positioned and competitive internationally, we continue to evolve by operating go-to-market structure to provide greater agility and flexibility to engage with, and support our global customers.

In this regard, we were pleased to successfully complete an offshoring of our non-US intellectual property to our Rapid7 international subsidiary in the UK. Previously, all of our global customer contracts had been executed with our US entity.

Our new global IP ownership and entity structure lays the ground work for more nimble and flexible global expansion of the Rapid7 brand and footprint, as well as a more efficient long-term tax profile and return to stockholders. Turning back to this side of the pond, we delivered solid results in North American in Q3.

Revenue grew 39% year over year and represented 86% of total revenue on continued growth and customer adoption. Our global channel partners continue to contribute to growth with 37% of total revenue in the third quarter, fairly consistent with past quarters. With that, let’s moved to our second highlight for Q3.

We’re focused and are continuing to be very thoughtful about managing our cost structure, making the necessary investments for growth while also driving a very deliberate and disciplined path to attaining profitability.

In this regard, we were pleased to deliver another good quarter of non-GAAP gross margin, with Q3 coming in at 77%, an improvement from 76% in Q3 2015 and the result of some nice efficiencies that we’re continuing to realize as we scale the business and continue to execute toward profitability.

This disciplined approach to improving profitability was also evident in our non-GAAP operating expenses in Q3 where the sales and marketing expense to revenue ratio came in at 49%, an improvement compared to 56% in the year ago period, and 55% in Q2.

The improvement in the sales and marketing expense ratio reflected prudent spending, as well as benefiting from lower sales commissions in the quarter, and still accommodated Q3 2016 royalty expenses related to Intel MVM customers that were not in the year ago period.

As we mentioned previously on this front, there’s some variability in the timing and magnitude of the Intel royalty expenses dependent upon the source and timing of these deal closings.

While we continue to drive efforts to improve sales and marketing expense ratios year over year, we like to remind you that we typically see higher costs sequentially in the fourth quarter related to commissions on seasonally higher billings.

As we’ll talk about in a moment, we’re also forecasting marginally higher royalty expenses in Q4 related to Intel MVM customers. Turning to R&D, our non-GAAP R&D expense was 25% of revenue in Q3 compared to 32% in Q3 2015 and 31% in Q2.

This continued improvement in our profitability is in a large part due to the great work that our products and engineering team has done and the dynamic where we now have nearly half of our R&D headcount outside of the United States.

We’re also pleased that a portion of this improvement was attributable to a non-recurring $500,000 UK Government grant received in the third quarter for our engineering operations in Northern Ireland.

We’re continuing to drive scale and leveraging our R&D investments while at the same time continuing to deliver important and differentiated features and functions across our core product lines.

The power of our cloud-based analytics platform in terms of speed, agility, and cost is also contributing meaningfully to our efficiency gains, and we expect to see continued decreases in our R&D expense to revenue ratios in the fourth quarter and beyond.

Finishing out OpEx, our non-GAAP G&A cost structure also improved marginally in Q3, coming in at 15% of revenue versus 16% in both Q3 2015 and Q2 2016. We expect to continue to improve our G&A expense profile over time.

Pulling this all together Q3 2016 non-GAAP operating loss was $5.3 million, which was better than our guidance range for operating loss of $8.6 million to $7.6 million. And our non-GAAP loss per share was $0.13, also better than our guidance range of $0.21 and $0.19 net loss per share.

Turning to our third and final highlight for Q3, positive operating cash flow. We ended Q3 with a cash balance of $87.7 million and our operating cash flow for Q3 was positive $1.8 million, a result of both our disciplined management of the business and the inherent leverage in our financial model.

With that, let's now turn to our outlook for Q4 and the full year 2016. And so far as our guidance for Q4 2016, we anticipate total revenue to be in the range of $42.2 million to $43.6 million. This equates to year-over-year growth of 31% at the midpoint. We anticipate non-GAAP operating loss for Q4 to be in the range of $11.7 million to $10.7 million.

And we anticipate non-GAAP loss per share for Q4 2016 to be in the range of $0.28 to $0.26. This is based on anticipated 42 million weighted average shares outstanding. As a result for full year 2016 guidance is updated as follows.

We expect total revenue to be in the range of $154.6 million to $156 million, higher than our previous guidance and representing 41% year-over-year growth at the midpoint. We anticipate an improved non-GAAP operating loss for the full year 2016 to be a lower loss in the range of $35.5 million to $34.5 million.

And we also anticipate an improved non-GAAP loss per share for the full year 2016 to be a lower loss in the range of $0.87 to $0.84. This is based on an anticipated $41.4 million weighted average shares outstanding for 2016.

With that, while we have not provided guidance on billings historically and we don’t currently plan to change that going forward, we did want to provide some additional color to Q4 billings given the work that we are doing around our execution as Corey discussed on the sales side.

While we’re confident on the changes that we’ve already made and the contributions that Andrew for example is already driving in the newly created COO role our go to market approach. We anticipate this taking a couple of quarters to work out.

As we implement our action plan in the near term, we expect Q4 billings to be in the area of approximately $58 million to $60 million. Finally, let’s talk about operating cash flow. We previously said that we expect to generate approximately $10 million in positive operating cash flow in 2016.

Despite the Q3 sales execution challenges and tempered Q4 2016 billings expectations, we still expect positive OCF for Q4 and the full year 2016. Lower billings though means lower cash collections and so we would anticipate OCF to be in the range of positive $4 million to $5 million for the full year 2016.

Operating cash flow is a meaningful proxy of our path to profitability and the power of the financial mode, and importantly we expect to see a multiple expansion of positive OCF in 2017 as we continue to scale the business and see leverage in the model.

With that, we appreciate your time and support and as always, we are glad to open the call for any questions. Operator..

[Operator Instructions] Our first question comes from the line of Rob Owens with Pacific Crest Securities. Please go ahead..

Great. Thanks for taking my question guys.

As you’ve expanded your value preposition from VM into more the broader based analytics some type of play, can you talk about what that’s done to sale cycles? As you’ve looked at some of these larger deals pushing out, have these been more around the VM space or have these been customers that are buying the larger vision and package from Rapid7 and as a result you’re just seeing larger sales cycles?.

We are definitely seeing – this is Corey. We are definitely seeing some longer sales cycles. What I’ll highlight is primarily focus on larger deals in general, and what we found is that as we’ve escalated the volume of larger deals that we do over a year it’s inconsistent.

In Q2 we had a much higher volume of larger deals closed than we expected, and in Q3 it was less.

So what we find is that as we expand our footprint into larger deal enterprise segments, we just have greater volatility around the closing timeframe and therefore were paying close attention to the length of the deal cycle, but in Q3 specifically we did see a longer deal cycle than we expected..

And are you seeing capacity issues on the front, Corey? I know that you’ve been reluctant to add a ton of heads that were more so on the direct side and still have -- you’re more of an indirect channel bent to the model.

So as you look at more large deals potentially in the pipeline moving forward, will you add incremental sales capacity?.

One of the things that we’re very focused on is both adding expertise and leadership that’s focused on large deals in the enterprise sector, but also adding the right headcount, but doing it in a way that allows us to continue to get scale and leverage and profitability of the business..

And then lastly for Steven real quick on the Intel MVM piece, any update in terms of how penetrated you feel you are into that base and how much longer you should begin to see benefits or when it should impact the members? Thanks..

Yes. Sure. Thanks Rob. So no material changes in the business. It continues to move forward well. It’s the same cycle if you will so far as the longevity of the relationships with the customers. We just see a little bit of the pressure if you will from doing a large amount of deals with Intel.

It means a little bit higher commission rate in the short-term, but higher marginal productivity. The key point was that we’re finding customers who take maybe a little bit longer to come over, a little bit more work if you will, but when they come over they’re usually coming over at a multiple of their run-rate bookings.

They take a long time to do something and then when they do it’s a more meaningful number, so that’s good news. But what we wanted to make sure everyone understood also and consistent what we said in the past two quarters is that means a little bit higher commission on the OpEx side..

Great. Thank you..

Our next question comes from the line of Michael Turits with Raymond James. Please go ahead..

Hedy Corey and Steven. Could you drill down a little bit more on exactly what happened with those deals especially since you sound like you do have some visibility that you said they wouldn’t close in 4Q but expected the next year. So I assume they weren’t competitive losses.

What was the nature of the reason for this slip?.

Absolutely. So we talked about 2 specific parts of the large deals that were challenging Q3. The first side, the Federal sector deals, those pushed but they pushed into fiscal 2017 because as you know the Federal sector you go through the budget cycle again. So it’s prioritized.

It’s in the budget cycle, but it’s in the budget cycle for this coming year. And so we have low expectations about the push deals closing in the Federal Q1 which is our Q4. So that’s the first part of the equation.

On the second part as I just mentioned, what we found is that we’ve had volatility in the enterprise sector on very large deals and we’ve talked about this before. We solved and closed much faster in Q2 and we saw lengthening cycles in Q3 and so therefore are more conservative on Q4.

Some of the deals that we projected in Q3 have already closed coming into Q4, but until we get a better execution capability on managing the increase in volume of large deals, we’re being more cautious about how we look at forecasting those deals..

[I know you’re not obviously giving guidance on 2017 right now, but you’ve got a straight number for sales. It’s in the mid-190s range.

so at this point, would you expect these kinds of delays to be in execution around large deals to be significant enough that it would begin to impact revenues and our expectations for them in 2017?.

Steven will tuck in -- so we are a growth business and we expect to address the large deals execution issues and then after that period continue to grow from there. And so that’s our expectation going into the year. And the nice thing that we have is we have a strong demand environment and we believe that we can address those issues.

And then I’ll tuck in with Steven about how we actually think about guidance and when we’ll give it for 2017..

Yes. We’ll give -- Michael, that’s spot on. Very appropriate and reasonable question and it’s something that we obviously work through. The nice part as Corey mentioned is the model.

On average if you look at a 2 year booking, the impact in any given year is muted per se of the weaker billings performance this quarter, but it does have some impact going forward. And so we’ll give more guidance on that on the February call full view of 2017 on the revenue side for sure.

So it will have some impact in the short term, but we obviously are focused as well and we gave a little bit of color today on the more important candidly impact or least equally important around the path to profitability, and we see a multiple gainer in profitability in 2017, and we continue to feel really confident about that..

Thanks Corey. Thanks Steven. .

Our next question comes from the line of Gregg Moskowitz with Cowen & Company. Please go ahead..

Okay, thanks very much and good afternoon guys. I guess a bit of a follow up on the sales execution.

I was wondering Corey, as you say the market demand of our initial is still strong, but are these newly surfaced issues in your view, or do you think that possibly they were latent or existing for a little while, but your opportunity has been so significant that you didn't perhaps really noticed them until now just sort of mention the deals that happened in the Q3?.

I would say that it’s very clear for a while. We’ve talked about this consistently that we have volatility in our larger deals. We saw that in our commentary in Q1 and in Q2.

We saw extremely positive benefits from that volatility in Q2, but the extension was much more than we expected in Q3, and so with that, we're actually taking the time to really go to the core and address the execution issues directly, and ensure we actually have the right team and people and processes in place so that we can actually have tighter bands about how we manage that business on an ongoing basis..

Okay, got it. Thanks Corey. And then Steven just getting to back to risk, I wanted to ask you about that because if you look at the shortfall, a lot of it, it appeared to occur because of long term deferreds and in fact short term billings grew by 25% year over year.

You talked about duration being two months shorter than what we've seen last quarter and a year ago.

Can you just add a little bit more color on duration for both new deals as well as for new ones this quarter?.

Yes, sure. You hit in my summary of all the dynamics. So new was about 25 months, new bookings way out of contract month, whereas renewals was 15, the average of which is about 21.

And so how that compares year over year is that the 25 months on new compared to 26 last year, and so that's not phenomenally different, a month much shorter, but a month is a month. It does pull it down a little bit.

The interesting comp though is if you recall from last Q3, last year's earnings call, we did have a bunch of interesting dynamics that we candidly can talk about a whole lot now, but we had some over performance in our bookings that really drove deferred revenue. We had a really nice federal deal that was very large.

We had a really large transactional business impact on the business, and as well we had a big renewal if you go back and look. And that large renewal in Q3 of 2015 took the renewal weighted average contract lines up to 19 months last year.

And so that's why when we look back at Q3 of 2015 and we had total bookings growth of 63%, we talk about the year of year growth as being a tough comp. It's the 19 and renewals that brought the average up to 23 last year versus 21 now. .

Okay, very helpful. Thanks for that Steven. And I guess one last question if I could, and again I realize to Michael’s question as well, you're not going to give understandably a lot of granularity on 2017.

However, you did make a comment that you expect OCF to affectively go with a multiple of what you're seeing in 2016, and if I look at the billing guidance for Q4, that implies a second half of 2016 billings growth of call it 11%, 12% or so.

And so I guess the question is again without you giving hard granular guidance, if you do expect a meaningful acceleration in your billings growth in 2017 versus your second half 2016 levels? Thanks..

Sure. We’ll as always tag team and Corey and I both. Yes, mathematically and importantly, the second half 2016 dynamic is as you said the guidance on what we feel. And candidly it’s looking at Q3 as being lower than certainly we had anticipated and desired.

And so we see that low water mark is giving it enough import that that’s as low as it would ever get. And so we see that starting to come back in Q4 as we have started taking action and see it continuing to get back to levels that we’re accustomed to seeing with the business. .

Yes, absolutely. If you look, Q3 was lower than expected. We’re taking management action to focus on center around the larger deal in Q4.

And so, therefore we remain doubtfully cautious there, but we expect that over the next 2 quarters for that action to have impact, and for us to be growing stronger than you see in the second half of this year in the guidance that we laid out..

Okay, great. Thanks very much. .

Our next question comes from the line of Melissa Gorham with Morgan Stanley Please go ahead..

Okay, great. Thanks for taking my question. Corey, you talked about the realignment of top sales talent that you're hoping to do to help mitigate the volatility in the enterprise business.

Can you maybe just detail how you think that's going to help execution? And then related to that with the new COO on board, what kind of steps is he taking pacifically to -- that are mitigate the volatility moving forward?.

Yes, so I mean the good thing we have going for us is that most of the businesses are working quite well. Whether you look at mid-market, international, our new product execution, it is fairly localized to the larger deals.

Specifically what we're doing is we're bringing in sales leadership that have experience managing the volume that we're now getting to in larger pipe, in larger transactions.

I really see that as a two part effort is we’re going to continue to add head count that has experience there, and we’ll add new processes about how you manage the volume of larger deal and parts that we have. Traditionally, lots of our growth has not come as we talked about before from the larger deals in the enterprise sector.

It's come from the mid-market, and that's been, how you say, it’s been additional upside and a sector expansion, but we're now at a place where we have enough volume of pipe there that will bring in expertise that experience in managing large deals with the volume that we have in that sector..

Okay. Got it, and then a question on McAfee. Steven, you talked about customers coming over, and they're coming over kind of a multiple of maybe what they were in McAfee.

To what extent is this due to customers evaluating and implementing InsightIDR, and does that perhaps lead to maybe longer sales cycles, as they're looking at that solution and maybe comparing it to a traditional thing that they already have implemented and seeing if it's something that they can replace?.

Sure, good question. The answer is in a nutshell, no. The IDR component is not elongating contracts.

What we're finding is the customers are engaging around the core threat exposure management, VM aspect and getting that in wraps, and then we are having conversations and continuing the dialog around the whole incident detection and response portfolio, but that doesn't seem to be impeding contract closing. .

Yes, especially around McAfee MVM. The nice thig that we have is that we do expect it, and we just want to be more predictable at it to impact the deal cycles, but we do have more and more customers that are looking to stand out on our platform, and that’s a good thing as long as we actually manage our ability to actually forecast the timing well..

Got it. Thank you..

[Operator Instructions] Our next question comes from the line of Jonathan Ho with William Blair. Please go ahead. It would appear that Mr. Ho disconnected. Our next question comes from the line of Matt Hedberg with RBC Capital Markets. Please go ahead..

Yes guys, thanks taking my question. This is actually Matt Swanson on for Matt. I was just curious. As you're moving more into some of these larger enterprise deals, are you seeing anything different in terms of competitive dynamic? It sounds like most of the challenges this quarter were internal, but just curious your thoughts on that..

I would say that we've not seen any difference in competitive dynamics over the course of the last year in the enterprise sector. The biggest thing we’ve talked about before is that we continue to see people upgrading their SIMs. We continue to see strong demand for visibility and products that deliver visibility and insight into the market.

And so, we look at this as really just focusing in on how do we actually manage a growing pipeline, and do that well with high predictability. .

Thanks. And then just one more on the talk around hiring and adding more headcount to the salesforce or at least at the management level. We’ve heard from other companies, this is kind of a tough I guess competitive hiring environment for those types of positions right now.

I was just curious your thoughts on that and if that could affect how long it takes to get a couple of these things straightened out. .

I think it’s a very good question and there is definitely a tight hiring environment for experienced sales leaders. Since we're active in the process right now and we’ve been looking, we're very well positioned I think to actually close a strong candidate in a reasonable timeframe.

And so you'll hear more from us about that later, but we're feeling very good about our progress on that search right now. .

All right. Thanks for the time guys..

We have Mr. Jonathan Ho with William Blair who’s reconnected back. Mr. Ho, please go ahead with your question. .

Hi, sorry about that. Just wanted to touch base in terms of what you guys are seeing in terms of public cloud adoption and is that having any negative or positive impact on your business as enterprises start to contemplate the public cloud. .

It’s a great question. So in general we see more companies open and willing to ship to the public cloud.

I think the two exceptions which were planned in our model, which aren’t surprises are the federal sector and governments around the world are taking a more cautious approach, although they're opening up avenues for them to be able to adopt cloud technology.

And the second thing is that there's higher scrutiny outside of the US, and so we’ve had to open up data centers in other countries around the world, but we are pursuing those values right now, but that’s expected..

Got it. And then can you talk a little bit more about sort of the IDR and temp pick up in terms of cross sell that you saw this quarter and maybe how you can continue to accelerate that adoption over time. .

Yes. I mean the big thing that we were looking at this year is that we had a great introduction. We launched InsightIDR and was it going to get to critical mass fast. What we’ve seen clearly is that it’s gone to critical mass fast.

We are able to sell it, drive traction, and adoption and we've nicely been able to actually split that adoption between our existing customer base, which represents expansion as well and bring in net new customers into the [indiscernible].

And so as we look forward, we're really looking at for next year about how do we optimize the efficiency and the cost around that expansion and that’s our big focus. We know it works.

We know customers have strong demand for the offerings and so it's really honing in and focusing on our market model next year where we actually have a full year of all of our products around the land and expanded strategy in place. .

Got it. And then just one final one for Steven. As we start to think about 2017 and operating leverage in the model. How should we kind of balance this with also the need to invest and maybe some of these sales execution challenges? How should we sort of think about that leverage especially just given some of the challenges on the booking side. .

Sure. So the confidence that we get in the model is really driven off of what you said which is, the leverage that we get from an operating and infrastructure standpoint, meaning our R&D and G&A if you're going to pick on line items and candidly on cogs as well for the most part.

Where we see that really as a step function investment and return profile. And so there are no meaningful investments that we see needing to make in any of those areas in order to drive continued growth, both from a scale standpoint getting the growth and B, from a leverage standpoint and getting more out of that marginal growth.

And so the efficiency comes out of those areas immediately and we see that in the OpEx, E to R, expense to revenue ratios. And then that is a big driver of the higher marginal OCF contribution.

Sales efficiencies we also continue to expect to see, as you noted and as we've been pretty candid, we had some challenges this past quarter and we'll work through those. So that will still be better, but it may not be as robust in so far as how to think about looking at that for next year. .

Great. That's helpful. Thank you. .

Our next question comes from the line of Saket Kalia with Barclays. Please go ahead..

Hi guys. Thanks for taking my questions here. And I'm sorry, I ended up hopping on late. So first, apologies if you've already spoken about this, but maybe just starting with the bread and butter sort of midmarket temp business.

Can you just maybe talk about qualitatively of course, how is volume of deals and pricing versus maybe what you've seen in the last couple of quarters. I want to ask about enterprise because clearly that's a focus, but I just want to maybe start in kind of that bread and butter mid-market business first. .

Yes. So as I talked about a little bit earlier, one of the things that we’re quite pleased with is we see strength in that mid-market, our traditional business in that mid enterprise business. And we see that across products and across all aspects of the business. And so that is a healthy strong business which gives us confidence as we look forward.

And it also gives us a clear focus area that as we address our large deal enterprise specific issue, that we’ll continue to be able to leverage the strong execution that we continue to see in both our mid enterprise, international and our new product business. .

Got it.

And then just to clarify, what was the bigger driver of the delta? I know we said enterprise and federal, but was there one that was maybe a little bit bigger than the other just to start out?.

Yes. From an impact federal in Q3 was definitely a bigger driver in the GAAP versus sort of like what the potential was there. That's mostly just because that’s the federal closed cycle. And so when you have lots of deals that are in pipe and you have a smaller volume to close, you just have a much higher index that’d be there.

However, there was a smaller impact because we saw, again continued volatility in the large deals in the enterprise sector, close rate in Q3 and those deal elongated past what we expected.

We're taking a more cautious approach to Q4, but more importantly we decided to go ahead and focus on the fundamentals of both the -- ensuring we have the right people and process to build those deals in place. .

Got it. And maybe if I could just slip this in, I think that idea of taking a more conservative approach to Q4 probably implies some of those larger deals, assuming they haven't slipped out of the pipeline, would actually happened in 2017. I guess that would imply an enterprise sales cycle over six months and correct me if I'm wrong.

The question is, how does that sales cycle maybe compare to what you've seen from enterprise customers that you've sold to in the past?.

Absolutely. And I think this is one of the things that we're paying careful attention to.

And so if you think about and we've talked about this before, our average sales cycle is closer to the 90 day range, and we've seen our larger deals have a wide range of deals there, but we've also seen a fair amount of it because we have a wider range be closer to the under six months mark.

However we know from experience both here and other places, and from lots of peers that we actually talk to, that the average sort of larger enterprise sales cycle is in the six to 12 months range. And so as we have a larger volume of deals, it's not unreasonable that we actually have revert to the normal or revert to the mean on those.

And so that’s something we actually pay careful attention to. And most of all I talk a lot about the predictability of how we actually manage and focus those larger deals. .

And Saket to Corey's point, we talk about this a lot. The nature of the model, the averages almost don't really exist in nature, because it's the two models of a high transaction volume business that you asked about earlier and the larger deal enterprise business.

And so the deal cycles for that high transaction volume business are more like 60 to 70 days and have been chugging along really nicely, fairly consistently for the last two years probably in that zip code.

And then to the whole discussion here, certainly nature of the market, increasing scrutiny on the power of purchasing, but then also this quarter specifically for us our own internal need to look inside that sales cycles for enterprise, for larger deals north of that 250,000 zip code. That could be five to eight months.

So that's where that 90 day average comes from, but it doesn't really exist in nature..

Got it, very helpful. That's it from me. Thanks guys. .

There are no further questions at this time. I will turn the call back to the presenters..

Thank you all very much for joining us on this call and we look forward to speaking with you on the next one..

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines..