Rubrik S-1 - Burning the Boats in Data Security

Rubrik, a Palo Alto-based data security company, filed their S-1 yesterday. At $784m in ARR, growing 47% with 130% net revenue retention across 6100 customers, the company should be one of top 10 fastest growing software companies alongside Klaviyo, ZScaler, & Crowdstrike - in ARR terms.

Half of new customers are over $100,000 in size & contract values have grown 19% from $101k to $120k in a year. 41% of new bookings derives from those new customers.

But overall revenue is growing 4.5% y/y, estimated sales efficiency is 0.11, & contribution margins are negative : Rubrik sells $1 of subscription software for $0.88.

How can ARR grow so quickly while overall revenue is much slower? & why would a software company run negative contribution margins?

It’s a strategic imperative to metamorphose from an on-premises perpetual-license company to a subscription-software company as fast as possible.

In fiscal 2023, we began transitioning customers from our legacy CDM (Cloud Data Management) capabilities to our subscription-based RSC offerings. As a result of differing revenue recognition treatment between CDM and RSC (Rubrik Security Cloud), this business transition will cause fluctuations to our total revenue growth and limit the comparability of our revenue with past performance.

The company’s subscription revenue increased from $385 to $538 million with a gross margin of 81-83%. The legacy business fell by 58%. Note the substantially lower margins of 44-47%.

However, the most curious part of the business is the margin structure.

The tldr : Rubrik is a top 10 growth software company with higher-than-average gross margins, lower-than-average profitability, on-par cash-flow-from-ops margins, & negative contribution margins.

It’s the contribution margin that sticks out.

Contribution margin is the unit profit generated from a marginal license sold : it’s -12%. This means the more software sold, the more money the company loses. The contribution margin has improved from -117% in 2022, to -38% in 2023, to -12% in 2024.

For most software companies, contribution margin is typically very high, around 80-90%.

This is a burn-the-boats strategy which requires a lot of courage, a phenomenal commitment to the long term, & a big balance sheet to sustain the short-term losses & invest in a new product & new sales & marketing strategy to transform a massive caterpillar into an even bigger butterfly.1

The company is well on its way to becoming a pure software business & with the margin trends improving, the big bet may come to fruition.

Congratulations to the entire team at Rubrik on building a massive business with a daring strategy!

1 I know, I know. I’m mixing metaphors.