Rapid7 (NASDAQ:RPD) Beats Q1 Sales Targets But Stock Drops

Jabin Bastian /
2023/05/09 4:30 pm EDT

Cybersecurity software maker Rapid7 (NASDAQ:RPD) reported Q1 FY2023 results that beat analyst expectations, with revenue up 16.4% year on year to $183.2 million. The company expects that next quarter's revenue would be around $188 million, which is the midpoint of the guidance range. That was roughly in line with analyst expectations. Rapid7 made a GAAP loss of $25.9 million, improving on its loss of $45 million, in the same quarter last year.

Is now the time to buy Rapid7? Access our full analysis of the earnings results here, it's free.

Rapid7 (RPD) Q1 FY2023 Highlights:

  • Revenue: $183.2 million vs analyst estimates of $181.3 million (1.05% beat)
  • EPS (non-GAAP): $0.16 vs analyst estimates of $0.09 ($0.07 beat)
  • Revenue guidance for Q2 2023 is $188 million at the midpoint, slightly below analyst estimates of $188.7 million
  • The company reconfirmed revenue guidance for the full year, at $776 million at the midpoint
  • Free cash flow was negative $1.22 million, down from positive free cash flow of $28.5 million in previous quarter
  • Customers: 11,034, up from 10,929 in previous quarter
  • Gross Margin (GAAP): 69.4%, up from 67.4% same quarter last year

“Rapid7 started the year with strong momentum as we work to deliver customers a comprehensive security operations platform at the most compelling economic value. The faster than expected traction from our Threat Complete and Cloud Risk Complete consolidated offerings, which made up over 20% of our new business during the first quarter, supported steady customer demand for our Insight Platform, driving 16% year-over-year growth in ARR to $728 million”, said Corey Thomas, Chairman and CEO of Rapid7.

Founded in 2000 with the idea that network security comes before endpoint security, Rapid7 (NASDAQ:RPD) provides software as a service that helps companies understand where they are exposed to cyber security risks, quickly detect breaches and respond to them.

The demand for cybersecurity is growing as more and more businesses are moving their data and processes into the cloud, which along with a major increase in employees working remotely, has increased their exposure to attacks and malware. Additionally, the growing array of corporate IT systems, applications and internet connected devices has increased the complexity of network security, all of which has substantially increased the demand for software meant to protect data breaches.

Sales Growth

As you can see below, Rapid7's revenue growth has been strong over the last two years, growing from quarterly revenue of $117.5 million in Q1 FY2021, to $183.2 million.

Rapid7 Total Revenue

This quarter, Rapid7's quarterly revenue was once again up 16.4% year on year. But the revenue actually decreased by $1.31 million in Q1, compared to $8.71 million increase in Q4 2022. We'd like to see revenue increase each quarter, but a one-off fluctuation is usually not concerning and the management is guiding for growth to rebound in the next quarter.

Guidance for the next quarter indicates Rapid7 is expecting revenue to grow 12.3% year on year to $188 million, slowing down from the 32.5% year-over-year increase in revenue the company had recorded in the same quarter last year. Ahead of the earnings results the analysts covering the company were estimating sales to grow 13.1% over the next twelve months.

In volatile times like these we look for robust businesses with strong pricing power. Unknown to most investors, this company is one of the highest-quality software companies in the world, and their software products have been the default standard in critical industries for decades. The result is an impressive business that is up an incredible 18,152% since the IPO. You can find it on our platform for free.

Customer Growth

You can see below that Rapid7 reported 11,034 customers at the end of the quarter, an increase of 105 on last quarter. That is a little slower customer growth than what we are used to seeing lately, suggesting that the customer acquisition momentum is slowing down. Rapid7 updated its customer count methodology in Q1 2021, which is the reason for the related drop in the number of customers.

Rapid7 Customers

Key Takeaways from Rapid7's Q1 Results

With a market capitalization of $2.87 billion Rapid7 is among smaller companies, but its more than $262.2 million in cash and positive free cash flow over the last twelve months put it in a very strong position to invest in growth.

Rapid7 topped analysts’ revenue expectations this quarter, even if just narrowly. That feature of these results really stood out as a positive. On the other hand there was a slowdown in customer growth. Overall, this quarter's results could have been better. The company is down 5.08% on the results and currently trades at $42 per share.

Rapid7 may have had a tough quarter, but does that actually create an opportunity to invest right now? It is important that you take into account its valuation and business qualities, as well as what happened in the latest quarter. We look at that in our actionable report which you can read here, it's free.

One way to find opportunities in the market is to watch for generational shifts in the economy. Almost every company is slowly finding itself becoming a technology company and facing cybersecurity risks and as a result, the demand for cloud-native cybersecurity is skyrocketing. This company is leading a massive technological shift in the industry and with revenue growth of 70% year on year and best-in-class SaaS metrics it should definitely be on your radar.

The author has no position in any of the stocks mentioned.