Rapid7 (NASDAQ:RPD) Reports Q3 In Line With Expectations But Stock Drops

Adam Hejl /
2022/11/02 4:22 pm EDT

Cybersecurity software maker Rapid7 (NASDAQ:RPD) reported results in line with analyst expectations in Q3 FY2022 quarter, with revenue up 25.6% year on year to $175.7 million. Guidance for the next quarter also missed analyst expectations with revenues guided to $180 million at the midpoint, or 3.84% below analyst estimates. Rapid7 made a GAAP loss of $28.7 million, improving on its loss of $37.7 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) Q3 FY2022 Highlights:

  • Revenue: $175.7 million vs analyst estimates of $176.2 million (small miss)
  • EPS (non-GAAP): $0.17 vs analyst estimates of $0.05 ($0.12 beat)
  • Revenue guidance for Q4 2022 is $180 million at the midpoint, below analyst estimates of $187.2 million
  • Free cash flow of $9.65 million, up from negative free cash flow of $1.25 million in previous quarter
  • Customers: 10,791, up from 10,624 in previous quarter
  • Gross Margin (GAAP): 69.3%, in line with same quarter last year

“Customers’ increasing focus on better value and higher efficacy of their security solutions in today’s shifting landscape supported 24% year-over-year growth in our third quarter ARR to $684 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 $105 million in Q3 FY2020, to $175.7 million.

Rapid7 Total Revenue

Even though Rapid7 fell short of revenue estimates, its quarterly revenue growth was still up a very solid 25.6% year on year. But the growth did slow down a little compared to last quarter, as Rapid7 increased revenue by $8.31 million in Q3, compared to $10 million revenue add in Q2 2022. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.

Guidance for the next quarter indicates Rapid7 is expecting revenue to grow 18.7% year on year to $180 million, slowing down from the 34% 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 21.8% 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 10,791 customers at the end of the quarter, an increase of 167 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 a little bit. 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 Q3 Results

With a market capitalization of $2.45 billion Rapid7 is among smaller companies, but its more than $251.5 million in cash and positive free cash flow over the last twelve months put it in a very strong position to invest in growth.

It was good to see Rapid7 improve their gross margin this quarter. And we were also glad to see good revenue growth. On the other hand, it was unfortunate to see that Rapid7's revenue guidance missed analysts' expectations. Overall, it seems to us that this was a complicated quarter for Rapid7. The company is down 5.34% on the results and currently trades at $37 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.