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Rapid7 (NASDAQ:RPD) Q2: Beats On Revenue, Upgrades Full Year Guidance


Full Report / August 04, 2021
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Cybersecurity software maker Rapid7 (NASDAQ:RPD) announced better-than-expected results in the Q2 FY2021 quarter, with revenue up 27.8% year on year to $126.4 million. Rapid7 made a GAAP loss of $34.1 million, down on its loss of $21.4 million, in the same quarter last year.

Rapid7 (RPD) Q2 FY2021 Highlights:

  • Revenue: $126.4 million vs analyst estimates of $123 million (2.7% beat)
  • EPS (non-GAAP): $0.07 vs analyst estimates of $0.03 ($0.04 beat)
  • Revenue guidance for Q3 2021 is $134.2 million at the midpoint, above analyst estimates of $128.1 million
  • The company lifted revenue guidance for the full year, from $503 million to $522 million at the midpoint, a 3.77% increase
  • Free cash flow of $5.04 million, down 71.7% from previous quarter
  • Customers: 9,315, up from 8,945 in previous quarter
  • Gross Margin (GAAP): 68.9%, in line with previous quarter

Founded in 2000, 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.

Rapid7's software scans all computers, servers and other devices on their customer’s network and finds vulnerabilities that can be exploited by malware or hackers, like computers that haven’t had patches installed. It then automatically alerts responsible personnel and provides them with guidance on how to patch them, reducing average time to fix a vulnerability from days to hours.

Rapid7 also provides companies with a real-time monitoring dashboard with an overview of the activity on their network and alerts them about any suspicious activity, for example a user that has logged in from two different countries. When Rapid7 detects a successful attack it alerts the IT security personnel, scans the network to identify the size of the breach and then provides suggestions on which users should have their access revoked and which parts of the network should be quarantined.

As technology penetrates our lives, almost every company is slowly finding itself becoming a technology company and facing cybersecurity risks. The migration of businesses to the cloud and employees working remotely in insecure environments are also contributing to increasing demand for cybersecurity software.

The market is highly competitive, and Rapid7 is competing with companies like Tenable (NASDAQ:TENB), Qualys (NASDAQ:QLYS) and Crowdstrike (NASDAQ:CRWD).

Sales Growth

As you can see below, Rapid7's revenue growth has been strong over the last year, growing from quarterly revenue of $98.9 million, to $126.4 million.

Rapid7 Total Revenue

This quarter, Rapid7's quarterly revenue was once again up a very solid 27.8% year on year. On top of that, revenue increased $8.97 million quarter on quarter, a very strong improvement on the $4.29 million increase in Q1 2021, which shows acceleration of growth, and is great to see.

Analysts covering the company are expecting the revenues to grow 19.6% over the next twelve months, although we would expect them to review their estimates once they get to read these results.

Customer Growth

You can see below that Rapid7 reported 9,315 customers at the end of the quarter, an increase of 370 on last quarter. That is a bit better customer growth than last quarter and a bit above the typical customer growth we have seen lately, demonstrating that the business itself has good sales momentum. We've no doubt shareholders will take this as an indication that the company's go-to-market strategy is working very well.

Rapid7 Customers

Profitability

What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. Rapid7's gross profit margin, an important metric measuring how much money there is left after paying for servers, licences, technical support and other necessary running expenses was at 68.9% in Q2.

Rapid7 Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.68 left to spend on developing new products, marketing & sales and the general administrative overhead. This would be considered a low gross margin for a SaaS company and we would like to see it start improving.

Key Takeaways from Rapid7's Q2 Results

With market capitalisation of $6.35 billion Rapid7 is among smaller companies, but its more than $607.8 million in cash and positive free cash flow over the last twelve months give us confidence that Rapid7 has the resources it needs to pursue a high growth business strategy.

We were impressed by the very optimistic revenue guidance Rapid7 provided for the next quarter. And we were also glad that the revenue guidance for the rest of the year was upgraded. Overall, this quarter's results seemed pretty positive and shareholders can feel optimistic. The company is flat on the results and currently trades at $116.73 per share.

Is Now The Time?

When considering Rapid7, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. Although Rapid7 is not a bad business, it probably wouldn't be one of our picks. Its revenue growth has been solid. But while its strong free cash flow generation gives it re-investment options, unfortunately its gross margins aren't as good as other tech businesses we look at.

Rapid7's price to sales ratio based on the next twelve months is 11.7, suggesting that the market has lower expectations of the business, relative to the high growth tech stocks. We don't really see a big opportunity in the stock at the moment, but in the end beauty is in the eye of the beholder. And if you like the company, it seems that Rapid7 doesn't trade at a completely unreasonable price point.