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Rapid7 (NASDAQ:RPD) Exceeds Q3 Expectations, Stock Soars


Full Report / November 03, 2021
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Cybersecurity software maker Rapid7 (NASDAQ:RPD) reported Q3 FY2021 results beating Wall St's expectations, with revenue up 33.1% year on year to $139.8 million. Guidance for next quarter's revenue was $145.7 million at the midpoint, which is 1.02% above the analyst consensus. Rapid7 made a GAAP loss of $37.7 million, down on its loss of $25.5 million, in the same quarter last year.

Rapid7 (RPD) Q3 FY2021 Highlights:

  • Revenue: $139.8 million vs analyst estimates of $134.1 million (4.28% beat)
  • EPS (non-GAAP): -$0.18 vs analyst estimates of -$0.07 ($0.11 miss)
  • Revenue guidance for Q4 2021 is $145.7 million at the midpoint, above analyst estimates of $144.2 million
  • Free cash flow of $14.3 million, up 184% from previous quarter
  • Customers: 9,909, up from 9,315 in previous quarter
  • Gross Margin (GAAP): 68.9%, down from 70.4% same quarter last year

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.

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 $105 million, to $139.8 million.

Rapid7 Total Revenue

This was a standout quarter for Rapid7, with the quarterly revenue up an absolutely stunning 33.1% year on year, which is above average for the company. On top of that, revenue increased $13.4 million quarter on quarter, a very strong improvement on the $8.97 million increase in Q2 2021, and a sign of re-acceleration of growth.

Analysts covering the company are expecting the revenues to grow 22.7% over the next twelve months, although estimates are likely to change post earnings.

Customer Growth

You can see below that Rapid7 reported 9,909 customers at the end of the quarter, an increase of 594 on last quarter. That is quite a bit better customer growth than last quarter and quite 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 updated its customer count methodology in Q1 2021, which is the reason for the related drop in the number of customers.

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 Q3.

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 Q3 Results

With a market capitalization of $6.86 billion Rapid7 is among smaller companies, but its more than $304.2 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 very impressed by Rapid7’s very strong acceleration in customer growth this quarter. And we were also excited to see the really strong revenue growth. Overall, we think this was a strong quarter, that should leave shareholders feeling very positive. The company is up 5.14% on the results and currently trades at $135 per share.

Is Now The Time?

Rapid7 may have had a good quarter, but investors should also consider its valuation and business qualities, when assessing the investment opportunity. 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 11.8x, suggesting that the market has lower expectations of the business, relative to the high growth tech stocks. We can find things to like about Rapid7 and there's no doubt it is a bit of a market darling, at least for some. But we are wondering whether there might be better opportunities elsewhere right now.

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