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Rapid7 (NASDAQ:RPD) Q2 Sales Beat Estimates But Next Quarter Guidance Underwhelms


Full Report / August 03, 2022
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Cybersecurity software maker Rapid7 (NASDAQ:RPD) reported Q2 FY2022 results beating Wall St's expectations, with revenue up 32.4% year on year to $167.4 million. However, guidance for the next quarter was less impressive, coming in at $176 million at the midpoint, being 0.89% below analyst estimates. Rapid7 made a GAAP loss of $39.6 million, down on its loss of $34.1 million, in the same quarter last year.

Rapid7 (RPD) Q2 FY2022 Highlights:

  • Revenue: $167.4 million vs analyst estimates of $164.1 million (2.02% beat)
  • EPS (non-GAAP): -$0.01 vs analyst estimates of -$0.04
  • Revenue guidance for Q3 2022 is $176 million at the midpoint, below analyst estimates of $177.5 million
  • The company reconfirmed revenue guidance for the full year, at $688 million at the midpoint
  • Free cash flow was negative $1.25 million, down from positive free cash flow of $3.82 million in previous quarter
  • Customers: 10,624, up from 10,407 in previous quarter
  • Gross Margin (GAAP): 67.5%, down from 68.9% 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.

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.

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 very strong over the last year, growing from quarterly revenue of $126.4 million, to $167.4 million.

Rapid7 Total Revenue

And unsurprisingly, this was another great quarter for Rapid7 with revenue up 32.4% year on year. On top of that, revenue increased $10 million quarter on quarter, a very strong improvement on the $5.74 million increase in Q1 2022, and a sign of acceleration of growth.

Guidance for the next quarter indicates Rapid7 is expecting revenue to grow 25.8% year on year to $176 million, slowing down from the 33.1% 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 23.9% over the next twelve months.

Customer Growth

You can see below that Rapid7 reported 10,624 customers at the end of the quarter, an increase of 217 on last quarter. That is a little better customer growth than last quarter but while it is still a bit below what we have typically seen over the last year, it is suggesting that the company may be reinvigorating growth. 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, licenses, technical support and other necessary running expenses was at 67.5% in Q2.

Rapid7 Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.67 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.

Cash Is King

If you follow StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. Rapid7 burned through $1.25 million in Q2, with cash flow turning negative year on year.

Rapid7 Free Cash Flow

Rapid7 has generated $14.7 million in free cash flow over the last twelve months, 2.38% of revenues. This FCF margin is a result of Rapid7 asset lite business model, and provides it with at least some cash to invest in the business without depending on capital markets.

Key Takeaways from Rapid7's Q2 Results

With a market capitalization of $3.96 billion Rapid7 is among smaller companies, but its more than $239.7 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 Rapid7’s acceleration in customer growth this quarter. And we were also excited to see the really strong revenue growth. On the other hand, it was unfortunate to see that the revenue guidance for the next quarter missed analysts' expectations. Zooming out, we think this was still a decent, albeit mixed, quarter, showing the company is staying on target. But investors might have been expecting more and the company is down 3% on the results and currently trades at $69.62 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 strong. Unfortunately, its gross margins show its business model is much less lucrative than the best software businesses.

Rapid7's price to sales ratio based on the next twelve months is 5.5x, 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.

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