Rapid7's (NASDAQ:RPD) Q4 Sales Top Estimates But Full Year Guidance Underwhelms

Full Report / February 08, 2023
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Cybersecurity software maker Rapid7 (NASDAQ:RPD) announced better-than-expected results in the Q4 FY2022 quarter, with revenue up 21.7% year on year to $184.5 million. However, guidance for the next quarter was less impressive, coming in at $181 million at the midpoint, being 1.91% below analyst estimates. Rapid7 made a GAAP loss of $11.4 million, improving on its loss of $44.6 million, in the same quarter last year.

Rapid7 (RPD) Q4 FY2022 Highlights:

  • Revenue: $184.5 million vs analyst estimates of $179.6 million (2.72% beat)
  • EPS (non-GAAP): $0.07 vs analyst estimates of $0.18 (-$0.11 miss)
  • Revenue guidance for Q1 2023 is $181 million at the midpoint, below analyst estimates of $184.5 million
  • Management's revenue guidance for upcoming financial year 2023 is $774.5 million at the midpoint, missing analyst estimates by 2.22% and predicting 13.1% growth (vs 28.4% in FY2022)
  • Free cash flow of $28.5 million, up 195% from previous quarter
  • Customers: 10,929, up from 10,791 in previous quarter
  • Gross Margin (GAAP): 70.2%, up from 67.1% 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 strong over the last two years, growing from quarterly revenue of $113.2 million in Q4 FY2020, to $184.5 million.

Rapid7 Total Revenue

This quarter, Rapid7's quarterly revenue was once again up a very solid 21.7% year on year. Quarter on quarter the revenue increased by $8.71 million in Q4, which was in line with Q3 2022. This steady quarter-on-quarter growth shows the company is able to maintain its steady growth trajectory.

Guidance for the next quarter indicates Rapid7 is expecting revenue to grow 15% year on year to $181 million, slowing down from the 34% year-over-year increase in revenue the company had recorded in the same quarter last year. For the upcoming financial year management expects revenue to be $774.5 million at the midpoint, growing 13.1% compared to 28% increase in FY2022.

Customer Growth

You can see below that Rapid7 reported 10,929 customers at the end of the quarter, an increase of 138 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


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 70.2% in Q4.

Rapid7 Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.70 left to spend on developing new products, marketing & sales and the general administrative overhead. Significantly up from the last quarter, this is around the lower average of what we typically see in SaaS businesses. Gross margin has a major impact on a company’s ability to invest in developing new products and sales & marketing, which may ultimately determine the winner in a competitive market so it is important to track.

Cash Is King

If you have followed 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's free cash flow came in at $28.5 million in Q4, turning positive year on year.

Rapid7 Free Cash Flow

Rapid7 has generated $40.7 million in free cash flow over the last twelve months, a decent 5.94% of revenues. This FCF margin is a result of Rapid7 asset lite business model, and provides it with optionality and decent amount of cash to invest in the business.

Key Takeaways from Rapid7's Q4 Results

With a market capitalization of $3.04 billion Rapid7 is among smaller companies, but its more than $291.4 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.

It was good to see Rapid7 outperform Wall St’s revenue expectations this quarter. And we were also glad to see the improvement in gross margin. On the other hand, it was unfortunate to see that Rapid7's revenue guidance for the full year missed analysts' expectations and it indicates quite a significant slowdown in growth. Overall, this quarter's results were not the best we've seen from Rapid7. The company is flat on the results and currently trades at $51.47 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. We cheer for everyone who is making the lives of others easier through technology, but in case of Rapid7 we will be cheering from the sidelines. Its revenue growth has been strong, though we don't expect it to maintain historical growth rates. 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 3.8x, suggesting that the market does have lower expectations of the business, relative to the high growth tech stocks. While we have no doubt one can find things to like about the company, and the price is not completely unreasonable, we think that at the moment there might be better opportunities in the market.

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