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


Full Report / November 02, 2022
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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.

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

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 $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.

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

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 69.3% in Q3.

Rapid7 Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.69 left to spend on developing new products, marketing & sales and the general administrative overhead. While it improved significantly from the previous quarter this would still be considered a low gross margin for a SaaS company and we would like to see the improvements continue.

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's free cash flow came in at $9.65 million in Q3, down 32.5% year on year.

Rapid7 Free Cash Flow

Rapid7 has generated $10 million in free cash flow over the last twelve months, 1.54% 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 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, this quarter's results were not the best we've seen from Rapid7. The company is down 5.34% on the results and currently trades at $37 per share.

Is Now The Time?

Rapid7 may have had a bad quarter, but investors should also consider its valuation and business qualities, when assessing the investment opportunity. 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. 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 2.9x, 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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