Cybersecurity software maker Rapid7 (NASDAQ:RPD) reported Q2 FY2023 results exceeding Wall Street analysts' expectations, with revenue up 13.7% year on year to $190.4 million. The company also expects next quarter's revenue to be around $197 million, roughly in line with expectations. Rapid7 made a GAAP loss of $66.8 million, down from its loss of $39.6 million in the same quarter last year.
Rapid7 (RPD) Q2 FY2023 Highlights:
- Revenue: $190.4 million vs analyst estimates of $188.1 million (1.24% beat)
- EPS (non-GAAP): $0.18 vs analyst estimates of $0.11 ($0.07 beat)
- Revenue Guidance for Q3 2023 is $197 million at the midpoint, roughly in line with what analysts were expecting
- The company reconfirmed revenue guidance for the full year of $773 million at the midpoint
- Free Cash Flow of $25.6 million is up from -$1.22 million in the previous quarter
- Customers: 11,287, up from 11,034 in the previous quarter
- Gross Margin (GAAP): 69.5%, up from 67.6% in the 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).
As you can see below, Rapid7's revenue growth has been strong over the last two years, growing from $126.4 million in Q2 FY2021 to $190.4 million this quarter.
This quarter, Rapid7's quarterly revenue was once again up 13.7% year on year. On top of that, its revenue increased $7.25 million quarter on quarter, a strong improvement from the $1.31 million decrease in Q1 2023. This is a sign of acceleration of growth and very nice to see indeed.
Next quarter's guidance suggests that Rapid7 is expecting revenue to grow 12.1% year on year to $197 million, slowing down from the 25.6% year-on-year increase it recorded in the same quarter last year. Ahead of the earnings results announcement, the analysts covering the company were expecting sales to grow 13.4% over the next 12 months.
Rapid7 reported 11,287 customers at the end of the quarter, an increase of 253 from the previous quarter. That's a little better customer growth than last quarter and quite a bit above the typical growth we've seen in past quarters, demonstrating that the business has strong sales momentum. We've no doubt shareholders will take this as an indication that Rapid7'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.
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's left after paying for servers, licenses, technical support, and other necessary running expenses, was 69.5% in Q2.
That means that for every $1 in revenue the company had $0.69 left to spend on developing new products, sales and marketing, and general administrative overhead. Rapid7's gross margin is poor for a SaaS business and we'd like to see it start improving.
Cash Is King
If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. Rapid7's free cash flow came in at $25.6 million in Q2, turning positive over the last year.
Rapid7 has generated $62.5 million in free cash flow over the last 12 months, a decent 8.42% of revenue. This FCF margin stems from its asset-lite business model and gives it a decent amount of cash to reinvest in its business.
Key Takeaways from Rapid7's Q2 Results
With a market capitalization of $2.55 billion, Rapid7 is among smaller companies, but its $293.5 million cash balance and positive free cash flow over the last 12 months give us confidence that it has the resources needed to pursue a high-growth business strategy.
We were impressed by Rapid7's strong growth in customers this quarter. We were also happy that its revenue growth outperformed Wall Street's expectations, even if just narrowly. Zooming out, we think this was a decent quarter, showing that the company is staying on track. The stock is up 8.69% after reporting and currently trades at $43.28 per share.
Is Now The Time?
When considering an investment in Rapid7, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter. We cheer for everyone who's making the lives of others easier through technology but in case of Rapid7, we'll be cheering from the sidelines. Its revenue growth has been solid, though we don't expect it to maintain historical growth rates. But while its strong free cash flow generation gives it re-investment options, the downside is that its customer acquisition is less efficient than many comparable companies and its gross margins aren't as good as other tech businesses we look at.
Rapid7's price to sales ratio based on the next 12 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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