Rapid7 (RPD)

Cybersecurity software provider Rapid7 (NASDAQ:RPD) reported Q3 CY2025 results beating Wall Street’s revenue expectations, with sales up 1.5% year on year to $218 million. On the other hand, next quarter’s revenue guidance of $215 million was less impressive, coming in 1.3% below analysts’ estimates. Its non-GAAP profit of $0.57 per share was 24.9% above analysts’ consensus estimates.

Company Overview

With its name inspired by the need for quick responses to cyber threats, Rapid7 (NASDAQ:RPD) provides cybersecurity software and services that help organizations detect vulnerabilities, monitor threats, and respond to security incidents.

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.

Rapid7 competes with cybersecurity providers like CrowdStrike (NASDAQ:CRWD), Palo Alto Networks (NASDAQ:PANW), Tenable (NASDAQ:TENB), and Qualys (NASDAQ:QLYS), as well as large technology companies offering security solutions such as Microsoft (NASDAQ:MSFT) and IBM (NYSE:IBM).

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Over the last five years, Rapid7 grew its sales at a 17.1% compounded annual growth rate. Although this growth is acceptable on an absolute basis, it fell slightly short of our standards for the software sector, which enjoys a number of secular tailwinds.

Long-term growth is the most important, but within software, a half-decade historical view may miss new innovations or demand cycles. Rapid7’s recent performance shows its demand has slowed as its annualized revenue growth of 6.5% over the last two years was below its five-year trend.

This quarter, Rapid7 reported modest year-on-year revenue growth of 1.5% but beat Wall Street’s estimates by 0.9%. Company management is currently guiding for flat sales next quarter.

Looking further ahead, sell-side analysts expect revenue to remain flat over the next 12 months, a deceleration versus the last two years. This projection doesn't excite us and suggests its products and services will face some demand challenges.

While reported revenue for a software company can include low-margin items like implementation fees, annual recurring revenue (ARR) is a sum of the next 12 months of contracted revenue purely from software subscriptions, or the high-margin, predictable revenue streams that make SaaS businesses so valuable.

Rapid7’s ARR came in at $837.7 million in Q3, and over the last four quarters, its growth was underwhelming as it averaged 3.2% year-on-year increases. This performance mirrored its total sales and suggests that increasing competition is causing challenges in securing longer-term commitments.

Rapid7 reported 11,618 customers at the end of the quarter, a sequential decrease of 25. That’s better than last quarter but a bit below what we’ve seen over the previous year. Furthermore, the increase wasn’t backed by an equivalent increase in annualized recurring revenue (ARR), so Rapid7 is likely winning disproportionately smaller customers.

The customer acquisition cost (CAC) payback period measures the months a company needs to recoup the money spent on acquiring a new customer. This metric helps assess how quickly a business can break even on its sales and marketing investments.

It’s relatively expensive for Rapid7 to acquire new customers as its CAC payback period checked in at 81.4 months this quarter. The company’s slow recovery of its sales and marketing expenses indicates it operates in a highly competitive market and must invest to stand out, even if the return on that investment is low.

For software companies like Rapid7, gross profit tells us how much money remains after paying for the base cost of products and services (typically servers, licenses, and certain personnel). These costs are usually low as a percentage of revenue, explaining why software is more lucrative than other sectors.

Rapid7’s gross margin is slightly below the average software company, giving it less room than its competitors to invest in areas such as product and sales. As you can see below, it averaged a 70.4% gross margin over the last year. Said differently, Rapid7 had to pay a chunky $29.56 to its service providers for every $100 in revenue.

The market not only cares about gross margin levels but also how they change over time because expansion creates firepower for profitability and free cash generation. Rapid7 has seen gross margins improve by 0.4 percentage points over the last 2 year, which is slightly better than average for software.

Rapid7’s gross profit margin came in at 70.2% this quarter, in line with the same quarter last year. On a wider time horizon, the company’s full-year margin has remained steady over the past four quarters, suggesting its input costs have been stable and it isn’t under pressure to lower prices.

Rapid7 has done a decent job managing its cost base over the last year. The company has produced an average operating margin of 1.9%, higher than the broader software sector.

Analyzing the trend in its profitability, Rapid7’s operating margin decreased by 2.6 percentage points over the last two years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

In Q3, Rapid7 generated an operating margin profit margin of 2.7%, down 3.3 percentage points year on year. Since Rapid7’s operating margin decreased more than its gross margin, we can assume it was less efficient because expenses such as marketing, R&D, and administrative overhead increased.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Rapid7 has shown decent cash profitability, giving it some flexibility to reinvest or return capital to investors. The company’s free cash flow margin averaged 18.2% over the last year, slightly better than the broader software sector.

Rapid7’s free cash flow clocked in at $30.11 million in Q3, equivalent to a 13.8% margin. The company’s cash profitability regressed as it was 4.1 percentage points lower than in the same quarter last year, prompting us to pay closer attention. Short-term fluctuations typically aren’t a big deal because investment needs can be seasonal, but we’ll be watching to see if the trend extrapolates into future quarters.

Over the next year, analysts predict Rapid7’s cash conversion will fall. Their consensus estimates imply its free cash flow margin of 18.2% for the last 12 months will decrease to 15.4%.

Rapid7 reported $407.1 million of cash and $970.8 million of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $171.4 million of EBITDA over the last 12 months, we view Rapid7’s 3.3× net-debt-to-EBITDA ratio as safe. We also see its $12.34 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We were impressed by how significantly Rapid7 blew past analysts’ EBITDA expectations this quarter. We were also glad its full-year EPS guidance trumped Wall Street’s estimates. On the other hand, its revenue guidance for next quarter slightly missed and its EPS guidance for next quarter fell short of Wall Street’s estimates. Overall, this quarter could have been better. The stock remained flat at $16.03 immediately after reporting.

Updated: December 4, 2025 at 9:17 PM EST

Before making an investment decision, investors should account for Rapid7’s business fundamentals and valuation in addition to what happened in the latest quarter.

Rapid7 doesn’t pass our quality test. First off, its revenue growth was mediocre over the last five years, and analysts expect its demand to deteriorate over the next 12 months. And while its strong free cash flow generation gives it reinvestment options, the downside is its ARR has disappointed and shows the company is having difficulty retaining customers and their spending. On top of that, its declining operating margin shows it’s becoming less efficient at building and selling its software.

Rapid7’s price-to-sales ratio based on the next 12 months is 1.2x. This valuation is reasonable, but the company’s shaky fundamentals present too much downside risk. There are better stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $20.37 on the company (compared to the current share price of $16.19).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.