Home Financial consultant Rapid7 battles Europe’s slowdown and price-conscious customers (NASDAQ:RPD)

Rapid7 battles Europe’s slowdown and price-conscious customers (NASDAQ:RPD)

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A quick take on Rapid7

Rapid7, Inc. (NASDAQ:RPS) released its second quarter 2022 financial results on August 3, 2022, beating expected revenue and EPS estimates.

The company provides a range of cybersecurity technologies to organizations around the world.

DPR faces a recession Europe, foreign currencies and more price-conscious customers, so I’m on hold for short-term RPD.

Rapid7 Overview

Based in Boston, Massachusetts, Rapid7 was founded in 2000 to provide a platform for various analytics-driven cybersecurity risk management functions.

The company is led by Chairman and CEO Corey Thomas, who was previously Group Product Manager at Microsoft and a consultant at Deloitte Consulting.

The company’s main offerings include:

  • XDR and SIEM

  • Threat intelligence

  • Vulnerability management

  • Application Security Testing

  • Orchestration & Automation

  • Cloud Security

The company acquires customers through its direct sales and marketing efforts as well as through referrals and its partner ecosystem.

Rapid7 market and competition

According to a recent market research report by Grand View Research, the global cybersecurity market size was valued at $185 billion in 2021 and is expected to reach $512 billion by 2030.

This represents a projected CAGR of 12.0% from 2022 to 2030.

The main growth driver of the market is the increase in cyber crimes and malware attacks against governments, BFSI and healthcare organizations.

The chart below shows the historical and projected future growth of the North America cybersecurity market:

North America cybersecurity market

North America Cybersecurity Market (Grand View Research)

Major competing vendors that offer cybersecurity solutions include:

  • Qualys

  • IBM

  • Tanium

  • CrowdStrike

  • Symantec

  • Cisco Systems

  • Checkpoint software technologies

  • Fortinet

  • Trend Micro

Recent financial performance of Rapid7

  • The total turnover per quarter increased according to the following graph:

Total revenue for the 9 quarters

Total revenue for the 9 quarters (looking for Alpha)

  • Gross margin by quarter followed a similar trajectory to total revenue:

Gross profit for the 9 quarters

Q9 gross profit (looking for Alpha)

  • Selling, G&A expenses as a percentage of total revenue per quarter remained within a relatively narrow range:

9 Quarter Sales, G&A % of revenue

9th Quarter Sales, G&A % of Revenue (Alpha Research)

  • Operating losses per quarter have worsened in recent quarters:

9 quarter operating profit

9th quarter operating profit (looking for Alpha)

  • Earnings per share (diluted) has also generated larger negative results in recent quarters:

Earnings per share over 9 quarters

Q9 earnings per share (seeking alpha)

(All data in the charts above is in accordance with GAAP.)

Over the past 12 months, RPD’s stock price has fallen 63.7% compared to the US S&P 500 Index decline of around 19.2%, as shown in the chart below :

52 week stock prices

52 week stock price (seeking alpha)

Valuation and other measures for Rapid7

Below is a table of relevant capitalization and valuation figures for the company:

Measure [TTM]

Rising

Enterprise Value / Sales

5.42

Revenue growth rate

33.4%

Net profit margin

-27.1%

% EBITDA GAAP

-17.3%

Market capitalization

$2,670,000,000

Enterprise value

$3,340,000,000

Operating cash flow

$41,990,000

Earnings per share (fully diluted)

-$2.92

(Source – Alpha Research)

The Rule of 40 is a software industry rule of thumb that states that as long as the combined revenue growth rate and EBITDA percentage rate are equal to or greater than 40%, the company is on a trajectory acceptable growth/EBITDA.

RPD’s most recent GAAP Rule 40 calculation was 16.1% in Q2 2022, so the company needs significant improvements in this regard, according to the table below:

Rule of 40 – GAAP

Calculation

Recent Rev. Growth %

33.4%

% EBITDA GAAP

-17.3%

Total

16.1%

(Source – Alpha Research)

Comment on Rapid7

In its last earnings call (Source – Seeking Alpha), covering Q2 2022 results, management highlighted 35% growth in the company’s ARR (annual recurring revenue) and an overshoot of its previous revenue and operating guidance.

However, management is starting to notice that customer budgets are being “scrutinized” which will likely lead to increased discounts or longer sales cycles.

Most of the company’s international business is focused in Europe, which is experiencing runaway inflation, declining consumer confidence and strong exchange rate headwinds against the US dollar.

As for its financial results, total revenue was up 32% year-over-year, while total gross margin was 72%, in line with expectations.

Management did not disclose the company’s net dollar retention rate, which is a critical metric for investors to determine customer satisfaction with its product/market fit and efficiency in sales and marketing.

The results of the RPD’s Rule of 40 have been poor and need significant improvement.

Sales and marketing expenses as a percentage of revenue increased slightly, as did R&D expenses.

However, operating losses remained significant for the quarter, as did negative earnings.

For the balance sheetthe company ended the quarter with cash equivalents and investments of $254 million and debt of $814 million.

In the past twelve months, free cash flow was $28.4 million.

On the valuation side, the market values ​​RPD at an EV/Sales multiple of around 5.4x.

The SaaS Capital Index of publicly held SaaS software companies had an EV/Average Revenue multiple of approximately 6.9x as of September 30, 2022, as shown in the chart below:

SaaS Capital Index

SaaS Capital Index (SaaS Capital Index)

So, by comparison, RPD is currently priced by the market at a discount to the broader SaaS Capital Index, at least as of September 30, 2022.

The main risk to the company’s outlook is an increasingly likely macroeconomic slowdown or recession, and a deeper recession in Europe, which could accelerate discounts to new customers, slow sales cycles and reduce its trajectory. revenue growth.

With a gloomy outlook in Europe and rising operating losses, I don’t see a significant near-term catalyst.

So I’m on standby for RPD right now.