Rapid7 Earnings: Boasts Impressive Margin Uplift and Improving Demand

We maintain our $45 fair value estimate for no-moat Rapid7 RPD after the firm reported third-quarter earnings in line with our revenue estimates, while delivering upside on profitability. Management increased its full-year 2024 outlook, as well as guiding for a sequentially stronger fourth quarter on the revenue front. While we see secular tailwinds blow in Rapid7′s favor along with a more normalized demand environment, we remain wary of the firm’s fierce competition and exposure to macroeconomic swings. With current shares up 8% after-hours, we view the stock as slightly overvalued.

Third-quarter sales clocked in at $199 million, up 13% from the prior-year period. Sales in the quarter were driven by revenue from products, up 14% year over year. However, they were partially offset by a decline in professional services revenue as the firm restructured its services offerings. Annualized recurring revenue increased 14% year over year to $777 million. We were pleased to see 40% of new ARR stem from Threat Complete and Cloud Risk Complete solutions, displaying demand for the firm’s bundled offerings.

On profitability, the non-GAAP operating margin was 18.5%, compared with 7.4% from the prior-year period. We believe margin expansion is largely driven by Rapid7′s recent restructuring, where the firm has streamlined its sales expenses and reduced its workforce. Following the initial impact of the restructuring, we expect margins to improve at a modest pace, supported by lower expenses and scaling efficiencies.