Rapid7 (RPD) and Q2 Holdings (QTWO) Report Q3 Earnings
Rapid7 (RPD) reported last night and results beat expectations, sending the stock up by around 10% today. Revenue of $62.4 million was up 23.4% and beat by almost $3 million while adjusted EPS of -$0.04 beat by $0.09. Annualized recurring revenue (ARR), management’s preferred metric for judging growth due to the transition to the subscription model (away from perpetual license), was up 46%, which was way above expectations. This was also the fifth consecutive quarter of accelerating ARR, which is a positive.
North American revenue was up 29% and accounted for 85% of the total while international was up 33% and accounts for the remaining 15%. Overall renewal rate was 120%, which reflects good cross-selling activity. If you pull out the cross-selling and upsells the renewal rate was 90%, which is still very good. I’ve mentioned I wanted to see customer count increase and in the quarter it went up by 10%. That meant 183 new customers for a total of 7,339. Also encouraging was that ARR per customer was up 33%. More customers, with each spending more, reflects a healthy business.
Guidance for 2018 was raised above expectations as well and now implies 20% to 21% growth, to $241.1 million to $242.5 million.
Stepping back, the big picture story here is a very competitive cybersecurity company that’s accelerating growth as it shifts to the subscription model and releases new, sophisticated products (it now has four main modules) that are resonating with the market. Its four products target a roughly $7 billion market.
With all the positives, and a stock that’s trading in-line with its peer average on valuation, it’s reasonable to expect Rapid7 to deliver healthy returns over the next two years. It held its ground remarkably well in October and this report should keep investors confident about the growth story. For now, I’m going to keep at Hold. However, if we see more improvement in the broad market Rapid7 will likely move back to buy. HOLD.
Q2 Holdings (QTWO) reported last night and results were more-or-less in line with expectations. Revenue was up 20.7% to $60.5 million (beating by $330K) while adjusted EPS of $0.09 improved from $0.03 in the year-ago quarter.
Management gave guidance for 2018 that, including the acquired Cloud Lending, implies around 23% revenue growth (likely conservative) to a range of $239.8 million to $241.2 million. With the business doing well I think we’ll see revenue growth accelerate to almost 30% in 2019 and 2020. Adjusted EPS growth should be significant, with potential to grow from around $0.13 in 2018 to $0.70, or more, in 2020.
Positives from Q3 included a tier 1 credit union win and 900,000 net new users (i.e. people like you and me signed up on its digital banking platform). User growth was the fastest in company history and roughly 500,000 above what analysts expected. That’s big. Q2 Open also signed eight deals, including a reseller agreement with a large payments provider for Q2’s biller direct solution.
In the fourth quarter and into next year there is likely to be some profitability dilution from the Cloud Lending acquisition that more than offsets the revenue contribution. But as this asset gets integrated and starts to contribute to growth the impact will fade.
The stock enjoyed a little lift from the report but came back to break-even as the end of the trading day approached. I think this report is good enough to keep investor enthusiasm high, and there’s little doubt in my mind that Q2 would make an attractive acquisition target. For now, let’s just keep an eye on it. Like many of our stocks Q2 can move back to buy if we continue to see the broad market firm up. HOLD.