Rapid7 (RPD) Reports Q4 Results
Rapid7 reported last night with revenue that was up 33.3% to $91.7 billion and beat by $3.4 million and adjusted EPS of $0.03 that beat by $0.04. Also notable was that annualized recurring revenue (ARR) was up 35% in Q4. Customer count at the end of the quarter was 9,000, a 16% increase over a year ago.
This means revenue was up 34%, to $327 million, in 2019 while adjusted EPS came in at $0.08, a huge improvement over a loss of -$0.41 in 2018. Management also issued guidance for 2020 that included revenue of $396 million to $404 million, above consensus at $395 million, and adjusted EPS of $0.11 to $0.18, versus consensus of $0.27. That guidance implies a revenue growth rate near 22%, and ARR growth of around 25%.
On the plus side Rapid7 is growing quickly in a big market and is expanding its product lineup to take advantage of opportunities. It’s also gaining momentum with larger clients. It grew far more quickly in terms of revenue, ARR and EPS in 2019 than analysts expected a year ago.
On the downside management pulled in operating margin growth way more than analysts wanted to see. Analysts had foreseen 2020 margins near 3.5% but management is calling for 1.8% to 2.7% this year, then bouncing back up near 5% in 2021. That’s unfortunate in the short-term because on higher revenue one would hope for economies of scale to drive margins up, not down. There was also some customer churn in Q4 that drove net retention down to 108% from 111% in Q3, and down from 119% in Q4 2018. Part of this was explained by internal compensation structures that incentivize landing new clients, not just upselling existing ones.
Where does this leave us? Unfortunately, we’re in no-man’s land now, and that’s why the stock is down almost 10% as of mid-day Tuesday. RPD had been trading near all-time highs going into the report and we all had high expectations that were not met. Companies like this need to beat and raise, beat and raise. With this ho-hum outlook, we get a selloff. We can hold Rapid7 a quarter or so to see how the trends are going (management should have set itself up to outperform). But I am concerned about a bigger drawdown in the near-term.
Let’s try to find a middle road and sell another quarter position (for a gain north of 110%), which means we’ll be left holding a half position. If the stock remains weak, we’ll reduce the position further, and if it comes back, we can evaluate our options. Sell A Quarter, Hold Remaining Half.