August 9, 2016 | 10:05 AM by Fahad Khalid |

Unlock: Rapid7 (RPD) +18% Today, Our Note to Clients on July 29

It pays to do fundamental research. This note was sent to clients on July 29. Stock is up +18% today after earnings. To learn more about our approach and how you can become a successful trader, sign up for 2 week trial and test drive live chat room with some of the best traders: SUBSCRIBE

July 29, 2016

Rapid7 (RPD) – Keep an eye on this stock Jags! Another one of those under the radar stocks with very low liquidity in options so I can’t issue a trade alert.

Unusual buyers of 450+ Feb’17 12.5-strike calls for up to $3.30 offer. Name never appears on radar. Very low open interest in option chain. This follows buyer of 800x February 10/15 bullish risk reversal back on June 29 that remains in open interest. Earnings on August 8.

RPD is another small $586 million market cap provider of data and analytics solutions that enable organizations to implement an active approach to cyber security. On May 17 Northland Capital initiated with Outperform rating and $18 price target. Company is not profitable yet, but continues to post strong revenue growth growth. From May 11:

– Q1 EPS ($0.23) vs. ($0.24) estimate, penny beat
– Q1 Revenues $34.8M vs. $33.8M estimate, beat
– Q1 Revenues +48% YoY
– Q1 Subscription Recurring Revenues 61% of total
– Q1 Deferred Revenues +49% YoY
– Q1 Gross Margins 77% vs. 74% prior quarter
– Q1 Revenues from US 87% of total
– Q1 Customer Renewal Rates 126% vs. 112% prior quarter

It was fantastic on every single metric. Revenues accelerated, margins expanded, recurring share expanded of total, renewal rates accelerated. Here is a comment from the CEO that gets my attention:

“We are particularly excited about the successful launch of our New Security Incident Detection and Response Solution, Rapid7 InsightIDR, which positions us to disrupt the SIEM market as it enters an upgrade cycle. Our innovative and cost effective approach meets the needs of customers that are seeking a solution that is easier to deploy with less overhead. As we look ahead, we’re pleased that we’ve built the strongest and highest quality sales pipeline in the history of the Company, due to interest in both our Threat Exposure Management portfolio and the new Incident Detection and Response offerings.”

This view from May 11 was confirmed on June 15 when RBC met with the CFO and walked away with several points that highlights robust growth:

– Threat exposure management marries vulnerability management (VM) with what is happening with assets in the organization and the external ecosystem. Management feels this differentiates themselves from VM peers. Feels they win 70%+ of competitive deals.

– They are increasingly targeting the SIEM market (i.e. Splunk). The company has 110 quota carrying inside sales representatives and has added eight field sales representatives over the last year.

– Target gross margins are expected to be 78-80% vs 77% today with sales efficiency expected to be the largest line-item margin driver due to higher incremental bookings and more efficiencies in sales spend.

– The company has 5,300 customers. One-third are enterprise customers and two-thirds are mid-market customers. Software is typically sold over a twenty-four month period with a 15% maintenance stream and 20% content subscription. Customers typically receive a weekly product update.

RPD Chart


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