Contact: Scott Denne
Threat management vendor Rapid7 is heading toward its initial public offering with few financial metrics to excite prospective investors. The company posted $76.9m in revenue last year, representing 28% growth – only a hair lower than the 30% growth rate from a year earlier. While Wall Street welcomes predictability, not all revenue is created equal: low-margin professional services jumped 47% to $10.8m while product sales decelerated to 22% growth, accounting for 61% of total revenue.
The company posted a $32.6m loss in 2014 as its gross margins ticked down a few percentage points to 76% due to the rising costs of delivering services, while operating expenses grew at a faster rate than revenue. Particularly notable are Rapid7’s sales and marketing expenses, which jumped 54% – its largest increase in any of the past three years. Its most recent quarters are Rapid7’s silver lining: year-over-year revenue growth, both product and overall revenue, is accelerating in each of the past three quarters to finish up 41% in the first quarter of this year.
Qualys, a competing vulnerability management provider, is the best available comp for gauging Rapid7’s potential IPO valuation. Investors value that company at 9x trailing revenue. At that level, Rapid7 would post a $750m market cap. We believe, however, that the offering will price below that level. Qualys’ growth was a bit slower – 24% compared with Rapid7’s 28% – but off a baseline that’s nearly double the size. Qualys also hit that mark while scaling back sales and marketing spending as a percentage of its overall revenue and generating a $30.2m profit.
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