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01/11 18:30
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Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
The earnings call reflects a positive outlook with strong gross margins, strategic investments in AI and international markets, and a promising partnership with Microsoft. Despite conservative guidance, the company shows potential for growth, particularly in MDR and Exposure Command. The Q&A highlights management's confidence in their strategic direction, though cautious about forecasting due to deal variability. The market cap suggests moderate volatility, but the positive elements likely outweigh concerns, forecasting a positive stock price movement (2% to 8%) over the next two weeks.
ARR (Annual Recurring Revenue) $838 million, growing 2% year-over-year. The growth was driven predominantly by a 2% increase in ARR per customer. However, there was timing variability within the large deal pipeline.
Revenue $218 million, growing 2% year-over-year. This exceeded the guided range, driven by product subscription revenue growth and international revenue growth of 8%.
Operating Income $37 million, above the guidance range. This was driven by natural leverage in the business and timing of spend.
Free Cash Flow $30 million generated in the quarter. This contributed to a year-to-date free cash flow of $98 million, driven by strong operational performance.
Product Subscription Revenue $210 million, growing 2% year-over-year. Growth was supported by enhancements in product capabilities.
Professional Services Revenue Declined year-over-year, consistent with the decision to deemphasize certain lower-margin services.
International Revenue Represented 25% of total revenue and grew 8% year-over-year, driven by increased adoption in international markets.
Gross Margin Product gross margin was 75%, and total gross margin was 73%. These margins were supported by operational efficiencies.
Sales and Marketing Expenses 33% of revenue, slightly above the prior year's 31%, reflecting targeted growth investments.
R&D and G&A Expenses R&D expenses were 17% of revenue, and G&A expenses were 6% of revenue, consistent with prior year levels.
AI-powered SOC vision: Rapid7 is innovating on its AI-powered SOC vision, which integrates AI into security operations to enhance situational awareness and remediation outcomes.
Command Platform: The platform unifies exposure management and threat detection response, providing integrated solutions for risk and threat management.
MDR for Microsoft: A new solution integrating Rapid7's SOC expertise with Microsoft Defender to enhance detection and response capabilities.
AI-generated risk intelligence: New feature in Rapid7's Remediation Hub to prioritize and remediate security threats faster.
Market validation: Recent wins, such as a six-figure deal with a Tier 1 public university, validate Rapid7's platform approach and leadership in the market.
Partnership with Microsoft: Expanding partnership to simplify and strengthen detection and response capabilities across Microsoft environments.
Leadership changes: New Chief Commercial Officer Allan Peters and incoming CFO Rafe Brown to drive operational alignment and growth.
Operational focus: Allan Peters is implementing changes to better align resources and incentives for growth in 2026, particularly in the MDR business.
ARR target adjustment: Reduced 2025 ARR target to reflect higher confidence outlook and rebuild investor confidence.
Focus on MDR: Accelerating growth transition towards a scaled market-leading MDR position for 2026.
Timing variability in large deal pipeline: The company continues to experience timing variability within its large deal pipeline, which has affected quarterly deal timing and overall growth performance.
Falling short of ARR guidance: The company acknowledges falling short of the ARR guidance provided in recent history, which has impacted investor confidence.
Longer competitive deal cycles: Larger platform consolidation opportunities naturally lead to longer, more competitive deal cycles, affecting growth performance.
Operational changes creating forecasting variance: Operational changes, including leadership transitions and resource realignment, may create higher near-term forecasting variance.
Customer spending environment challenges: The customer spending environment is challenged by additional scrutiny, particularly in large deals.
Execution shortcomings in Exposure Command expansion: The company has fallen short of its goals in expanding its Exposure Command customer base, which is seen as an execution shortcoming.
Regulatory pressures: Regulatory pressures for compliance and reporting are amplifying demand for integrated exposure and detection programs, which could pose challenges if not adequately addressed.
Deemphasis on lower-margin services: The decision to deemphasize certain lower-margin professional services has led to a decline in professional services revenue.
ARR (Annual Recurring Revenue) Target for 2025: The company has reduced its 2025 ARR target to reflect a higher confidence outlook, embedding a discount for potential impacts of operational changes and seasonal budget opportunities.
Growth Focus for 2026: Operational changes are being implemented to better align resources and incentives for growth in 2026 and beyond, particularly in the MDR (Managed Detection and Response) business, which is more than half of ARR and continues to grow double digits.
AI-Powered Security Operations: The company is focusing on scaling its AI-driven security operations command platform, integrating exposure management and detection and response capabilities to drive growth.
Revenue Guidance for Q4 2025: Revenue is expected to be in the range of $214 million to $216 million.
Full-Year 2025 Revenue Guidance: Revenue guidance for the full year is tightened to $856 million to $858 million, representing year-over-year growth of 1% to 2%.
Profitability Guidance for 2025: Operating income guidance for the full year is raised to $130 million to $135 million, representing an operating margin of 15% to 16%. Non-GAAP net income per share is expected to be $2.02 to $2.09.
Free Cash Flow Guidance for 2025: The company reiterates its full-year free cash flow target range of $125 million to $135 million.
Q4 2025 Profitability Guidance: Non-GAAP operating income is expected to be between $25 million and $30 million, and non-GAAP net income per share is expected to be $0.37 to $0.44.
The selected topic was not discussed during the call.
The earnings call reflects a positive outlook with strong gross margins, strategic investments in AI and international markets, and a promising partnership with Microsoft. Despite conservative guidance, the company shows potential for growth, particularly in MDR and Exposure Command. The Q&A highlights management's confidence in their strategic direction, though cautious about forecasting due to deal variability. The market cap suggests moderate volatility, but the positive elements likely outweigh concerns, forecasting a positive stock price movement (2% to 8%) over the next two weeks.
The earnings call reflects mixed signals: the company shows strong product development and strategic initiatives, particularly in AI and partnerships, which are positive indicators. However, the lowered ARR guidance, despite a healthy pipeline and Q2 results, introduces uncertainty. The cautious approach to guidance reflects strategic deal cycles, but vague responses in the Q&A, especially regarding the India SOC and ARR adjustments, suggest potential execution risks. Given the market cap of $2.66 billion, the stock is likely to experience a neutral reaction, with minor fluctuations within the -2% to 2% range.
The earnings call reveals challenges in risk and exposure management, competitive pressures, and economic uncertainties. Despite exceeding revenue guidance and achieving strong operational performance, the company lowered its ARR guidance and acknowledged growth deceleration. The Q&A highlighted concerns about the upgrade cycle, competitive pressure, and macroeconomic effects. While there is some optimism about future stabilization, the lack of a share repurchase program and unclear management responses further contribute to a negative sentiment. Given the market cap, a stock price movement in the -2% to -8% range is expected.
The earnings call summary presents a mixed picture. Financial performance shows positive revenue growth, but there are concerns like missed EPS expectations and declining professional services revenue. The Q&A reveals uncertainties in the vulnerability management market and competitive pressures, offset by optimism in D&R growth and pipeline. Despite solid cash flow and operating income, the cautious ARR guidance and unclear management responses contribute to a neutral sentiment, especially given the market cap. The predicted stock movement is likely within the neutral range (-2% to 2%).
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